Global Credit Ratings has accorded the above credit rating(s) on SA Corporate Real Estate Fund based on the following key criteria:
SA Corporate Real Estate Fund (“SAC”) has a large and relatively well diversified property portfolio, totalling R7.9bn at FYE12. As much of the retail and office portfolio comprises B or C grade properties the fund has underperformed the market over the review period. However disposals of underperforming properties and the restructuring of the funding profile are positively considered, with the standing portfolio having evidenced firmer performance metrics than the overall portfolio. Moreover, the portfolio is underpinned by a strong industrial portfolio and some larger retail assets.
Income and earnings have been static since F10, impacted by the weaker performance of certain properties and disposals. However, lower vacancies and a return to positive rental reversions in the retail portfolio, combined with strong escalations clauses, should see income from the standing portfolio increase going forward. This is reflected in the 6.4% net income growth from the standing portfolio in F12. Nevertheless, management have cautioned that at the fund level this would be offset by some drag from property disposals in F13, with overall growth only likely to manifest in F14.
Cash generated from asset sales has been utilised to reduce debt, repurchase units and expunge legacy hedges. Thus, SAC currently evidences a very lowly geared balance sheet, with the net LTV having decreased to 9.3% at FYE12 (FYE11: 16.2%) and net debt to EBITDA to 100% (FYE11: 179%), well below the industry average and GCR’s benchmark for highly rated companies. Combined with significant access to capital, this provides substantial funding flexibility for transactions going forward. To this end, SAC has several potential acquisitions underway that could contribute substantially to the quality of the portfolio. Although gearing is likely to increase as SAC taps new debt funding to finance opportunities, gearing is unlikely to exceed 30% in the short to medium term.
A rating upgrade is dependent on a demonstrated ability to extract sustained medium to long term growth from the property portfolio, even amidst a more challenging property environment. A large transaction that would add marque properties to the fund or substantially influence size and diversification would also be positively considered, as would progress on the refurbishment of existing properties. Conversely, Continued underperformance from key properties or property classes would likely lead to a rating downgrade. In addition, further property sales without accompanying acquisitions will continue to erode the income base and lead to flat rental income.
|Sector Head: Corporates|
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|+27 11 784 1771|
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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.
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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.
SA Corporate Real Estate Fund participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to SA Corporate Real Estate Fund with no contestation of the rating.
The information received from SA Corporate Real Estate Fund and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, budgeted financial statements, corporate governance and enterprise risk framework, investment policy, Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties.