Fitch Rates InRetail Real Estate Corp.'s IDR 'BB'; Proposed Sr. Unsecured Notes 'BB'
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to InRetail Real Estate Corp. (InRetail Real Estate):
--Foreign currency Issuer Default Rating (IDR) 'BB';
--Local currency IDR 'BB'.
--Proposed senior unsecured notes 'BB' (to be issued by InRetail Shopping Malls).
The Rating Outlook is Stable.
The proposed transaction will be issued by InRetail Shopping Malls, a fully owned subsidiary of InRetail Real Estate. The notes will be fully and unconditionally guaranteed by InRetail Real Estate Corp.; and the following subsidiaries of the issuer: Interproperties Holding, Interproperties Holding II, Real Plaza S.R.L., and InRetail Properties Management S.R.L.
The target amount of the proposed issuance is USD300 million; the final amount of the issuance will depend on market conditions. Proceeds from the seven year proposed issuance will be used primarily to fund the company's capital expenditures plan, refinance existing debt, and strengthen the company's liquidity.
The ratings reflect the company's solid business position, stable and predictable cash flow generation, expected levels of leverage, liquidity, and unencumbered assets post-proposed issuance, strong credit linkage with its parent company Intercorp Retail Inc. (Intercorp Retail), positive industry momentum riding on Peru's favorable economic environment, and the low working capital requirements of the industry, with tenants responsible for most property maintenance expenses.
KEY RATING DRIVERS:
Solid Business Position:
InRetail Real Estate is the largest company in the shopping mall sector in Peru based on both gross leasable area (GLA) and the number of shopping malls. Under its Real Plaza brand, the company operates 16 shopping malls with 496 thousand square meters (m2) of gross leasable area (GLA) that it owns or leases on a long term basis and three additional shopping malls with 58 thousand m2 of GLA that are owned by related parties. The company maintains a market share, measured as its participation in Peru's total GLA, estimated around 20% by Dec. 31, 2013. Its market position in Peru's shopping mall industry is viewed as solid in the medium term.
Favorable Business Environment:
The company is expected to continue to benefit from solid fundamentals for Peru's shopping mall sector as a result of a positive macroeconomic environment coupled with a limited supply of leasable shopping areas. During the last five years Peru's favorable economic environment has led to increases in disposable income. The Peruvian mall industry's low penetration rate support continued growth. The sector is characterized by limited supply of leasable area, with only 63 shopping centers in the country and low penetration rates, with a ratio of only 66 thousand GLA per 1,000 persons; and only 13% of Peru's retail sales being through shopping centers.
Lease Characteristics Support Revenue Stream:
InRetail Real Estate's margins are viewed as stable. They are supported by a lease structure that consists of fixed rent payments and tenant reimbursements, which represent 84% and 2%, respectively, of the company's total rental income. InRetail Real Estate's net revenues and adjusted EBITDA during latest 12 months (LTM) March 2014 were S/.164 million and S/.125 million, resulting in an adjusted EBITDA margin of 76%. The company's adjusted EBITDA is expected to reach annual growth rates of 52% and 27% during 2014 and 2015, respectively driven by the increase in GLA. Adjusted EBITDA margin should remain stable around 76%.
Operational Performance in Line with Industry Standards:
InRetail Real Estate has maintained good occupancy levels and low default rates average of 95% and 1%, respectively, during the 2012-2014 period. Its lease portfolio has adequate lease expiration dates, with approximately 8% and 10% of the company's lease portfolio - measured as a percentage of the company's total fixed income - having expiration dates during 2014 and 2015, respectively. In addition, the company's lease duration profile for its property portfolio has an average of five years, which is in line with market standards.
The ratings incorporate InRetail Real Estate's asset and tenant concentration risk. The company's net revenues structure presents some asset concentration with four malls representing approximately 45% of its expected net revenues during 2014. In addition, the company's tenant composition is concentrated as its 10 most important tenants represent approximately 50% of the company's total annual rent revenue. This concentration is partially counterbalanced by the credit quality of these tenants. The company's assets and tenant concentration risk is not expected to materially change in the short to medium term.
