Fitch Affirms Fibra UNO's Ratings at 'BBB'; Outlook Stable

MONTERREY, Mexico & NEW YORK--()--Fitch Ratings has affirmed the following ratings for Deutsche Bank Mexico, S.A., Institucion de Banca Multiple, Division Fiduciaria F/1401 (FUNO or Fibra UNO):

--Local currency Issuer Default Rating (IDR) at 'BBB';

--Foreign currency IDR at 'BBB';

--Senior unsecured notes for USD600 million due 2024 at 'BBB';

--Senior unsecured notes for USD400 million due 2044 at 'BBB';

--National Scale Long Term Rating at 'AAA(mex)';

--Local Certificados Bursatiles Issuances FUNO 13 due in 2019 at 'AAA(mex)'.

--Local Certificados Bursatiles Issuances FUNO 13-2 due in 2023 at 'AAA(mex)'.

--Local Certificados Bursatiles Issuances FUNO 13U due in 2028 at 'AAA(mex)'.

The Rating Outlook is Stable

The ratings reflect FUNO's solid market position as the leader and first REIT (Fibra) in Mexico. The ratings takes into account the company's large, well-diversified portfolio of industrial, retail and office properties, strong franchise value, good quality tenants, high occupancy rates, adequate credit metrics for the rating, and adequate financial flexibility highlighted by good access to capital and growing unencumbered asset pool. These strengths are offset by its externally managed structure and its aggressive growth strategy that may theoretically hinder the acquisition of same quality properties as the ones that are currently in the portfolio.

The Stable Rating Outlook reflects the expectation that FUNO will continue to deliver positive operating results based upon its strong market position and the high quality of its assets. Pro-forma net leverage is expected to remain in the 4.0x - 5.0x range by the end of December 2015, as additional growth is expected to occur through a continued balanced mix of funding that will not compromise its capital structure.

SOLID MARKET POSITION

The ratings reflect the company's solid market position as the leader and first REIT (Fibra) in Mexico. As of Oct. 31, 2014 FUNO had a 49.4% participation of Mexico's REITs according to market capitalization. The ratings also factor the contributors shareholders' and advisors' (control group) track record in the Mexican Real Estate sector with more than 30 years of experience in the acquisition, development, rental and operation of different types of commercial real estate projects in Mexico, including industrial, retail, office and mixed-use projects.

WELL DIVERSIFIED BUSINESS MODEL

The company has a portfolio with strong diversification across sectors, regions and tenants. As of Sept. 30, 2014 FUNO owns and operates a large and diversified portfolio, located throughout the country. Fitch expects that gross leasable area (GLA) will increase in the second half of 2014 through acquisitions to total 65.7 million square feet (6.1 million square meters) at year end. Fitch expects that FUNO's Annualized Fixed Income (AFI) in a pro forma basis taking into account 2014 acquisitions will be contributed by its Retail segment by 52.9%, Industrial segment by 31.6% and its office segment by 15.5%. The company's AFI is concentrated in Mexico City and Mexico State with 27.3% and 26.3% respectively; the following states contribute 10% or less with presence in 31 states across the country.

HIGH QUALITY AND DIVERSIFIED TENANTS

Last year acquisition of Mexican Retail Properties (MRP) consisting of 49 retail properties allowed FUNO to have one of the most diversified and high quality base of tenants; Walmart de Mexico y Centroamerica (formats including Walmart, Bodega Aurrera, Superama, Sam's Club, Suburbia, etc.) is positioned as the most important tenant for FUNO in terms of annualized rent income representing approximately 11.9% of rents. The next top nine tenants collectively accounting for less than 18.3% of AFI. Fitch estimates that approximately 30% of FUNO's rents come from blue chip companies. Further, more than 70% of revenues are generated from tenants that individually contribute less than 1% of annual revenue. This diversification insulates the company's cash flows from economic weakness in any particular region as well as credit risk at the tenant level.

HIGH OCCUPANCY AND COMPETITIVE RENT RATES

FUNO's strategy is focused to have rent prices per square meter below the average of the market to assure that its portfolio's properties are the first to be occupied and the last to be vacant in time of economic downturns. Fitch estimates that the monthly rent per square meter in the Industrial, Retail and Office segment will be MXN60, MXN150 and MXN240 in average during 2014. This strategy allows the company to have high occupancy levels. Fitch estimates that occupancy for Industrial, Retail and Office segments will be not less than 94%, 93% and 84% respectively of total GLA, with a total portfolio occupancy above 90%. Total portfolio historical occupancy has been 94.6%, 95.1% and 97.2% at Sept. 30, 2014, YE 2013 and 2012 respectively. Lease maturities are well-laddered with no more than 13.5% of GLA expiring in any individual year. The lease expiration profile is as follows, 4.0% in 2014, 12.0% in 2015, 13.5% in 2016, 24.4% in 17 - 18, 10.9% in 19-20, 6.5% in 21 - 22 and the rest in the following years.

