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Tierra XP: How to Play Latin American Real Estate
12/25/2015 10:00 am EST
Tierra Funds just recently launched the first US-listed Latin America real estate exchange-traded fund. Below, we talk with managing partner Jamie Anderson, who explains the reasoning behind launching the fund, the headwinds and opportunities facing Latin America, and some real estate stocks in the portfolio.
Steven Halpern: Our guest today is Jamie Anderson, managing partner at Tierra Funds. How are you doing today, Jamie?
Jamie Anderson: I’m doing great, Steve. Thanks for having me on.
Steven Halpern: Now, your company has just launched the first US-listed Latin America Real Estate ETF, the Tierra XP Latin America Real Estate (LARE). Could you tell our listeners a little about the make-up of the fund?
Jamie Anderson: Absolutely, Steve. Thanks. The Tierra XP Latin America Real Estate ETF has 52 components and as you mentioned, it’s the first sector-specific US-listed product to give an investor exclusive access via a diversified basket of listed equities in the region to the real estate sector in Latin America. The components have a weighted average market cap of approximately $1.2 billion.
The index has a trailing 12-month dividend yield of approximately 6.5%, which is net of local withholding taxes. If we drill down a little bit into the various buckets, I’ll just give you a big picture, but Brazil REITs trade on average about nine times’ price earnings at about .65 times book value.
The Mexican REITs trade at about 15 times’ earnings one-time book value and the balance of the product is really real estate operating companies, so these will be companies that are involved in the development, management, and operation of commercial real estate in the region.
Steven Halpern: Now, this fund is designed for investors that are interested in a growth component as well as in income. Can you talk a little about this balance in the fund’s objectives?
Jamie Anderson: That’s right, that’s right, Steve, so when we set out to create this product, we wanted to capture both the income availability in the region via listed real estate equities as well as the growth potential, so if you look at the basket, about 55% of the weights are essentially REITs or REIT-like instruments.
If you look at Brazil, REITs yield somewhere between 10% and 14%. In the case of Mexico, they’re around 4% or 5%, but it’s a growing asset class.
On the growth side, we are talking about companies that are essentially reinvesting profits into their businesses and focused on growing those businesses and this includes home builders, commercial office developers, industrial developers, etcetera.
The methodology itself behind the ETF is based on the Selective Latin America Real Estate Index. The Index itself takes market caps, dividend yields, and liquidity and ranks the individual components against the population set and then weights them in the index.
And the product of this is essentially to give a very disperse, diversified snapshot of the listed equities in the region that satisfy the criteria. The goal here, again, is to give an investor diversified exposure but also to maximize the income component.
Steven Halpern: Let’s talk a little about the timing of the recent launch for the fund. It’s been a particularly challenging year for emerging markets, including Latin America, in large part due to currencies as well as weak commodity prices. Could you touch on the timing behind the launch and maybe discuss the impact of overall negative sentiment towards emerging markets?
Jamie Anderson: Sure, absolutely, and this is a concern that is out there in the investor community. We frankly think it’s a perfect time to be building exposure in the region. When you step back, we’re really into our third year of a global FX reset. The trade-weighted US dollar basket has now appreciated over 30%.
The Brazilian real, the local currency there, has lost about half its value over the last two and a half years. The Mexican peso has lost a little over 35% of its value over the same time period, so this weak emerging market backdrop is nothing new.
What’s really happened is asset prices have reset in the emerging markets arena and since stocks are essentially a discounting mechanism, investors really want to be looking forward rather than backward.
And if we look forward 12 to 24 months, given where we’re at in terms of this US dollar reset, as well as the discounts that are available on local assets, it’s frankly a pretty compelling time period to be holding a position in a portfolio.
Steven Halpern: Obviously, Latin America covers a broad range of countries. Are there any specific countries where you’re seeing particularly compelling long-term value?
Jamie Anderson: Yeah, sure, so in Latin America, we’re really, 80% of the region is dominated by Brazil and Mexico, so you can’t have a conversation about Latin America without those two countries. Each one is in a unique position.
On the former, Mexico is very, very tied to the US economy. They’ve gone through a 25-year period here where they’ve integrated themselves so closely to the US economy and diversified their sources of national revenue, that it’s really, it’s a country that will probably trade in lockstep with the United States.
On the Brazil side, the story there is frankly a discount story. Equities have been sold off so hard that we’re at the point where, for example, in the ETF itself, REITs are trading at 65% of the tangible book value. Now, these are unlevered vehicles that own outright, commercial income-producing real estate, yielding 10% to 14%, trading at 35% discount to book value.
On the real estate operating company side, you’ve got home builders—I’ll talk about a couple of them in few minutes if we’ve got time—that are trading at 60% of book value, with essentially no debt, so we’ve got two converging scenes here in the region.
One is this increasingly more-aligned Mexico with the United States, and then secondly, we have a mean reversion opportunity in Brazil.
Steven Halpern: Before I let you go, perhaps you can highlight a few individual holdings in the fund where you’re seeing long-term opportunities.
Jamie Anderson: Sure. One of the benefits of this product is that it gets the investor access to companies that are not available through competing products, or secondly, are companies that an investor would find challenging to own as a single stock, so there’s a big access story in the layer, the Tierra XP Latin America Real Estate ETF.
Let me highlight a first one: It’s a Mexican REIT, in Mexico it’s a mid-cap, okay, so it’s about a $500 million market cap. In the US, that’s a small-cap, bordering on a micro-cap, but this is a fantastic company. It’s about two years old. They are focused on the business hotel segment, structured as a REIT.
They’ve got 11,000 rooms and trading at about 70% of tangible book value. This is a well-managed company that in two, three, four years, is going to have a stabilized business class hotel portfolio and we fully expect the dividend yield to grow, etcetera.
Steven Halpern: What’s the name of the company?
Jamie Anderson: This is FibraHotel. The ticker is FIHO12 and that’s listed in Mexico on the Bolsa there. They’ve got 81 hotels right now. They’re probably expanding at, I would say, at least three or four hotels per quarter. It’s a wonderful example of part of the access story that this product gets the investor.
Steven Halpern: We’ve only got a minute, but perhaps you mention another name or two quickly?
Jamie Anderson: Yeah, really quickly, so in Brazil, and this is another advantage of the product, GP Investments, the ticker is GPIV33. This is real estate operator and investor. It’s a $225 million market cap.
They just announced the acquisition of BR Properties, which is another commercial developer and operator in Brazil, for about $500 million.
They’re buying this from BTG Pactual, which is an investment bank in Brazil that’s kind of gone belly-up because its founder was wrapped up into this Petrobras scandal, but GP Investments is a wonderful example of, if you play a basket, you get to take advantage of some of the inherent M&A that’s occurring in the region and it’s all happening on the public side, not on the private side.
GP Investments trades at 0.35 times tangible book value. They’re going to bring in, I fully expect when the announcement is made, we’re going to see some kind of big name like BlackRock or something like that involved in the deal, but they’re going to go from $225 million market cap to three quarters of a billion overnight when they conclude that transaction.
Steven Halpern: Again, our guest is Jamie Anderson of Tierra XP Latin America Real Estate ETF. Thank you so much for your time today.
Jamie Anderson: Thanks a lot, Steve.
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