Luis Quintero
Executive Director
HR Ratings
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Market Stability Derived from Fibras

Wed, 11/01/2017 - 12:45

Q: What role do ratings companies play in the market?

A: HR Ratings’ values dictate that its ratings should be as clear and transparent as possible to clients and issuers. We always try to be as detailed as possible about what we can offer to clients since investors read our reports and seek our analysis to decide whether certain investments should be made. We have detailed analyses in which we include the profile of the company, industry, operation and background to understand where they come from and how they operate. Our ratings are based on qualitative analyses that include business strategy, corporate governance and executive management, among other factors. HR Ratings complements this information with quantitative analyses that incorporates financial projections based on what the company has shared with us. Our objective is to provide a thorough analysis of the company and to gauge where it will be positioned in the future considering its current trajectory. Investors appreciate this information because it gives them an alternative way to visualize the company. This is part of our core mission in terms of being transparent and providing as much as detail as possible.

Q: What are the biggest advantages the real estate market should consider when it comes to Fibras?

A: Many construction companies and developers struggle with the noncore areas of their business, such as the operation and management of projects. Fibras are a useful channel for them, in the sense that developers can use them to allocate their assets more quickly than with a participation obtained through CFBIs. Developers normally place an asset within the Fibra and gain access to certain liquidity that they use to develop additional assets that meet the needs of the Mexican market, such as office, commercial and retail development. Real estate has greatly benefited from these tools as many old buildings have been replaced under a more professional administration, allowing developers to keep on building.

The Fibra market is currently much calmer in terms of acquisitions, which is why we believe that Fibras will begin to gain larger market share.

Q: What challenges are issuers facing to improve their ratings and what can they do to close these gaps?

A: When it comes to Fibras, in this period of economic volatility, we will continue to assess the cash-flow generation of the companies to evaluate their payment capacity. When it comes to cash-flow generation, this is dependent on the occupancy rate, the rollover of lease agreements and the renewal of rents at a new rate, whether it is in dollars or pesos. Industrial and office buildings are more related to dollars, while commercial is seen more in terms of pesos. In this case, we try to ensure Fibras are aligned in terms of the rent charged and the revenue generated in local currency.

Based on the Fibras’ cash-flow generation, we assess their capacity to meet their financial obligations in the short term by their Debt-Service Coverage Ratios (DSCR), while in the long term we focus on years of payment. Real estate is a longterm investment and we welcome Fibras and real estate assets whose business strategies seek financial longevity.

Real estate assets tend to be relatively stable under economic recession and periods of volatility. They are not as volatile as investment assets within other industries and we will continue to evaluate the strength of this sector. Although we have experienced a certain degree of volatility in 2016, revenues have remained stable for most Fibras. Some Fibras have even gone as far as to raise a CKD to develop property. Also, we have seen new issuances in the last year from Fibra Uno, Fibra Inn and Fibra Danhos, which speaks to the market’s interest in this sector. Fibras are starting to focus on the debt market as an opportunity to rebalance their debt structure with longer terms, aligned with assets that last 20 to 30 years. We really expect Fibras to continue heading in this direction. In the next two to three years, we can expect more participation in the debt market in terms of debt issuances. There are only four Fibras that participate in Mexico but we will continue to see that number grow.