Johannesburg, 27 Aug 2014 — Global Credit Ratings has today released the initial national scale ratings accorded to Accelerate Property Fund Ltd of BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable. While the rating exercise was carried out in February 2014 (following the fund’s initial public offering), the rating initially remained private, but has now been published ahead of the finalisation of the proposed bond programme.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Accelerate Property Fund Ltd based on the following key criteria:
Accelerate listed a mid-sized property portfolio on the JSE in December 2013, but its competitive advantage is underpinned by its relationship to the much larger Georgiou family portfolio. This should ensure a natural pipeline of acquisitive opportunities, as well as being able to leverage off the strong relationships the Georgiou family has in the property sector. Concentration is high with the Fourways Mall comprising 36% of rental income and the greater Fourways node 69%. Risk is somewhat moderated by the robust income track record of the Fourways Mall and the above average rental rates and escalations it is able to attract. This is enhanced by the fund’s dominance of the Fourways node, and the medium term development prospects.
Whilst the earnings performance will be underpinned by the Fourways properties, which report lower vacancies and above average rental rates, the remainder of the portfolio has relatively high vacancies. Moreover, several properties require small refurbishments, adding to the portfolio risk.
Budgets indicate net rental growth of 7%-8% over the first two years, underpinned by long dated tenant leases. This should cover the expected interest charge by between 2.5x and 3x.
Accelerate’s 40% LTV is on the cusp of GCR’s benchmark for A-band rated property funds, but the budgeted debt to EBITDA ratio of 5.4x is well above GCR’s benchmark of 4x. Moreover, liquidity is constrained by a lack of unutilised funding facilities. These factors may limit the fund’s ability to raise additional debt funding without negatively impacting the rating.
A rating upgrade is dependent on sustained growth in rental income and operating profit over the medium term. This will likely be achieved by the completion of the smaller refurbishments and the successful tenanting of the vacant space. While more a longer term factor, the successful completion of the Fourways Precinct redevelopment has the potential to significantly strengthen the composition of the fund, which in turn could result in an upward rerating. Conversely, continued high vacancy levels could result in weaker than expected profitability levels, which in turn could lead to negative fair value adjustments to properties. Were this to result in a sustained increase in the LTV ratio above 40%, particularly closer to the 50% level, this could result in a rating downgrade. Acquisition or other transactional activity that results in higher gearing may also be negatively viewed.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (Feb/2014)
Long term: BBB+(ZA); Short term A2(ZA)
Sector Head: Corporate & Public Sector Debt Ratings
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated August 2013
Criteria for Rating Property Funds, July 2013
RATING LIMITATIONS AND DISCLAIMERS
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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.
Accelerate Property Fund Ltd 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 Accelerate Property Fund Ltd with no contestation of the rating.
The information received from Accelerate Property Fund Limited and other reliable third parties to accord the credit rating included the Pre-Listing Statement, full details of the property portfolio as well as diversification statistics, external property valuation reports, financial projections for 2014 to 2016, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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.
GCR accords an initial rating of BBB+(ZA) to Accelerate Property Fund Ltd; Outlook Stable.