Johannesburg, 29 Apr 2015 — Global Credit Ratings has today assigned national scale ratings to Rebosis Property Fund Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively, with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Rebosis Property Fund Limited (“Rebosis, the REIT, or the fund”) based on the following key criteria:
Although Rebosis has a fairly short listed history, management has been investing in both brownfields and strategic real estate developments since 1999 through the Billion Group, from which the fund originated. The Billion Group has over the years built up a robust property development and asset management infrastructure, on the back of its clout in the industry and a clearly delineated strategy to invest primarily in dominant retail and office properties with strong earnings growth potential. Recently concluded and imminent investments are expected to see the value of the REIT’s portfolio ramp up to approximately R14bn by FYE15. These transactions include the R1.2bn acquisition of a 62% stake in New Frontier Properties, which provides a Rand hedge and diversification spin offs, and the takeover of Ascension Properties Limited.
While these prospects are a strong consideration, cognisance is also taken of the sound fundamentals of the existing portfolio, which have been engendered by hands-on, internal support structures such as property management, collections and legal expertise from the Billion Group. The investment properties are dominated by ‘A’ grade tenants (88% of GLA), supporting a well-spaced lease profile, low vacancies (2.2% at 1H F15) and sound retail trading densities. Acquisitions have driven strong growth, with a 43% increase in rental income to R808m reported in F14. While growth moderated to an annualised 6% in 1H F15, planned acquisitions will drive uplift in 2H F15 and F16. Operating margins (1H F15: 76%) are well above the 60% benchmark for highly rated REITs, on the back of strong returns on single tenanted assets. In view of the higher retail weighting planned, margins are expected to taper in the medium term as the industry contends with sharp YoY escalations in utility tariffs, rates and taxes, as well as slowing consumer spend.
While gross debt nearly doubled over the review period to R3bn at 1H F15, new equity underpinned a 1.5x increase in capital to R5.1bn (excluding goodwill and intangibles), supporting fairly comfortable LTVs and earnings based gearing (1H F15: 39% and 423% respectively). Net interest cover registered at 3x in 1H F15, against a 2.5x threshold for ‘A’ band rated funds. Management intends to keep LTVs below 40% going forward, in line with GCR’s benchmark for highly rated REITs. The fund’s untapped bank facilities were low at 1H F15, while 63% of debt is set to mature in the 18 months to FYE16. Some comfort is, however, drawn from sufficient overcollateralisation (2.3x with respect to properties at 1H F15) and recently raised equity. Relationships are maintained with two bankers, and while most highly rated property funds reflect more banking counterparties, the planned R3bn DMTN programme will provide further funding flexibility.
The ratings are premised on the successful refinancing of the maturing obligations. In the medium term, upward rating pressure could emanate from the demonstrated ability to bed down the planned acquisitions (supporting robust sustainable cash flows), achieved in tandem with conservative gearing and strong debt serviceability. However, materially or persistently higher than planned gearing ratios, even to fund strategic acquisitions, would warrant negative rating action. Adverse macroeconomic or regulatory developments (inter alia) could also place pressure on earnings, resulting in a downward ratings review.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Apr 2015)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Corporate Entities, February 2015
Global Criteria for Rating Property Funds, April 2015
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Gross lettable area||Or GLA, is a term used in commercial property to indicate the amount of floor space rented or available for rental.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Liquidity Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
|Loan to value (“LTV”)||The principal balance of a loan divided by the value of the property funded. LTVs can be computed as the loan balance to current property market value, or the original property market value.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|REIT||Real Estate Investment Trusts are JSE listed companies that own operate and manage a real estate portfolio consisting of income producing property (office parks, industrial parks or retail centres).|
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SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating Was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Rebosis Property Fund Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Rebosis Property Fund Limited with no contestation of the rating.
The information received from Rebosis Property Fund Limited and other reliable third parties to accord the credit rating(s) included;
- Audited financial results for 2014
- Unaudited interim results for the six months ending February 2015
- Two years of comparative numbers, as well as audited 3.5 months’ performance for 2011
- Budgeted financial statements for 2015
- A breakdown of facilities available and related FI counterparties
- Corporate governance and enterprise risk framework
- Industry comparative data
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.