Fitch Affirms BR Properties' IDR at 'BB'; Outlook Stable
RIO DE JANEIRO -- March 21, 2014
Fitch Ratings has affirmed BR Properties S.A.'s (BR Properties) foreign and
local currency Issuer Default Ratings (IDR) at 'BB' and long-term national
scale at 'AA-(bra)'. Fitch has also affirmed the senior unsecured perpetual
notes issuance, in the amount of USD285 million, at 'BB'. The Outlook for the
corporate ratings is Stable.
KEY RATING DRIVERS
The ratings reflect BR Properties' leading position in the Brazilian
commercial properties segment and its predictable cash flow generation from
lease agreements during diverse macroeconomic conditions. The ratings also
incorporate 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.
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 are constrained by the company's low financial flexibility
from unencumbered assets, the cyclicality of the commercial properties
business, and the company's reliance on long-term lines of credit to finance
its expansion plans.
The ratings consider that the possible sale of BR Properties' industrial
portfolio during the first half of 2014 should not impact the ratings. The
company signed an agreement in March 2014 to sell 34 industrial warehouses to
LPP Empreendimentos e Participacoes Ltda. (an entity of the Global Logistic
Properties Limited group - GLP) for BRL3.18 billion. The benefits from the
transaction to the company's liquidity and credit metrics should be momentary
and do not reflect Fitch's expectation for the company's leverage in the long
Predictable Operational Cash Flow
BR Properties benefits from a predictable and consistent cash flow from lease
agreements. A significant part of the proceeds from the sale of industrial
properties, if concluded, should be directed to higher dividends distribution
and free cash flow (FCF) should be strongly negative in 2014. FCF should be
positive in 2015. The company has been efficient to increase revenues and
preserve robust EBITDA margins. In 2013, BR Properties generated BRL811
million of EBITDA, with EBITDA margins of 87.8%, BRL168 million of funds from
operations (FFO), and BRL194 million of cash flow from operations (CFFO). With
investments of BRL230 million and BRL160 million of dividends, FCF was
negative BRL196 million. Fitch expects an annual EBITDA reduction of BRL200
million as a result of the sale of its industrial portfolio.
Moderate Leverage in the Medium Term
BR Properties' ratings incorporate Fitch's expectation that the company's net
leverage will be between 4.5x and 5.0x in the medium term, due to the
company's growth strategy. Fitch expects a punctual reduction of net
debt/EBITDA ratio in 2014, to 3.5x, as BR Properties should benefit from
greater cash generation from projects in development and sale of assets. Total
debt/EBITDA was 6.9x and net debt/EBITDA was 5.7x in 2013, compared to 9.9x
and 8.8x, respectively, in 2012. Relative to the value of the company's
property portfolio, leverage is manageable with a loan-to-value ratio of about
41% and 34% on a net basis, at December 2013.
BR Properties has a prudent risk management policy and has preserved an
adequate cash reserve. As of Dec. 31, 2013, the company reported cash and
marketable securities of BRL951 million, that covered 1.0x short-term debt of
BRL923 million. Total debt was BRL5.6 billion and included two debentures
issued in 2013, in the amount of BRL850 million. Fitch considers the
concentration of debt maturities of BRL1.6 billion in 2016 manageable and that
liquidity should benefit from the BRL3.18 billion sale of properties in 2014,
despite potential pressure of higher dividend distribution. Fitch also expects
FFO interest coverage to remain around 1.3x in the short term. In 2013, FFO
interest coverage was 1.3x, while EBITDA-to-gross interest expense ratio was
BR Properties has limited financial flexibility from its unencumbered assets.
As of Dec. 31, 2013, about BRL3.5 billion of total debt was guaranteed by
receivables from rental agreements or by the properties. Unencumbered assets
had an estimated market value of BRL2.3 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 1.1x of unsecured debt of BRL2.1
billion. Fitch does not expect a reduction of the portion of its encumbered
assets in the medium term.
More Challenging Market Environment
BR Properties' higher vacancy rate is a concern. Vacancy rates increased in
2013 as a result of the deliveries of partially leased properties, in a more
challenging market environment. The financial and physical vacancy rates as of
December 2013 were 8.6% and 4.1%, respectively. Higher stock in the market
also contributed to lower leasing spread in 2013, of 3% above inflation,
compared to higher levels reported in 2011 and 2012. BR Properties' lease
contract expiration timeline is well distributed, with 8% of the contracts (by
revenues) expiring up to the end of 2014 and 12% in 2015. The company has
maintained low delinquency rates, even under changing 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 48% and 64%, respectively, of the company's revenues in 2013.
Sale of Industrial Portfolio
The possible sale of 34 warehouses to GLP is positive in the short term as
should improve liquidity and allow some debt reduction. However, it reduces
the company's business diversification and financial flexibility. As of Dec.
31, 2013, the company had 120 properties, including projects under
development, with a Gross Leasable Area (GLA) of 2,186 thousand square meters
and an estimated market value of BRL13.8 billion. Following the sale of
properties, GLA should reduce to 966 thousand square meters and estimated
market value to BRL10.5 billion. The industrial portfolio represented about
25% of the company's revenues in 2013.
BR Properties' rating could be positively affected if the company preserves
net leverage below 4.5x in the long term, cash to short term debt ratio above
1.0x and FFO interest coverage beyond 2.0x. The ratings could also be upgraded
if the unsecured debt covered by unencumbered assets increases significantly.
The rating could be negatively affected by an increase in leverage to levels
above 6.0x and liquidity falling to levels that considerably weaken short-term
debt coverage. The ratings could also be pressured by vacancy rates
consistently above 10% and higher delinquency rates, which could result in a
reduction in operational cash generation.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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