Sam Zell Slams Mexican Real Estate Trust Leaders: ‘Shame on You’

(Bloomberg) -- Billionaire investor Sam Zell chastised the industry officials who had invited him to speak at a recent event in Mexico, calling on the country’s real estate investment trusts to improve their corporate governance standards.

“Shame on you,” he said, according to three people present.

Zell shocked attendees as he appeared to step away from his record as a champion of investing in the country, saying in a keynote address last month that Mexican REITs, known as Fibras, must take note of U.S. reforms. The industry lacks the corporate structures needed to attract global investors, he said, according to the people present.

Zell declined to comment through his fund, Equity International. The event, hosted in Mexico City by the Fibra industry association at Torre Virreyes, was closed to the media.

Fibras have long struggled to win over major global investment funds due to high fees, closely-controlled boards, conflicts of interest and anti-takeover measures. Yet Fibras have surged this year, far outpacing Mexico’s benchmark index, after U.S. and Mexican central banks cut interest rates.

The rally, however, has left the industry at a crossroads as corporate structures, which have benefited insiders and angered long-term investors, are impeding greater flows from major funds that restrict themselves to REITs with better governance. Investor ire is particularly focused on external advisory companies that the Fibras use for real estate purchase decisions that may conflict with shareholders’ interests.

Amid an economic slowdown in Mexico, the appeal of Fibra dividend yields has been growing, according to analysts at BTG Pactual led by Gordon Lee. With lower U.S. interest rates and borrowing costs in Mexico, the rally in REITs is also likely to continue, they said.

Zell’s comments back calls for reform from Mexican pension funds, which are major investors in Fibras. Last year, Grupo Sura’s Mexican pension fund wrote a letter to Fibra Shop, complaining the stock was underperforming its peers due to its external advisory company.

Under such a structure, the Fibra pays fees usually based on the value of the properties in the fund, not the stock’s performance, meaning managers have an incentive to add properties, even if it hurts the stock price.

Conflicts of interest are also a concern for investors, said Sheryl Cefali, a managing director at Duff & Phelps, who was also at the investment event. Families that founded Fibras have sold additional properties to the funds, raising concerns that the prices paid may not be fair to investors, she said.

Investors had overlooked such conflicts when Fibras were introduced to the market in 2011, when shares traded at a premium to the value of their properties.

But tensions have since grown as share prices among Fibras, such as Fibra Uno, have fallen below the value of their properties.

Luis Gutierrez, the head of the Mexican REIT association Amefibra and CEO of Fibra Prologis, said the push for reform was “a decision for each Fibra.”

Industrial Fibras, like his, have topped recent investment lists by analysts at Credit Suisse and Itau BBA, who argue the properties have been unfairly discounted over U.S.-Mexico trade concerns.

Most Fibras are trading at a discount of 15% to 25% to net asset value, according to BTG, meaning prices are still about 20% lower than where Fibras would need to be to internalize and buy out the advisory companies that raise governance concerns.

Consolidation could also further improve liquidity among Mexico’s Fibras, but that would require eliminating anti-takeover restrictions, BTG’s Lee said. Meanwhile, Greg Kuhl, a portfolio manager at Janus Henderson, said liquidity is a top concern. Reform could help improve liquidity as some investors won’t even look at a REIT that is externally managed, he said.

To contact the reporter on this story: Michael O'Boyle in Mexico City at moboyle7@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Jennifer Bissell-Linsk, Will Daley

©2019 Bloomberg L.P.