Fibra Uno: The Crowded Trade

We’ve written from time to time some of the issues facing Mexico’s Fibra Uno (FUNO11), including an overextended balance sheet, over reliance on USD debt and an increasingly complicated portfolio. While we see Fibra Uno being a major player in Mexican real estate for a long time to come, shareholders will suffer in the short term as the Company works through portfolio issues. More importantly, we see little indication that management intends to slow the pace of acquisitions, which are the root of the problem. Investors should recognize that the combination of higher USD borrowing costs and management’s failure to temper acquisitions, could force the Company to become a forced seller of assets. We will see….

All of that said, Fibra Uno remains the go-to REIT for global funds seeking LatAm REIT exposure. Liquidity, in our view, is the main reason for this. Instead of evaluating relative fundamentals, global investors poured capital into the REIT over the last several years and have continued to do so. Pension-manager Los Angeles Capital, Principal, Dimensional and AQR, combined held almost $100 million worth of shares as of 9/30/16 which are down 20% over the last two months.

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Indeed, Fibra Uno is now down over 25% year to date versus the Solactive Latin America Real Estate Index which is up 14.4% and tracks a comparable dividend yield as well. Going regional and diversifying across managers, property types and geography are cornerstones of successfully navigating the Latin America markets in our view. While we continue to see Fibra Uno playing a major role in Mexican real estate, we believe the Company is being re-rated from a growth concern to a pure yield investment. Fibra Uno’s main challenge for the next two years will be how to grow funds from operations? Our view is FFO growth will be very muted for the next one to two years and investors expecting dividend growth may be disappointed.