INVESTMENT GRADE CREDIT METRICS

Fitch expects that year end 2014 pro forma net leverage will be around 2.0x and within a range of 4.0x to 5.0x over the next 24-36 months. FUNO's net leverage has declined to 2.0x at Sept. 30, 2014 from 11.0x at FYE13. Fitch defines leverage as net debt to recurring operating EBITDA, including Fitch's estimate of recurring joint venture (JV) distributions. Fixed charge coverage is expected to be 2.3x at YE14 and was 3.9x at YE13. This coverage ratio is expected to be in the 2.3x - 3.3x range going forward. Coverage metrics are adequate for the rating category. Fixed-charge coverage is calculated as recurring operating EBITDA, including Fitch's estimate of recurring JV distributions less recurring capital expenditures and straight-line rents, divided by total interest incurred and preferred operating unit distributions.

TRANSITION TO UNSECURED FINANCING STRATEGY

Fitch expectations about the transition from secured to unsecured financing were not fully met. The company successfully executed long-term debt issuances both in local and international markets. These issuances allowed the company to undergo a transition to a predominantly unsecured-focused debt financing strategy. The issuance of Capital Market Debt proceeds were used mostly to convert its secured bank loans to unsecured debt via repayment of mortgage maturities. This strategy resulted in FUNO's unsecured debt/total debt ratio of 63% at Sept. 30, 2014 from 40.8% at YE13 and 0% at FYE12; Fitch expected this metric to increase above 80%. Fitch's new expectations are that unsecured debt will be around a 60 - 70% range due to the assumed debt from the acquisitions pipeline.

STRONG LIQUIDITY AND ADEQUATE UNENCUMBERED ASSET PROFILE

FUNO has a strong base case liquidity with projected cash and equivalents of MXN28.4 billion at YE 2014 and committed credit lines for MXN7.0 billion. The company's unencumbered asset coverage of unsecured debt (calculated using a stressed 10.0% cap rate on projected 2014-2015 unencumbered NOI) will be in a 1.8x - 2.8X range. Unencumbered Asset coverage using the Market Value of the assets (Properties) will be in a range of 3.4x -5.0x for the 2014-2015 period; this ranges are considered adequate for the rating. Fitch expects that FUNO will have around 70.0% of unencumbered assets in its Portfolio in the next 12 - 24 months compared to a 75.5% at Sept. 30, 2014. The company before undergoing to the unsecured issuances in domestic and international markets had an asset profile consisting of around 35% unencumbered assets.

EXTERNALLY MANAGED STRUCTURE

FUNO's management team continues to improve the quality of the portfolio via the acquisition of high quality assets with good locations, high quality tenants and high occupancy rates. Fitch views management's focus on asset quality as a key differentiator between FUNO and other market participants. Senior management's experience in the sector is also a key differentiator between FUNO and its peers. These strengths are offset by its externally managed structure with diverse fees charged for management and advisory to the company. Some of the fees are the following: (1) Annual advisory fee of 0.5% of NAV and (2) acquisition fee of 3% of property value for third party acquisitions to the advisor, (3) 2% of monthly lease payments to the leasing administrator and (4) Monthly fee at 1% of lease payments to the manager.

AGGRESSIVE GROWTH STRATEGY

Factored in the ratings is the company's aggressive growth strategy that may theoretically hinder the acquisition of same quality's properties as the ones that are currently in the portfolio. Although in the past the company has managed to acquired good quality properties at adequate price, this ability could be affected in the future as the company continues to grow at the fast pace that has been performing in recent times. In Fitch opinion this expansion efforts through acquisitions will pressure properties prices in the market.

RATING SENSITIVITIES:

The following factors may have a negative impact on FUNO's ratings:

--Increase in the secured debt / total debt ratio;

--Fitch's expectation of an AFFO dividend payout ratio exceeding 80%;

--Fitch's expectation of net leverage sustaining above 5.0x for several consecutive quarters (leverage was 2.0x as of Sept. 30, 2014);

--Fitch's expectation of fixed-charge coverage sustaining below 2.0x for several consecutive quarters (coverage was 2.6x for the LTM ended Sept. 30, 2014);

--Fitch's expectation of a sustained liquidity shortfall.

Fitch does not envision positive actions in the short term. Factors that could support a positive rating action includes: strengthening of the business platform as acquired properties mature, resulting in improvements in net leverage along the business cycle, in conjunction with positive free cash flow generation and strong liquidity.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=917155

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Contacts

Fitch Ratings
Primary Analyst
Indalecio Riojas
Associate Director
+52-81-8399-9100
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst
Jose Vertiz
Director
+1-212-908-0641
or
Committee Chairperson
Sergio Rodriguez, CFA
Senior Director
+52-81-8399-9100
or
Media Relations, New York
Elizabeth Fogerty
+1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Indalecio Riojas
Associate Director
+52-81-8399-9100
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst
Jose Vertiz
Director
+1-212-908-0641
or
Committee Chairperson
Sergio Rodriguez, CFA
Senior Director
+52-81-8399-9100
or
Media Relations, New York
Elizabeth Fogerty
+1-212-908-0526
elizabeth.fogerty@fitchratings.com