IPO Update: Vesta Real Estate Targets US $401 Million IPO (VTMX)

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A brief look at Vesta Real Estate Corporation

According to an amended F-1/A registration, Vesta Real Estate Corporation (VTMX) has filed a request to raise $401 million in an initial public offering of its American Depositary Shares, which are underlying common stock Opinion.

The company acquires, develops and manages industrial properties in Mexico.

VTMX is growing relatively quickly as the company continues to acquire and develop industrial properties throughout Mexico.

For investors looking for a dividend stock with a 4.6% yield, VTMX could potentially be a good pick, but I have a Neutral (Hold) bias on the stock.

Vesta overview

Based in Mexico City, Mexico, Vesta Real Estate Corporation was founded in 1998 with the aim of developing a portfolio of industrial real estate properties in numerous regions of Mexico.

Management is led by Co-Founder and Chairman Mr. Lorenzo Manuel Berho Corona who has been with the company since its inception in 1998 has more than 30 years of experience in the real estate industry in Mexico.

As of March 31, 2023, the Company’s portfolio consisted of 202 buildings with approximately 33.7 million square feet of GLA.

The stabilized occupancy rate of the portfolio was 96.7%.

As of March 31, 2023, Vesta has a fair market value investment of US$952 million in equity and US$925 million in long-term debt from investors such as Afore Coppel and others.

Management says the company is “one of the few fully vertically integrated and internally managed Mexican industrial real estate companies that owns, manages, develops and leases large-scale industrial properties in Mexico.”

The company’s portfolio as of March 31, 2023 is presented below:

Company Portfolio List (SEC)

The share of general and administrative expenses in total sales has increased as revenue has increased, as shown in the following figures:

General administration	Expenses vs. Income
Period	percentage
Three Mos. Ended March 31, 2023	16.3%
2022	13.7%
2021	13.3%

click to enlarge

(Source – SEC)

The General & Administrative Efficiency Multiplier, which defines how many dollars of additional new revenue generated by each dollar of general & administrative expenses, increased by 1.0x over the most recent reporting period, as shown in the following table:

General administration	efficiency rate
Period	Several
Three Mos. Ended March 31, 2023	1.0
2022	0.7

click to enlarge

(Source – SEC)

Vestas market and competition

According to a market research report by Mordor Intelligence, the market for commercial real estate of all types in Mexico was valued at US$52.3 billion in 2019 and is expected to reach US$88.4 billion by 2028.

This equates to a projected CAGR (Compound Annual Growth Rate) of 6% from 2019 to 2028.

The main drivers of this expected growth are a rebound in demand for services since the pandemic subsided and a likely increase in demand as the US tries to “near-land” additional production in various industries.

In addition, the Company currently has 13 projects under construction in the North and Bajio regions of the country totaling nearly 3.9 million square feet of gross leasable area.

Key competitors or other industry players include:

• prolog

• CPA

• Fiber One

• Macquarie fiber

• Fiber Monterrey

• Terrafina Fiber

• fine

• American Industries

• Regional property owners

Financial performance of Vesta Real Estate Corporation

The company’s recent financial results can be summarized as follows:

• Growing Sales

• Increase in operating profit and operating margin

• Variable cash flow from operating activities

Below are relevant financial results derived from the Company’s registration statement:

total sales
Period	total sales	% Variance vs. Previous
Three Mos. Ended March 31, 2023	$50,193,961	19.5%
2022	$178,025,461	10.7%
2021	$160,786,358
Operating Profit (Loss)
Period	Operating Profit (Loss)	operating margin
Three Mos. Ended March 31, 2023	$47,035,862	93.7%
2022	$166,602,067	93.6%
2021	$150,059,601	93.3%
Total Income (Loss)
Period	Total Income (Loss)	net margin
Three Mos. Ended March 31, 2023	$34,669,763	69.1%
2022	$252,548,018	503.1%
2021	$171,990,367	342.7%
Cash flow from operations
Period	Cash flow from operations
Three Mos. Ended March 31, 2023	$24,083,453
2022	$65,214,868
2021	$107,930,032
(Glossary of terms)

click to enlarge

(Source – SEC)

As of March 31, 2023, Vesta had US$98.2 million in cash and US$1.3 billion in total debt.

Free cash flow for the twelve months ended March 31, 2023 was $93.7 million.

