Fitch Rates FUNO's USD500MM Senior Notes Reopening 'BBB'

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BBB' to Deutsche Bank Mexico, S.A., Fideicomiso F/1401's (FUNO, or Fibra UNO) reopening of senior notes due in 2026 and 2044, for up to USD500 million. This includes the reopening of up to USD200 million and USD300 million in the senior notes due in 2026 and 2044, respectively. The final transaction's size will depend on market conditions. Proceeds from the proposed issuance will be used for general corporate purposes, which may include debt substitution, as well as funding working capital and capex requirements.

The ratings reflect FUNO's solid market position as the leading and largest Fibra (REIT) in Mexico. The ratings incorporate the company's large, well-diversified portfolio of industrial, retail and office properties, strong franchise value, diversified tenant base, high occupancy rates, and credit metrics aligned with the rating level. It also considers FUNO's 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 46.2% share of Mexico's REITs segment as of May 31, 2016, according to market capitalization. As of March 31, 2016, the company had 490 properties representing approximately 7.1 million square meters (sqm) of gross leasable area (GLA). The ratings also factor in the contributors shareholders' and advisors' (the controlling 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.

WELL-DIVERSIFIED BUSINESS MODEL

The company has a portfolio with strong diversification across sectors, regions and tenants that has resulted in consistent cash flow generation. As of March 31, 2016, FUNO's total GLA breakdown was 40.7% retail, 48% industrial and 11.3% office, located throughout 30 states in the country and Mexico City. Fitch expects that FUNO's annualized fixed income (AFI) on a pro forma basis, taking into account 2015 acquisitions and outstanding development projects, will be 49.8% Retail, 24.9% Industrial, and 25.4% Office. The company's GLA is concentrated in Mexico State and Mexico City at 38.8% and 16.1%, respectively; other states contribute 10% or less, with a 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, Suburbia, etc.) is positioned as the most important tenant for FUNO, representing less than 10% of annual base rent (ABR). Fitch estimates that approximately 30% of FUNO's rents come from blue chip companies. In addition, more than 70% of revenue is 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 from credit risk at the tenant level.

HIGH OCCUPANCY AND COMPETITIVE RENTS

FUNO's strategy is focused on competitive rents per square meter in order to support occupancy and renewals through economic cycles. This strategy allows the company to maintain high occupancy levels. Fitch estimates that the average monthly rent per square meter in 2016 for each segment could reach MXN71 in Industrial, MXN170 in Retail and MXN306 in the Office segment. Fitch also estimates that occupancy for Industrial, Retail and Office will be not less than 96%, 90% and 80% of total GLA including projects in development, with total portfolio occupancy above 94% for the following years. Lease maturities are well-laddered with no more than 15% of GLA expiring in any given year.

STABLE CREDIT METRICS

Fitch expects that Fibra Uno's pro forma net leverage will be close to 5x and within a range of 4x to 5x over the next 24-36 months. Recurring EBITDA is supported by high occupancy and renewal rates, as well as its lease contract characteristics, which include annual inflation adjustments. About 70% of contracts are denominated in pesos and 30% in U.S. dollars. Fitch estimates that FUNO's debt structure will remain stable, with unsecured debt-to-total debt at approximately 70%.

STABLE UNSECURED DEBT STRUCTURE

Fitch believes FUNO's debt structure will remain reasonably stable, with unsecured debt representing more than 70% of total debt. Our initial expectations were higher, in the range of more than 80%; the company assumed debt coming from acquired properties, which has maintained the proportion of secured debt on FUNO's balance sheet. Fitch believes the company will continue executing refinancing initiatives.

The company successfully executed long-term debt issuances both in local and international markets in the last three years. These issuances allowed it to make the transition to a predominantly unsecured-focused debt-financing strategy. The proceeds were used mostly to convert its secured bank loans to unsecured debt via repayment of mortgage financing. This strategy resulted in unsecured debt/total debt of 79% at March 31, 2016, from 41% at YE2013 and 0% at FYE2012.

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 services to the company. Some of the fees are the following: annual advisory fee of 0.5% of NAV, and 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 2% of monthly lease payments to the leasing administrator and a monthly fee at 1% of lease payments to the Manager.

AGGRESSIVE GROWTH STRATEGY

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

KEY ASSUMPTIONS

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

--GLA annual average growth of 5%;

--Rents aligned with annual inflation rates;

--Occupancy rates around 94% on average, based on historical levels;

--EBITDA margins around 75%;

--CAPEX based on development projects in pipeline;

--Dividends representing 85% of FFO.

RATING SENSITIVITIES

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

--Fitch's expectation of an AFFO dividend payout ratio consistently exceeding 85%;

--Fitch's expectation of sustained net leverage above 5x for several consecutive quarters;

--Fitch's expectation of fixed-charge coverage sustained below 2x for several consecutive quarters;

--Fitch's expectation of a sustained liquidity coverage ratio below 1.25x;

--Unencumbered asset coverage of unsecured debt consistently below 3x for several consecutive quarters.

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 4x for several consecutive quarters while maintaining robust unencumbered asset coverage above 3x and strong liquidity above 1.5x.

LIQUIDITY

FUNO has a good base-case liquidity with cash and equivalents of MXN6.5 billion at first quarter 2016 (1Q16) 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 3.2x at 1Q16. FUNO met Fitch's expectations to have around 70% of unencumbered assets in its portfolio, with close to 80% at March 31, 2016. Prior to the unsecured issuances in the domestic and international markets, the company had an asset profile consisting of around 35% unencumbered assets.

Fitch rates Deutsche Bank Mexico, S.A., Fideicomiso F/1401 as follows:

--USD800 million, including proposed reopening, senior notes due in 2024 'BBB'

--USD700 million, including proposed reopening, senior notes due 2044 'BBB'

--Local and Foreign Currency IDRs 'BBB'; Outlook Stable;

--National scale rating 'AAA(mex)'; Outlook Stable;

--Certificados Bursatiles FUNO 13 due in 2019 'AAA(mex)';

--Certificados Bursatiles FUNO 13-2 due in 2023 'AAA(mex)';

--Certificados Bursatiles FUNO 13U due in 2028 'AAA(mex)';

--Certificados Bursatiles FUNO 15 due in 2025 'AAA(mex)';

--Certificados Bursatiles FUNO 16 due in 2019 'AAA(mex)';

--Certificados Bursatiles FUNO 16U due in 2027 'AAA(mex)'.

Date of Relevant Rating Committee: Nov. 4, 2015.

Additional information is available on www.fitchratings.com

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160608006266/en/

Fitch Ratings
Primary Analyst
Javier Rios
Associate Director
+52 81 8399 9144
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes No. 2612
Piso 8, Col. Del Paseo Residencial
Monterrey, NL, 64920, Mexico
or
Secondary Analyst
Jose Vertiz
Director
+212 908 0641
or
Committee Chairperson
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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