OREANDA-NEWS. 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-'.

The Rating Outlook is Stable.

The ratings factor in Fibra Terrafina's solid real estate, market position, and growth strategy. The ratings also reflect the positive business fundamentals driving Mexico's industrial real estate segment.

The Stable Outlook reflects the expectation that the company will execute its 2016-2018 growth strategy while stabilizing its net leverage post acquisitions at around 5.5x and reaching interest coverage around 3x, while keeping an unencumbered assets/net unsecured debt around 2.25x on a consistent basis. Also incorporated in the Stable Outlook is the company's commitment to maintaining solid levels of unused committed credit lines as an additional source of liquidity. Currently, the company maintains a committed unused credit line of USD375 million.

KEY RATING DRIVERS

Market Position and Business Fundamentals Incorporated:

The ratings consider Fibra Terrafina's market position as one of the largest owners of industrial real estate in Mexico with a portfolio, as of June 30, 2016, of 208 developed industrial facilities with a collective gross leasable area (GLA) of approximately 30 million square feet (sf), plus 6.4 million sf of buildable GLA.

The ratings factor in a positive view of the Mexican industrial real estate sector over the medium term, which is based on the strong linkage between the U. S. economy and industrial activity in Mexico, with a geographic location that is a natural industrial hub to the U. S. Demand for high-quality logistics and warehousing leasable space in Mexico is expected to remain stable. Approximately 80% of Mexico's total non-oil exports are oriented to the U. S.

Growth Strategy Driven by Acquisitions:

The company's business strategy is to increase its total portfolio primarily through acquisitions and, to a lesser extent with some organic growth through real estate developments (RE developments). Total net resources oriented toward acquisitions and capital expenditures (capex) are expected to be around USD420 million, plus Value Added Tax (IVA) and transaction costs, during 2016-2017, increasing the company's total GLA approximately by 20% from December 2015 levels.

This strategy incorporates the view the Mexican real estate market offers opportunities for market consolidation, as it is highly fragmented, with approximately 70% of the industrial real estate in the hands of local developers, and the remaining 30% owned by major players, most of them public companies. Fibra Terrafina maintains an estimated 4.3% share of Mexico's total industrial market as measured by GLA, which is estimated around 690 million sf.

Stable Operational Metrics, Low FX Risk Exposure:

The company's portfolio supports an adequate profile in terms of occupancy, lease expiration schedule and diversification. As of June 30, 2016, the portfolio was approximately 93.1% occupied. The ratings consider the expectation the company's occupancy rate will be around 93.5% by the end of 2017, as the properties being acquired (during 2015-2017) are stabilized. Terrafina's weighted average remaining lease term is 3.6 years, with approximately 20% of the company's annualized base rent expiring during 2016-2017.

The company's lease expiration schedule is viewed as adequate as it reflects standard practices in Mexican real estate of having lease terms that are around five years on average. Positively considered, 96% of the company's total lease base is U. S. dollar-denominated, minimizing the company's foreign exchange risk exposure. The company's leases generally contain contractual annual rental rate increases linked to an inflation index. Fitch expects Terrafina to maintain high renewal rate levels; the company's historical level has been around 80%.

Adequate Diversification:

Fibra Terrafina's portfolio consists of 208 developed industrial properties as of June 30, 2016. The company's diversification by property is viewed as adequate with the top 20 properties representing approximately 25% of the total. Fibra Terrafina's portfolio is geographically diversified across 17 states, while regionally the portfolio is distributed primarily in the central (20% of the total GLA), Bajio (25%) and northern (55%) regions of Mexico.

As of June 30, 2016, 30% of the portfolio was used for distribution and logistics activities and 70% was used for manufacturing activities. In terms of tenant diversification, the company's top 20 clients represent approximately 34.1% and 34.4% of its total GLA and total annual base rent, respectively. No individual tenant represents more than 5% of Fibra Terrafina's total GLA. The company's geographic diversification and tenant concentration is not expected to materially change in the medium term.

