Fitch Ratings has assigned an initial Issuer Default Rating (IDR) of 'BB' to Caparra Hills, Inc. (Caparra Hills). Fitch has also assigned a rating of 'BBB-' to the company's USD51 million secured bonds. The Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA) issued the secured bonds in August 2002. The secured bonds are payable solely from payments made to AFICA by Caparra Hills. AFICA serves solely as an issuing conduit for local qualified borrowers for purpose of issuing bonds pursuant a trust agreement between AFICA and a trustee. The secured bonds are not guaranteed by AFICA, not constitute a charge against the general credit of AFICA; and, not constitute an indebtedness of the Commonwealth of Puerto Rico or any of its political subdivisions.
The Rating Outlook is Stable.
The ratings reflect the stable cash flow generated by the company's lease portfolio, which passes the vast majority of its operating expenses on to its tenants. Caparra Hills' properties have low vacancy rates and solid collateral values backing its secured debt. The ratings are also supported by the company's manageable debt maturity schedule, adequate cash position of USD6.7 million, and stable EBITDA margins of over 60% during the last five years ended Sept. 30, 2010, which result in adequate debt service coverage ratios. Also factored in the ratings is Caparra Hills' capacity to generate consistently positive free cash flow (FCF) during the last several years.
The rating of the secured bonds (BBB-) positively incorporates the collateral support included in the transaction structure as the payments of the bonds are secured by a first mortgage on the company's real estate properties and an assignment of leases.
The Stable Outlook reflects Caparra Hills' consistent and stable operating performance and its track record of maintaining stable credit metrics during the last several years. Fitch expects Caparra Hills will continue its commitment to maintain an adequate capital structure.
Stable and Predictable Results:
The ratings incorporate Caparra Hills' stable revenues stream from its lease portfolio and adequate credit profile of its main tenants. The lease revenues are predominately fixed in nature and also provide for the pass-through of ongoing maintenance and operating expenses for the company's properties, which lowers business risk. The company's revenues for the fiscal years ending 2008, 2009, and 2010 and the LTM period ended in September 2010 were USD11.7 million, USD11.9 million; USD12.1 million, and USD11.9 million, respectively. The company's lease portfolio has an adequate maturity profile with staggered expirations of 9.5% and 16.1% of company's rental income expiring in the next 12 and 24 months, respectively; about 43% of the company's rental income contracts have expiration dates over the next 24-48 months, and 31.9% of the portfolio expires beyond 48 months.
Caparra Hills' revenues structure is mostly based on fixed rent, which represent about of 60% total revenues, making the company's revenues very predictable. The other significant component in company's revenue structure is tenant reimbursements, which represent about of 25% of total revenues, covering costs associated with property management and taxes.
Incorporated in the ratings is the company's tenant concentration risk. Caparra Hills' five most important anchor tenants are University of Phoenix, Banco Santander, General Electric Consumer Fin., United Surety & Indemnity Co, and Kimberly Clark Corp. These tenants generate annual revenues of about USD6.4 million and represent approximately 60% of the company's total annual rent revenues.
Despite a challenging operating environment during the last two years, Caparra Hills' operating metrics indicated resilience to the economic slowdown. During the last two years, the company's vacancy rates were in the 4%-5% range. At June 30, 2010, the company had occupancy level of 96.5%. As of Sept. 30, 2010, the company's occupancy level was 89.9% due to the early termination of the lease with one tenant. The company has already leased the area occupied by the former tenant to two new tenants that began to pay rent in December 2010 and January 2011, bringing the company's occupancy level to 95.8% by January 2011. Caparra Hills's rental rate and revenue per square foot have remained stable during the last several years. During the two years ended June 30, 2010 and 2009, the company's average revenue per square foot was USD25.80.
