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Fitch Publishes Vesta's 'BBB-' IDR; Outlook Stable
September 25, 2017 / 5:02 PM / 2 months ago

Fitch Publishes Vesta's 'BBB-' IDR; Outlook Stable

(The following statement was released by the rating agency) MONTERREY, September 25 (Fitch) Fitch Ratings has published Corporacion Inmobiliaria Vesta, S.A.B. de C.V.'s (Vesta) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) of 'BBB-' with a Stable Outlook. At the same time, Fitch has assigned an expected rating of 'BBB-(EXP)' to Vesta's proposed privately placed notes for up to USD125 million. A complete list of rating actions follows at the end of this press release. Vesta's ratings reflect its business profile as an industrial real estate developer and operator in Mexico, serving the manufacturing and distribution segments, with some tenant concentration, its consistent strategy focused on organic growth through development of properties compared to acquisition of stabilized assets, high operating margins and stable financial metrics. KEY RATING DRIVERS Focus on Organic Growth: Vesta's target is to increase its gross leaseable area (GLA) by approximately 35% by the end of 2020 - reaching 33 million square feet. It will require a 2017-2020 capex plan of approximately USD400 million to USD450 million and will be funded with a combination of new debt (the proposed unsecured notes), cash on hand, and own cash flow generation. The company's track record in terms of business growth and capital structure is incorporated into the ratings Tenant Concentration Risk Incorporated: The company's portfolio has a degree of concentration with the top 10 clients representing approximately 30% of its total lease revenue. The automotive sector represents approximately 41.5% of the annualized base rent, with most of the tenants in this segment being tier-1 manufacturers. Fitch views Mexico's global position as a leading manufacturing platform as sustainable over the medium term, supporting continued growth in terms of real estate space demand High Margins: The company maintains one of the highest margins in the industry, which is explained by its relatively light cost structure, which does not consider any type of fees (advising or managing fees as is the case for Fibras). The company reached EBITDA and EBITDA margin of USD75 million and 83%, respectively, during 2016. Vesta's annual EBITDA has increased by 32% from 2014 to 2016. The ratings incorporate the expectation that the company's EBITDA margin will remain around 82% during 2017-2019. Execution of Financial Strategy: The ratings incorporate Fitch's expectation that the company is successful in executing its financial strategy. Fitch expects Vesta will look to complete its inaugural public unsecured bond issuance during 2017, making material progress in extending its debt maturity schedule and pre-funding a good portion of its capex plan. Post the proposed issuance, Vesta will extend the average life of its debt from 5.9-years to 6.8-years, migrate to a capital structure based primarily on unsecured debt, and access larger and deeper debt capital markets. 2018 Net Leverage Expected around 5.0x: The company's net leverage ratios were 1.9x and 3.9x, respectively, by the end of Dec. 31, 2015 and Dec. 31 2016. Net leverage is expected to remain around 5.5x in 2017 and trend to around 5.0x toward the end of 2018. These expectations consider the following: (1) the company completing a capex plan for a total net amount of approximately USD 250 million during 2017-2018, (2) increase in its total debt from USD343 million in Dec. 31, 2016 to USD577 million in Dec. 31, 2018 (with incremental debt of USD234 million during the period; and (3) annual dividend payments in the USD30 million to USD40 million range. The company's 2018 EBITDA is expected to increase from USD75 million in 2016 to USD95 million in 2018. This prospect for cash flow improvement is supported by the increase in GLA as the capex plan is being executed. Important Unencumbered Assets Pool, Low LTV: As of Dec. 31, 2016, the asset value of the company's unencumbered portfolio was USD1.1 billion (75% of the portfolio value). The expected level of unencumbered assets post issuance is estimated at USD1.2 billion by the end of 2017, providing material financial flexibility. The company's debt structure is expected to switch to a 35% secured and 65% unsecured debt post the proposed unsecured bond issuance, resulting in a pro forma unencumbered assets-to-unsecured debt coverage of around 3.2x. The company's net loan-to-value (LTV) ratio is estimated at 30% by Dec. 31, 2017, which is viewed as adequate. DERIVATION SUMMARY Vesta's 'BBB-' ratings compare favorably with regional real estate peers in terms of asset diversification with over 22 million of squared feet (sf) GLA and 138 industrial properties in Mexico as of Dec. 31, 2016, high EBITDA margins of 83%, and high proportion of dollar-denominated revenues (approximately 80%). In terms of portfolio structure, the ratings are limited by tenant concentration, with the top 10 clients representing approximately 30% of total lease revenues, as well as some concentration in the auto industry. In addition, the ratings consider the transition to an unencumbered asset base in the medium term. In terms of financial leverage, Vesta's leverage metric, measured as Net Adjusted Debt / EBITDAR, is expected to remain around 5.2x during 2017-2020, which is viewed as adequate when compared with regional peers. Fibra Uno (BBB/Stable) and Terrafina (BBB-/Stable) are expected to reach net leverage metrics of 5.0x and 5.5x respectively during the same period. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for Vesta's rating include: -- EBITDA margin for 2017-2019 around 83%; -- 2017-2019 occupancy levels around 90%; --Total net leverage around 5.0x during 2017-2019; --Interest coverage (EBITDA/gross interest expenses) consistently trending to l3.3x during 2017-2019; --Total liquidity, measured as total unrestricted cash plus unused committed credit lines, consistently above USD120 million during 2017-2019. RATING SENSITIVITIES Detail Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --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. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Net leverage consistently above 5.5x by the end of 2018; --Significant deterioration in EBITDA margin and occupancy below expected levels; --Increase in the secured debt / total debt ratio above expected levels; --Liquidity below expectations, cancellation of unused committed credit line. LIQUIDITY Adequate Liquidity, USD100 Million Unused Committed Credit Line in Place: Liquidity post issuance is viewed as adequate considering the company's capacity to cover interest expenses, manageable debt schedule (with no material debt principal payment due during the next three years ending December 2019), important levels of unencumbered assets, and high levels of cash plus committed credit lines. Vesta's interest coverage ratio, measured as total EBITDA/gross interest, is forecast to be around 3.0x during 2017-2019. The company's liquidity as of Dec. 31, 2016 is USD148 million, which includes available cash of USD48 million and a USD100 million available unused committed credit line. Considered in the ratings is the company's financial strategy - and commitment - to maintain minimum liquidity of USD120 million during 2017-2020 composed of a minimum cash position of USD20 million plus the USD100 million committed credit line. FULL LIST OF RATING ACTIONS Fitch has published the following ratings for Corporacion Inmobiliaria Vesta, S.A.B. de C.V.: -- Foreign Currency Long-Term Issuer Default Rating of 'BBB'; -- Local Currency Long-Term Issuer Default Rating of 'BBB-'; -- Unsecured Privately Placed Notes of USD65 million maturing in 2024 'BBB-'; -- Unsecured Privately Placed Notes of USD60 million maturing in 2027 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Jose Vertiz Director +1-212-908-0641 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Diana Cantu Associate Director +81 8399 9100 Committee Chairperson Alberto Moreno Senior Director +81 8399 9100 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. 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