The last couple of days have been a truly wild time for one particular company. The company in question is none other than Logistic Properties of the Americas (NYSE:LPA), a real estate business that owns industrial properties throughout Central and South America. Shares of the business spiked from $33.01 on May 29th to $258.85 one day later. They then plummeted roughly 49.8% on May 31st, closing at $130.00 apiece. This volatility came about in response to news that the company would be one of seven new real estate firms added to the Russell Microcap Index as part of that index’s annual reconstitution.
It makes a great deal of sense that shares would appreciate after such a development. Typically, inclusion in a major index results in a lot of buying activity by funds that are set up to track the broader market and to track the index in question. However, I would argue that this initial move higher vastly overstates the value of the company. And after seeing shares fall by nearly half, the stock still appears to be priced at levels that just don't make sense. Because of this, I have no choice but to downgrade the firm to a ‘strong sell’ even though I believe in its potential for growth in the long run.
A niche business
Odds are, there is a lot of confusion regarding Logistic Properties of the Americas right now. This is almost certainly because the company is a new player in the public markets. Prior to March 27th of this year, the operations that Logistic Properties of the Americas controls were under a privately held company known as LatAm Logistic Properties, S.A. However, that company, as well as two, a Cayman Islands SPAC, whereby both enterprises merged with newly formed subsidiaries under the new enterprise known as Logistic Properties of the Americas.
In an investor presentation that recently came out, the management team at Logistic Properties of the Americas lays out what the company’s assets now include. As a whole, it controls 7.3 million square feet of gross leasable area assets. This square footage is in the form of what management calls Class A logistics real estate. These assets largely consist of industrial warehouses, with many of them focused on the e-commerce market. It is worth noting that only about 4.6 million square feet of this space is currently operating. The rest is in the form of square footage that is either under development or that is included in the company's land bank. When looking at stabilized properties, these are ones that have been operating at capacity, the firm boasts a 100% occupancy rate.
The largest chunk of its operating space, about 2.4 million square feet in total, is located in Costa Rica. The company has another 1.3 million square feet of operating space in Colombia, with just over 1 million square feet in Peru. Its eight largest tenants account for roughly 41% of the firm's annualized base rent. And when it comes to the types of tenants that it services, the largest concentration falls under the consumer goods category. Approximately 31% of its operating square footage falls under this category. This is followed very closely by the retail category at 29%. While comparing itself to other similar enterprises, the management team pointed out that it boasts a weighted average lease term remaining of about 5.3 years. Of the five companies that compared itself to, only one boasted a weighted average lease term greater than this. And none of them had the same kind of occupancy rate that Logistic Properties of the Americas claims to have.
Over the past few years, management has done well to really grow the business. Back in 2019, the company had less than 1.9 million operating square feet. From that point to the 4.6 million square feet that the company has today translates to an annualized growth rate of about 25%. Much of this has come from the firm's decision to diversify away from Costa Rica by investing in assets in Colombia and Peru. And in an interview on CNBC, the company’s CEO stressed that the business intends to enter into Mexico in the near future.
Geographically speaking, these types of moves make sense. Management pointed out, for instance, that e-commerce sales throughout Latin America are exploding. It's expected that from 2023 through 2027, we should see an annualized growth rate in that region of about 11%. This should take total e-commerce sales there up from $133 billion last year to $204 billion by 2027. In Costa Rica, growth is supposed to be a whopping 14%, marking the fastest growth of the three countries in which the firm has a presence.
This overall expansion in e-commerce is expected to correspond with strong inflation adjusted GDP growth. From 2016 through 2019, the three countries in which the firm already has a presence saw annualized real GDP growth of between 2.3% and 3.4%. From 2021 through the end of this year, the range is expected to be between 4.5% and 5.3%. Those same regions also post stable inflation levels and low amounts of debt relative to GDP. This most certainly bodes well for any company doing business there.
I would also like to point out that e-commerce penetration in Latin America is still very low. Only about 12.3% of all sales throughout the region are in the form of e-commerce. That compares to 15.5% in Europe. In North America, that figure is at 26.3%. And in the Asia Pacific region, it stands at a whopping 27.5%. Of the regions of the world that Logistic Properties of the Americas highlighted, only the Middle East and Africa remain lower at about 4.1%. It is practically guaranteed that, as time goes on, e-commerce penetration will grow further. Considering the assets that will benefit from a growth in penetration, this also should translate to growth for the company down the road.
Naturally, the growth in assets that Logistic Properties of the Americas experienced during this window of time resulted in strong growth from a financial perspective. From 2020 through 2023, revenue for the company grew by about 27.6% annually. That took sales up from $18.9 million to $39.3 million. In 2024, revenue is expected to be $50.8 million. That's 29.3% higher than what the company reported last year. There has been a gradual increase in the firm’s EBITDA margin as well, with expansion from 63% in 2020 to 66% last year. But for 2024, management expects this to grow further to 78%, taking EBITDA up from $26 million last year to $39.7 million this year. If we assume that adjusted operating cash flow, which is a metric that strips out working capital changes from operating cash flow, will grow at the same rate that EBITDA did, then we would expect that metric to expand from $10.7 million last year to $16.3 million this year.
Perhaps the only negative thing from an operational perspective is that leverage appears to be quite high. Although the company’s net leverage ratio is down from the astronomical 15.6 reading that it was at in 2019, it is still quite lofty at 9.1 based on data from last year. Obviously, the expansion in EBITDA this year should help with that. But we do not have any idea how much additional debt the company might take on in the process. If this number is high, the net leverage ratio could remain the same or increase further. But only time will tell what that outcome will be like.
One other thing that is important to mention is that the company does seem to have an issue with its assets in Colombia. In its latest financial filing, the firm made clear that high interest rates in Colombia have required it to get a waiver on its debt service coverage ratio for the $93 million worth of investment properties that the company has in that country. The next testing period for the covenants is slated to be on June 30th of this year. Management said that if they cannot further restructure this arrangement or get another waiver that it could result in the lender, Bancolombia, foreclosing on those properties. These assets were responsible for 22.3% of the company's revenue in the latest quarter. So while the business would certainly be fine if this does come to pass, it would certainly put a lot of pain on shareholders in the near term.
Given all of these positive things about the company, you might think that I would be bullish about its prospects from an investment perspective. I do believe that the company has excellent potential to grow. However, in addition to the lofty leverage, the firm is now trading at multiples that don't make sense. Even after seeing shares fall by nearly half on May 31st, the stock is still trading at astronomical multiples as shown in the chart above. By comparison, other non-REIT real estate operating properties trade at multiples significantly lower than this as shown in the table below.
Company Price / Operating Cash Flow EV / EBITDA Logistic Properties of the Americas 394.5 172.9 Corporacion Inmobiliaria Vesta S.A.B. de C.V. (VTMX) 22.4 7.4 DigitalBridge Group (DBRG) 12.4 4.2 Kennedy-Wilson Holdings (KW) 12.9 39.1
Takeaway
As much as I like Logistic Properties of the Americas and as much as I believe in its potential to grow in the long run, the price at which shares of the business are trading looks absurd. Even with projected growth for 2024, I cannot see a scenario by which the stock would be even fairly valued. So even though I suspect the business will continue to grow at a nice clip, I have no choice but to rate it a ‘strong sell’ for now.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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