Fibra Uno: a 12-month high, still a third below its own valuation

Fibra Uno closed at 33.22 pesos on 20 October, a day after its highest close in twelve months, 33.44.[3] The certificates are up 24.5% over a year and 23.0% since January.[3] Analysts are comfortable: the 13 tracked by StockAnalysis rate it a buy on average, with a 12-month target of about 34.85 pesos, barely above today’s price.[4]

The consensus story is simple and mostly true. Mexico’s biggest landlord, with nearly 600 properties across industrial parks, shopping centres and offices, is collecting more rent from a fuller portfolio.[1]

The market has spent a year marking Fibra Uno up. It still doesn’t believe Fibra Uno’s own number.

The operating story is good

In the second quarter, revenue rose 5.5%, net operating income rose 5.8% at an 82.4% margin, and funds from operations rose 9.7%. Occupancy was 95.7%.[1] Same-store cash operating income, which compares only properties held in both years, rose 13.1%.[2] The quarterly distribution rose 12.2% to 0.6398 pesos per certificate.[1]

The number the market disagrees with

Fibra Uno reports a net asset value of 50.20 pesos per certificate.[1] At 33.22, the market price is about 34% below it. After a year-long rally, investors are still paying two thirds of what the trust says its property is worth.

In the same quarter, the trust’s net income per certificate turned negative, against a profit a year earlier. The cause was valuation adjustments on the property portfolio and on financial instruments, not weaker rents.[2] The operations were fine. The marks moved the wrong way.

Paying out nearly everything

The second-quarter distribution equalled 98.6% of adjusted funds from operations.[1] Annualised, that payout comes to about 2.56 pesos per certificate, roughly 7.7% of today’s price (our calculation, not a forecast). That yield explains a good part of the rally. It also means almost nothing is kept back: future distribution growth has to come from higher rents, not from a cushion.

Tenant retention was 60.8%, which the company presents as a deliberate swap of weaker tenants for stronger ones.[2] That can be true and still be expensive: every departing tenant is space that has to be re-let before it pays again.

What to watch in the third-quarter report

Fibra Uno holds its third-quarter results call on Thursday 29 October.[5]

• Distribution against AFFO. With the payout already at 98.6%, distributions can’t keep growing faster than adjusted funds from operations for long.
• Valuation adjustments. Another negative quarter would put the 50.20 net asset value under more strain.
• Occupancy and renewals. Industrial space carries the story; its renewal terms matter most.

A 24.5% year is the market slowly closing the gap. Whether it closes the rest depends on which number turns out to be right: Fibra Uno’s own valuation, or the price.