Fitch Affirms Caparra Center Associates, LLC's IDR at 'BBB+' & Secured Bonds at 'A-'

NEW YORK--()--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Caparra Center Associates, LLC (Caparra) at 'BBB+'. Fitch has also affirmed Caparra's USD21.8 million secured bonds at 'A-'.

The Rating Outlook is Stable.

Caparra's rating reflects the company's stable cash flow generation, its adequate lease structures and tenant portfolio, as well as moderate vacancy rates during the last years. Further supporting the ratings are the company's manageable debt maturity schedule comfortably covered by the company's annual cash flow generation. The company's solid collateral package with a low loan-to-value ratio supports the 'A-' rating of the bonds. A rating constraint is the company's lack of diversification due to its reliance upon a single shopping mall location with approximately 149 stores.

The Stable Outlook reflects the expectation that Caparra will maintain stable operating results based on the quality of its assets, while preserving a health level of liquidity and a conservative capital structure.

KEY RATING DRIVERS:

Stable Cash Flow Generation:

Caparra's ratings reflects the company's stable cash flow generation due to the characteristics of its lease portfolio, which provide it with a stable base of fixed-rent income. Caparra's lease structure consists of fixed rent payments (67%) and tenant reimbursements (23%), which basically cover costs associated with property management and taxes. The company has consistently maintained FCF margins in the 10%-13% range during the last four years. The ratings incorporate an expectation the company will preserve stable cash flow generation and maintain EBITDA levels of at least USD11.5 million in 2015.

Moderate Vacancy Rates and Steady Rents:

The vacancy rate was 5.13% as of March, 2014. During the next 12 months, lease expirations are at 13%. The lease maturities are concentrated in many small tenants, as the largest one represents less than 1% of total revenues. The vast majority of these leases are expected to be renewed at similar rent levels. Caparra's most important anchor tenants are Walgreens, K-Mart, Bed Bath & Beyond, Office Depot, and TJMaxx. These tenants generate approximately 37% of the company's total annual rent revenues. Despite a challenging operating environment in recent years, Caparra's operating metrics have been relatively resilient to the economic slowdown.

Adequate Leverage:

Caparra's on-balance debt was USD42.3 million as of March 31, 2014, and was mostly composed of the AFICA bonds (USD13.7 million) and secured banking loans (USD26.3 million). Fitch expects Caparra's leverage measured as net debt/EBITDA to reach 3.1x at FYE14 (May) and 3.5x on a gross basis.

Good Liquidity:

The group has a manageable maturity profile with and annual debt service levels (principal) of USD3.2 million and USD3.4 million in FYE15 and FYE16, respectively, comfortably covered by its cash flow generation, measured as EBITDA. As of March 31, 2014, Caparra had USD 4 million of cash and cash equivalent. The company's cash position includes USD1.9 million of restricted funds in a reserve fund that secures the payment of principal and interest payments for the secured public debt when due, as required by transaction structure. Caparra's liquidity is primarily a result of its cash flow generation. The company's liquidity is further supported through committed and unused credit lines with banks of USD2.5 million. Under a stress scenario, Caparra could reduce dividends, which have been in the range of USD4 million to USD5 million per year. The company also has unencumbered properties with a total market value of approximately USD24 million that could be used to access liquidity in a distress scenario.

Strong Collateral Coverage:

The 'A-' rating for AFICA secured bonds incorporates the collateral support included in the transaction structure. The notes are secured by a first mortgage on the shopping center and an assignment of leases. The recent appraisal of the shopping center was at USD140 million as of May 2014 (USD144 million as of February 2012.) By the end of March 2014, the LTV ratio based on the last appraisal value is at 29% for the total secured debt.

Concentration Risk and Business Environment:

Caparra's rating is constrained by the weak economic environment in Puerto Rico and lack of geographical diversification. It currently relies upon a single shopping mall location with approximately 149 stores with seven tenants representing approximately 37% of total rents. The ratings also consider as a negative credit factor Caparra's high dividend pay-out ratio. During the last five years, Caparra has distributed more than USD23 million in dividends, and the company expects to maintain a dividend pay-out ratio of at least 85% for the next years.

RATING SENSITIVITIES:

The ratings incorporate Fitch's expectations that Caparra will maintain current leverage and liquidity levels. It also builds in an expectation the company would reduce distributed dividends if required to maintain an adequate credit profile. Deterioration in the company's financial profile and weaker credit metrics driven by the non-renewal of a contract with a major anchor tenant would be viewed negatively. Increasing vacancy rates or additional debt that would move the company's capital structure away from currently expected levels could also lead to a negative rating action.

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

Applicable Criteria and Related Research:

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

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831994

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Contacts

Fitch Ratings
Johnny Da Silva, +1-212-908-0367
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jose Vertiz, +1-2121-908-0641
Director
or
Committee Chairperson
Dan Kastholm, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Johnny Da Silva, +1-212-908-0367
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jose Vertiz, +1-2121-908-0641
Director
or
Committee Chairperson
Dan Kastholm, +1-312-368-2070
Managing Director
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com