Fibra MTY: 8% Monthly Dividend Yield On Mexican Industrial Properties

A Mexican REIT that is perfectly positioned for the manufacturing boom.

Summary

• Fibra MTY is an internally-managed REIT focused on industrial buildings in Northern Mexico.

• The company has long had a share price around 12 Pesos each. I believe with a recent funding overhang lifted, shares could join the rally we've seen in Mexican equities.

• Shares offer a 8% monthly dividend yield, and the stock trades at a slight discount to book value.

• As reshoring picks up steam, Fibra MTY's asset base should garner more interest with foreign investors, thus improving its valuation.

The airports, namely OMAB and PAC, remain my favorite way to play the industrialization of Northern Mexico. That said, the airport stocks have been the leading part of the Mexican equity wave.

We’ve already seen valuations on the airports come up significantly as they’ve been the most obvious winner from Mexico’s strong post-COVID economic performance.

Also, being listed on the NYSE and paying huge dividends has given the airport stocks a lot more visibility with foreign investors. While I believe the airports will continue to benefit greatly from the rise of Mexican manufacturing throughout the 2020s, we are starting to see folks model that into the stock prices.

That's the case for today's featured company, however. Fibra Monterrey (Mexico:FMTY14) (hereafter MTY REIT) doesn’t have any of this going for it (yet). A fibra is the Mexican name for the REIT financial structure.

I can find no discussion of MTY REIT on English-language Twitter. There are no Seeking Alpha articles about it. Trading volume tends to be modest. And the stock price has been at 12 Pesos (give or take 10%) for five years now aside from its initial COVID decline:

Yet, if you told someone in 2018 just how good things were going to get for Mexican manufacturing and Monterrey in particular, you’d probably be surprised to learn that MTY REIT’s stock price hadn’t gone up during the interim.

Unlike the airports, few people have championed this stock for a broader non-Mexican investor audience. As such, I believe there is opportunity here.

MTY REIT was launched in 2014 to prosper from the growing demand for industrial and commercial real estate in Northern Mexico. Of note, the REIT is internally managed, which has to-date been a rare feature within the Mexican market.

Up until 2022, the REIT owned a collection of real estate assets that was around a 50/50 split of offices and industrial buildings with more than half of the revenue coming from the state of Nuevo Leon, of which Monterrey is the capital city.

Most of the company's buildings are near the U.S.-Mexican border.

The REIT significantly changed its profile with the announcement of a huge acquisition late last year which will double the size of its portfolio. It also greatly changed the balance of the portfolio, as now industrial will make up the lion’s share of its earnings and office is a far smaller portion than prior.

This was the make-up of the portfolio prior to its most recent deal:

• Occupancy Rate: 87%

• Asset-Type: Industrial 50%, Office 47%, Retail 2%.

• Revenue by Currency: 77% Dollars, 23% Mexican Pesos

I'm guessing the large office exposure has been the thing holding the stock back in recent years. Also, counter-intuitively, since it primarily charges in dollars for its rents, Fibra MTY has been slowed down by the appreciation of the Mexican Peso since 2020.

I should note that office isn’t a dying asset class in Mexico as it may be in the U.S. and other developed markets. Office had been growing quickly in Mexico prior to the pandemic and was less saturated than in developed markets. In addition, telework is less established as a concept in Latin America, and problems with broadband speed and other cultural and infrastructure factors are likely to keep offices relevant for longer in Mexico than in developed markets.

That said, investors have a grim view of offices in general, so MTY REIT’s move to focus on industrial is a positive for its outlook even if the Mexican office market has fair prospects going forward.

Fibra MTY is currently buying a $662 million portfolio of buildings, which carry the following features:

• 46 industrial buildings

• Gross leasable area of 822,052 square meters across 11 Mexican states

• Occupancy rate of 98.3% in GLA terms

• Average lease term of 6.1 years

• Dollarized lease revenue of 92.0%

This moves Fibra MTY's exposure to 75% industrial going forward. It brings the company's overall average occupancy rate up significantly. And it tilts the portfolio even more to dollar rather than peso-based revenues (for better or worse).

I don’t think I need to dwell too long on the appeal of industrial properties in Northern Mexico.

Various Fibra MTY properties.

Mexico has been the biggest winner from the global reshuffling of supply chains since the onset of the pandemic. This trend is likely to persist throughout the 2020s, giving investors a long secular growth story to take part in.

In 2023, already, we’ve seen major wins for the city of Monterrey specifically, including a new $2 billion steel plant and last week’s announcement of the Tesla Latin American factory, both of which will be in Monterrey.

As I laid out in my most recent piece on the airports, we’re also seeing a rush to develop logistics and cargo/warehouse capacity in Northern Mexico. Due to the lack of capacity at Mexico City, we are seeing faster development of facilities at Guadalajara, Monterrey, and other northern cities. As e-commerce penetration in Mexico catches up with other markets, that should boost demand for industrial and logistics space as well.

