December 20, 2017 / 9:59 PM / 8 months ago

Fitch Affirms Caparra Hills LLC's IDR at 'B+' /Secured Debt at 'BB'/'RR2'; Outlook Negative

(The following statement was released by the rating agency) NEW YORK, December 20 (Fitch) Fitch Ratings has affirmed Caparra Hills LLC (Caparra Hills) Long-Term Issuer Default Rating (IDR) at 'B+' and the senior secured debt at 'BB/RR2'. The ratings have been removed from Rating Watch Negative (RWN) and assigned a Negative Outlook. Caparra Hills' 'B+' Long-Term Issuer Default Rating reflects the company's small size and limited property diversification. The rating was placed on RWN due to heightened business risk that resulted from Hurricane Maria, which has placed additional pressure on Puerto Rico's fragile economy. With 18% of its leases falling due in the next 12 months, Caparra Hills is susceptible to declining lease rates and appraisal values. KEY RATING DRIVERS Hurricane Aftermath Uncertain: Damage to Caparra Hills' assets from recent hurricanes was manageable. The company was able to resume operations days after the power outage by using power generators. Hurricane-related costs were minimal and were mainly diesel and generator related. Potential for medium- to long-term impact on tenants, contract renewals and lease rates remain key risks as the island seeks to recover. Slight Drop in Occupancy Expected: Occupancy has improved to 88% as of Sept. 30, 2017, up from 76% as of fiscal year-end June 2016 and 70% as of June 2015. Fitch's base case projections anticipate occupancy will drop slightly in FY2019, as a key client's contract is set to expire. Fitch expects the potential departure by this client to be partially offset by new clients during FY2019. Concentration and Contracts Risk: Fitch expects counterparty risk to decline and contract maturities to extend as the company replaces key tenants. As of Sept. 30, 2017, T-Mobile Center's (previously Santander Tower) occupancy rate was 88%, of which about 48% was occupied by 10 major tenants (down from 62% in 2015 and 58% in 2016). Contract maturity risk is viewed as moderate to high, as 18.4% of the company's leases (as a percentage of total rents) are set to expire within the next 12 months. Secured Bond Enhances Recovery Prospects: Fitch's 'BB' rating on the secured bonds positively incorporates the collateral support included in the transaction structure. The payments of the bonds are secured by a first mortgage on the company's real estate properties and the assignment of leases. The secured bonds are payable solely from payments made to the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA) by Caparra Hills. AFICA serves solely as an issuing conduit for local qualified borrowers for the purpose of issuing bonds pursuant to a trust agreement between AFICA and the 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. Fitch's Recovery Rating of 'RR2' reflects superior recovery prospects, given default. High Leverage Profile: Caparra Hills' gross leverage as of LTM September 2017 was 8.7x. Fitch expects leverage to remain relatively flat during FY2019 as the company looks to replace expiring contracts in Puerto Rico's fragile economic environment. Leverage has been trending down over the last couple of years as the company improved its vacancy rates, but is still viewed as high. Caparra had USD53.8 million of total debt as of June 30, 2017, composed entirely of secured bonds, and requires annual debt service of approximately USD5.1 million (interest and principal). DERIVATION SUMMARY Caparra Hills, LLC's 'B+' rating reflects its property portfolio, which is in line with a 'B' rating category due to the limited property diversification and rental income risk profile. Occupancy of 88% as of Sept. 30, 2017 is in line with the 'B' rating category, which has a median of 85% occupancy. Caparra Hills' business and operating environment are weaker than its U.S. peers, as the company is exposed to the fragile economy of Puerto Rico and operates on a relatively small scale. However, the company has shown resilience in its performance, with EBITDA margins around 60%, which is in line with 'BB' rated companies within the sector. The company's leverage is in line with the 'B' rating category among its peers. When comparing the leverage profile of a higher rated peer such as Mack-Cali (BB+;, net leverage 7.5x), Caparra Hills' net leverage of 8.0x on an LTM basis, compares unfavorably. Caparra Hills' consistently positive FCF and adequate liquidity justify its higher rating when compared to General Shopping Brasil (CC). Caparra Hills' notes have been notched up to 'BB' to reflect strong recovery prospects in the event of a default. The company's loan-to-value ratio (LTV), based on the last appraisal, is estimated to be around 71%. The LTV is consistent with peers rated in the 'B' category. KEY ASSUMPTIONS Fitch's Key Assumptions within Our Rating Case for the Issuer --Debt-to-EBITDA of 8.8x at FY2018; --Slight drop in occupancy during FY2019 as the company looks to replace a tenant; --Negative FCF for FY2018 due to high capex on improvements. Recovery Assumptions: --Recovery for Caparra Hills reflects a 10x multiple of estimated going-concern distressed EBITDA of USD4.2 million; --Adjusted enterprise value available for claims (after 10% adjustment for administrative claims) of USD37.8 million; --Estimated value results in a recovery level of 'RR2', consistent with securities historically recovering 71%-90% of current principal and related interest. RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action A positive rating action could be triggered by lower business risk in terms of contract maturity schedule; concentration risk while improving cash flow generation resulting in lower gross leverage of about 6.5x. A loan-to-value (LTV) of 60%, or below, would also be viewed positively. Developments That May, Individually or Collectively, Lead to Negative Rating Action A downgrade could be triggered from deterioration in the company's occupancy rates and contract maturity schedule coupled with declining cash flow generation, measured as EBITDA, which results in weaker credit metrics. Sustained gross leverage above 9.0x and an LTV above 80% would also be viewed negatively. LIQUIDITY Adequate Liquidity: Caparra Hills' liquidity position is supported by its cash position of USD4.5 million and an unused unsecured line of credit for USD1 million. As of Sept. 30, 2017, Caparra Hills' short-term debt obligation was USD1.6 million. The company also maintains a debt service reserve fund of approximately USD8.6 million, held by the trustee, covering 20 months of debt service (interest and principal). FCF, as of FYE June 2017, was USD289,000 and is expected to be negative in FY2018, but should improve in FY2019 as the company benefits from increased revenues from new tenants and lower capex requirements, as Caparra Hills completes a period of tenant renovations. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Caparra Hills, LLC --Long-Term Foreign Currency IDR at 'B+'; --Senior secured debt at 'BB/RR2'. Contact: Primary Analyst Johnny da Silva Director +1-212-612-0367 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Jose Vertiz Director +1-212-908-0641 Committee Chairperson Joe Bormann, CFA Managing Director +1-312-368-3349 Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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