Fitch Affirms Fibra UNO at 'BBB'; Outlook Stable

MONTERREY, Mexico & NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following ratings of Deutsche Bank Mexico, S.A. Fideicomiso F/1401 (FUNO or Fibra UNO):

--Local Currency Long-term Issuer Default Rating (IDR) at 'BBB';

--Foreign Currency Long-term IDR at 'BBB';

--National Scale Long-Term Rating at 'AAA(mex)';

--Senior unsecured notes for USD600 million due 2024 at 'BBB';

--Senior unsecured notes for USD500 million due 2026 at 'BBB';

--Senior unsecured notes for USD700 million due 2044 at 'BBB';

--Local issuances of Certificados Bursatiles FUNO13, FUNO13-2, FUNO13U, FUNO15, FUNO16, FUNO16U at 'AAA(mex)'.

The Rating Outlook is Stable.

The ratings reflect FUNO's solid market position as the leading and largest Fibra (REIT) in Mexico. The ratings take into account the company's large, well-diversified portfolio of industrial, retail and office properties, strong franchise value, diversified tenant base, high occupancy rates, credit metrics aligned with the rating level, and adequate financial flexibility in the form of good access to debt and equity markets, in conjunction with unsecured committed credit lines, and an important unencumbered asset pool. FUNO's ratings are limited by its externally advised and internally managed structure and aggressive growth strategy.

KEY RATING DRIVERS

SOLID MARKET POSITION

The ratings reflect the company's solid market position as the largest Fibra in Mexico. FUNO had a 43.6% participation of Mexico's REITs segment as of Sept. 30, 2016 according to market capitalization. As of Sept. 30, 2016 the company had 516 stabilized properties representing approximately 7.3 million square meters (sqm) of Gross Leasable Area (GLA). The ratings also factor the contributors shareholders' and advisors' (control group) track record in the Mexican Real Estate sector with more than 30 years of experience in the acquisition, development, rental and operation of various types of commercial real estate projects in Mexico, including industrial, retail, office and mixed-use projects, as well as a robust property management platform.

WELL DIVERSIFIED BUSINESS MODEL

The company has a portfolio with strong diversification across sectors, regions and tenants that result in consistent cash flow generation. As of Sept. 30, 2016, FUNO's total GLA breakdown was 40.3% retail, 48.7% industrial and 11.0% office, located throughout 31 states in the country and Mexico City. Fitch expects that FUNO's GLA could increase at year-end 2016 to around 7.5 million sqm, through development completion and acquisitions still in the pipeline. Fitch expects FUNO's Annualized Fixed Income (AFI) on a Pro-forma basis, taking into account 2016 acquisitions and current development projects will be contributed by its Retail segment 53.2%, Industrial segment 27.5% and its Office segment by 19.3%. The company's GLA is concentrated in Mexico State and Mexico City with 38.6% and 16.8% respectively; other states contribute 10.9% or less, with presence in 31 states across the country.

HIGH QUALITY AND DIVERSIFIED TENANTS

FUNO's initial portfolio and subsequent acquisitions have allowed it to consolidate a robust base of tenants in terms of diversification and quality; Walmart de Mexico y Centroamerica, S.A.B. de C.V. (with all its formats, including Walmart, Bodega Aurrera, Superama, Sam's Club, etc.) is positioned as the most important tenant for FUNO, representing approximately 9.0% of Annual Base Rent (ABR). The next top nine tenants collectively account for approximately 15% of ABR. Fitch estimates that approximately 30% of FUNO's rents come from high quality companies. In addition, more than 70% of revenues are generated from tenants that individually contribute less than 1% of annual revenue. This diversification insulates the company's cash flows from economic weakness in any particular region as well as credit risk at the tenant level.

HIGH OCCUPANCY AND COMPETITIVE RENT RATES

FUNO's strategy is focused to have competitive rent prices per square meter in order to support occupancy and renewals along economic cycles. This strategy allows the company to have high occupancy levels. Fitch estimates that the average monthly rent per square meter in 2017 for each segment could reach MXN77 in Industrial, MXN191 in Retail and MXN309 in the Office segment. Fitch estimates that occupancy for Industrial, Retail and Office segments will be not less than 96.0%, 94.0% and 90.0% respectively of total GLA including projects in development, with a total Portfolio occupancy above 94.0% for the following years. Lease maturities are well-laddered with no more than 15.0% of GLA expiring in any given year.

