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Real Estate News & Analysis: May Edition

Trump win a snag in Mexican REITs' growth story

The Mexican REIT market has had its share of growing pains, but Donald Trump's unexpected victory in the 2016 U.S. presidential election presents a new, and potentially high, growth hurdle for the young industry.

The FIBRAs fideicomiso de infraestructura y bienes raíces, the name for the asset class in Mexico have been hit particularly hard in the weeks since the election. Together, the share prices of the eight SNL-covered companies fell 11.75% from Nov. 9 through Dec. 23, according to SNL data. U.S. REITs were up 1.89% over the same period.

The FIBRAs were trading at discounts to NAV in the range of 15% to 25% toward the end of December by one analyst's measure, compared to a 1.5% discount for U.S. REITs.

Observers say the investor base for the FIBRAs expanded steadily in 2016, as U.S. investors increased their exposure and European players came around to the story. But Trump's protectionist rhetoric is likely to clip their ranks, at least temporarily.

Evercore ISI analyst Sheila McGrath said investors who have had their eyes on the FIBRAs are likely to remain on the sidelines in the near term until it becomes clear how Trump's campaign trail talk manifests as policy.

"While rational minds tend to consider some of the chatter on tariffs as merely election banter that will likely not come to fruition, we believe investors require some transparency on US/Mexico trade relations and potential NAFTA changes before jumping into the sector," she said. "The supply chain of US/Mexico is much more intertwined than US election rhetoric would indicate."

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Cold feet would represent a shift in investor sentiment. Real estate investors overall have warmed to the FIBRAs in recent quarters, as industry leaders have worked to allay concerns about transparency and corporate governance. To be sure, many of the FIBRAs are still externally managed, but, according to Citigroup analyst Dan McGoey, the FIBRAs' profitability, now established after a few years of operation, has begun to outshine such concerns. Many dedicated REIT funds that previously were not interested in the FIBRAs have been calling McGoey for recommendations.

"Even after the fees are considered, the margins on the Mexican FIBRAs are actually quite high. And there's been no material, or egregious, conflicts of interest or corporate governance abuse," McGoey said. "Net-net, the investor perception is, they still prefer internal [management], but I find less aversion to it today than initially."

In an interview, Jorge Girault, CFO of FIBRA Prologis, said the company's external management structure remains top-of-mind for most of the company's investors.

"There is no investor that we speak with that does not ask that question," he said.

Still, Girault said many investors no longer see an external manager as a categorical negative. In Fibra Prologis' case, the company reaps many "perks and benefits" from its relationship to its manager, Prologis Inc., arguably the world's leading industrial powerhouse. Prologis maintains authority to manage Fibra Prologis' business and investment decision making, including borrowings, distributions and property transactions.

"If we were to be internally managed, we would have to pay for those services, and so the math doesn't make that much of a difference," he said. "People tend to understand that."

Girault in the interview said the steep share price declines the FIBRAs have seen in recent weeks present a window of opportunity for M&A activity, but he does not think a big deal is likely, given the preponderance of family-owned businesses and external management structures in the space.

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Evercore ISI's McGrath said the FIBRAs' share price volatility is likely to continue, but she thinks that today's low prices will, in the long term, look like an attractive entry point. She recommends FIBRAs with lower-risk profiles, like low-debt Fibra Danhos. She also has a "buy" rating on FIBRA Prologis because of its high percentage of U.S. dollar-denominated revenue and low speculative development risk.

McGoey, for his part, thinks the number of FIBRAs will continue to grow in the coming quarters, but at a more moderate pace because of the general shortage of institutional portfolios in the market.

"There's probably some room for consolidation among the listed players, but otherwise their growth is going to have to come more piecemeal, via asset by asset acquisitions," he said. "Overall I do think the penetration of the publicly listed real estate space in Mexico is in its very, very early stages, with plenty of room for growth."

McGoey, like other industry observers, is bullish on the industrial segment, in particular, where many of the leases are still denominated in the U.S. dollar, and the tenant base is comprised largely of high-quality multinationals.

Beyond subsector-specific considerations, the wind is at the Mexican FIBRAs' back, the analyst said. The broad acceptance of the REIT asset class around the world, even of externally managed ones, has been a boon to the industry, the analyst said.

As for trade war concerns, McGoey said any deterioration of the relationship between the U.S. and Mexico would be a clear negative for the FIBRAs, but he thinks that cooler heads will prevail. And Mexico's ability to grow its manufacturing base on its own is strong, besides.

"Our view is that the [FIBRAs'] business is more resilient than the stock price is giving it credit for, and that your compensation is more than sufficient for the country risk of being in Mexico," he said.