NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Caparra Center Associates, LLC (Caparra) at 'BBB+'. Fitch has also affirmed Caparra's USD21.8 million secured bonds at 'A-'.
The Rating Outlook is Stable.
Caparra's rating reflects the company's stable cash flow generation, its strong lease structures and tenant portfolio, as well as moderate vacancy rates in the range of 5% to 1.5% during the last three years. Further supporting the ratings are the company's manageable debt maturity schedule with annual debt service levels (principal plus interests) of approximately USD5.5 million comfortably covered by the company's annual cash flow generation - measured by EBITDAR - of approximately USD10.5 million. The company's solid collateral package with a low loan-to-value ratio supports the 'A-' rating of the bonds. A rating constraint is the company's lack of diversification due to its reliance upon a single shopping mall location with approximately 150 stores.
The Stable Outlook reflects the expectation that Caparra will maintain stable operating results based on the quality of its assets, while preserving a health level of liquidity and a conservative capital structure.
The Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA) issued the secured bonds in December 2009. The secured bonds are payable solely from payments made to AFICA by Caparra. AFICA serves solely as an issuing conduit for local qualified borrowers for purpose of issuing bonds pursuant a trust agreement between AFICA and a trustee. The secured bonds are not guaranteed by AFICA, do not constitute a charge against the general credit of AFICA, and, do not constitute an indebtedness of the Commonwealth of Puerto Rico or any of its political subdivisions.
KEY RATINGS DRIVERS
Stable Cash Flow Generation:
Caparra's revenues are stable given the characteristics of its lease portfolio, which provide it with a stable base of fixed-rent income. Staggered lease expirations, as well as the stable credit profile of its main tenants, further support revenue stability. Caparra's lease structure consists of fixed rent payments (65%) and tenant reimbursements (24%), which basically cover costs associated with property management and taxes. Caparra's EBITDAR for the latest 12 months (LTM) period ended March 31, 2013, was USD11.6 million, which is similar to EBITDAR levels of USD11.8 million in the fiscal year ended May 30, 2012 and USD11.1 million in the fiscal year ended May 30, 2011. The ratings incorporate an expectation the company will preserve stable cash flow generation and maintain EBITDAR levels around USD11.5 million.
The lease portfolio has staggered lease expiration dates. Approximately 56% of the company's rental income contracts have expiration dates that mature after four years. During the next 12 months, lease expirations are somewhat high at 25%, although the lease maturities are concentrated in many small tenants, as the largest represents less than 1% of total revenues. The vast majority of these leases are expected to be renewed at similar rent levels. Caparra's most important anchor tenants are Walgreens, K-Mart, Bed Bath & Beyond, Office Depot, and TJMaxx. These tenants generate approximately 36% of the company's total annual rent revenues. Despite a challenging operating environment in recent years, Caparra's operating metrics have been relatively resilient to the economic slowdown. As of March 31, 2013, the company has an occupancy level of 98.5%, which favorably compares with the company's occupancy rates in prior periods.
Adequate Leverage and Liquidity:
Caparra's total adjusted debt was USD45.3 million as of March 31, 2013. This figure is stable relative to USD46 million as of May 30, 2011. Caparra's total on-balance debt was USD44 million as of March 31 and it was composed mostly by the secured AFICA bonds (USD16.4 million) and secured banking loans (USD 26.7 million). The company's off-balance debt associated with operating leases obligations was USD1.3 million. Caparra's leverage, as measured by net debt/EBITDAR, was 3.6 times (x) at the end of March, which remains consistent with leverage levels from 2008 through 2012. The company leverage is expected to remain around 3.5x in the short to medium term.
As of March 31, 2013, Caparra had USD3.4 million of cash. It faces USD3.2 million during the next 12 months. The company's cash position includes USD1.8 million in a reserve account that secures the semiannual principal and interest payments for the secured public debt, as required by transaction structure. Caparra's liquidity is primarily a result of its cash flow generation. The company's liquidity is further supported through committed and unused credit lines with banks of USD2.5 million. If stressed, Caparra could reduce dividends, which have been in the range of USD4 million to USD5 million per year. The company also has two unencumbered properties with a total market value of approximately USD20 million that could be used to access liquidity in a distress scenario.
Strong Collateral Coverage:
The 'A-' rating for the AFICA secured bonds incorporates the collateral support included in the transaction structure. Payments of the bonds are secured by a first mortgage on the shopping center and an assignment of leases. The ratings incorporate the bonds' first lien collateral position over the shopping center, which is the company's main asset with a recent appraisal of USD144 million as of February 2012, and the expected improvement in the loan to value (LTV) ratio for the debt secured by the shopping center over the life of the AFICA bonds as this secured debt is being amortized. As of March 31, 2013, the LTV ratio was 17%. This ratios was based on the value of the last appraisal of the shopping center (USD144 million) versus the secured debt with a premium collateral position (first lien), which includes the AFICA bonds (USD16.4 million), the Oriental Bank loan (ex-BBVA loan) (USD4.3 million), and the Banco Popular de Puerto Rico loan (USD3.9 million).
Ratings Constraints:
The ratings are constrained by the negative business environment and the concentration risk affecting Caparra's operations. The ratings consider the negative business environment affecting the economy of Puerto Rico, which has been in recession during the last few years. The ratings also factor in the concentration risk in Caparra's operations which are related to a single retail asset (the shopping center). Further, Caparra's operations are dependent on its main tenants and six tenants represent approximately 36% of Caparra's total revenues. The ratings also consider as a negative credit factor Caparra's high dividend payout ratio. During the last five years, Caparra has distributed more than USD20 million in dividends, and the company expects to maintain a dividend payout ratio of approximately 85% for the next years.
RATING SENSITIVITIES:
The ratings incorporate Fitch's expectations that Caparra will maintain current leverage and liquidity levels. It also builds in an expectation the company would reduce distributed dividends if required to maintain an adequate credit profile. Deterioration in the company's financial profile and weaker credit metrics driven by the non-renewal of a contract with a major anchor tenant would be viewed negatively. Increasing vacancy rates or additional debt that would move the company's capital structure away from currently expected levels could also lead to a negative rating action.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=792378
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