STABLE CREDIT METRICS

Fitch expects that year-end 2016 pro forma net leverage will be close to 5.9x and improve to 5.0x over the next two to three years. Fixed charge coverage is expected to be 2.7x at YE16 and trending toward 3x in the same time frame. During 2015 and 2016 FUNO deployed in acquisitions and developments most of the cash obtained from equity follow-on and debt issuances in the domestic and international markets of more than MXN40 billion. Recurring EBITDA is supported by high occupancy and renewal rates, as well as lease contracts characteristics, which include annual inflation adjustments, and currency denomination; approximately 70% of contracts are denominated in MXN and 30% in US dollars.

STABLE UNSECURED DEBT STRUCTURE

Fitch estimates that FUNO's debt structure will remain relatively stable, with unsecured debt representing more than 80% of total debt. The company has successfully refinance to unsecured debt the assumed secured debt coming from acquired properties, which represents the proportion of secured debt in FUNO's balance sheet. Fitch believes the company may assume some secured debt in the near future to continue its portfolio expansion.

The company successfully executed long-term debt issuances both in local and international markets in 2013 - 2016. These issuances allowed it to undergo a transition to a predominantly unsecured-based debt financing strategy. The proceeds from debt capital markets' issuances were used mostly to convert its secured bank loans to unsecured debt via repayment of mortgage financing. This strategy resulted in FUNO's unsecured debt/total debt ratio of 92.9% at Sept. 30, 2016 from 74.7% at Sept. 30, 2015 and 64.3% at YE14.

EXTERNALLY ADVISED, INTERNALLY MANAGED STRUCTURE

FUNO's management team continues to improve the quality of the portfolio via the acquisition of high quality assets in good locations, high quality tenants and high occupancy rates. Fitch views management's focus on asset quality and its senior management's experience in the sector as key differentiators between FUNO and other market participants. These strengths are offset by its externally advised structure with diverse fees charged for advisory to the company. Some of the fees are the following: (1) Annual advisory fee of 0.5% of NAV and (2) acquisition fee to the advisor of 3% of property value for third party acquisitions. The internal management structure under FUNO's wholly-owned subsidiaries includes (a) 2% of monthly lease payments to the leasing administrator and (b) Monthly fee at 1.0% of lease payments to the Manager.

AGGRESSIVE GROWTH STRATEGY

Factored in the ratings is the company's aggressive growth strategy, which could result in future lower-quality property acquisitions that may theoretically hinder FUNO's historical portfolio strength. However, in the past the company has managed to acquired good quality properties at adequate price. In addition, Fitch believes this expansion efforts through acquisitions can add pressure on properties prices.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for FUNO include:

--GLA annual average growth of 8%;

--Rent prices aligned to annual inflation rates;

--Occupancy rates of total portfolio around 94% in average, based on historic levels;

--EBITDA margins around 74%;

--CAPEX based on acquisition and development projects in pipeline;

--Dividends representing 95% of FFO.

RATING SENSITIVITIES

The following factors may have a negative impact on FUNO's ratings:

--Fitch's expectation of an FFO dividend payout ratio consistently exceeding 100%;

--Fitch's expectation of sustained net leverage above 5.0x;

--Fitch's expectation of fixed-charge coverage sustained below 2.0x;

--Unencumbered asset coverage of unsecured debt consistently below 3.0x.

The following factors may have a positive impact on FUNO's ratings:

--Stabilization of the portfolio profitability as asset mix evolves;

--Fitch's expectation of sustained net leverage below 4.0x while maintaining robust unencumbered asset coverage above 3.0x.

LIQUIDITY

FUNO has a good base-case liquidity with cash and equivalents of MXN7.7 billion at 3Q16 and availability equivalent to MXN14 billion under its committed credit lines. Unencumbered asset coverage using the market value of the assets (i.e. properties) was 2.6x at 3Q16. FUNO met Fitch's expectations to have around 70% of unencumbered assets in its portfolio, with close to 90% at September 30, 2016. Prior to the unsecured issuances in the domestic and international markets, the company had an asset profile consisting of around 35% unencumbered assets.

Date of Relevant Rating Committee: [03, November, 2016]

Additional information is available on www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014367

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014367

Endorsement Policy

https://www.fitchratings.com/regulatory

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Fitch Ratings
Primary Analyst
Javier Rios
Associate Director
Prol. Alfonso Reyes No.2612
Piso 8, Col. Del Paseo Residencial
Monterrey, N.L., 64920 Mexico
+52 81 8399 9144
or
Secondary Analyst
Jose Vertiz
Director
+1-212-908-0641
or
Committee Chairperson
Sergio Rodriguez
Senior Director
+52 81 8399 9100
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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