Fitch Rates Fibra UNO's Proposed Sr. Notes 'BBB(exp)'

Fitch Ratings has assigned the following ratings to Deutsche Bank Mexico, S.A., Institucion de Banca Multiple, Division Fiduciaria F/1401 (FUNO or Fibra UNO):

--Local currency Issuer Default Rating (IDR) 'BBB';

--Foreign currency IDR 'BBB';

--Proposed up to USD800 million senior unsecured notes due up to 2044 'BBB(exp)'.

The Rating Outlook is Stable

The ratings reflect FUNO's solid market position as the leader and first REIT (Fibra) in Mexico. The 'BBB' rating proposal takes into account the company's large, well-diversified portfolio of industrial, retail and office properties, strong franchise value, good quality tenants, high occupancy rates, adequate credit metrics for the rating, and adequate financial flexibility highlighted by good access to capital and growing unencumbered asset pool. These strengths are offset by its externally managed structure and its aggressive growth strategy that may theoretically hinder the acquisition of same quality properties as the ones that are currently in the portfolio.

The company plans to issue senior unsecured notes up to USD800 million. The notes proceeds will be used to prepay current indebtedness and to strengthen the liquidity position of the company.

SOLID MARKET POSITION

The ratings reflect the company's solid market position as the leader and first REIT (Fibra) in Mexico. As of Sept. 11, 2013 FUNO had a 56.1% participation of Mexico's REITs according to market capitalization. The ratings also factor the contributors shareholders' and advisors' (control group) track record in Mexican Real Estate sector with more than 30 years of experience in the acquisition, development, rental and operation of various types of commercial real estate projects in Mexico, including industrial, retail, office and mixed-use projects.

WELL DIVERSIFIED BUSINESS MODEL

The company has a portfolio with strong diversification across sectors, regions and tenants. As of Sept. 30, 2013 FUNO owns and operates a large and diversified portfolio, located throughout the country. Fitch expects that gross leasable area (GLA) will increase in the second half of 2013 through acquisitions to total 61.3 million square feet (5.7 million square meters) at year end. Fitch expects that FUNO's Annualized Fixed Income (AFI) in a pro forma basis taking into account 2013 acquisitions will be contributed by its Retail segment by 61.1%, Industrial segment by 27.2% and its office segment by 11.7%. The company's AFI is concentrated in Mexico City and Mexico State with 23% and 19% respectively; the following states contribute 10% or less with presence in 29 states across the country.

HIGH QUALITY AND DIVERSIFIED TENANTS

The recent acquisitions of Mexican Retail Properties (MRP) consisting of 49 retail properties will allow FUNO to have one of the most diversified and high quality base of tenants; Walmart de Mexico y Centroamerica (formats including Walmart, Bodega Aurrera, Superama, Sam's Club, Suburbia, etc.) would be positioned as the most important tenant for FUNO in terms of annualized rent income representing approximately 14.3% of rents (pro forma at 2Q'13+MRP). The next top nine tenants collectively accounting for less than 15.2% of AFI. Fitch estimates that approximately 30% of FUNO's rents come from blue chip companies. Further, more than 70% of revenues are generated from tenants that individually contribute less than 1% of annual revenue. This diversification insulates the company's cash flows from economic weakness in any particular region as well as credit risk at the tenant level.

HIGH OCCUPANCY AND COMPETITIVE RENT RATES

FUNO's strategy is focused to have rent prices per square meter below the average of the market to assure that its portfolio's properties are the first to be occupied and the last to be vacant in time of economic downturns. Fitch estimates that the monthly rent per square meter in the Industrial, Retail and Office segment will be MXN31, MXN100 and MXN99 in average during 2013. This strategy allows the company to have high occupancy levels. Fitch estimates that occupancy for Industrial, Retail and Office segments will be not less than 92.4%, 88.8% and 91.7% respectively of total GLA including projects in development, with a total portfolio occupancy above 92%. Total portfolio historical occupancy has been 94%, 97.16% and 91.2% at Sept. 30, 2013, YE 2012 and 2011 respectively. Lease maturities are well-laddered with no more than 12.8% of GLA expiring in any individual year. The lease expiration profile is as follows, 9.2% in 2013, 12.8% in 2014, 10.9% in 2015, 9.8% in 2016, 7.4% in 2017, 11.7% in 2018, 3.6% in 2019, 3.5% in 2020, 1.7% in 2021 and the rest in the following years.

