Fitch Upgrades BR Properties' IDR to 'BB'; Outlook Stable
RIO DE JANEIRO -- March 21, 2013
Fitch Ratings has upgraded the ratings of BR Properties S.A. (BR Properties)
--Long-term foreign currency Issuer Default Rating (IDR) to 'BB' from 'BB-';
--Long-term local currency IDR to 'BB' from 'BB-';
--Long-term National scale rating to 'AA-(bra)' from 'A(bra)';
--USD285 million perpetual notes issuance to 'BB' from 'BB-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The upgrade of BR Properties' ratings reflects the consolidation of the
company's leading position in the Brazilian commercial properties segment and
the expectation that leverage and coverage ratios will moderately improve as a
result of stronger cash generation from lease agreements. The rating action
also incorporated BR Properties' higher financial flexibility, due to the
strong increase of the company's scale of operations, with a market value of
the portfolio of commercial assets of BRL13.84 billion in December 2012. Fitch
does not expect relevant property acquisitions financed with debt in the short
The ratings incorporate BR Properties' predictable cash flow generation and
its low vacancy and delinquency rates during diverse macroeconomic conditions.
The rating also benefits from the high quality of the properties and the
company's diversification into offices, warehouses, and retail stores, which,
combined with the scale of its business and the high quality of its tenant
base, adds more consistency to its results.
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 cost. The company's ratings are limited by the
cyclicality of the commercial properties business and the company's reliance
upon long-term lines of credit to finance its expansion plans.
Growing and Predictable Operational Cash Flow to Benefit Credit Metrics
BR Properties' predictable and growing cash flow from lease agreements should
contribute to improve leverage and debt service coverage ratios. In 2012, BR
Properties generated BRL532 million of EBITDA, BRL127 million of funds from
operations (FFO), and BRL136 million of cash flow from operations (CFFO).
During 2012, BR Properties invested BRL1.248 billion and distributed dividends
of BRL60 million, which resulted in negative free cash flow (FCF) of BRL1.172
billion. Large investments in the period reflect the relevant acquisition of
the office building Ventura in Rio de Janeiro for BRL746 million. Fitch
expects continued and sustainable EBITDA growth to more than BRL800 million in
Fitch expects FFO interest coverage to improve to 1.7x by the end of 2014 as
the company refinances higher cost debt and improves CFFO with new rental
revenues from recent acquisitions and project deliveries. In 2012, FFO
interest coverage was 1.3x, while the EBITDA/interest expense ratio was 1.2x.
Leverage Reduction Expected
Fitch expects a reduction in leverage in 2013 and 2014, to levels more
compatible with other rated companies in the sector. BR Properties should
benefit from greater cash generation from projects in development and a full
year of revenues from the incorporation of One Properties, while net debt is
not anticipated to change significantly. In 2012, total debt/EBITDA was 9.9x
and net debt/EBITDA was 8.8x, pressured by the incorporation of One
Properties. In 2011, these ratios were 7.4x and 3.8x, respectively. Net
leverage should reduce to about 5.0x by the end of 2014.
BR Properties' business is capital intensive and highly dependent on access to
the debt and capital markets to finance its expansion plan. Compared to other
corporate sectors, the company's leverage is high, but is supported by more
predictable cash flows and long-term leases. Relative to the value of the
company's property portfolio of BRL13.84 billion and total debt of BRL5.26
billion, leverage is manageable with a loan-to-value ratio of about 38% and
34% on a net basis, at December 2012.
Scale of Operations Benefits Financial Flexibility
The sharp increase in BR Properties' scale of operations contributed to
improve the company's financial flexibility. As of Dec. 31, 2012, about BRL4.4
billion of total debt, or 84%, was guaranteed by receivables from rental
agreements and by the properties. Unencumbered assets had an estimated market
value of BRL3.2 billion (23% of the total market value of properties), which
may be available for sale or serve as collateral for a secured financing, if
needed. The estimated value of unencumbered assets covered about 3.7x of
unsecured debt of BRL859 million. These properties represent about 20% of
total pro forma net operating income (NOI). The company's long-term strategy
to reduce the portion of its encumbered assets is positive and should improve
liquidity contingency and unsecured debt coverage.
BR Properties has a prudent risk management policy and has preserved an
adequate cash reserve. As of Dec. 31, 2012, the company reported cash and
marketable securities of BRL574 million and total debt of BRL5.261 billion.
These numbers compare with BRL1.032 billion and BRL2.137 billion,
respectively, in December 2011, prior to the merger with One Properties. The
reduction in the company's cash balances resulted mainly from the acquisition
of the Ventura office building. The company has debt maturities of BRL644
million in the short term and BRL870 million in 2014. Fitch expects BR
Properties to be successful in its debt restructuring plan and manage its
liquidity conservatively, maintaining a cash cushion sufficient to cover
annual debt amortization and an eventual increase in vacancy costs.
Positive Operating Track Record and Leading Position in Commercial Properties
BR Properties has demonstrated a positive operating track record since 2007
with a diverse portfolio of offices, warehouses and retail stores. The
company's properties have a favorable leasing profile with tenants
representing a cross section of industries. Customer concentration is an
issue, however, as the 5 and 10 largest tenants represented about 41% and 57%,
respectively, of the company's revenues in 2012.
BR Properties has been successful in revising lease spreads of its contracts.
In the last couple of years, the company reported high leasing spreads, both
market alignments and new leases, well above inflation, due mainly to the
increased demand for commercial properties and the high quality of its assets.
BR Properties' lease contract expiration timeline is well distributed, with
only 6% of the contracts (by revenues) expiring in 2013 and 9% in 2014. The
company has maintained low delinquency rates, even under changing
macroeconomic conditions. As of Dec. 31, 2012, the financial vacancy rate was
4.0% and physical vacancy rate was 2.6%, compared to 1.7% and 0.9%,
respectively, in 2011. This increase is temporary and was due to the delivery
of the partially leased Paulista Building.
The incorporation of One Properties consolidated BR Properties' leading
position in the Brazilian commercial properties segment. As of Dec. 31, 2012,
the company had 123 properties, including 13 under development, with a Gross
Leasable Area (GLA) of 2,223 thousand square meters.
BR Properties' ratings could be positively affected by coverage and leverage
ratios better than the expectation incorporated by Fitch in this rating
action. An extended debt maturity profile and the maintenance of conservative
cash cushion are also important for future rating actions. The rating could
also be upgraded if the unsecured debt covered by unencumbered assets
The ratings can be negatively affected by an increase in leverage, a weakening
debt amortization profile, and liquidity falling to levels that considerably
weaken short-term debt coverage. The ratings could also be pressured by a
significant increase in vacancy and delinquency rates, a reduction in
operational cash generation, as well as a sharp downturn in the Brazilian
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research
Corporate Rating Methodology
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