Fitch Affirms Cyrela Comm'l Properties IDR at 'BB'; Outlook Stable

SAO PAULO, Brazil--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of Cyrela Commercial Properties S.A. Empreendimentos e Participacoes (CCP), as follows:

--Foreign Currency Long-term Issuer Default Rating (IDR) at 'BB';

--Local Currency Long-term IDR at 'BB';

--Long-term National Scale at 'AA-(bra)';

--Long-term National Scale rating of the BRL204.4 million second debenture issuance, due 2017 at 'AA-(bra)'.

The Outlook for the corporate ratings is Stable.

The affirmation of CCP's ratings considers the company's aggressive growth strategy for the next four years, which should lead to a substantial increase of its leverage, when compared to its conservative historical levels. This growth strategy will require a higher debt volume to finance the high investments scheduled for the next four years and will require financial discipline as to avoid pressure on its ratings. Fitch believes that CCP will preserve a satisfactory liquidity level and, mainly, an adequate debt profile, based on the intensive use of long-term real estate credit lines, linked with the future cash flow from the projects, and lower use of corporate debt. These factors should restrict, in a satisfactory manner, the effects of a higher leverage and limit refinancing pressures in the short and medium terms.

CCP's ratings reflect its stable business base and growing operational cash generation. The ratings also reflect its diversified portfolio of assets with economic value significantly superior to its debt, which positions CCP as one of the leading companies in the leasing of high-standard corporate buildings in Brazil. Historically, CCP has shown residual vacancy and delinquency rates, and high margins in its businesses. The ratings also contemplate the expectation that CCP will successfully manage a higher level of long-term debt to finance its strong expansion, and that the company should preserve a satisfactory financial profile, supported by adequate liquidity and considerable financial flexibility, since a large portion of its assets were unencumbered at end-2011. The higher leverage expected associated with the expectation of negative free cash flow (FCF) over the next few years limits the ratings, as well as the fact that CCP's businesses are strongly dependent on the fluctuations of the domestic economy, as well as the availability of long-term credit lines.

The rating also takes into account CCP's strong brand, and the operational synergies and integration with Cyrela Brazil Realty Empreendimentos Imobiliarios S.A. (Cyrela; (rated with a foreign and local currency IDR of 'BB', and long-term national scale rating of 'AA-(bra)' by Fitch, with a Negative Outlook for the corporate ratings) - one of Brazil's largest real estate construction companies.

Fitch also considered in its assessment the current relatively favorable country environment and the expansion cycle of the industry, as well as CCP's experience and the competitive advantage of its integrated business model within a highly fragmented industry. This permits the company to manage and develop high-standard assets, with strategic location and strong demand

Diversified Portfolio of Commercial Properties

CCP is a leading company in the domestic market of leasing high-standard corporate buildings in the Sao Paulo market and benefits from its integrated business model. At Dec. 31, 2011, the company owned 18 commercial properties, with an estimated BRL2.1 billion market value and gross leasable area (GLA) of 195.5 thousand square meters (sqm). Around BRL1.3 billion (62%) of the portfolio market value corresponds to 12 corporate buildings. The diversified portfolio also includes two shopping malls, two distribution centers and two office centers. CCP has an aggressive growth strategy and currently has 14 projects under development. These projects should add a total GLA of 333,3 thousand of sqm, expected to be delivered between 2012 and 2015, with a total of scheduled investments of BRL778 million. CCP's high-quality portfolio and its access to long-term credit lines support its strong market position, considered sustainable in the medium term.

Predictable and Growing Cash Generation Capacity in the Lease Business

CCP's cash flow generation from its lease agreements is predictable and growing. In 2011, total net revenue evolved 28%, compared to 2010, to BRL309 million. This increase reflected the renewals and closing of new leases as well the relevant revenues from property sales and development of BRL140 million in 2011. In 2011, the company reported gross revenue of BRL321 million, which included BRL140 million of asset sales and development. Net operating income (NOI), considering only lease revenues, was BRL150 million, in comparison with BRL132 million in 2010.

