NEW YORK--()--Fitch Ratings has assigned a national scale rating of 'AA+(bra)' to Iguatemi Empresa de Shopping Centers SA (Iguatemi). The Rating Outlook is Stable.
The rating of Iguatemi reflects its dominant business position in the Brazilian shopping center market with participations in 13 shopping centers and three office towers. The company manages a total gross leasable area (GLA) of 491 thousand square meters (m2) and owns 281 thousand m2 of GLA as of Sept. 30, 2012. Positively factored into the ratings are the solid business fundamentals for Brazil's shopping mall industry over the medium term given the scarcity of quality leasable retail space. The strength and track record of the company's controlling shareholder, Jereissati Participacoes S.A. is also an important consideration.
Iguatemi's credit rating also incorporates the company's stable and predictable cash flow generation, solid liquidity, low net leverage, and diversified property revenue base. Working capital requirements are low, as tenants are responsible for most of the maintenance expenses. The rating takes into consideration Iguatemi's organic growth strategy and aggressive capital expenditures (capex) plan for 2012 through 2014 that should result in the company having negative free cash flow generation and a modest increase in net leverage. Iguatemi's solid liquidity position and large pool of unencumbered assets should ensure adequate funding for the capex plan.
Solid Industry Fundamentals:
Iguatemi's business strategy is based upon targeting the high and middle income segments. Brazil's favorable demographic trends, emerging middle class, and increasing retail consumption coupled with still low penetration levels of quality retail space in the industry, support this strategy and are factored in the company's rating. In the near-term, the industry's revenue growth rates should moderate from recent levels. In general, Brazilian shopping center operators have shown some resiliency to economic slowdowns due to leasing structures that have fixed and inflation adjusted components, which reduce volatility in revenues and cash flow generation.
Positive Operating Trends:
The consolidated sales of Iguatemi's tenants totaled BRL7.4 billion and BRL5.7 billion during 2011 and the first nine months of 2012. These sales levels represent increases of 18% and 14%, respectively, versus the comparable time period in the previous year. The growth of sales during the past 21 months reflect the strong demand for leasable space, as Iguatemi has maintained high occupancy levels of around 97% during the last several years, which has allowed its lease spreads to increase on average by approximately 12% in real terms. The improvements have occurred in spite of projected GDP growth levels in Brazil of only 1.5% during 2012.
Iguatemi has managed to keep occupancy costs at reasonable levels of around 10% of total sales during the first nine months of 2012 and default rates below 2%. The lease portfolio has staggered lease expiration dates with approximately 60% of the company's lease portfolio having expiration dates longer than two years. The vast majority of leases falling due in the next two years are projected by Fitch to be renewed.
High Margins and Stable Revenues:
Iguatemi's net revenues for the LTM ended Sept. 30, 2012, 2011 and 2010 were BRL387 million, BRL330 million, and BRL264 million, respectively. Fixed rent payments account for about 68% of Iguatemi's net revenues, while tenant reimbursements represent an additional 11% of total net revenues. These payments by tenants comfortably cover the Iguatemi's property management costs and taxes, resulting in stable EBITDA margins of about 70%. Iguatemi's cash flow generation, as measured by EBITDA, was BRL278 million during the LTM Sept. 2012.
The company's revenues are stable given the characteristics of its lease portfolio, which provide it with a stable base of fixed-rent income and lease expirations. Iguatemi's top-20 tenants account for less than 10% of its revenues.
Solid Liquidity, High Level of Unencumbered Assets:
As of Sept. 30, 2012, Iguatemi had BRL1.4 billion of total debt, which was composed of local debentures (BRL 769 million), BNDES financing (BRL 334 million) and bank loans (BRL 258 million). The company's secured debt, BRL330 million, represents approximately 25% of the company's total debt. Iguatemi's debt is entirely denominated in local currency, which reduces foreign exchange risk as its revenues are also denominated in local currency. The company's debt has an average tenor of three years.
Iguatemi's liquidity is strong due to its solid cash position, manageable debt payment schedule, and high levels of unencumbered assets. The company's cash position was BRL758 million as of Sept. 30, 2012, which comfortably covers its scheduled debt payments of BRL14 million, BRL156 million, and BRL171 million due in 4Q2012, 2013, and 2014, respectively. Iguatemi is expected to maintain a cash position in the range of BRL500 million and BRL1 billion between 2012 and 2014.
The company's owned GLA was 281 thousand m2 as of Sept. 30, 2012, which had a market value of approximately BRL5.5 billion. Iguatemi maintains a high level of unencumbered assets; approximately 33% of its total owned GLA (93 thousand m2) has been used as collateral for secured debt of BRL330 million. The company maintains total GLA of approximately 185 thousand m2 which is unencumbered and has an estimated market value of between BRL3 billion to BRL 3.5 billion. These assets provide financial flexibility as they could be used in the future to help access financing, if needed.
Moderate Leverage Expected to Increase:
The company's total net debt/EBITDA ratio was low at 1.8x as of Sept. 30, 2012. This ratio compares with a net debt position of 1.2x at the end of 2011 and a net cash position of 0.7x during 2010. The ratings incorporate the expectation that Iguatemi's net leverage will increase to between 2.5x and 3.0x by 2014 as the company executes its capex plan. Over the longer term, the company's financial strategy is to maintain net leverage levels to 2.5x or below.
The company has an aggressive capex plan that will result in expansions of existing developments, as well as greenfield projects. The company is expected to spend BRL1.1 billion - net of key money - on developments between 2012 and 2014. These investments should increase the company's GLA by approximately 140 thousand m2 and should result in the growth of the company's EBITDA to about BRL450 million.
Key rating drivers include the development of the Brazilian macroeconomic environment in which the company operates. The Stable Outlook reflects Fitch's expectation that Iguatemi will complete its capex plan as scheduled and reach annual EBITDA levels around BRL450 million by the end of 2014. The Stable Outlook also incorporates the view that the company's liquidity will remain solid with a cash position between BRL500 million to BRL1 billion and that its net leverage will remain around 2.5x during the next two years.
Positive Rating Actions: Iguatemi's rating could be positively affected by significant improvement - above expectations already incorporated - in its cash flow generation, leverage and liquidity metrics, and level of unencumbered assets, coupled with capex plan completion ahead of original schedule.
Negative Rating Actions: A negative rating action could result from some combination of the following factors: delays in the company's capex plans for 2013 and 2014, lower cash flow generation (EBITDA) by existing malls; and/or significant incremental debt associated with acquisition activity resulting in a deterioration of the company's credit profile.
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 - Methodology Update' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria