Fitch Ratings has assigned Fideicomiso Fibra UNO's (FUNO) proposed senior unsecured green notes a rating of 'BBB-' on Rating Watch Evolving.

The senior green notes will have a 10-year term, aiming to raise USD600 million. The proceeds will be used to pay off the company's USD600 million senior notes due in 2024.

Fitch currently rates Fibra UNO's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) 'BBB-' on Rating Watch is Evolving. Fitch assigns Rating Watches to indicate that there is a heightened probability of a rating change and to signal the likely direction of such a change. 'Evolving' is used if ratings may be raised, lowered or affirmed.

The RWE on Fibra Uno's ratings reflects the material transaction risk FUNO faces while executing the Carve-out of its Industrial assets through the IPO of Fibra NEXT, creation of NEXT Properties, and subsequent completion of the bond exchange. Fitch expects to resolve the RWE once there is visibility on the outcome of the transactions. At that time, Fitch will determine the exact rating implications through analysis of the company's new business profile, financial position, governance structure, and treatment of bondholders, amongst other factors.

Key Rating Drivers

Carve-Out Transaction Carries Execution Risk: Fitch considers the completion of the IPO transaction and exchange as material to the rating. The impact on Fibra Uno's ratings will be analyzed following the resolution of the pending transaction consisting of Fibra NEXT's IPO and the creation of NEXT Properties. The creation of NEXT Properties is subject to the creation of Fibra NEXT and the completion of the IPO. NEXT Properties will be the jointly owned investment trust vehicle of Fibra NEXT and FUNO. A debt swap will also occur transferring a portion of FUNO's existing debt to NEXT Properties, the new vehicle. This exchange has already been launched and remains oversubscribed contingent upon the creation of NEXT Properties.

Growth Strategy Expected to Support Ratings: Fitch expects FUNO to continue taking advantage of the strong momentum in the industrial nearshoring in Mexico either through acquisitions or new developments, but in a more gradual manner while keeping net leverage below 7.0x in the medium term. An aggressive growth strategy will pressure its capital structure and any liability management strategy would be secondary to its expansionary plans, which could pressure the ratings. From 2017 to 2022, FUNO has grown its portfolio from 83.3 million sf to 120.7 million sf, representing a 45% growth. During the same period, debt went from MXN68 billion to more than MXN141 billion, representing a 107% growth.

Improving Capital Structure: Under the current corporate structure, Fitch expects FUNO's net leverage to be below 7.0x in 2023 from 7.4x at YE 2022. Net leverage improved to 6.8x as of LTM Sept. 30, 2023 compared with 7.7x in 2022 resulting from continuous recovery of the office sector, continued increase in retail occupancy and rent levels, and double digit rent growth in the industrial portfolio. The company's net loan-to-value was 41% as of Sept. 30, 2023. The net leverage ratios deterioration during 2019-2022 reflects the company's execution of its aggressive growth strategy through acquisitions and new developments as well as its high distributions policy relative to its cash flow generation. The company's unencumbered asset over unsecured debt was weak at 2.4x as of Sept. 30, 2023 (3.0x is a ratio more aligned for a 'BBB' category).

Adequate Market Fundamentals: Near-shoring is an important growth opportunity for Mexico, given increased U.S.-China tensions manufacturers' desire for shorter and more resilient supply chains. Fitch revised Mexico's growth outlook to 3.1% in 2023 reflecting benefit from robust consumption due to a strong labor market and unexpectedly strong increase in private investment. Recent fiscal policy announcements have also been growth supportive.

Despite the risk of a slowdown of the U.S. economy, Fitch expects the industrial segment to keep growing over the long term, driven by the export market due to Mexico's strategic location and lower labor cost than other manufacturing markets. Spaces are concentrated in industries such as logistics, manufacturing and e-commerce. The average price for industrial warehouses in the main Mexican markets for 3Q23 soared to around USD6.3/sqm/month according to CBRE data, including Bajio, Guadalajara, Mexico City, Monterrey, Reynosa and Saltillo. The pace of growth is also limited by rising construction costs, lack of land availability in primary border markets and delays in obtaining construction licenses and electricity permits

Gradual Improvement in Cash Flow Generation: Under FUNO's current corporate structure, Fitch expects EBITDA to grow to around MXN20 billion by 2024 compared to MXN17.9 billion in 2022. The growth is a result of growing GLA, higher prices and improving occupancy rates. Fitch's previous base case considers GLA growing to 120.4 million sf by 2024 while benefiting from higher rental prices in border cities and the Central region. Fitch expects the occupancy rate to range between 93%-95% over the medium term.

