Remote Work And Aging Assets Will Hurt Mexican Office Occupancy

Key Takeaways

• Shifts toward remote work and e-commerce threaten long-term demand for office and retail properties, risking higher vacancies and rental pressures.
  
• Rising financing costs, high leverage, and an aging property portfolio create vulnerabilities for future cash flows and earnings stability.
  
• Strong demand, premium pricing, and strategic portfolio management support resilient earnings growth, balance sheet improvement, and sustained value creation through quality assets and sustainability leadership.

Catalysts

Fibra UNO Trust was established as a Real Estate Investment Trust on January 12, 2011, by Fibra UNO Administración, SA de CV (the "Settlor") and Deutsche Bank México, SA, Institución de Banca Múltiple, División Fiduciaria (the "Trustee" or "Deutsche Bank").

• Even as Fibra UNO celebrates strong current occupancy in its office and retail segments, the acceleration of remote and hybrid work threatens to fundamentally reduce long-term demand for office space in Mexico's urban centers, which will likely erode occupancy rates and pressure rental revenues over time.
  
• The shift toward e-commerce, while currently boosting demand for logistics, is expected to increasingly displace traditional brick-and-mortar retail tenants, potentially elevating vacancy rates or forcing rental concessions for Fibra UNO's shopping centers, resulting in less predictable and potentially lower cash flows.
  
• Rising interest rates and tightening global monetary policy continue to push up the company's cost of capital while lowering refinancing flexibility; this dynamic will negatively affect net margins, distribution yields, and the valuation of its property assets in coming years.
  
• High leverage remains a significant vulnerability for Fibra UNO, with net debt to EBITDA still around seven times and material refinancing risk over the next several years, leaving net earnings and distributable income highly exposed if cash flows weaken or interest expenses increase further.
  
• A large portion of Fibra UNO's property portfolio is aging and will require considerable reinvestment to remain competitive; if capital expenditures are delayed or cannot keep pace with changing tenant and market expectations, recurring revenue and long-term earnings will slowly deteriorate.

Fibra UNO Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Fibra UNO compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Fibra UNO's revenue will grow by 3.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 29.2% today to 41.7% in 3 years time.
• The bearish analysts expect earnings to reach MX$13.6 billion (and earnings per share of MX$3.55) by about July 2028, up from MX$8.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, down from 11.8x today. This future PE is greater than the current PE for the MX REITs industry at 8.0x.
• Analysts expect the number of shares outstanding to decline by 0.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.93%, as per the Simply Wall St company report.

Fibra UNO Future Earnings Per Share Growth

Risks

• Sustained high occupancy rates across all segments, including industrial at over 98%, retail at nearly 94%, and office surpassing pre-pandemic levels at close to 84%, signal strong and resilient demand for Fibra UNO's core property types, which bolsters rental revenue and supports future earnings growth.
  
• Consistent ability to achieve positive leasing spreads well above inflation, such as the 15% annual rent growth in industrial and solid spreads in retail and office, indicates robust pricing power and points toward continued net operating income and margin expansion in the long run.
  
• Successful execution of planned asset divestures and the anticipated industrial carve-out (Fibra Next) are expected to result in significant deleveraging, improving the balance sheet, lowering financial risk, and potentially boosting distributable earnings and valuation multiples.
  
• Strategic asset allocation towards primary metropolitan areas, rather than riskier border or secondary markets, enhances capital appreciation and preserves real estate value, positioning the company for long-term growth in property values and equity.
  
• Market leadership in LEED-certified and sustainable properties underpins the company's ability to capture premium rents and attract institutional capital, which should drive higher recurring revenue and support strong net margins as ESG trends accelerate.

Valuation

• The assumed bearish price target for Fibra UNO is MX$22.95, which represents two standard deviations below the consensus price target of MX$31.4. This valuation is based on what can be assumed as the expectations of Fibra UNO's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$38.0, and the most bearish reporting a price target of just MX$21.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be MX$32.6 billion, earnings will come to MX$13.6 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 16.9%.
• Given the current share price of MX$26.61, the bearish analyst price target of MX$22.95 is 15.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.