Fitch Rates Caparra Center Associates, LLC's Proposed US$21.6MM Secured Bonds 'A-'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'A-' to US$21.6 million of secured bonds to be issued by Caparra Center Associates, LLC (Caparra) to be issued through the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA). Fitch has also assigned an Issuer Default Rating (IDR) of 'BBB+' to Caparra. The Rating Outlook is Stable. The secured bonds will be paid with funds solely provided by Caparra, which will be made to AFICA and then will pass-through to bondholders. The secured notes are not guaranteed by AFICA, will not constitute a charge against the general credit of AFICA, and will not constitute an indebtedness of the Commonwealth of Puerto Rico or any of its political subdivisions.

The proposed bonds are being issued in the aggregate principal amount of US$21.6 million consisting of serial bonds maturing from Jan. 15, 2011 to July 15, 2020. The bonds are being issued under a trust agreement between AFICA and Banco Popular de Puerto Rico, as trustee. Banco Popular de Puerto Rico will act also as collateral agent for the bonds for purposes of the Security Agreements. AFICA is a corporate body and politic constituting a public corporation and governmental instrumentality of Puerto Rico.

The ratings reflect the company's stable cash flow generation, its solid lease portfolio with consistently reasonable renewal and vacancy rates, and single shopping mall location of approximately 150 stores. Further supporting the ratings are the company's manageable debt maturity schedule, adequate cash position of US$6.2 million, stable EBITDA margins of over 52% during the last three years ended May 31, 2009, and a solid collateral package with low loan to value. Fitch positively views Caparra's capacity to generate consistently positive free cash flow (FCF) during the last several years. The company's FCF for the last 12 month period ended May 31, 2009 was US$2.2 million.

The Stable Outlook reflects Caparra's consistent operating performance over the last several years and its successful track-record of growing its operations during the last 20 years. Fitch expects Caparra's management commitment to a sustainable growth strategy, with an adequate capital structure, to continue.

Cash Flow Stability:

Caparra's revenues are stable given the characteristics of its lease portfolio which provide it with a stable base of fixed-rent income, staggered lease expirations and a solid credit profile of its main tenants. Caparra's revenues for 2007, 2008, and 2009 were US$17.9 million, US$19 million and US$19.1 million, respectively. Caparra's lease structure consists of fixed rent payments (65%) and tenant reimbursements (24%), which (basically covering costs associated with property management and taxes) represent about of 90% total revenues and make Caparra's revenues more predictable. The lease portfolio has staggered lease expiration dates with about of 70% of the company's rental income contracts have expiration dates higher than four years (23% for 4-5 years, 25% for 6-9 years, and 21% for 10 or more years). Over the next 12 months, lease expirations are somewhat high at 18% although the lease maturities are concentrated in many small tenants (largest represents less than 1% of total revenues) and the vast majority of these leases are expected to be renewed at similar rent levels. Caparra's four most important anchor tenants are Walgreens, Bed Bath & Beyond, Office Depot, and K-Mart of varied credit quality (credit quality ranging from 'A+' to 'B'. These tenants generate annual revenues of about US$4.3 million and represent approximately 25% of total annual rent revenues.

Despite a challenging operating environment during the last two years, Caparra's operating metrics have been relatively resilient to the economic slowdown. During the last four years, vacancy rates for the shopping center were between 6%-12%. At May 31, 2009, the San Patricio Plaza, Caparra's sole shopping mall, had an occupancy level of 91.2%. Caparra's rental rate and revenue per square foot have remained stable during the last several years. During the three years ended May 31, 2009, 2008 and 2007, the average rental rate per square foot was US$21.00, while average revenue per square foot was US$36.30. Caparra has experienced satisfactory results with respect to lease renewals upon the expiration of the initial lease term and any renewal option periods. During the period from 2004 through 2008, an average of 180,000 square feet of gross leasable area (GLA) has been subject to renewal. An average of 44.5% of the lease space subject to renewal was renewed with the same tenant, with the balance being leased to new tenants.

Moderate Leverage and Manageable Debt Schedule:

Caparra's total adjusted debt (on-balance and off-balance) decreased to US$42.4 million in May 2009, from US$45 million in May 2008. By the end of May 2009, the company's total on-balance debt was US$41.1 million, and it was composed mostly by secured bonds (US$24 million, also referred as the refunded bonds), secured banking loans (US$15.3 million); and, unsecured banking loans (US$1.8 million). The company's off-balance debt associated with operating leases obligations was US$1.3 million. Caparra's leverage, as measured by net debt/EBITDAR, was 3.5 times (x) by the end of May 2009. The company has also maintained an average net debt/EBITDAR ratio of 3.7x between fiscal year-end 2005 and 2009, which is consistent with its rating category. The company leverage is expected to be around 3.6x and 3.5x by the end of fiscal years of 2010 and 2011, respectively.

