Yield Hunters Sought for Mexico Mortgage Investment IPOJonathan Levin
A Mexican mortgage trust, looking to close the country’s largest initial public offering in over a year, is hoping to compel investors to buy its shares with one thing: yield, and lots of it.
Concentradora Hipotecaria SAPI, which is seeking to raise as much as 9.6 billion pesos ($706 million) from its IPO today, has spelled out a plan to deliver dividend yields of 14 percent to prospective investors. That’s better than the dividend projections of 36 of 38 global mortgage REITs, and more than twice the yield on 10-year fixed-rate Mexican bonds, according to data compiled by Bloomberg.
Central to its strategy is a growing pool of homebuyers in Latin America’s second-biggest economy, where mortgage rates far exceed the fund’s cost of debt financing. FHipo, as it is known, is working with the National Workers’ Housing Fund Institute, the state-backed mortgage bank that goes by Infonavit, to fund home loans at an average rate of 9.5 percent, all the while borrowing at 6.5 percent.
“The dividend yield makes it a great play,” Gerardo Sienra, a trader with Intercam Casa de Bolsa SA whose clients are evaluating the investment, said in a telephone interview from Mexico City. “What’s particularly attractive is the alliance they’re going to have with Infonavit, which is what makes this REIT solid.”
FHipo, which was created by the founders of Mexico City-based boutique investment banking firm Vace Partners, plans to sell about 320 million shares for 25 pesos each, before a so-called hot deal option that could increase the IPO by 20 percent. An overallotment option would boost the size another 15 percent of the base if it’s exercised.
The money will be used to co-originate mortgages which FHipo can do exclusively with Infonavit for a year. In keeping with the practice among Mexico’s REITs, which are known locally as fibras, FHipo plans to pay out 95 percent of profit as dividends.
Mortgage REITs use the difference between mortgage rates and their own borrowing costs to maximize returns, sometimes deploying considerable leverage. FHipo says it could pay a dividend yield of 14 percent through leverage -- by raising debt financing to double the amount of money it has to invest. Under the terms of the fund, its maximum debt-to-equity ratio is currently one, according to a prospectus.
The company may sustain high dividend payouts in part because the Infonavit mortgages have an inflation-protection mechanism linked to wages. Without such protection, consumer prices and rising interest rates can erode the attractiveness of investing in mortgage-related securities.
The IPO will be the first of a mortgage trust in Mexico, and the largest IPO in the country since dairy producer Grupo Lala SAB raised about $1 billion in October 2013, data compiled by Bloomberg show.
FHipo’s novelty could dampen demand as investors wait until the company builds out its portfolio and starts making promised payments, said Jorge Lagunas, who oversees about $200 million as a money manager at Grupo Financiero Interacciones SAB.
“This is a totally new instrument, and some investors will want to wait and see how the security matures,” Lagunas said by phone from Mexico City. “Many investors are still nervous about the volatility in the market.”
Developing nation stocks, as measured by MSCI Inc.’s Emerging Markets Index, have fallen 8.2 percent from their 12-month high in September. Mexico’s benchmark IPC index is down 2.5 percent from its high.
Infonavit was founded in the 1970s as a government-backed entity to help curb a housing deficit. Infonavit can keep a lid on borrower delinquencies because most of its home loans are structured as so-called payroll loans -- paid directly out of the borrower’s paycheck.
The government’s support for the mortgage market has translated into consistent growth, despite the recent financial struggles of homebuilders. According to data provided in FHipo’s investor presentation, Mexico’s mortgage market has grown at a compound annual growth rate of 7.7 percent since 2007.
The Mexican mortgage market “has been growing and has great potential,” Sienra said. “It’s one of the few securities that’s paying you that type of rate.”