Corporación Inmobiliaria Vesta, S.A.B. de C.V.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Corporación Inmobiliaria Vesta, S.A.B. de C.V. is a vertically-integrated and internally managed industrial real estate developer, with a focus on building and operating industrial facilities for large multinational companies in Mexico and the Americas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Vesta’s core business involves developing, acquiring, and managing industrial buildings and distribution facilities, primarily for multinational corporations operating in Mexico. This includes both build-to-suit and speculative properties, catering to diverse needs within the industrial sector.

Vesta’s revenue streams are primarily derived from:

Rental Income: This constitutes the majority of their revenue, generated from their leased properties to tenants.
Real estate income: Revenue generated from the sale of land reserves.
Management and other income: Fees from management services, plus other one-off income.
Interest Income: income generated from the entity’s own financial investments.

A notable element of their operating model is their vertical integration which offers cost and time advantages. They handle everything from land acquisition, construction, design and engineering to the management of finished properties, plus their own team handles operations, leasing, and financial functions in-house.

The industrial real estate market in Mexico is experiencing robust growth, driven by nearshoring trends and the USMCA agreement, and the demand is mostly concentrated in the areas near the U.S. border.

Vesta is focusing on expanding into key locations in the north of Mexico. They also have the right access to infrastructure to facilitate manufacturing and logistics companies that focus on serving the U.S. market.

Their occupancy rates have remained high (at around 97%) with stable rental rates, resulting in predictable and stable income. The company’s recent moves to increase property prices and attract a high-quality tenant base has also shown promising results for both ROIC and revenues. Margins: Vesta has a high EBIT margin at 67% but that should be looked at through different aspects of the business, as those margins are generated by development.

Competitive Landscape: The industrial real estate market in Mexico is competitive, with several key players including other developers like Prologis and Fibra Uno, and international developers like GLP. Competition for tenants is mainly based on strategic location, speed of development, construction quality and costs. In Mexico, industrial real estate development is often tied to industrial production, with competition from companies building in other low-cost areas of the world.

What makes Vesta different from competitors:

Established relationships: Vesta has established relationships with multinational corporations, giving them a key advantage in acquiring and retaining key tenants.
Vertically integrated platform: This lets them control costs, timelines and quality in ways that are difficult for competitors to replicate, while being close to customers and suppliers.
Geographic focus: While they’re expanding, Vesta still focuses primarily on northern and central Mexico-this expertise and knowledge might make it more difficult for competitors to replicate.
ESG focus: They’re making strides in sustainability and climate change mitigation which helps improve brand reputation, while reducing costs (and attracts clients).

Moat Assessment: 3/5 Vesta has a narrow moat based on several factors, but isn’t impenetrable:

Location Advantages: Vesta has locations in strategic industrial areas in Mexico, which have a unique geographical advantage being close to the U.S. market. While these locations are valuable, they aren’t unique. Other competitors could develop projects in these areas and potentially replicate success.
Customer Relationships: Long-standing relationships with key clients, particularly global multinationals, help to secure contracts and repeat business, and these are very hard to replicate.
Vertical integration: By owning and managing their construction, and having their management in-house, Vesta creates a more cost-efficient and higher quality of work.
Barriers to Replication: Building their scale and brand reputation requires effort, plus having the expertise in development and property operations. This serves as a barrier to new entrants.
Intangible Assets: Their brand as an international developer focused in Mexico, along with certification and recognition of their sustainability efforts.

However, Vesta’s moat isn’t as strong as a wide moat company with deep and sustainable advantages:

Competitors can still take up on new locations and develop properties that may entice some customers.
Competitors could also replicate some of their process and business model.
New, innovative construction technologies and project management may erode Vesta’s cost advantages. Therefore, I would assign a moat rating of 3 out of 5.

Legitimate Risks to the Moat and Business Resilience:

Economic Downturn in Mexico and the U.S.: A slowdown or recession in these countries will result in less demand for industrial facilities. This would lower occupancy rates and lower their revenues.
USMCA Review/Changes: The USMCA’s role in encouraging companies to move or expand to Mexico may be altered or removed, thus significantly limiting or reducing their revenues.
Increased Competition: New entrants or existing competitors may try to increase incentives and price cuts, thereby taking up market share, and squeezing their profitability. This could be done more readily as the market develops further.
Rising Labor Costs: Mexico’s labor costs and other input costs may rise, particularly due to global inflation, which would squeeze profit margins.
Inflation: Inflation can significantly decrease profit margins by increasing operating costs, while also potentially reducing the value of their assets if they’re not kept up.
Technological Obsolescence: As technological advances are made in construction and logistics, some of their current properties could be viewed as substandard.
Political and Regulatory Changes in Mexico: Regulatory barriers and policies in Mexico may change that put an enormous strain on profitability, or may restrict their business operations.
Supply Chain Disruptions: Supply chain issues could make costs variable and lead to inefficiencies in the process.
Global Events: Global events such as the war in Ukraine, the Chinese economic slowdown, or global recessions may adversely affect the company.
Loss of Key Clients: Loss of key clients that use their spaces may have a significant impact on profitability and operations.
Rising Interest Rates: Rising interest rates will increase financing costs for future projects. This will also affect the attractiveness of investment.

