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Fitch Affirms Fibra Terrafina's IDRs at 'BBB-'; Outlook Stable.

New York: Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) for CIBANCO, S.A. Institucion de Banca Multiple, Trust F/00939 (Fibra Terrafina) at 'BBB-'. Fitch has also affirmed Fibra Terrafina's senior unsecured bond at 'BBB-'.


Acquisition Activity and Balanced Capital Structure Incorporated: The ratings consider Fibra Terrafina's business position as one of the largest owners of industrial real estate in Mexico with a portfolio, as of Sept. 30, 2017, of 268 developed industrial facilities with a collective gross leasable area (GLA) of approximately 37.8 million square feet (sf). The company executed portfolio acquisitions for a total amount of approximately USD 600 million during 2017. It was funded with Fibra Terrafina's cash position, proceeds from the USD 300 million equity follow-on completed during 2017, and incremental debt. On a pro forma basis, the company's total portfolio is estimated at 41 million of sf of GLA as of Dec. 31, 2017. This represents a 33% increase in the company's portfolio over 2016 level. Fitch expects Fibra Terrafina's future acquisition activity to be funded with a continued balance of equity and debt as occurred during 2014-2017.

Business Fundamentals Remain Solid: Potential damage to the Mexican real estate sector's growth prospects could occur if some U.S. proposals in ongoing North American Free Trade Agreement (NAFTA) negotiations materialize. However, Fitch believes the Mexican industrial real estate sector's business fundamentals will remain solid over the medium term on the back of its economic competitive advantages, which include the country's strategic location, consistent legal framework for foreign investment; and lower labor cost relative to other manufacturing hubs. Fitch does not expect material changes in 2018 for the industrial real estate segment's cash flow generation due to the sector's lease revenue structure, which include a fix-rent component and leasing contracts with an average duration of four to six years

Stable Operational Metrics, Low FX Risk Exposure: As of Sept. 30, 2017, Fibra Terrafina's portfolio was approximately 95% occupied. Terrafina's weighted average remaining lease term is 3.6 years as of Sept. 30, 2017, with approximately 14.8% and 17.4% of the company's annualized base rent expiring during 2018 and 2019, respectively. Fitch views the company's lease expiration schedule as adequate as it reflects standard practices in Mexican real estate of having lease terms that average around five years. Positively considered, 97% of the company's total lease base is U.S. dollar-denominated, minimizing the company's foreign exchange risk exposure. Fitch expects Fibra Terrafina to maintain high renewal rate levels similar to historical levels of around 80% during 2017-2019.

Adequate Portfolio Diversification, Limited Tenant Concentration: Fibra Terrafina's portfolio consists of 268 developed industrial properties as of Sept. 30, 2017. Fibra Terrafina's portfolio is geographically diversified across 17 states, while regionally the portfolio is distributed primarily in the central (17% of the total GLA), Bajio (24%) and northern (59%) regions of Mexico, while 27% of the portfolio was used for distribution and logistics activities and 73% was used for manufacturing activities, respectively, as of Sept. 30, 2017. In terms of tenant diversification, the company's top 10 clients represent approximately 20% of its total GLA annual base rent. No individual tenant represents more than 3.6% of Fibra Terrafina's rental revenue. The company's geographic diversification and tenant concentration is not expected to materially change in the medium term.

High Margins, Net Leverage Trending to 5.5x: The company reached EBITDA levels and EBITDA margin of MXN2.7 billion and 82.9%, respectively, during the LTM ending Sept. 30, 2017. The ratings incorporate Fitch's expectation that the company's EBITDA margin will remain stable at around 83% during 2017-2019. Fibra Terrafina's annualized average leasing rate per sf is expected at USD5 for full year 2017, representing increases over prior years of approximately 2.5%. The company's leases generally contain contractual annual rental rate increases linked to an inflation index. The company's net leverage ratio was 4.6x at Sept. 30, 2017. It reflects LTM EBITDA, total debt, and cash levels of MXN2.7 billion, MXN 19.2 billion, and MXN 6.7 million, respectively. By the end of 2018 the company's net leverage is forecasted at levels around 5.5x.


Fibra Terrafina's ratings reflect an experienced and well positioned real estate operator in the Mexican market with adequate portfolio granularity, limited tenant concentration, and the scale necessary to be a meaningful issuer in the debt and equity capital markets, which are comparable attributes to other rated entities in Latin America. The Stable Outlook reflects the expectation that the company will execute its 2017-2019 growth strategy while stabilizing its net leverage around 5.5x.

