TERRA posted annual operating-level declines. Despite divestments of less profitable assets, higher expenses slightly pressured the REIT's adjusted margins
The debt profile improved with a Loan To Value of 37.4% vs. 40.5% previously. In addition, it announced a cash distribution yield of ~2.0%, slightly above our estimate
Despite lower operating margins, FFO profitability rose. 1Q21 was the first full operational quarter without ~3 million square feet that were divested at the end of 4Q20, representing a 7.0% y/y decline in GLA. The above, hand-in-hand with lower demand leading to lower occupancy by 1.5pp to 94.6%, partly offset by an increase in total portfolio average rent of 2.1% y/y to US$1.3, resulting in a 6.2% y/y drop in net revenue to US$49.0 million (-3.9% in pesos). By region, Bajio remained weak, followed by the North, partially offset by a better performance in the Center region. With respect to NOI and EBITDA, these fell 2.3% and 2.8% y/y, to US$46.0 million and US$41.0 million (-0.2% and 0.0% in pesos), despite the asset sales that had lower margins. It is worth noting that higher operating expenses for security (+74.4% y/y) and repairs and maintenance (16.8% y/y), as well as higher commissions and administrative expenses (+3.4% y/y), pressured margins (adjusted for TERRA revenues) from 28pp to 94.0% in NOI and from 67pp to 83.7% in EBITDA. In contrast, net income reached US$67.4 million −due to a gain from a property value adjustment− vs. the loss recorded in 1Q20. Finally, it recorded a higher FFO margin of 1.9pp to 62.6% y/y due to a 12.6% lower financial cost. Thus, distribution amounted to US$0.0297 (MXN 0.6026), equivalent to a ~2.0% yield. Better prospects for the sector. With higher expected economic growth in Mexico (linked to that of the US), coupled with the continued relocation of Asian companies to Mexico (nearshoring), expectations for the sector have become more favorable. As such, we believe TERRA is well positioned to capitalize on strong demand, which could boost results.