The company's strategy focuses on maintaining competitive rent prices per sqm to support occupancy and renewals amid economic cycles. FUNO's portfolio characteristics include average lease duration of a four to six-year period with renewal rates consistently around 90% during the past years. FUNO's ratings also factor in its laddered lease maturities, with no more than 19.4% of ABR (2025) expiring in any given year in the next four years.

Mitigated Foreign Exchange Risk: As of Sept. 30 2023, about 44% of its total debt of MXN131 billion (USD7.4 billion) was dollar-denominated considering currency swaps instruments. While historically approximately 60%-65% of EBITDA has been in local currency. The company strives to maintain a natural hedge of U.S. dollar-denominated revenue to the U.S. dollar interest expense between 1x to 1.5x.

As of YE 2022, FUNO maintained U.S. dollar-denominated bond issuances and contracted currency swaps for USD1 billion, of which USD650 million cover only principal and USD350 million cover principal and interest. Fitch estimated that a 10% depreciation, over 12 months, of the Mexican peso should increase by about 0.1x in the net leverage ratio. However, the recent appreciation of the MXN may result in extraordinary dividends payable to investors as the company would have a fiscal benefit on its USD denominated debt that could increase the regulatory income base on which dividend payments are calculated. This is an industry wide occurrence for all Fibra's with USD denominated debt.

Derivation Summary

FUNO's ratings compare well with other regional peers' in the 'BBB' category such as Division Fiduciaria (Fibra Prologis) (BBB/Stable), Institucion de Banca Multiple, Trust F/00939 (Fibra Terrafina) (BBB-/Stable) and Corporacion Inmobiliaria Vesta S.A.B. de C.V. (BBB-/Stable). All of these issuers have large and well-diversified portfolios of properties in the Mexican real etate market that exhibit a diversified tenant base, high occupancy rates and ample financial flexibility from adequate access to debt and equity markets.

FUNO is rated one notch below Fibra Prologis. FUNO has a larger and more diversified asset base, but Fibra Prologis' capital structure is stronger. FUNO is rated at the same level as Fibra Terrafina and Vesta given its strong asset base despite the higher leverage.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Net leverage below 6.0x on a sustained basis;

Unencumbered asset over unsecured debt above 3.0x on a sustained basis;

EBITDA interest cover above 3.0x on a sustained basis;

LTV (net debt/investment properties) below 40% on a sustained basis;

Maintain solid liquidity.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

An FFO dividend pay-out ratio consistently exceeding 100%;

Net leverage sustained above 7.0x;

EBITDA interest cover below 2.0x on a sustained basis;

LTV (net debt/investment properties) above 50% on a sustained basis;

Unencumbered asset coverage over unsecured debt consistently below 2.0x.

Liquidity and Debt Structure

Solid Liquidity Provides Financial Flexibility: FUNO's liquidity is strong and supported by strong cash flow generation, adequate cash on hands, a material unencumbered asset base, access to capital markets and manageable debt amortization profile. Additionally, the company has revolving committed credit facilities totaling over USD1 billion.

Cash and equivalents totaled MXN1.9 billion while total short-term debt was MXN14.7 billion as of Sept. 30, 2023. FUNO's unencumbered asset to unsecured debt coverage was 2.4x as of Sept. 30, 2023, with 91% of its assets unencumbered as of YE 2022. Fitch estimates FUNO's debt structure will be relatively stable, with unsecured debt representing approximately 94% of total debt in the foreseeable future.

Issuer Profile

FUNO is the largest Fibra in Mexico, in terms of market capitalization, number of properties and GLA. Under its current corporate structure, the issuer represented around 40% of total Mexican REITs, according to market capitalization.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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