Internally Managed, Externally Advised:

The ratings incorporate Fibra Terrafina's fee structure. The company is internally managed by industry specialists and externally advised by PLA Administradora Industrial, S. De R. L. de C. V., an affiliate of PGIM Real Estate (PGIM). Pursuant to the terms of the advisory agreement, the advisor (PGIM) is entitled to an advisory fee and performance fee. The advisory fee is an annual fee payable on a quarterly basis and equal to 0.5% of the company's gross asset value. The advisor is also entitled to a performance fee payable in Certificados Bursatiles Fiduciarios Inmobiliarios and calculated based on cumulative returns to holders through distributions and growth in market capitalization over a 9% growth per-year hurdle rate. Since the trust is internally managed, no actual management fee exists, but the cost is estimated around 3% of Fibra Terrafina's gross rental income.

EBITDA Margin Stable at 80%:

The company reached EBITDA levels and EBITDA margin of MXN1.9 billion and 80.8%, respectively, during latest 12 months (LTM) June 30, 2016. The ratings incorporate the expectation that the company's EBITDA margin will remain around 80% during 2016-2018, which considers the company's growth strategy. In addition, the company is also considering some investing in RE developments during 2016-2017; however, organic growth is not anticipated to be substantial during this period. The company's annualized average leasing rate per sf was USD4.88 during the second quarter of 2016 (2Q16); this level remains flat when compared with last year's same quarter.

Increase in Net Leverage Driven by 2016-2017 Acquisitions Incorporated:

The company's net leverage ratio was 4.6x at June 30, 2016. It reflects LTM EBITDA, total debt, and cash levels of USD114 million (MXN1.9 billion), USD737 million (MXN13.6 billion), and USD253 million (MXN4.7 billion), respectively. The company's net leverage is expected to increase to levels in the 6x to 7x range during 2016-2017, which is anticipated as the most intense period in terms of acquisitions. The company's net leverage is expected to trend to levels around 5.5x - on a pro forma basis - toward the end of 2018 as the acquired property portfolios stabilize. The company's dividend pay-out ratio is estimated to be in the 95%-100% range of its adjusted funds from operations (AFFO).

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Fibra Terrafina's ratings include:

--EBITDA margin for 2016-2018 around 80%;

--Occupancy levels consistently around 93% during 2016-2018;

--Total net leverage around 6x during 2016-2018 and trending to 5.5x, on a proforma basis, by the end of 2018;

--Secured debt/total debt ratio consistently around 20%;

--AFFO dividend payout ratio in the 95% to 100% range;

--Interest coverage (EBITDA/gross interest expenses) consistently around 3x during 2016-2018;

--Total liquidity, measured as total unrestricted cash plus unused committed credit lines, consistently above USD200 million during 2016-2018;

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

RATING SENSITIVITIES

The following factors may have a negative impact on Fibra Terrafina's ratings:

--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 of 80% and 93% respectively;

--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.

The following factors may have a positive impact on Terrafina's ratings:

--Post 2016-2017 portfolio acquisition activity, 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.

LIQUIDITY

The company's liquidity is viewed as adequate considering its manageable debt schedule with no material principal payment maturities during 2016-2017, its level of interest coverage ratio - measured as total EBITDA-to-gross interests are expected to remain stable at around 3x. The company's level of unencumbered assets is USD1.1 billion - as of June 30, 2016 - providing additional financial flexibility. The ratings incorporate the company's financial strategy to maintain minimum cash position of USD50 million over the medium term and a material level of its unused committed revolving facility. Combined the company's liquidity measured as total unrestricted cash position plus unused committed credit lines is expected to remain consistently above USD200 million during 2016-2018.

The company's financial strategy is to continue shifting toward an asset base primarily unencumbered replacing a portion of its current secured debt. As of June 30, 2016, the company's total debt was 41% secured for a total amount of USD300 million (company's total debt of USD737 million as of June 30, 2016), while the company's portfolio value is USD1.6 billion with 68% of the total portfolio being unencumbered assets. The company's debt structure is expected to switch to a 15% secured debt and 85% unsecured debt post portfolio acquisition and debt refinancing activity during 2016-2017, resulting in a pro forma unencumbered assets-to-unsecured debt coverage of around 2.1x. The company's loan to value (LTV) is anticipated to trend to levels in the 35% to 40% range during 2016-2018.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings for CI Banco, S. A. Institucion de Banca Multiple, Trust F/00939 (Fibra Terrafina):

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

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

--Senior unsecured notes at 'BBB-.

The Rating Outlook is Stable.