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US investors warming to Mexican REITs, even as macro concerns linger


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US investors warming to Mexican REITs, even as macro concerns linger

U.S. investors who harbored skepticism about the market for Mexican real estate investment trusts are warming to the story with five years of performance history now on the books.

The REITs, or FIBRAs — fideicomiso de infraestructura y bienes raíces — as the asset class is known in the country, have had a solid run so far in 2017, even factoring in the recent pullback that attended a series of follow-on equity offerings, the timing and pricing of which did not agree with some investors, industry observers said.

UBS analyst Marimar Torreblanca framed the group's 2017 performance largely as a bounce-back. When Donald Trump was elected president after campaigning on a protectionist platform, the FIBRAs suffered a sharp selloff. But as the winter months faded and the market "digested" the election-time rhetoric, investors' fears eased, the analyst said. In the spring, the steeply discounted FIBRAs began to rally.

Year-to-date through Oct. 4, SNL-covered FIBRAs returned 8.34% as a group, while the SNL US REIT Equity index returned 6.40%. Performance has varied widely among the companies. FIBRA Prologis, an industrial-focused company, has been the best-performing name, and Fibra Shop, a shopping center landlord, has been the worst performer, with total returns of 29.4% and negative 11.9%, respectively.

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The industrial subsector, an outperformer in recent quarters north of the border, is Torreblanca's favorite in Mexico, with occupancy at more than 90% in all major markets. Investors had been particularly cautious on industrial names after the U.S. election, but that cloud has mostly dispersed, she said. Fibra Terrafina and FIBRA Macquarie México, like FIBRA Prologis, are industrially focused.

"It's a very, very tight market," Torreblanca said. "The fundamentals are very strong, and that has not changed."

In an interview, Jorge Girault, CFO of FIBRA Prologis, named exports and increased consumption spurred by an emerging e-commerce market as the main growth drivers of Mexico's industrial segment. The renegotiation of the North American Free Trade Agreement is still a significant concern, but companies are growing in Mexico anyway, he said.

"There are more people hungry in the room than there are hamburgers at the table," Girault said of the supply-demand picture.

The FIBRAs have also received a boost from improved sentiment among foreign investors, and among U.S. investors in particular, many of whom had shunned the group because of a perceived misalignment of interest between shareholders and the FIBRAs' leadership. The majority of the FIBRAs are still externally managed.

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Torreblanca said U.S.-based investors are more active this year in the capital markets and in secondary market transactions than they had been in the prior two years. While the external management structures remain a concern for some, most now review the FIBRAs on a nuanced, case-by-case basis, and not all external management arrangements are created equal.

In FIBRA Prologis' case, Girault said, many U.S. investors have come to regard the fee structure with its sponsor, the global industrial REIT Prologis Inc., as transparent and aligned with shareholder interests. Prologis Inc. notably has a 46% ownership stake in FIBRA Prologis.

Guillermo Bravo, head of corporate development and investor relations at FibraHotel, said in an interview that the company's external management structure is less of an issue today for investors than it was previously. On a recent road show, he fielded no more than "a couple of questions" about the matter, he said.

Fibra Inn, the only SNL-covered FIBRA that has fully internalized management, could not be reached for comment.

Torreblanca said many FIBRAs will likely follow in Fibra Inn's footsteps and, eventually, internalize management. Those expectations have also helped boost investor sentiment, she said.

Another, perhaps less intuitive arena of growth in Mexico's FIBRA market is retail, which, for cultural as well as structural reasons, has not suffered the same pullback that the U.S. retail market has this year. The Mexican retail market, compared to the U.S. sector, is underbuilt and underpenetrated, and the country's retail centers have an even more entrenched, more vibrant life as entertainment destinations, with amenities like amusement parks, not just restaurants. They have been and remain the main leisure attractions in many markets.

"[Retail] is a much more resilient asset class in Mexico than other places," Torreblanca said.