Earnings Report /

Prologis Property Mexico SA de CV: FIBRAPL, Quarterly Report 1Q21: Solid growth driven by acquisitions

  • FIBRAPL began the year with operating progress, once again driven higher GLA and rents, but lower EBITDA profitability

  • 2021 expansion plan of US$100-US$200 million will favor its performance, supported by expected higher economic growth

  • We raise our PT to MXN 47.00. We believe valuation partially incorporates the favorable outlook thus we reiterate Hold

Jose Itzamna Espitia Hernandez
Jose Itzamna Espitia Hernandez

Senior Equity Research Analyst, Infrastructure, Materials and Transportation

Eridani Ruibal Ortega
Eridani Ruibal Ortega

Jr Equity Research Analyst

26 April 2021
Published byBanorte
  • FIBRAPL began the year with good operating progress, in line with estimates, once again driven by the addition of GLA and higher rents, although with lower EBITDA profitability

  • We believe that the expansion plan in 2021 of between US$100-US$200 million will favor the REIT's performance figures, also supported by expected higher economic growth

  • We raise our PT to MXN 47.00 from MXN 45.00 (13.5x P/FFO 2021e vs. 11.7x sector). We believe the valuation partially incorporates the favorable outlook thus we reiterate Hold

Inorganic growth reflected in 1Q21 results. In the quarter, FIBRAPL's revenues achieved a 16.5% y/y advance to US$59.7 million, driven mainly by higher gross leasable area of ~15% more compared to 1Q20. This was coupled with higher average rent per square foot of 3.7% y/y, in line with expectations.  Total portfolio occupancy stood at 96.7%, virtually unchanged vs. 1Q20, whereas the increase in demand in Mexico City, Guadalajara, Reynosa and Ciudad Juarez was offset by a drop in Monterrey, while Tijuana assets continued to be 100% occupied. In the same vein, higher operating leverage drove a 17.9% y/y increase in NOI to US$52.6 million, and a margin expansion of 1.0pp to 88.1%. On the other hand, EBITDA grew by a smaller 8.0% y/y to US$46.2 million, reducing the respective margin by 6.1pp to 77.4%, due to a significant benefit from FX hedging instruments in 1Q20, in addition to higher management fee costs as a percentage of sales (from 8.6% to 8.9%). Given the improved operating performance, FFO increased 16.0% y/y to US$36.8 million. On the leverage side, Loan to Value stood at 28.5% (vs. 29.4% in 4Q20). Finally, FIBRAPL announced a distribution per CBFI of US$0.0269 (MXN 0.5333), equivalent to a 1.2% yield.

Estimates 2021

Improved economic growth prospects would boost industrial sector. Although logistics and manufacturing space demand behaved resiliently in an extremely challenging environment, managing to maintain a vacancy rate in industrial properties close to 5%, for this year the expectation is that it will remain below 4%, which would motivate to observe higher rents. This would be mainly benefited by a more encouraging economic growth expectation in 2021 for the global economy, particularly in the main economy, the US, due to the greater stimuli implemented. Thus, being closely related to the performance of that country, positive implications are expected for the national economy, being one of the most benefited sectors the manufacturing and logistics sectors, since the continuous reconfiguration of supply chains in the world, as well as the changes in consumer patterns would continue to benefit trends such as nearshoring (approaching main consumer markets for export) and the acceleration of e-commerce demand. It is important to mention that Mexico is in a privileged position to take advantage of these opportunities, given its proximity to the US, its skilled and cheap labor force, not to mention trade agreements such as the T-MEC that generate an ideal environment for investing in the country.

2021 guidance with higher inorganic growth. FIBRAPL released its 2021 earnings guidance, in which it anticipates ending the year with a total portfolio occupancy of between 95%-96%, building acquisitions of between US$100-US$200 million and a cash distribution per CBFI of US$0.1075. While the distribution came in slightly below our estimate, what is more relevant is that a higher-than-expected amount for acquisitions will trigger higher growth over the longer term, given that we were forecasting additional GLAs of 800 thousand square feet, representing a 2.0% increase vs 2020 to 40.2 million square feet, while we now forecast 1.6 million square feet to be added, which equates to an annual increase in GLAs of ~4.0% to 41.6 million square feet.