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MTY has a fairly diverse selection of top tenants including large tech companies, manufacturers and logistics operators including:

• Whirlpool

• Cemex

• Accenture

• Oracle

• DHL

As many of these tenants are multinationals that either are headquartered in America or sell their wares primarily via export for dollars, they are happy to pay leases in dollars rather than pesos. This should give investors more security with Fibra MTY as the company's revenues will be stable regardless of short-term economic swings thanks to the large dollar revenue base.

Currently, Fibra MTY has seen a headwind thanks to the rise in the value of the Peso, but this is unlikely to be a permanent state of affairs, and dollar revenues will come in handy whenever the Peso does decline again.

I'd also note that rent rates remain very low in Mexico compared to developed markets, suggesting there is a great deal of arbitrage left for companies wanting to set up offices or industrial properties in Mexico.

Specifically, Fibra MTY reported 4Q22 average monthly rents per square meter, considering rates in Mexican pesos and U.S. dollars, were US$18.9 for corporate offices, US$15.1 for back offices, US$5.0 for industrial buildings, and US$7.3 for retail properties. Keep in mind there are roughly 11 square feet per square meter. The numbers pencil out pretty favorably compared to developed market rent rates.

What Are Shares Worth?

Here's the REIT's breakdown of its financial picture as of its Q4 2022 results (the company has excellent disclosures on its English-language investor relations site):

Figures in Pesos. Note that CBFI means "exchange certificate" and refers to the REIT's shares, i.e. FMTY14 on the Mexican stock exchange.

As per these calculations, the REIT was trading at either a 7.5% or 8% cap rate, depending on whether you base this calculation from book value or enterprise value. In either case that seems like a fair price for a collection of primarily industrial assets given the more favorable cap rates industrial tends to earn compared to other types of commercial real estate.

The Bottom Line: Attractive Entry Point As Short-Term Headwind Lifts

I believe shares have minimal downside at the current price. For one thing, the stock has traded around 12 Pesos forever, which suggests there is a great deal of support at that level from back during times when folks were much less bullish on Mexico as a whole.

For another thing, the company just raised a huge pile of money at $12.20 per share in its rights offering. That money, in turn, went to buy the new portfolio of properties discussed above. I doubt that shares would trade much below that level where the REIT was able to raise so much fresh capital.

And, related to that, it’s not surprising that the stock was flat in recent months – despite the huge run-up in other Mexican names – since people were waiting to see how the fundraising for the new property portfolio would go. Now that the capital came in and has been priced, this lifts that overhang. Analysts can update their models and start pricing in the upside as the new properties start flowing into MTY’s results.

I wouldn’t be surprised if the REIT’s stock price really starts to run now that the capital raise was priced. That should be the new floor for the stock, while upside could be considerable as investors wake up to the REIT's newly improved portfolio composition.

The dividend should also appeal to investors. An 8% yield, paid monthly, is not too common in most parts of the world. In the U.S., a REIT offering an 8% yield tends to be associated with dying malls or struggling senior housing, for example, rather than a booming property sector with secular tailwinds.

You might be questioning why the yield is so high for such an attractive portfolio of assets. That’s a good question.

The answer comes from comparative interest rates. Keep in mind that Mexican investors can get more than 10% yields on short-term bonds and bank products and that the Mexican central bank has hiked rates to 11% recently.

Mexico's central bank rate over the past year.

In that environment, a REIT has to offer a fairly high yield to be competitive with what is available on lower-risk products.

Indeed, in the opening paragraph of MTY REIT's latest quarterly report, it noted that:

"The annualized yield of the Trust’s [shares] was 410 basis points above the weighted yield of 10-year government bonds issued in Mexico and the United States (M10 and UMS, respectively) at the beginning of the year [2022]."

While U.S. REIT investors have become accustomed to accepting quite low yields on various types of real estate, we have not yet seen a similar trend in Mexico. There, investors still expect a yield that is highly attractive directly compared to bank deposits and government bonds.

As more foreign investors discover MTY REIT and start bidding for it, we may see its yield decline to a rate that is more reflective of the global (rather than Mexican) cost of capital. And, in doing so, we should see a large increase in the share price in order to drive that lower yield.

That said, up until now, MTY REIT has not had a great deal of publicity outside of Mexico and thus has operated under a more limited capital availability framework which leads to the higher yield.

To sum up, I believe shares have extremely limited downside given the stock’s long history of trading at 12 Pesos each and that the company just raised a ton of capital at the same price. In doing so, it dramatically increased the quality of its portfolio while reducing exposure to offices.

Also, while MTY REIT has been stuck on its 12 Peso price for ages, Mexican stocks in general have appreciated sharply over the past 18 months. MTY REIT’s share price would have to jump significantly to “catch-up” with the rest of its market. In addition, rising asset prices in Mexico imply that the value of MTY REIT's portfolio has gone up as well, which would note that its book value (13 Pesos per share) undercounts the true economic value at the company.

With the capital raise results announced at the end of the February, the prior overhang that had been keeping a ceiling on the stock price is now lifted. In other words, there’s a nice 8% monthly dividend yield here on attractive Mexican industrial assets, and a good chance for sharp near-term share price appreciation as well.

Disclosure: I/we have a beneficial long position in the shares of FMTY14 shares on the Mexican exchange either through stock ownership, options, or other derivatives.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.