The company's financial strategy is to issue new bonds for an outstanding amount of US$21.6 million to refinance the existing bonds (the refunded bonds) with an outstanding balance of US$23.1 million at the end of August 2009. The existing bonds include the 1993 Project Bonds (outstanding balance of US$11.1 million at August 2009) and the 1995 project bonds (outstanding balance of US$11.9 million by August 2009). The debt refinancing will positively impact the company's debt structure, with no principal payments during 2010. Further, this transaction will provide the company with additional funds currently maintained in reserve accounts of about US$ 5.1 million to be used for paying the cost of the issuance, funding the reserve account, and general corporate purposes. The new bonds will require maintaining a debt service reserve fund of approximately US$1.7 million, equivalent to six months of principal and interest payments.

Adequate Liquidity:

Caparra's liquidity position is solid and results from its capacity to consistently generate cash flow from operations (CFFO) and access to bank lines of credit. During the last three years, the company's CFFO reached an annual average of US$7 million. Caparra's free cash flow has been positive during the last five years, excepting for fiscal year end (FYE) 2007. For the last 12 month period ended in May 2009, Caparra's free cash flow was positive US$2.2 million. Caparra had US$6.2 million in cash and approximately US$2.5 million available in unused committed bank credit facility at the end of May 2009.

Caparra's free cash flow is expected to be negative during 2010 and 2011 mainly due to the level of expected capital expenditures to add 33,000 square feet of GLA, approximately US$9 million, during the next 18 months, and the level of dividends of more than US$4 million each year. The company's 2010-2011 investment program will be financed with a secured bank loan, it is expected to generate revenues and EBITDA on annual basis of US$980,000 and US$200,000, respectively; and it will allow the company to incorporate a major tenant, PetSmart, Inc., which will be positive in terms of the company's revenues and cash flow stability. After 2011, Caparra does not plan to execute any major investments that could place additional pressure on its cash flow.

Strong Collateral Coverage:

The 'A-' rating assigned to the secured bonds incorporates the collateral support included in the transaction structure. Payment of the bonds will be secured by a first mortgage on the shopping center and an assignment of leases. The company's total secured debt supported by the collateral is expected to be around US$38.6 million. The last appraisal for San Patricio Plaza was completed in 2005 with a property value of US$150 million; even in a distressed scenario, the Loan to Value (LTV) ratio is estimated at approximately 50% for the first year, and decreasing in the next years.

Caparra conducts its operations in Puerto Rico, which Fitch views as a positive in terms of enforceability of the security in the event of default. The relationship between the United States and Puerto Rico is referred to as commonwealth status. Puerto Rico's constitutional status is that of a territory of the United States, and, pursuant to the territorial clause of the U.S. Constitution, the ultimate source of power over Puerto Rico is the U.S. Congress.

Main Credit Concerns:

The ratings are constrained by the negative business environment and the concentration risk affecting Caparra's operations. The ratings incorporate the negative business environment affecting the economy of Puerto Rico, which has been in recession since the fourth quarter of fiscal year 2006. Puerto Rico's real gross national product decreased by 1.9% and 2.5% during FYE 2007 and FYE 2008, respectively. Additionally, the ratings factor the concentration risk in Caparra's operations which are related to a single retail asset (the shopping center) limiting the company's diversification and growth strategies. Further, Caparra's operations are highly dependent on its main tenants, with five tenants representing 31% of Caparra's total revenues. The concentration risk is counter balanced by the adequate credit profile of Caparra's main tenants.

The ratings also incorporate Caparra's high dividend payout ratio. During the last five years, Caparra has distributed more than US$22 million in dividends, and the company expects to maintain a dividend payout ratio of approximately 85% for the next years. The ratings incorporate Fitch's expectations that Caparra will maintain current leverage and liquidity levels. Deterioration in the company's financial profile and weaker credit metrics coupled with significant distributed dividends and increasing vacancy rates or additional debt that would move the company's capital structure away from currently expected levels could lead to rating pressure.

Caparra is a limited liability company organized under the laws of the Commonwealth of Puerto Rico. The principal business activity of Caparra consists of the ownership and operation of a mall-type shopping center and several out-parcels located in Guaynabo, Puerto Rico, known as San Patricio Plaza, containing in the aggregate approximately 565,674 square feet of GLA. Caparra's revenues for fiscal year, ended in May 2009, were US$19.1 million (US$19 million in 2008).

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