Solid Liquidity Expected to Continue:
Caparra Hills' liquidity position is solid resulting from its capacity to consistently generate cash flow from operations (CFFO) and its good credit access. During the last three years, the company's CFFO reached an annual average of USD4 million. By the end of September 2010, the company's cash position was USD6.7 million, including USD5.6 million in certificates of deposits, representing approximately 56% of the company's LTM revenue (USD11.9 million) and 3.4 times (x) the company's short-term debt (USD2.03 million). In addition, the company maintains USD1 million available in unused committed bank credit facility. The ratings incorporate the view that the company will maintain a solid liquidity, with a cash position above 30% the company's revenue and more than 2x its short-term debt on a consistent basis.
A Positive Free Cash Flow Business:
The ratings factor in a continued trend in the company's free cash flow, which has been positive during the last five years. For the LTM period ended September 2010, fiscal year ended June 2010, and fiscal year ended June 2009, Caparra Hills' free cash flow was positive at levels of USD2.1 million, USD2.1 million , and USD 2 million, respectively. Caparra Hills' free cash flow is expected to continue to be positive during the next following years due to the company's stable cash flow from operations, low level of capital expenditures (approximately USD0.3 million per year), and level of dividends of approximately USD1.5 million the company is planning to distribute per year. Factored into the ratings is the view that Caparra Hills does not plan to execute any major investments that could place additional pressure in its cash flow.
Leverage Not Expected to Increase, Manageable Debt Schedule A Positive:
By the end of September 2010, the company's total debt was USD51 million, and it was USD51.9 million and USD52.9 million by the end of June 2009 and June 2008, respectively. By the end of September 2010, Caparra Hills' debt was composed entirely by USD 51 million secured bonds. The company does not maintain any off-balance debt associated with operating leases obligations.
The company's EBITDA margin was 63% by the end of September 2010, which has been in line with the company's average EBITDA margin for the last three years (2010-2008) of 62%. The company's net leverage, as measured by net debt/EBITDA, was 5.9x by the end of September 2010, similar to the levels of 6.1x and 6.6x the company reached by the end of June 2009 and June 2008, respectively. The ratings incorporate the expectation that the company's net leverage will be in the 6.0X to 5.75x range during the next three fiscal years ending June 2013.
Positively factored into the ratings is the company's manageable debt maturity schedule. The company's debt amortization schedule is well distributed with only 4% concentrated in the short term.
Main Credit Concerns:
The ratings are constrained by the negative business environment and the concentration risk affecting Caparra Hills' operations. The ratings incorporate the negative business environment affecting the economy of Puerto Rico, which has been in recession since the fourth quarter of fiscal year 2006. Additionally, the ratings factor the concentration risk in the company's operations related to three contiguous properties, which limits the company's diversification and growth strategies. Further, Caparra Hills' operations are highly dependent from its main tenants, with five tenants representing approximately 60% of the company's total revenues. The concentration risk is counter balanced by the adequate credit profile of Caparra Hills' main tenants and the company's good track-record of maintaining adequate occupancy levels.
Negatively incorporated in the ratings is Caparra's high dividend payout ratio. During the last five years, Caparra has distributed more than USD4.8 million in dividends, and the company expects to maintain a dividend payout ratio of around 80% over its excess of cash flow for the next years. The ratings incorporates Fitch's expectations that Caparra Hills will maintain current leverage and liquidity levels.
Caparra Hills conducts its operations in Puerto Rico, which Fitch views as a positive in terms of enforceability of the company's secured debt in the event of default. The relationship between the United States and Puerto Rico is referred to as commonwealth status. Puerto Rico's constitutional status is that of a territory of the United States, and, pursuant to the territorial clause of the U.S. Constitution, the ultimate source of power over Puerto Rico is the U.S. Congress.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 13, 2010;
--'Liquidity Considerations for Corporate Issuers', June 12, 2007;
--Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers, Nov. 24, 2009.
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489006
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Contacts:
Fitch Ratings
Primary Analyst
Jose Vertiz, +1-212-908-0641
Director
Fitch,
Inc.
One State Street Plaza
New York, NY 10004
or
Secondary
Analyst
Daniel Kastholm, +1-312-368-2070
Managing Director
or
Committee
Chairperson
Rina Jarufe, 011 562 499 3310
Senior Director
or
Media
Relations:
Brian Bertsch, +1-212-908-0549
Email: brian.bertsch@fitchratings.com