Nearshoring And Lower Rates Are Expected To Support Long Term Retail REIT Strength

Catalysts

About Fibra Shop

Fibra Shop is a Mexican retail-focused REIT that owns, operates and develops shopping centers across key high-growth regions of the country.

What are the underlying business or industry changes driving this perspective?

• Benefiting from sustained formal employment growth and resilient domestic consumption in regions such as the northern border and Bajío, Fibra Shop can continue to push lease spreads 1 to 2 points above inflation, driving steady rental revenue growth.
• Mexico's continued nearshoring momentum and strong gross fixed investment in industrial and service corridors surrounding Fibra Shop's properties support higher tenant sales and demand for space, which should underpin occupancy around 96 percent and support NOI expansion.
• As interest rates trend toward 6.5 percent and the recently executed refinancing extends maturities and improves pricing, lower financial costs and reduced refinancing risk should lift FFO margins toward the 35 to 40 percent target range and support earnings growth.
• Ongoing ramp up and lease up of strategic assets such as La Perla and Las Misiones, including the absorption of large vacant spaces by stronger brands, is expected to increase stabilized NOI toward the MXN 460 million goal and enhance portfolio level EBITDA.
• Scaling clean energy use, sustainability-linked financing and social programs that improve tenant and employee stability should translate into more efficient operations and lower utility and risk-related costs, supporting stable NOI margins above 75 percent and higher distributable cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Fibra Shop's revenue will grow by 12.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 89.7% today to 19.1% in 3 years time.
• Analysts expect earnings to reach MX$701.8 million (and earnings per share of MX$0.96) by about December 2028, down from MX$2.3 billion today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, up from 2.5x today. This future PE is greater than the current PE for the MX Retail REITs industry at 2.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.64%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Mexico's GDP is only expected to grow around 1 percent in 2025 and 1.4 percent in 2026. If nearshoring and domestic consumption weaken versus expectations, tenant sales could slow, pressuring future rent increases and putting revenue and NOI growth at risk.
• The strategy of pushing lease spreads 1 to 2 points above inflation in a lower inflation environment may prove unsustainable if tenants resist higher rents. This could lead to lower occupancy than the targeted 96 percent and constrain rental revenue and EBITDA growth.
• The refinancing strategy keeps leverage just below 40 percent and contemplates reopening the FSHOP 25 U bond for around MXN 1.2 billion. If interest rates do not fall toward 6.5 percent as expected or credit conditions tighten, higher financing costs could cap FFO margin expansion and reduce earnings.
• Key assets like La Perla and Las Misiones still depend on successful lease up and renewals. Any delays in renting large vacant spaces or weaker demand from major brands could prevent NOI from reaching the targeted MXN 460 million and weigh on portfolio level EBITDA and cash flows.
• While 45 percent of energy comes from clean sources and sustainability initiatives are progressing, future regulatory changes or higher capital requirements for environmental upgrades could increase operating expenses faster than rents. This could compress NOI margins that are currently above 75 percent and limit distributable cash flow growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of MX$10.05 for Fibra Shop based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be MX$3.7 billion, earnings will come to MX$701.8 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 19.6%.
  
• Given the current share price of MX$8.66, the analyst price target of MX$10.05 is 13.8% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.