Vesta Real Estate IPO details

VTMX intends to sell 12.5 million American Depositary Shares, representing underlying common stock, at a reference price of $32.07 per share for gross proceeds of approximately $401 million, with the sale of customary underwriters -Options is not considered.

No existing or potential new shareholder has shown any interest in buying shares at the IPO price.

Assuming a successful IPO in the middle of the proposed price range, the Company’s enterprise value at IPO (excluding underwriter options) would be approximately $3.1 billion.

The float to outstanding share ratio (excluding underwriter options) will be approximately 15.29%. Anything below 10% is generally considered a “low float” stock, which can experience significant price volatility.

As a foreign private issuer, the company may elect to benefit from reduced, delayed or exempt financial and executive disclosure requirements compared to those required by domestic US companies.

The company is an “emerging growth company” within the meaning of the JOBS Act 2012 and may choose to benefit from the reduced reporting requirements of public companies; Potential shareholders would receive less information for the IPO and going forward as a publicly traded company under the requirements of the law.

Pursuant to the Company’s most recent regulatory filing, the plan is to use the net proceeds as follows:

We intend to use the net proceeds of the Offer to fund our growth strategy, including an estimate of 30% to 40.0% of the net proceeds of the Offer for the acquisition of land or real estate and related infrastructure investments and an estimate of 60.0% to 60.0% % 70.0% for the development of industrial buildings.

(Source – SEC)

A presentation of the company roadshow by the management is not available.

Regarding pending lawsuits, management said it has not accrued any lawsuits because they are “unpredictable in nature and involve significant uncertainty.”

The public bookrunners for the IPO are Citigroup, BofA Securities, Barclays, Morgan Stanley and Scotiabank.

Valuation metrics for Vesta real estate

Below is a table of the company’s relevant capitalization and valuation metrics at the IPO, excluding the impact of underwriter options:

Dimension (TTM)	Crowd
Market capitalization at IPO	$2,621,769,957
Enterprise value	$3,071,369,957
price/sales	08/14
EV/Revenue	16.49
EV/EBITDA	17.68
earnings per share	$2.77
operating margin	93.31%
net margin	124.53%
Ratio of float to shares outstanding	15.29%
Proposed IPO midpoint price per share	$32.07
Net Free Cash Flow	$93,712,248
Free cash flow yield per share	3.57%
Debt/EBITDA multiple	5.35
CapEx ratio	307.71
sales growth rate	19.54%
(Glossary of terms)

click to enlarge

(Source – SEC)

Comment on Vesta Real Estate

VTMX seeks public capital market investment in the United States to fund the acquisition and development of industrial real estate in Mexico.

The company’s financials show increasing revenues, increasing operating profits and operating margins, and fluctuating cash flow from operations.

Free cash flow for the twelve months ended March 31, 2023 was $93.7 million.

The proportion of general and administrative expenses in total sales has risen as income has increased; The multiplier of general and administrative efficiency increased to 1.0 times in the last reporting period.

The company currently plans to pay out up to 75% of its distributable earnings each year. However, payments may be restricted due to debt securities agreements and Mexican law.

The company paid an annual dividend of about 8.3 cents per share in 2022 and an annual dividend of 9.7 cents per share in 2021.

In March 2023, the board of directors declared an annual dividend of $9.0 per share, to be paid in quarterly instalments.

The market opportunity for commercial real estate in Mexico is large and is expected to grow at a moderate growth rate of around 6% through 2028.

Citigroup is the leading underwriter, and the three IPOs it has completed in the last 12 months have produced an average negative return (31.6%) since their IPO. This is a bottom performance for any major underwriter over the period.

Risks to the Company’s prospects as a public company include the Company’s focus on industrial real estate in Mexico, which is subject to various economic, political and interest rate risks.

As for valuation expectations, management is asking IPO investors to pay an enterprise value/sales multiple of 16.5x.

The company essentially operates as a REIT with a funds from operations (FFO) of 15.23 cents per share in 2022.

Assuming an ADS price of $32.00 at IPO, the annual rate would be about 4.6%.

While the Mexican peso has appreciated in recent quarters, its long history against the US dollar has generally been one of depreciation.

For investors looking for a dividend stock with a 4.6% yield, VTMX could potentially be a good pick, but I have a Neutral (Hold) bias on the stock.

Estimated price date for the IPO: June 29, 2023.