Capex Plan to Increase GLA 25% by December 2016:
The company's management strategy is to grow organically by taking advantage of shopping mall development opportunities identified throughout Peru, expanding its reach across socioeconomic segments and geographic markets.
InRetail Real Estate has a good track record in executing new developments and it maintains a significant capital expenditure (capex) plan, which will be funded with the company's cash flow generation (adjusted EBITDA) and incremental debt through the proposed transaction. In the past three years, equity injections for a total amount of approximately S/.1.2 billion (USD418 million) were an important component to fund the execution of the company's capex. During the last 18 months ended in May 2014, the company added approximately 227 thousand m2 to its GLA, increasing total GLA in approximately 78% during the period and ending May 2014 with a total GLA of 497 thousand m2. The company's capex plan for 2014-2015 period considers levels of approximately S/.600 million (USD214 million), increasing its total GLA in approximately 250 thousand m2 and reaching total GLA of 650 thousand m2 by the end of 2016.
Fitch views the company's proforma net leverage in line with industry standards. As of March 31, 2014, the company had S/.647 million (USD230 million) of total debt, which was composed of the USD185 million secured bonds - issued through Interproperties Holding - and the remaining balance mostly in banking loans and financial leases. InRetail Real Estate's rating incorporate the expectation that the company's net leverage will remain in the 4x to 4.5x range during the 2014-2015 period. At the end of March 2014, the company's net leverage, measured by the total net debt-to-EBITDA ratio, was 4.9x, reflecting its LTM March 2014 EBITDA of S/.125 million (USD45 million) and total net debt of S/.606million (USD216 million). On a pro forma basis - considering the proposed unsecured USD300 million transaction - the company's net debt is expected to be around S/.770 million (USD275 million) by the end of 2014.
Good Liquidity Post Issuance:
InRetail Real Estate Corp.'s liquidity post issuance is viewed as adequate as a result of expected cash position, manageable debt payment schedule, and levels of unencumbered assets. The ratings incorporate the view that the company will end 2014 with a cash position of around S/.250 million (USD90 million), InRetail Real Estate will face - post proposed issuance - annual debt payments in the S/.18 million to S/.20 million range during the 2014-2016 period, which is viewed as manageable.
In addition, the company's assets related to the shopping malls - including Salaverry shopping mall - have an estimated market value of approximately USD725 million by June 2014.
On a consolidated and pro forma basis, considering new assets being added with proceeds from proposed transaction, the company's total asset value and total secured and unsecured debt, the loan to value is estimated at around 45%. The company is expected to maintain a good level of unencumbered assets with an estimated market value of approximately USD585 million, covering 2x its unsecured debt level. This level of unencumbered assets provides financial flexibility as it could be used to access financing in a stress scenario.
Retail Holding's Adjusted Leverage Constrains Ratings:
Fitch views the credit linkage between InRetail Real Estate and its parent company Intercorp Retail - rated 'BB', Outlook Stable - as strong reflecting the operational and strategic ties between these entities. InRetail Real Estate's ratings are constrained by Intercorp Retail's high adjusted net leverage driven by significant levels of capex and inorganic growth in recent years. Intercorp Retail's consolidated financial net leverage ratio, measured by the total net adjusted debt/EBITDAR, was 5.7x during the LTM March 31, 2014. Intercorp Retail's ratings include the expectation of a business deleverage taking place during 2014-2015. Intercorp Retail's business position in the Peruvian retail industry is viewed as solid driven by a sound business strategy of developing and integrating several retail formats with its real estate operations.
Negative Rating Actions:
Fitch would consider a negative rating action if the company's financial profile deteriorates due to some combination of the following factors: adverse macroeconomic trends leading to weaker credit metrics; significant dividend distributions; and higher than expected vacancy rates or deteriorating lease conditions. A rating downgrade could be also triggered by deterioration in the group's retail operations resulting in Intercorp Retail Inc.'s inability to reduce its net adjusted leverage in line with expectations incorporated in the ratings.
Positive Rating Actions:
Fitch would consider a positive rating action as a result of the combination of the following factors: Improvement in InRetail Real Estate's net leverage, liquidity and unencumbered assets at levels above those incorporated in the ratings coupled with Intercorp Retail reaching a significant business deleverage in the next 12 to 18 months ended in December 2015.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', May 28, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage