A South of the Border REIT

09/03/2013 10:00 am EST


Vivian Lewis

Editor and Publisher, Global Investing


I have found a new emerging markets play for income investing; this stock idea is a FIBRA, which is a Mexican Real Estate Investment Trust, explains international stock specialist Vivian Lewis, editor of Global Investing.

Our new stock idea is a FIBRA, a Mexican Real Estate Investment Trust or REIT. Mexico created the REIT instrument at the end of 2010 after five years of struggle.

As in the US, rules allow FIBRAs to pass through income tax-free to shareholders, on condition that 70% of the assets are invested in real estate, 95% of income is distributed annually, and shares are widely held.

The FIBRA shares that we are recommending provide a way to play the Mexican economic reform program being undertaken by the center and right parties, which includes allowing private exploration for the country's oil, improving education by cutting the power of the teachers' union, and opening up to foreign investment.

While recent numbers on Mexican growth rates show a contraction (Q2 is down 0.74% from prior year Q2), the country's respected and honest statistical office still expects a real growth rate of 1.8% for this calendar year. Q2 is a reflection of world conditions rather than a Mexican problem.

Our fund has a name intended to reassure gringos and other foreigners, Deutsche Bank Mexico SA Real Estate Investment Trust (FBASF)—although the German bank's Mexican arm is only the trustee and custodian. It is called Fibra Uno Trust F/1401 in Spanish. The ticker is FBASF.

The trust was launched for US institutions. However, it is now seasoned, so retail investors can buy it.

It just bought 334 factories for $372 million (US) in conjunction with AIG (of the US) and Walton St. Capital, a Mexican developer, in northern Mexico, which are 97% occupied.

The acquisition is subject to government approval. The annual net income from the new properties will be $29.8 million, a nice piece of change.

The managers are members of the El-Mann family, a paint making company, which got into property by the back door when it opened offices and stores in new regions of Mexico, and wound up with surplus square footage which it proceeded to lease to other firms.

Now it is a full-fledged property company, managing portfolios, doing construction and acquisitions, and providing finance and services to current and potential tenants.

The numbers are good. FBASF has a 2.9% return on assets, a 3.1% return on equity, and a 3.28% return on invested capital. The stock trades at 1.2 times book value at a p/e ratio of nearly 35 times. The main reason for that very scary number is that it is growing its metrics very fast.

EPS rose 13% last year and dividends by 15%. Operating margins (margins on EBITDA, or earnings before interest, taxes, depreciation, and amortization) grew 74.87% last year.

Asset turnover is minimal, 0.04% and debt is only 17% of assets, making this a relatively safe and long-term-minded REIT.

The dividend yield is 3.58%, and well covered by earnings. The stock trades at Mexican price levels, but without a huge spread: $2.88 bid, $2.89 ask.

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