In terms of business resilience, Vesta’s operational strengths are still a big plus. The management team has a track record of creating value for clients with a vertical integrated approach. The company also has a diversified portfolio of properties, reduces the reliance on any one client. Moreover, their focus on long-term contracts allows for predictable and stable cash flows. These attributes make Vesta likely to remain resilient. However, the business is also subjected to the market conditions, so an economic downtown or external events will heavily impact performance.

Vesta has implemented a robust sustainability framework in their operations that reduces operating costs and also improves their image with clients. These efforts may help the firm to remain relevant in the eyes of its current and future clients.

Financials Analysis: Vesta’s financial statements reveal a company with consistent growth, especially in revenues. In 2022, revenue grew by a good margin to USD $464.3 million. In 2023 their revenue for three months ended March 31, is USD $152.3 million, a 16% increase over the previous three months of last year. While profitability and margins have varied slightly over the year, they remain at a high point and a sign of a business with low costs and solid growth potential.

Revenue Growth: Revenue has grown consistently in the past three years (excluding pandemic years), driven by leasing and property sales.
Profitability: While total operating profit is very healthy, the net profit has fluctuated across recent periods due to market volatility.
ROIC: Average ROIC of their business appears to be 10% and in the top half of the industry. While some of their business units and segments are not performing up to the same rate, they maintain this average through solid performance in other operations.
Debt: The company has a modest leverage ratio that provides the company with financial flexibility and low interest repayments. Although the debt is not low enough that it would protect the company from external shocks.
Cash Flows: Cash flow remains robust, and the company is continuing to make strategic investments and acquisitions for future growth.
Guidance: The current guidance suggests that company revenues are likely to grow moderately in the future.

Recent concerns / controversies:

Uncertainty around Mexican Economy: There is some instability, including inflation and increased unemployment in Mexico that could make it difficult for expansion of their businesses and for clients, leading to a reduction of demand.
Global Inflation: High global inflation rates might lead to greater costs, and reduce purchasing power in the region. Vesta is facing a dilemma in having to decide between passing the costs on to their tenants, or absorbing the costs themselves.
Currency fluctuations: Because a lot of revenue is earned in pesos, there’s vulnerability in the FX rate affecting their financial results. In response to these, Vesta’s management have given these explanations in the latest earning calls:
They believe that their focus on strategic locations means they’re better positioned to handle downturns in the economy and still attract key clients, they also highlighted their large, diverse client base.
As for inflation, the company plans on passing some costs on to tenants, but also to improve their own cost structure to mitigate the damage, and they have successfully been doing this in the last year.
While there are risks regarding the Mexican economy, the company will continue to focus on high growth areas of Mexico that are less vulnerable to recessions or economic uncertainty.
They also acknowledge some of the changes in their tax structure, which may cause some financial volatility in the short term, but it is a part of their plan to focus on long term gains and growth.
They intend to reduce their leverage in the coming years to have more financial flexibility.

Understandability: 3 / 5 The business model is a fairly standard real estate model, which makes it easy to grasp:

Acquire land
Build facilities
Lease or sell the space.

However, Vesta’s business involves a number of complicated financial structures that make it less understandable. Understanding their financial statements will require additional work, since several aspects of reporting are particular to real estate developers and the Mexican market. Therefore, it should be regarded as moderately complex. I would give an understandability rating of 3 out of 5.

Balance Sheet Health: 4 / 5 Vesta’s balance sheet is strong overall and continues to grow in strength:

Current Assets/Liabilities Ratio: The ratio is 1.85, which indicates that the company has substantial assets to cover its current liabilities, which is also a strong indicator that the company will meet short-term obligations.
Debt-to-Equity Ratio: The debt to equity ratio is around 69%, which means that the company is levered more than competitors, especially given that companies with a lower ROIC tend to have lower debt ratios, and it indicates some risk in a time of financial distress. However, they have committed to lowering the ratio to 1.1 in the coming years.
Quick ratio: The quick ratio is 0.58. which indicates lower levels of liquidity in the short-term, though this doesn’t fully represent Vesta’s strength.

Moreover, their revenue is stable and growing, with great margins and strong long-term lease contracts that provide the company with consistent cash flows. Therefore, I would give the company a 4 out of 5 rating, since it is mostly in a strong position but with some points of concern.