RIO DE JANEIRO--(BUSINESS WIRE)--Fitch Ratings has affirmed BR Properties S.A.'s (BR Properties) ratings as follows:
--Long-term foreign currency Issuer Default Rating (IDR) at 'BB';
--Long-term local currency IDR at 'BB';
--USD285 million senior unsecured perpetual notes at 'BB';
--Long-term national scale rating at 'AA-(bra)'.
Fitch has removed the Rating Watch Negative from BR Properties' ratings and assigned a Stable Rating Outlook.
KEY RATING DRIVERS
The affirmation and assignment of the Stable Outlook to BR Properties' ratings reflects the cancellation of the proposed tender offer. BR Properties' ratings were on Watch Negative since February 2015 due to the tender offer, when the company received a Letter of Intention for a voluntary takeover of its shares. In Fitch's view, there were high uncertainties of the impact on BR Properties' credit metrics. With the cancellation of the tender offer, the ratings are not influenced anymore by the transaction. However, according to BR Properties, Brookfield group, which was initially involved in the tender offer, remains interested in acquiring important assets of the company. The sale of assets that results in a considerable increase in leverage and weaker interest coverage ratios, as well as a less diversified and weaker portfolio of properties, could generate strong downgrade pressure on BR Properties' ratings.
BR Properties' ratings reflect the company's leading position in the Brazilian commercial properties segment, the high quality of the properties and of its tenant base which, combined with the scale of its business, adds more consistency to its results. The ratings incorporate the company's adequate cash flow generation from lease agreements and the expectation that cash flow generation should be affected by weaker market environment, with higher vacancy rates and lower lease spreads, once demand for commercial properties is directly related to Brazil's macroeconomic conditions. Fitch projects that BR Properties will continue to report EBITDA to gross interest expenses ratio above 1.3x in the next couple of years.
BR Properties has an adequate financial profile for its business sector and a prudent risk management policy, preserving an adequate cash reserve to cover annual debt amortization and an eventual increase in the vacancy rates. BR Properties' ratings remain constrained by the cyclicality of the commercial properties business.
Operational Cash Flow to be Pressured by Challenging Macroeconomic Environment
BR Properties benefits from a predictable cash flow from lease agreements. In the latest 12 months (LTM) ended March 2015, the company generated BRL863 million of EBITDA and included about BRL172 million of gains from the sale of 61 properties. Recurring EBITDA was BRL691 million during the period. Fitch projects EBITDA to reduce to about BRL600 million, if vacancy rates increase to 15% for office and warehouse segments and leasing spreads are below inflation rate. The company's capacity to continue to generate adequate cash flow is strongly correlated to domestic market conditions, once demand for commercial properties is directly related to Brazil's macroeconomic conditions.
In the LTM ended March 2015, BR Properties reported negative cash flow from operations (CFFO) of BRL3 million, compared to BRL194 million in 2013, as per Fitch's calculation. This reduction was due to punctual factors related to the sale of assets and acquisition of participation in one SPE, and CFFO should improve to about BR150 million in 2015. High dividend distribution of BRL1.8 billion and investments of BRL113 million resulted in a negative free cash flow (FCF) of BRL1.9 billion in the LTM ended March 2015, covered by the sale of assets of BRL3.1 billion.
Leverage to Remain Moderate in the Medium Term
BR Properties' ratings incorporate Fitch's expectation that the company's net leverage will be between 5.0x and 5.5x in the medium term. In the LTM ended March 2015, net debt/EBITDA ratio was 4.5x, from 3.9x in 2014 and 5.7x in 2013, and benefited from greater cash generation from sale of assets. Considering only recurring EBITDA, net debt/recurring EBITDA ratio was 5.6x. In March 2015, net debt was BRL3.8 billion, compared with BRL4.6 billion in December 2013, as BR Properties used part of proceeds from the sale of assets to amortize debt. Relative to the value of the company's property portfolio, leverage is manageable with a loan-to-value ratio of about 41% and 36% on a net basis, in March 2015.
Cyclicality of Commercial Properties Business
High vacancy rate remains as a concern. In March 2015, financial vacancy rate was 9% and physical vacancy was 8%, compared to 8.5% and 7.2%, respectively, in 2014. Higher stock in the market also contributed to lower leasing spread, of 3.4% in March 2015, considering same properties, and lower than average inflation rates. BR Properties' lease contract expiration timeline continues well distributed, with 13% of the contracts (by revenues) expiring up to the end of 2015 and 9% in 2016. The company has maintained low delinquency rates, even under diverse macroeconomic conditions.
The company's properties have a favorable leasing profile with tenants representing a cross section of industries. Fitch also considers high the customer concentration, with the five and 10 largest tenants representing about 45% and 54%, respectively, of the company's revenues in 2014. BR Properties is the leader in the Brazilian commercial properties segment, with high quality assets, and had 57 properties, with 965 thousand sqm GLA and an estimated market value of BRL10.7 billion as of March 31, 2015.
Moderate Financial Flexibility from Unencumbered Assets
BR Properties financial flexibility from its unencumbered assets improved in 2014. As of Dec. 31, 2014, about BRL2.7 billion of total debt was guaranteed by receivables from rental agreements or by the properties. Unencumbered assets had an estimated market value of BRL3.9 billion, which may be available for sale or serve as collateral for a secured financing, if needed. The estimated value of unencumbered assets covered about 2.6x of unsecured debt of BRL1.5 billion.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--No sale of asset or acquisition of new properties;
--Vacancy rates between 10% and 15%;
--Increase in average rent below inflation rates;
--Net leverage between 5.0x and 5.5x.
RATING SENSITIVITIES
Future developments that may individually or collectively lead to a negative rating action includes:
--Increase in net leverage to levels above 6.0x;
--EBITDA to gross interest expense coverage ratio below 1.2x.
--Liquidity falling to levels that considerably weaken short-term debt coverage;
--Vacancy rates consistently above 10% and higher delinquency rates, which could result in a reduction in operational cash generation;
--Sale of assets that results in a less diversified and weaker portfolio of properties, with a significant reduction of the company's cash flow generation capacity.
Positive rating actions are not expected in the medium term.
LIQUIDITY
BR Properties has a prudent risk management policy and has preserved an adequate cash reserve to cover annual debt amortization and an eventual increase in the vacancy rates. As of March 31, 2015, the company reported cash and marketable securities of BRL515 million and BRL4.4 billion of total debt. Cash conservatively covered 1.8x short-term debt of BRL294 million, and Fitch considers the concentration of debt maturities of BRL566 million from April to December 2016 and BRL602 million in 2017 manageable. Fitch also expects EBITDA to gross interest expenses ratio above 1.3x in 2015 and 2016, compared to 1.7x in the LTM ended March 2015.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings for BR Properties S.A.:
-- Long-term foreign currency Issuer Default Rating (IDR) at 'BB';
-- Long-term local currency IDR at 'BB';
-- USD285 million senior unsecured perpetual notes at 'BB';
-- Long-term national scale rating at 'AA-(bra)'.
Fitch has removed the Rating Watch Negative from BR Properties' ratings and assigned a Stable Rating Outlook.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=987492
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=987492
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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