Johannesburg, 10 October 2018 — Global Credit Ratings has today accorded Equites Property fund Limited first-time Issuer national scale ratings of A(ZA) and A1(ZA) for the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Equites Property Fund Limited (“Equites”) based on the following key criteria:
The ratings are supported by Equites’ high quality and well-situated industrial assets in South Africa and the UK (albeit the latter still a relatively modest exposure), with the property portfolio valued at R8bn at FY18. The fund is comparatively smaller compared to its rated peers in the broader REIT industry, although it has established meaningful franchise value over its short, listed track record by focusing on developing modern big-box logistics properties, which enhances its ability to attract blue-chip tenants in a dynamic and competitive rental market.
The portfolio does display asset, tenant and sector concentration risk. Granularity should progressively improve as Equites continues to execute its development-led growth strategy, whilst credence is taken of the strong quality of its overall tenant base. Overall, cash flows remain predictable and resilient, supported by low vacancy rates and the portfolio’s long-weighted average lease expiry of approximately 7.9 years at FY18, with above inflation built-in annual rent increases. Further, the triple net lease structure on the majority of contracts continues to provide for stable and strong operating margins.
GCR has considered the REIT’s relatively high development appetite as part of its growth strategy (representing 18% of the total investment portfolio at FY18), which encompasses more risky ground-up builds. However, the high proportion of preleasing and conservative funding largely mitigates the earnings and liquidity risks.
Equites’ conservative financial profile is reflected in its net debt to operating income ratio of 442%, net LTV ratio of 23.8%, and net interest cover of 4.3x at FY18. The REIT is committed to a LTV ratio of 25%-35% as part of its prudent capital management policy. From a liquidity perspective, the REIT has sufficient unutilised credit facilities to meet its debt maturities and capex commitments in FY19. Although Equites’ limited unencumbered asset pool somewhat diminishes financial flexibility, note is taken of headroom under loan covenants and the REIT’s track record of raising equity and good access to banks, albeit only on a secured basis to date.
Positive rating progression could develop off the back of sustained sound rental and cash flow growth, despite the challenging operating environment, coupled with enhanced scale that allows for greater asset and tenant diversification. Conversely, if the REIT embarks on more aggressive financial policies, and/or if the portfolio quality declines, such that credit metrics weaken, negative rating pressure could ensue.
|NATIONAL SCALE RATINGS HISTORY
Initial/last rating (October 2018)
Long term: A(ZA)
Short term: A1(ZA)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Global Criteria for Rating Property Funds and Commercial Real Estate Companies, Updated February 2018
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|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||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Loan to value||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.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings are for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Equites 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 ratings have been disclosed to Equites Property Fund Limited.
The information received from Equites Property Fund Limited and other reliable third parties to accord the credit ratings include:
• the 2018 Integrated annual report and audited AFS (plus three years of prior comparative information);
• analyst presentations;
• a breakdown of facilities available and related counterparties at FY18 and post year-end;
• other non-public information.
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 Equites Property Fund Limited a first-time rating of A(ZA); Stable outlook