INVESTMENT GRADE CREDIT METRICS

Fitch expects that year end 2013 pro forma leverage will be around 4.8x and within a range of 3.5x to 4.5x over the next 24-36 months. FUNO's net leverage has declined to 5.1x at Sept. 30, 2013 from 7.3x at FYE12. Fitch defines leverage as net debt to recurring operating EBITDA, including Fitch's estimate of recurring joint venture (JV) distributions. Fixed charge coverage was 4.3x LTM at Sept. 30, 2013 and 6.5x at YE12. This coverage ratio is expected to remain in the 3.5x-4.0x range. Coverage metrics are adequate for the rating category. Fixed-charge coverage is calculated as recurring operating EBITDA, including Fitch's estimate of recurring JV distributions less recurring capital expenditures and straight-line rents, divided by total interest incurred and preferred operating unit distributions.

TRANSITION TO UNSECURED FINANCING STRATEGY

Fitch anticipates that the company will look to execute an unsecured bond offering and/or term loan issuance over the near-term. This issuance will allow the company to undergo a transition to a predominantly unsecured-focused debt financing strategy. The issuance of Capital Markets Debt will allow the company to convert its secured bank debt to unsecured via repayment of mortgage loans. This will derive in FUNO's secured debt/total debt ratio of 18% FYE 2013 from 100% at FYE09, with Fitch expecting the metric to decline below 17% over the next 24-36 months.

STRONG LIQUIDITY AND ADEQUATE UNENCUMBERED ASSET PROFILE

FUNO has a strong base case liquidity with projected cash and equivalents of MXN4.5 billion at YE 2013 and available committed credit lines for MXN4.6 billion. The company's unencumbered asset coverage of unsecured debt (calculated using a stressed 10% cap rate on projected 2013-2014 unencumbered NOI) will be in a 2.2x-2.4X range. Unencumbered NOI coverage will be in a range of 3.4x-3.8x for the 2014-2015 period; this ranges are considered adequate for the rating. With the bank debt prepayment using the proceeds of the bond issuances, FUNO will have on a pro forma basis at Dec. 31, 2013 79.5% of unencumbered assets in its Portfolio from a 34.8% of unencumbered assets if the current debt structure remains unchanged.

EXTERNALLY MANAGED STRUCTURE

FUNO's management team continues to improve the quality of the portfolio via the acquisition of high quality assets with excellent locations, high quality tenants and high occupancy rates. Fitch views management's focus on asset quality as a key differentiator between FUNO and other market participants. Senior management's experience in the sector is also a key differentiator between FUNO and its peers. These strengths are offset by its externally managed structure with diverse fees charged for management and advisory to the company. Some of the fees are the following: (1) Annual advisory fee of 0.5% of NAV and (2) acquisition fee of 3% of property value for third party acquisitions to the advisor, (3) 2% of monthly lease payments to the leasing administrator and (4) Monthly fee at 1% of lease payments to the manager.

AGGRESSIVE GROWTH STRATEGY

Factored in the ratings is the company's aggressive growth strategy that may theoretically hinder the acquisition of same quality's properties as the ones that are currently in the portfolio. Although in the past the company has managed to acquired good quality properties at adequate price, this ability could be affected in the future as the company continues to grow at the fast pace that has been performing in recent times. In Fitch opinion this expansion efforts through acquisitions will pressure properties prices in the market.

RATING SENSITIVITIES:

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

--Increase in the secured debt / total debt ratio or inability to refinance current secured debt with the proposed unsecured issuance;

--Fitch's expectation of an AFFO dividend payout ratio exceeding 80%;

--Fitch's expectation of net leverage sustaining above 5.0x for several consecutive quarters (leverage was 5.1x as of Sept. 30, 2013);

--Fitch's expectation of fixed-charge coverage sustaining below 2.0x for several consecutive quarters (coverage was 4.3x for the LTM ended Sept. 30, 2013);

--Fitch's expectation of a sustained liquidity shortfall.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 5, 2013.

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=814865

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Fitch Ratings
Primary Analyst
Indalecio Riojas, [phone]
Associate Director
Fitch Mexico, S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst
Jose Vertiz, [phone]
Director
or
Committee Chairperson
Sergio Rodriguez, CFA, [phone]
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, [phone]
[e-mail]