BMW’s Mexican Landlord Favoring Equity to Bank Loans: Mortgages

BMW’s Mexican Landlord Favoring Equity to Bank Loans
Corp. Inmobiliaria Vesta SAB, based in Mexico City, said it plans to use the cash raised from the IPO to develop industrial parks and distribution centers as well as purchase real estate. Photographer: John Moore/Getty Images

Mexican real-estate developers are turning to stock markets and private equity investors for funding as commercial lending fails to keep up with demand, and property companies expand to serve cross-border manufacturers.

Corp. Inmobiliaria Vesta SAB, whose tenants include BMW, the world’s largest luxury carmaker, and chocolate-maker Nestle AG, is set to become Mexico’s first publicly traded industrial park operator with an initial public offering tomorrow, following last year’s IPO of shopping center developer Fibra Uno Administracion SA, Mexico’s first real-estate investment trust. Vesta aims to raise as much as 4.1 billion pesos ($310 million), according to a prospectus on the stock exchange website.

Mexican real estate companies are benefiting as businesses pour across the 1,800-mile border with the U.S. to take advantage of a four-year slide in the peso that has driven down labor costs. Foreign companies pledged $5.3 billion of investment in the first four months of the year, the most since at least 2007, the Economy Ministry said.

While bank lending has grown by about 14 percent this year, “banks haven’t fully developed credit products that start from the ground up” for businesses, said Eduardo Torres, an economist tracking the industry for Banco Bilbao Vizcaya Argentaria SA’s Mexico unit, speaking by phone from Mexico City. “Housing growth got way ahead of our urban infrastructure needs. That opened a gap that has to be closed.”

Development, Acquisitions

Vesta, based in Mexico City, said it plans to use the cash raised from the IPO to develop industrial parks and distribution centers as well as purchase real estate.

The shares will be priced in a range of 19 pesos to 21 pesos, the prospectus said. The median price suggests a capitalization rate of 9 percent, based on projected net operating income for 2013, according to a person familiar with the transaction, who declined to be named because the company forecasts aren’t public.

Industrial sector real-estate investments in the U.S. have average cap rates of 7.7 percent as of May, according to Real Capital Analytics Inc., a New York-base real-estate research firm. Cap rates are a measure of investment return that falls as prices rise.

Credit Suisse Group AG and Banco Santander SA are managing the sale.

Mexican developers and infrastructure companies have also boosted financing through so-called development capital certificates, which allow investors to participate in private equity-type projects similar to special purpose acquisition companies in the U.S.

Six IPOs

The Vesta IPO would be the first in Mexico since petrochemical producer Alpek SAB sold shares in April. While considered an IPO, Alpek was carved out from Alfa SAB, which already traded on the Mexican bourse. Before that, the last company to sell shares in Mexico was lender Banregio Grupo Financiero SAB in July 2011.

Mexico has had six IPOs in the past two years, compared with 18 in Brazil, which has an economy only about twice the size of Mexico’s. Half the Mexican offerings have subsequently lost value, compared with less than a quarter of the Brazilian companies that went public.

Among the Mexican IPOs in the past 24 months, REIT Fibra Uno Administracion, whose properties include shopping centers near the Mayan Riviera beaches of southern Mexico, has posted the best returns to date, climbing 41 percent in the period.

Equity Options

Stock sales are “an option that a lot of real-estate developers are going to start exploring,” said Ramon Ortiz, an analyst at Corp. Actinver SAB in Mexico City, who has a buy recommendation on Fibra Uno. “We could see more of this. It’s just getting started.”

Vesta is a “high risk” investment because it’s entering a developing sector on the bourse and listing shares after a drop in profit, said Aldo Miranda, a trader at Intercam Casa de Bolsa SA in Mexico City.

Vesta’s earnings before interest, taxes, depreciation and amortization -- a measure of profit known as Ebitda -- fell 4.2 percent in 2011 to $40.4 million.

“They still have a lot to prove,” Miranda said in a July 17 telephone interview. “What’s the rush? You should go public in your company’s best moment.”

Vesta plans to prioritize development of its “made-to-order” industrial park business. Its aerospace-focused property in the central state of Queretaro counts among its tenants Bombardier Inc., the world’s largest maker of business jets, and Meggitt Plc, a maker of engine sensors, wheels and brakes.

Foreign Investment

Foreign direct investment in Mexico will total about $22.8 billion in 2012, the most since 2008, according to forecasts by HSBC Holdings Plc.

German automaker Bayerische Motoren Werke AG runs a training center for dealers out of a Vesta property in Mexico state, which borders the capital Mexico City.

Vesta said 89 percent of its contracts, equivalent to 72 percent of its income from rent, are denominated in dollars, saddling the company with exchange-rate exposure while protecting its foreign customers. While it has pared losses this year, the Mexican peso is down 11 percent in the past 12 months against the dollar, the worst performance in Latin America after the Brazilian real. The peso is down 22 percent in the past four years.

Vesta operated 85 industrial parks and distribution centers as of the end of last year, representing more than a million square meters in rental space. Its parks span central Mexico to the U.S. border in the state of Chihuahua.

BBVA’s Torres said the growing availability of equity financing for developers is a sign of maturation in the market. He said average commercial bank mortgage rates should decline because of increasing competition.

“A lot of the development in the mortgage market in the last few years has taken place thanks to greater competition,” Torres said. “At the end of the day, that means better conditions for those seeking financing.”

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