Caparra Center Associates, LLC, which owns and operates San Patricio Plaza, is going to issue $21.6 million in secured bonds, which Fitch Ratings has assigned an ‘A-’ to and given a stable outlook. Fitch has also assigned an Issuer Default Rating (IDR) of ‘BBB+’ to Caparra.
The bonds are being issued under a trust agreement between the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority, known as AFICA and Banco Popular de Puerto Rico, as trustee. Banco Popular de Puerto Rico will act also as collateral agent for the bonds for purposes of the security agreements.
The company’s financial strategy is to issue new bonds for an outstanding amount of $21.6 million to refinance the existing bonds (the refunded bonds) with an outstanding balance of $23.1 million at the end of August 2009.
The existing bonds include the 1993 Project Bonds (outstanding balance of $11.1 million at August 2009) and the 1995 project bonds (outstanding balance of $11.9 million by August 2009).
The debt refinancing will positively impact the company’s debt structure, with no principal payments during 2010, according to Fitch.
Furthermore, this transaction will provide the company with additional funds currently maintained in reserve accounts of about $5.1 million to be used for paying the cost of the issuance, funding the reserve account and general corporate purposes.
The proposed bonds being issued consist of serial bonds maturing from Jan. 15, 2011 to July 15, 2020.
The secured bonds will be paid with funds solely provided by Caparra, which will be made to AFICA and then will pass through to bondholders.
According to Fitch, the ratings reflect the company’s stable cash flow generation, its solid lease portfolio with consistently reasonable renewal and vacancy rates and single shopping mall location of approximately 150 stores.
Further supporting the ratings are the company’s manageable debt maturity schedule, adequate cash position of $6.2 million, stable EBITDA margins of over 52 percent during the last three years ended May 31, 2009, and a solid collateral package with low loan to value.
Consistency key
Thus, Fitch positively views Caparra’s capacity to generate consistently positive free cash flow (FCF) during the last several years. In fact, the company’s FCF for the 12 month period ended May 31, 2009 was $2.2 million.
The stable outlook reflects Caparra’s consistent operating performance over the last several years and its successful track-record of growing its operations during the last 20 years. Fitch expects Caparra’s management commitment to a sustainable growth strategy, with an adequate capital structure, to continue.
Moreover, Caparra’s revenues are stable given the characteristics of its lease portfolio which provide it with a good base of fixed-rent income, staggered lease expirations and a solid credit profile of its main tenants.
The company’s revenues for 2007, 2008, and 2009 were $17.9 million, $19 million and $19.1 million, respectively.
Caparra’s lease structure consists of fixed rent payments (65 percent) and tenant reimbursements (24 percent, which represent around 90 percent of its total revenues and make Caparra’s revenues more predictable.
Meanwhile, its lease portfolio has staggered lease expiration dates with about 70 percent of the company’s rental income contracts with expiration dates higher than four years (23 percent for four to five years, 25 percent for six to nine years and 21 percent for 10 or more years).
Over the next 12 months, lease expirations are somewhat high at 18 percent although the lease maturities are concentrated in many small tenants and the vast majority of these leases are expected to be renewed at similar rent levels.
Caparra’s four most important anchor tenants are Walgreens, Bed Bath & Beyond, Office Depot and K-Mart with credit quality ranging from ‘A+’ to ‘B.’
These tenants generate annual revenues of about $4.3 million and represent approximately 25 percent of total annual rent revenues.
Despite a challenging operating environment during the last two years, Caparra’s operating metrics have been relatively resilient to the economic slowdown. During the last four years, vacancy rates for the shopping center were between 6 percent and 12 percent. As of May 31, San Patricio Plaza had an occupancy level of 91.2 percent.
Caparra’s total adjusted debt decreased to $42.4 million in May 2009, from $45 million in May 2008. By the end of May 2009, the company’s total on-balance debt was $41.1 million, and it was composed mostly by secured bonds ($24 million, also referred as the refunded bonds), secured banking loans ($15.3 million) and unsecured banking loans ($1.8 million).
The company’s liquidity position is also solid and results from its capacity to consistently generate cash flow from operations (CFFO) and access to bank lines of credit. During the last three years, the company’s CFFO reached an annual average of $7 million. The company’s free cash flow has been positive during the last five years, excepting for fiscal year 2007.
While Caparra’s free cash flow was positive at $2.2 million for the last 12-month period ended in May 2009, its free cash flow is expected to be negative during 2010 and 2011 mainly due to the level of expected capital expenditures to add 33,000 square feet of gross leasable area, approximately $9 million, during the next 18 months, and the level of dividends of more than $4 million each year.
The company’s 2010-2011 investment program will be financed with a secured bank loan, and it will allow the company to incorporate a major tenant, PetSmart, Inc., which will be positive in terms of the company’s revenues and cash flow stability, according to Fitch. After 2011, Caparra does not plan to execute any major investments that could place additional pressure on its cash flow.
Fitch’s expectations are that Caparra will maintain current leverage and liquidity levels.