Mexico REIT (FIBRA) Corporate Governance - It’s Personal

My father spent most of his childhood in the greater Guadalajara, Mexico region. As a teenager, he was a construction worker laboring away in the burgeoning neighborhood of Zapopan. In fact, almost fifty years ago, my mother would visit him at the jobsite of the then-new mall, Plaza Patria.

Fast forward to 2014, I advised my first publicly traded REIT or FIBRA in Mexico - Fibra Mty. The Chairman and founding management team wanted to change FIBRAs in Mexico by setting a new benchmark for corporate governance. With my roots and family still in Mexico, the idea that I would play a small role in making better FIBRAs for their retirement portfolios meant something to me. Advising FIBRAs to achieve better corporate governance wasn’t just my business - it was personal.

Over the next five years the Mexico FIBRA market would evolve. External management fees decreased and were increasingly paid in shares. Externally advised structures for new market entrants became uninvestable. Eventually Mexican pensions, like SURA, began to stand up against poor corporate governance. And several years ago Sam Zell, a US REIT godfather, shamed Mexico’s bad-actors for their conflicted structures. While the boom time of the FIBRA market is a thing of the past, the evolution of FIBRA corporate governance is not.

Corporate governance is supposed to evolve. Case in point, modern US REITs have been around for over three decades and the evolution is still happening. It’s what keeps activist REIT investors like Land & Buildings in the REIT headlines. But the same evolution (although in its own way) should and will happen in Mexico. Why? Because it matters.

Better corporate governance maximizes the number of investors - domestic and international- willing to consider an investment in FIBRAs. This decreases the cost of capital for the sector - all else being equal. With a lower cost of capital, investment opportunities create more value (more positive NPV projects in finance speak). In the long-run, it’s a good thing for the FIBRA market even if it means sponsors have to give something up in the short-term. After all FIBRAs are not get-rich-quick investments. They are vehicles that are meant to generate stable value over time through dividends and property value appreciation.

I recently had a call with my aunt in Guadalajara and she asked me whether she should invest in FIBRAs. I am not a personal financial advisor, but what I did tell her is that there are some real estate companies in Mexico worth investing in - they have great investment strategies, a proven platform, and good corporate governance. And there are some companies where investors, unfortunately, don’t do as well financially as the management teams or the Sponsors.

Brava! To Better Corporate Governance.

David De La Rosa