AMERICAS NEWS: Alternative exits

In July, Mexico Retail Properties (MRP), the country’s largest shopping center owner and developer, agreed to sell 49 shopping centers to Fibra Uno, a Mexican real estate investment trust, for roughly $23.16 billion pesos (€1.3 billion; $1.8 billion). It was the largest property transaction ever in the history of the Mexican real estate market. 

Still, the sale was notable for other reasons besides its unprecedented price tag: it also marked a massive exit of private equity real estate investments in Mexico. MRP, an affiliate of Denver-based real estate investment firm Black Creek Group, originally had acquired the properties in the portfolio – totaling nearly 1 million square meters (10.76 million square feet) – through three of its institutional real estate funds. 

The rise of Mexican REITs, known locally as a Fideicomiso de inversiones en bienes raices (Fibras), has significantly altered the private equity real estate industry’s view of the market, according to Michael Fitzgerald, a partner in the Latin America practice of law firm Paul Hastings. “Private equity investors always have been reluctant to commit capital in emerging markets because of a lack of viable exit strategies,” particularly for real estate investment, said Fitzgerald, whose firm has served as counsel on multiple Fibra offerings. “With the advent of the Fibra, the world has turned upside down. Now, real estate investments in Mexico have become among the most liquid kind of private equity investment.” 

In 2011, the El-Mann family, one of the largest real estate owners in Mexico, created Fibra Uno, the first publicly traded Mexican REIT. Spurred by the success of Fibra Uno, five additional Fibras have been listed on the Mexican Stock Exchange, Bolsa Mexicana de Valores, in the past year. 

Among them is the March launch of Terrafina, into which Prudential Real Estate Investors (PREI) rolled its existing industrial assets from two of its legacy Latin American funds. Other private equity real estate firms were expected to follow suit and place their own Mexican properties into new REITs.

One of those firms was MRP, which had long been anticipated to exit its massive Mexican holdings through an IPO as a Fibra, not a sale to an existing REIT. However, with shares of existing Fibras trading at an implied capitalization rate of 10 percent, the firm was said to have determined that it would achieve a better valuation for its assets through a sale rather than forming its own Fibra. After all, competition for assets among existing Fibras has driven up pricing for high-quality properties. Also, to a lesser extent, volatility in the Mexican equity markets has reduced the short-term valuation multiples of Fibra stocks.

MRP isn’t the only private real estate shop to forgo a Fibra listing as its real estate holdings in Mexico enter the harvesting stage. For example, Hoteles City Express, a Mexico City-based business hotel company, issued a $200 million initial public offering on the Bolsa Mexicana in June. City Express’ primary owner is Morgan Stanley Real Estate Investing, which invested in the company on behalf of its Morgan Stanley Real Estate Special Situations Fund III. 

Like MRP, City Express also was largely expected to roll over its assets into a newly-formed Fibra. However, as a developer, the company wanted to re-invest the cash that it generated into new projects rather than distribute it to shareholders, as would be required if it were structured as a REIT. So, the firm decided to go public with a C-corporation structure instead. Grupo Hotelero Santa Fe, a hotel operator partly owned by private equity firm Nexxus Capital, also is seeking to go public with a traditional corporate IPO for similar reasons.

Some private equity firms now may consider a corporate IPO more attractive than launching a Fibra because such companies are more focused on maximizing capital gains, which may be best achieved by re-investing profits back into the company. Interestingly, corporate IPOs have gotten a lift from Fibras, which have raised real estate valuations across the board in Mexico and, in turn, boosted IPO pricing and multiples for ordinary real estate companies. 

Indeed, Fibras appear to have fallen out favor in recent months. “There’s definitely been a shift out there,” said 
Alfonso Munk, head of PREI Latin America. “I don’t think the market can digest more Fibras for the moment.”
Other industry players, however, still view Fibras as their preferred exit strategy. Last month, a partnership between Mexican industrial developer Finsa, Walton Street Capital and American International Group sold 34 industrial assets in the country with a total value of $372 million to Fibra Uno. 

Meanwhile, the Fibra market overall is poised for further expansion, with a number of companies expected to launch new REITs during the second half of 2013, although it remains to be seen how many actually will go public. As that market continues to evolve, so will private equity real estate in Mexico.