EBITDA grew consistently since 2007. In 2011, CCP reported BRL180 million of EBITDA and an EBITDA margin of 58.3%, against BRL156 million and 64.4% in 2010, respectively. High EBITDA margins are characteristic of the segment, since operating costs are low when compared to lease revenues. The volatility of EBITDA margin results from asset sales, which carry lower and volatile margins when compared with the recurring revenues of lease agreements.

CCP's cash flow generation capacity also evolved. In 2011, funds from operations (FFO) was BRL218 million and the cash flow from operations (CFFO) BRL86 million. These figures compare favorably with the BRL127 million and BRL46 million recorded in 2010, respectively. With capex of BRL5 million and dividends of BRL33 million, CCP's FCF was BRL48 million. CCP's aggressive capex plan of around BRL778 million over the period 2012-2015 should result in negative FCF over the period 2012-2014, not considering possible future asset sales. Fitch expects that the company can assure long-term real estate construction financing for its projects, with amortizations based on the proceeds from the leased assets, so as to preserve its cash flow.

Leverage Should Increase Due to Expansion

CCP's expansion of operations is capital intensive and highly dependent on availability of long-term credit lines and access to capital markets. Leverage, measured by total debt/EBITDA, was adequate at 3.9 times (x) at end-2011, compared with 3.8x at end-2010, while net leverage was 1.9x, compared to 1.6x over the same period. CCP's net leverage should increase significantly in 2012 to around 4.5x, and should continue to be high in 2013, since part of the high investment should be financed with long-term real estate construction financing.

The company's predictable cash generation and the increased participation of long-term construction financing partially mitigates the expected leverage increase. These financings should reach between 50% and 60% of CCP's total debt in 2012 to 2013.

When compared with the company's market value of properties, the leverage is low. The loan to value ratio (net debt/estimate market value) was 16% at end-2011, without considering the projects under development. This ratio should increase to between 40% and 50% over the period 2012-2015, considering the expansion of the property portfolio based on asset-secured construction financing. The leverage increase, combined with a downturn in the domestic economy, could pressure the company's ratings.

Adequate Liquidity for Debt Maturing in the Short Term

CCP's liquidity position is satisfactory for the debt maturities due in 2012. At Dec. 31, 2011, total cash and equivalents amounted to BRL353 million and the total debt was BRL697 million. The company had relatively high short-term debt of BRL279 million, which was partially increased with the proceeds from the second debenture of BRL204.4 million issued in February 2012. CCP shows reduced debt maturities of BRL70 million in 2013 and BRL66 million in 2014.

CCP also counts on good financial flexibility since around 75% of the estimated market value of its assets were unencumbered in December 2011. At Dec. 31, 2011, the market value of unencumbered assets covered about 5.3x its corporate net debt. Fitch expects CCP to continue to manage its liquidity conservatively and preserve a long-term debt amortization profile.

Satisfactory History of Operating Performance

CCP has reported a satisfactory operating performance since 2007. The company has shown reduced turnover of leases and vacancy at residual rates. In 2011, both physical and financial vacancies were at 0.8%. The lease maturity profile is well distributed, with 3% maturing in 2012 and 22% in 2013. CCP has a concentration of tenants; the 20 largest accounted for 90% of the total monthly revenue from corporate buildings in 2011. This risk is partially mitigated by the high quality of the tenants and the portfolio, as well as by the country's favorable environment and, in addition, the strong demand and low vacancy rates in Sao Paulo and Rio de Janeiro.

Potential Rating or Outlook Drivers

CCP's ratings can be negatively affected if the company does not manage its liquidity carefully and weakens the coverage of its short-term debt; by an increase in leverage above Fitch's expectations; by the weakening of the debt maturity profile to finance the high-capex plan; by cost increases above budgets of projects or other factors that can intensely weaken the company's cash generation. An adverse economic environment can also lead to a negative rating action. Positive rating actions are considered unlikely given the increased challenges associated with the expected increase of CCP's leverage.

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. 12, 2011);

--National Ratings - Methodology Update (Jan. 19, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

National Ratings Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885

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