Terrafina, an industrial REIT, boasts a substantial portfolio of 42 million square feet across 300 industrial properties strategically located in Mexico’s central, Bajio, and northern regions.

 

The nearshoring trend, driven by geopolitical tensions and supply chain disruptions during COVID-19, has seen US companies relocate factories closer to their consumer base, with Mexico being a significant beneficiary. This shift has dramatically improved Terrafina’s market position, as evidenced by a sharp decline in vacancy rates from approximately 6.5% to 1.2% by Q4 2023. Concurrently, asking rents have surged by 63% since early 2021, according to the CBRE Q4/23 Report.

 

As Mexico’s business cycle matures, the industrial real estate market is entering a consolidation phase. Fibra Prologis, Terrafina’s largest competitor, alongside global private equity firms, is leading this consolidation trend. On February 13, 2024, Fibra Prologis announced its intention to acquire Terrafina at a share-for-share exchange ratio of 0.580x, valuing Terrafina at ~39 MXN per share as of May 23. This initial offer has attracted considerable interest, with a total of six parties expressing their intent to make competitive bids.

 

•Fibra Prologis - 0.58x Exchange Ratio = ~39MXN

•Fibra Monterrey - 2.8x Exchange Ratio = ~45MXN (Monterrey Mgmt assuming a 16.8x P/AFFO multiple Rerate)

•Fibra Macquarie - 1.05x Exchange Ratio = ~43 MXN (Macquarie Mgmt Assuming 100% P/NAV Rerate)

•Fibra Uno - Structure to be disclosed = ~49.63 MXN (Implied Offer Price According to Uno Press Release)

•2 Anonymous Cash Buyers (We speculate they are)

oBlackstone - Offer price to be disclosed

oGrupo Mexico - Offer price to be disclosed

 

The current price of Terrafina is approximately 41 MXN, making some of these offers very compelling. The reason why the stock is mispriced is because the current offers have left room for upbids, and the quality of Terrafina's portfolio is high enough to potentially induce a bidding war. Management has structured the process to allow shareholders to decide the winning bid through multiple tenders. The tender that receives over 50% of the votes will win the bidding process. Each time a new offer, including upbids, is made, the voting window is extended by five business days. As of May 23, 2024, only Fibra Prologis has come forward with their official tender.

 

 

1.Implied Cap Rates vs. Portfolio Transactions

 

Approximately two-thirds of Terrafina's portfolio is located in the Northern region of Mexico, making it particularly attractive for capitalizing on the nearshoring trend, as most demand is concentrated in this region. Currently, Fibra Prologis' implied cap rate at a 67 MXN share price is equivalent to a 5.6% implied cap rate, compared to the 8% cap rate offered for Terrafina implied by Prologis' 0.58x exchange ratio. Many industrial portfolios in Mexico have transacted closer to a 7% cap rate or sometimes lower, which could equate to a 47 MXN target price. Given the significant market rent growth, looking forward to 2025E cash flows, the NAV could be in the high 50s. An offer price with a "5 handle" is not out of the realm of possibility, especially considering the quality of buyers involved. Further upside could range from 15% to 35%.

 

2.Mentality and Profile of the Mystery Cash Buyers

 

Terrafina management has indicated that two cash buyers prefer to remain undisclosed. Given that Fibra Prologis' offer is official, the remaining potential bidders are likely to make their tenders official soon, revealing the identity of these cash buyers. Cash buyers often bid higher due to their ability to use higher leverage in the private market and their lower cost of capital. Blackstone, which already has industrial properties in Mexico, is rumored to be making a cash offer and has an exceptional cost of capital. The other mystery buyer is rumored to be Grupo Mexico, a ~$50 billion US market cap conglomerate focused on mining, transportation, and infrastructure sectors. On April 26, 2024, Grupo Mexico announced they were eyeing industrial real estate opportunities but declined to comment on whether they were targeting Terrafina. The company currently holds

over 100 billion MXN in cash, roughly three times Terrafina's market cap. Grupo Mexico is a family-run business controlled by the Larrea family, known for paying high premiums for past acquisitions, which could be beneficial for Terrafina's stockholders.

 

3.Prologis Showing their Hand on a Potential Upbid

 

In FIBRAPL’s ordinary shareholders meeting on March 21, 2024, the management team brought up a proposal containing this text “delegate to the Manager the authority to determine the terms and conditions of each such Offerings, including, without limitation, the exchange factor applicable thereto." This language modification signals that they expect the need to modify the exchange ratio to upbid as they likely view the process to be competitive. This kind of behaviour has been done by the parent company Prologis in which they made an offer for Duke Realty and came back with an upbid a few weeks later in 2022.

 

 

 

The following are key potential risks:

 

 

oNot all shareholders may want a cash out; they may seek to grow with a larger platform

oShareholders may not choose to take the highest bid and prefer to go with a larger brand instead i.e. Prologis

 

US Election can Create uncertainty on policy

 

 

 Given what was mentioned above we see the following events as key price catalysts:

 

•Cash bid details revealed (likely to be higher than strategic offers)

•Fibra PLD Exchange Ratio Upbid (given they are prepared to do so)

•Any further upbids from other parties