Fitch Affirms FUNO's Ratings at 'BBB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the following ratings for Deutsche Bank Mexico, S.A., Institucion de Banca Multiple, Division Fiduciaria F/1401 (FUNO):
--Local currency Issuer Default Rating (IDR) at 'BBB';
--Foreign currency IDR at 'BBB';
--Senior unsecured notes for USD600 million due 2024 at 'BBB';
--Senior unsecured notes for USD400 million due 2044 at 'BBB';
--National Scale long-term rating at 'AAA(mex)';
--Local Certificados Bursatiles Issuances FUNO 13 due in 2019 at 'AAA(mex)';
--Local Certificados Bursatiles Issuances FUNO 13-2 due in 2023 at 'AAA(mex)';
--Local Certificados Bursatiles Issuances FUNO 13U due in 2028 at 'AAA(mex)';
--Local Certificados Bursatiles Issuances FUNO 15 due in 2025 at 'AAA(mex)'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect FUNO's solid market position as the leading and largest Fibra (REIT) in Mexico. The ratings takes 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.
SOLID MARKET POSITION
The ratings reflect the company's solid market position as the largest Fibra in Mexico. FUNO had a 47.1% participation of Mexico's REITs segment as of July 31, 2015 according to market capitalization. As of Sept. 30 2015 the company had 477 stabilized properties representing approximately 6.8 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.
WELL DIVERSIFIED BUSINESS MODEL
The company has a portfolio with strong diversification across sectors, regions and tenants that results in consistent cashflows. As of Sep, 30, 2015 FUNO's total GLA breakdown was 40.6% retail, 49.1% industrial and 10.3% office, located throughout 30 states in the country and Mexico City. Fitch expects that FUNO's GLA could increase at year-end 2015 to around 7 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 in account 2015 acquisitions and outstanding development projects will be contributed by its Retail segment 49.8%, Industrial segment 24.9% and its office segment by 25.4%. The company's GLA is concentrated in Mexico State and Mexico City with 38.8% and 16.1% respectively; others contributing 10% 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, Suburbia, etc.) is positioned as the most important tenant for FUNO, representing approximately 9.6% of Annual Base Rent (ABR). The next top nine tenants collectively account for approximately 21% of ABR. Fitch estimates that approximately 30% of FUNO's rents come from blue chip 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 2016 for each segment could reach MXN71 in Industrial, MXN170 in Retail and MXN306 in the Office segment. Fitch estimates that occupancy for Industrial, Retail and Office segments will be not less than 96.0%, 90.0% and 80.0% 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 2015 pro forma net leverage will be close to 5x and within a range of 4.0x to 5.0x over the next 24-36 months. During 2H2014 and 2015 FUNO deployed the cash obtained from follow-on in acquisitions and developments most of the cash obtained from last year's equity follow-on of approximately MXN32.8 billion. Fixed charge coverage is expected to be 3x at YE15. Recurring EBITDA is supported by high occupancy and renewal rates, as well as lease contracts characteristics, which include annual inflation adjustments, and currency denomination; Approximately70% of contracts are denominated in MXN and 30% in US dollars.
STABLE UNSECURED DEBT STRUCTURE
Fitch estimates that FUNO's debt structure will remain reasonably stable, with unsecured debt representing 70% of total debt. Fitch's initial expectations were higher, in the range of more than 80%; the company has assumed debt coming from acquired properties, which has maintained the proportion of secured debt in 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 2014-15. These issuances allowed it to undergo a transition to a predominantly unsecured-focused debt financing strategy. The issuance of Capital Market Debt proceeds were used mostly to convert its secured bank loans to unsecured debt via repayment of mortgage maturities. This strategy resulted in FUNO's unsecured debt/total debt ratio of 74.7% at September 30, 2015 from 40.8% at YE13 and 0% at FYE12.
EXTERNALLY ADVISED, INTERNALLY MANAGED STRUCTURE
FUNO's management team continues to improve the quality of the portfolio via the acquisition of high quality assets with excellent locations, high quality tenants and high occupancy rates. Fitch views management's focus on asset quality as a key differentiator between FUNO and other market participants. Senior management's experience in the sector is also a key differentiator between FUNO and its peers. 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 of 3% of property value for third party acquisitions to the advisor. 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; that 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.
Fitch's key assumptions within the rating case for FUNO include:
--GLA annual average growth of 5%;
--Price rents aligned to annual inflation rates;
--Occupancy rates around 94% in average, based on historic levels;
--EBITDA margins around 75%;
--CAPEX based on development projects in pipeline;
--Dividends representing 85% of FFO.
The following factors may have a negative impact on FUNO's ratings:
--Fitch's expectation of an AFFO dividend payout ratio consistently exceeding 80%;
--Fitch's expectation of sustained net leverage above 5.0x for several consecutive quarter;
--Fitch's expectation of fixed-charge coverage sustained below 2.0x for several consecutive quarters;
--Fitch expectation of a sustained liquidity coverage ratio below 1.25x;
--Unencumbered asset coverage of unsecured debt consistently below 3.0x 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 4.0x for several consecutive quarters while maintaining robust unencumbered asset coverage above 3x and strong liquidity above 1.5x.
FUNO has good base case liquidity with projected cash and equivalents of MXN5.2 billion at 3Q15 and committed credit lines for MXN7.0 billion and USD410 million. Unencumbered Asset coverage using the Market Value of the assets (Properties) was 3.5x at 3Q15. FUNO met Fitch expectations to have around 70.0% of unencumbered assets in its Portfolio in the next 12-24 months, having 79.9% at September 30, 2015. Prior to undergoing the unsecured issuances in domestic and international markets, the company had an asset profile consisting of around 35% unencumbered assets.