We expect the transactions to be completed throughout the year. In this regard, the REIT recently announced the acquisition of a property in Mexico City consisting of 95,852 square feet in Vallejo, one of the main consumer markets and in line with its Last Touch urban strategy. It is worth mentioning that the full contribution of these properties will be reflected in 2022.

Considering the above, for 2021 we anticipate total portfolio occupancy to stand at 96.9% (vs. 96.6%e previously), which is equivalent to a 0.5pp increase vs. 2020. We anticipate that global markets will continue to be the main drivers of occupancy, specifically Mexico City, given the significant growth of e-commerce, followed by Monterrey, while Guadalajara will show more limited gains.

On the other hand, due to higher logistics and manufacturing demand, coupled with high occupancy levels, we expect average rents per square foot to rise 2.5% y/y (vs. 2.4% previously), in line with historical increases, although above our Economic Analysis area's estimated inflation of 1.9%. In this sense, we estimate that by 2021, FIBRAPL's revenues will show a 9.8% y/y increase in dollars to US$238 million (vs. +8.3%e previously). It is worth mentioning that in pesos, the increase would be 4.7% to MXN 4.9 billion, given the expected appreciation in 2021 vs. 2020.

Regarding margins, and remembering that historically the variation in costs and expenses goes hand in hand with the increase in revenues, we now estimate that NOI will register a 10.5% y/y increase to US$208 million (vs. +8.5%e previously), an increase of 5.2% in pesos to MXN 4.3 billion. NOI margin would reach 87.5%, an increase of 0.5pp vs. 2020. EBITDA would increase 3.7% y/y to US$183 million (vs. +2.7%e prior), although in pesos it would represent a 1.4% y/y decline to MXN 3.7 billion, due to the aforementioned adverse FX rate effect. EBITDA margin would stand at 76.7%, -4.5pp vs. 2020, due to a significant foreign exchange benefit recorded in 2020 that adjusts directly to EBITDA. Meanwhile, FFO and AFFO would grow 7.8% y/y and 15.8% y/y to US$145 million and US$114 million, respectively (+2.2% to MXN 3.0 billion and +9.9% to MXN 2.3 billion). As for margins, these would be 60.8% (-1.1pp vs 2020) and 47.9% (+2.5pp vs 2020). It is important to mention that we expect the FFO margin to be lower due to a foreign exchange benefit that favored the indicator in 2020.

It should be recalled that, during 2020, FIBRAPL lowered the AFFO distribution percentage to ~78%, cautiously in the face of pandemic risks. In our estimates, we project the distribution percentage in 2021 to stand at ~84%, while by 2022 we expect it to return to 95%. In this regard, we anticipate the distribution per CBFI this year to be US$0.1108 (MXN 2.26), slightly above the REIT's guidance, which is equivalent to a 5.2% yield on current prices. Regarding leverage, we believe that, despite the acquisitions it will carry out, it would maintain a low LTV at 32.5%, up from 29.3% in 2020.

Valuation and PT 2021 of MXN 47.00

To obtain FIBRAPL's CBFI target price we used the dividend discounted valuation method (DDM), where we discounted the 2022-2026 distributions and perpetuity to present value. In this way, we raise our PT to MXN 47.00 from MXN 45.00, which equates to a 2021e P/FFO multiple of 13.5x and 2022e 12.1x (which is when the full contribution of the acquisitions occurs), which is below the 3-year average of 14.0x. Taking as a reference the REITs focused on the industrial sector (FIBRAPL, TERRA and VESTA), the estimated 2021 average multiple is 11.7x, while the 2022 average multiple is 11.2x, thus the target multiple represents a premium of 15.4% and 8.0%, respectively. We believe FIBRAPL's higher multiples are supported by higher expected inorganic growth, coupled with a top-tier customer base and strong corporate governance; however, in our view, the favorable outlook is already partially incorporated in the valuation. Considering the above, and the total potential return offered by our target price of 14.0%, which includes the cash distribution return of 5.2%, our recommendation is Hold.

Our assumptions integrate a cost of capital (CAPM) of 11.1%, composed of a risk-free rate of 6.9% (closing of the 10-year MBono 2021e by our Fixed Income area), Beta of 0.7, a market risk premium of 6.0% and a perpetual growth rate of 5.0% for its high acquisition-related activity.

Relative Valuation

Source: Banorte, Bloomberg. (04/21/21)