Fitch Affirms CCP's Ratings at 'BB+'; Outlook Stable

SAO PAULO, Brazil--()--Fitch Ratings has affirmed the ratings for Cyrela Commercial Properties S.A. Empreendimentos e Participacoes (CCP) as follows:

--Long-term Foreign Currency Issuer Default Rating (IDR) at 'BB+';

--Long-term Local Currency IDR at 'BB+';

--Long-term National Scale rating at 'AA(bra)';

--Second debenture issuance, in the amount of BRL204.4 million, due in 2017, at 'AA(bra)';

--Third debenture issuance, in the amount of BRL150 million, due in 2018, at 'AA(bra)';

--Fifth debenture issuance, in the amount of BRL200 million, due in 2019, at 'AA(bra)'.

The Outlook for the corporate ratings is Stable.

KEY RATING DRIVERS

The affirmation of CCP's ratings reflects the company's consistent and growing operating results and the company's healthy strategy to continue to manage its liquidity and debt maturity schedule. The ratings incorporate the expectation that the company will carefully manage its higher leverage, reported in 2013, maintaining these ratios close to the current level, as they are already high with limited space for further growth. A more aggressive investment strategy that is not followed by an eventual sale of properties could pressure CCP's leverage ratios, and consequently pressure the ratings.

The classification is also supported by its diversified asset portfolio and position as one of the leaders in the leasing of high-quality corporate buildings in Brazil, which adds more consistency to its results. The company's credit profile also benefits from its stable business base and competitive advantage of an integrated business model in a highly fragmented industry, and its financial flexibility due to a significant volume of unencumbered assets, which could potentially be sold. CCP has the challenge to reduce vacancy rates and preserve the average value of lease contracts, in a more volatile market environment. The ratings are constrained by the cyclicality of the commercial properties business and its vulnerability to fluctuations in the domestic economy and the availability of long term credit lines.

The classifications also incorporate the strength of the CCP brand and its operational synergies and integration with Cyrela Brazil Realty S.A. Empreendimentos e Participacoes (Cyrela, IDRs in Foreign and Local Currency 'BB' and Long-Term National Scale Rating 'AA-(bra)' with a Stable Outlook).

Predictable Operational Cash Flow

CCP's cash flow from lease agreements is predictable and growing, and has benefited from the occasional sale of assets. The company's revenues and EBITDA were affected by the new standard accounting requirements related to consolidation of properties. Considering pro-forma results, net revenues was BRL434 million in 2013, compared to BRL485 million in 2012, and included BRL158 million from the sale of assets (BRL285 million in 2012). CCP's net operating income (NOI), which considers only the lease revenue, was BRL238 million in 2013, compared with BRL195 million in 2012. Adjusted EBITDA, including dividends of BRL98 million from properties that are not consolidated, was BRL292 million. Projects under development could add about BRL100 million of lease revenue up to 2016.

The large capex plan is expected to continue to pressure CCP's free cash flow (FCF), which is likely to remain negative in 2014 and in 2015, excluding occasional property sales. In 2013, the company's funds from operations (FFO) totaled BRL310 million, while its cash flow from operations (CFFO) was BRL311 million. With investments of BRL1.1 billion and dividends of BRL73 million, FCF was a negative BRL839 million. In 2013, FFO interest coverage remained strong, at 4.5x, while adjusted EBITDA/interest expense ratio was 3.3x.

Leverage Remains Manageable

High investment initially planned could pressure CCP's leverage. The company plans to invest about BRL810 million in 2014 and 2015, which, absent the sale of assets, could increase leverage to levels high for the rating category. Fitch expects CCP to continue to conservatively manage its net leverage below 5.5x in periods of high investments to prevent any pressure on its ratings. As of Dec. 31, 2013, total debt/adjusted EBITDA (including dividends from properties that are not consolidated) was 5.6x and net debt/adjusted EBITDA was 4.7x, in line with Fitch's expectations. FFO net adjusted leverage increased to 3.4x in 2013, from 2.0x in 2012, and reflects higher debt to finance the company investments of BRL1.1 billion in 2013.

When compared with the economic value of the CCP's commercial properties, leverage is manageable. The ratio loan-to-value, measured by net debt/estimated market value of assets, was of 35% at end 2013 (23% in 2012), and is not expected to exceed 50%, considering the projects under development.

Adequate Liquidity and Debt Profile

CCP's liquidity is comfortable for debt maturities due by year-end 2015 and is an important rating consideration. As of Dec. 31, 2013, cash and marketable securities totaled BRL264 million and total debt, BRL1.6 billion. The company has BRL240 million of debt maturing in the short term, BRL135 million in 2015 and BRL240 million in 2016, of which BRL172 million, BRL63 million and BRL165 million, respectively, consisted of corporate debt. Debt amortization profile was extended in January 2014, following its 6th debentures issuance in the amount of BRL150 million. On a pro-forma basis, cash increases to BRL324 million and short term debt reduces to BRL150 million, of which BRL82 million is corporate debt. Fitch expects the company to continue to manage its liquidity conservatively and benefit from an increasing lease base and growing EBITDA generation.

CCP counts on good financial flexibility, since around 63% of the estimated market value of its assets were unencumbered and may be available for sale or serve as collateral for a secured financing, if needed. In December 2013, unencumbered assets had an estimated market value of BRL1.7 billion and covered about 1.8x the corporate debt of BRL924 million.

More Challenging Market Environment

The company's high portfolio quality supports its positive operational track record, with low tenant turnover and delinquency rates. However, CCP's higher vacancy rate is a concern. As of Dec. 31, 2013, physical and financial vacancy rates were 12.6% and 8.5%, respectively. Fitch does not expect vacancy rates to return to the historical low levels e should remain pressured by the more challenging environment. Higher stock in the market also contributed to lower leasing spread in 2013, of 7%, compared to higher levels reported in 2011 and 2012. The lease maturity profile remains well distributed, with 8.2% of the contracts (by revenues) maturing in 2014 and 7.5% in 2015. CCP has a concentration of tenants and the 20 largest represented 82% of its total monthly revenues in 2013. This risk is partially mitigated by the high quality of tenants and property portfolio.

CCP is one of the largest companies of investment, lease and commercialization of commercial properties in Brazil. At end 2013, the company owned 27 commercial properties, with an estimated market value of BRL2.7 billion and gross leasable area (GLA) of 329 thousand sqm. CCP currently develops 18 projects, which should add 410 thousand sqm of GLA.

RATING SENSITIVITIES

CCP's ratings could be negatively affected if the company does not preserve on a sustainable basis net debt/EBITDA adjusted by dividends below 5.5x, and FFO net adjusted leverage below 4.0x. The ratings could also be pressured by FFO interest coverage below 2.0x, liquidity falling to levels that considerably weaken short-term debt coverage, and vacancy rates consistently above 10%, which could result in a reduction in operational cash generation. Positive rating action is unlikely in the medium term.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology — Effective 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827240

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Contacts

Fitch Ratings
Primary Analyst
Fernanda Rezende, +55-21-4503-2619
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010
or
Secondary Analyst
Jose Roberto Romero, +55-11-4504-2603
Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Fernanda Rezende, +55-21-4503-2619
Director
Fitch Ratings Brasil Ltda.
Praca XV de Novembro, 20 - Sala 401 B - Centro - Rio de Janeiro - RJ - CEP: 20010-010
or
Secondary Analyst
Jose Roberto Romero, +55-11-4504-2603
Director
or
Committee Chairperson
Ricardo Carvalho, +55-21-4503-2627
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com