Fibra Terrafina's 'BBB-' rating compares well with regional real estate peers in the 'BBB' rating category in terms of capital structure, margins, and liquidity. In terms of net financial leverage, Fibra Terrafina's Net Debt to EBITDA is expected to be around 5.5x during 2017-2019, which is viewed as adequate when compared with regional peers. Fibra UNO (BBB/Stable Outlook) and Corporacion Inmobiliaria Vesta S.A. (BBB-/Stable Outlook) are expected to reach net leverage metrics of 5.5x and 5.3x respectively during the same period. In terms of margins, Fibra Terrafina's EBITDA margin is forecasted around 83% during 2017-2019, which is viewed as relatively strong when compared with regional peers. Fibra UNO and Corporacion Inmobiliaria Vesta S.A. (Vesta) are expected to reach EBITDA margins around 76% and 83%, respectively, during the same period. In terms of interest coverage, Fibra Terrafina's EBITDA / net Interest ratio is anticipated around 3.5x during 2017-2019, which is viewed as similar to expected levels for Fibra UNO and Vesta of around 2.8x and 4x, respectively, during the same period. In addition, Fitch considers Fibra Terrafina's characteristics in terms of scale, diversification, portfolio granularity and access to equity/debt markets as sitting between those for Fibra UNO and Vesta, with Fibra UNO as the strongest on these characteristics. FX risk exposure is viewed as lower for Fibra Terrafina, as 97% of its revenue rental base is U.S. denominated - versus Fibra Uno and Vesta.


Fitch's Key Assumptions within Our Rating Case for the Issuer

--EBITDA margin around 83% during 2017-2019;

--Occupancy levels consistently around 95% during 2017-2019;

--Total net leverage around trending to 5.5x during 2017-2019;

--Interest coverage (EBITDA/net interest expenses) consistently around 3.5x during 2017-2019;

--Total liquidity, measured as total unrestricted cash plus unused committed credit lines, consistently above USD200 million during 2017-2019;

--Unencumbered assets-to-net unsecured debt coverage consistently above 2x.


Developments That May, Individually or Collectively, Lead to Positive Rating Action

--Net leverage consistently at or below 4.5x for several consecutive quarters;

--Significant improvement in EBITDA margin and occupancy above expected levels;

--Material liquidity improvement on a sustained basis above expected levels;

--100% of the total debt being unsecured, no secured debt;

--Unencumbered assets-to-net unsecured debt coverage consistently above 3x.

Developments That May, Individually or Collectively, Lead to Negative Rating Action

--Post 2016-2017 portfolio acquisition activity, net leverage consistently at 6.5x for several consecutive quarters;

--Significant deterioration in EBITDA margin and occupancy below expected levels;

--Weakening in interest coverage;

--Material increase in the secured debt/total debt ratio above expected levels;

--Unencumbered assets-to-net unsecured debt coverage consistently below 2x.

--Failure to maintain consistently expected levels of committed unused credit lines plus available cash above USD200 million.


Adequate Liquidity: The company's liquidity is viewed as adequate considering its manageable debt schedule with no material principal payment maturities and expected levels of interest coverage ratio (measured as total EBITDA-to-gross interests) at around 3.5x during 2017-2019. The company's relatively high level of unencumbered assets of USD 1.7 billion as of Sept. 30, 2017 provides additional financial flexibility. The ratings factor in the company's financial strategy to maintain minimum cash position of around USD 50 million over the medium term and a significant level of unused committed credit line. Fibra Terrafina's combined liquidity (measured as total unrestricted cash position plus unused committed credit lines) is expected to remain consistently above USD 200 million during 2017-2019.

The company completed several refinancing transactions during 2017, several of them occurring during the fourth quarter of 2017. On a pro forma basis, Fibra Terrafina's total debt is expected around USD 1.1 billion with a composition of approximately unsecured debt and secured debt of 85% and 15%, respectively as of Dec. 31, 2017. The company's portfolio value is estimated at USD 2.2 billion resulting in an adequate pro forma loan-to-value ratio - measured as the total debt to property portfolio value ratio - of around 45% as of Dec. 31, 2017.


Fitch has affirmed Fibra Terrafina's ratings as follows:

--Foreign Currency Long-Term IDR at 'BBB-;

--Local Currency Long-Term IDR at 'BBB-;

--Senior unsecured notes at 'BBB-.

The Rating Outlook is Stable.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Mar 14, 2018
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