Terrafina: TERRA:New growth strategy and developments, with a change in payout ratio policy

  • TERRA announced new development projects for this year, and a growth strategy for the next 3 years
  • It now foresees investments and divestments to optimize the portfolio's performance and will change its payout ratio
  • This reaffirms the favorable demand for industrial real estate, even though this means reducing cash distributions

Terrafina announced that it closed a 354,000 square-foot (0.9% of total GLA as of 1Q21) build-to-suit lease in Tijuana with a leading e-commerce client. In addition, there is a letter of intent for an additional 200,000 square feet (0.5% of total GLA as of 1Q21), from a packaging company that intends to serve its e-commerce related activities. It should be noted that the cost of these projects – to tentatively materialize in 3Q21– is US$43.5 million and would generate an estimated NOI of US$4.1 million per year.

The REIT added that due to the growing demand favored by the T-MEC, coupled with the expectation of higher economic growth and the strengthening of trends such as nearshoring (regionalization of processes to optimize costs), TERRA now foresees investments and divestments that will seek to optimize the portfolio's performance and, consequently, a higher growth of NAV per CBFI. The objectives for the next three years are: 1) Invest between US$150-US$200 million for development of 2.5-3.2 million square feet (focused on e-commerce, logistics and nearshoring); 2) asset sales of US$75-US$100 million equivalent to 2.0-2.7 million square feet (exiting non-strategic markets); and 3) implement an ESG program for new developments. This growth plan would be financed through a higher reinvestment rate by payout ratio reduction to 70% from 85% of AFFO, plus possible additional debt, while maintaining a stable Loan to Value (target of 35%), upon completion of the developments.

Positive implication: We believe this release reaffirms the favorable demand outlook for the industrial real estate sector and it is positive that TERRA has a clear portfolio optimization strategy, even though this means reducing cash distributions somewhat starting in 2Q21. Regarding the projects closer to completion in 3Q21, these represent a 1.4% increase in ARBs to 39.8 million square feet with an estimated cap-rate of 9.4%, which compares favorably with acquisition cap-rates that could be between 7% and 8%. While with the 3-year plan, GLA would be increasing by 1.3%. In this sense, we will be incorporating the growth strategy to our estimates, and it will be relevant to know any additional information that the REIT may provide in today's 10:00 am conference call.

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