Johannesburg, 9 Mar 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Accelerate Property Fund Limited of BBB+(ZA) and A2(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 Accelerate Property Fund Limited (“Accelerate”) based on the following key criteria:
Accelerate, which listed in December 2013, is a mid-sized Real Estate Investment Trust (“REIT”) that has a property portfolio of sound quality and a longstanding history. Its portfolio is characterised by its exposure to the retail sector, and in particular to shopping malls located in the Fourways node of Gauteng. This exposure is complemented by office properties, but is expected to reduce slightly in the short term as a result of large acquisitions in 2H F15. Over the longer term, however, the Fourways area remains pivotal to Accelerate’s overall strategy, and it expects to buy into the 90,000m2 off-balance sheet extension of the existing Fourways Mall (which is owned by Accelerate) in 2018.
The overall property portfolio is of sound quality, with retail properties anchored by blue chip tenants and office properties largely being single tenanted by high-quality counterparties. While the portfolio vacancy rate remains elevated at 8.8% of gross lettable area (“GLA”) at 1H F15 (FYE14: 9%), this includes strategic vacancies and those associated with refurbishments. Acquisitions in 2H F15 will increase exposure to the office and industrial sectors, decrease blended vacancies (as properties are all fully tenanted), and improve the overall credit quality of the tenant base. These acquisitions relate to 13 properties acquired or to be acquired, which will add 124,633m2 of lettable area and around R128m of annual net rental income to the portfolio. With the acquisitions expected to be largely funded with new Accelerate shares, the overall impact of the transactions on the fund’s credit quality is expected to be positive.
Accelerate attained revenue of R221m in its initial 110-day reporting period (“F14”) and R345m in the 1H F15 interim period. This translated to operating income of R233m in 1H F15 (F14: R147m), attained at a sound margin of 67.5% (F14: 66.6%). With net finance charges amounting to R82m in 1H F15 (F14: R50m), net interest cover was comfortable at 2.8x (F14: 3x). Further to this, Accelerate reported stable debt of R2.3bn at 1H F15, against an investment portfolio valued at R6.2bn. As such, the fund is moderately geared relative to equity and property values, with net gearing of 57% and a net LTV of 37% at 1H F15 (FYE14: 62% and 38%). However, debt levels relative to earnings are higher, with net debt to EBITDA registering at an annualised 487% at 1H F15 (FYE14: 477%).
Accelerate reports sounds growth prospects, as a result of a strong pipeline of opportunities over the medium term. Nonetheless, an upgrade of the ratings would only likely occur once the portfolio has stabilised, and once earnings grow such that net debt to EBITDA improves to within GCR’s 400% benchmark for “A” band rated domestic property funds. In contrast, a ratings downgrade would only likely occur if increased vacancy and/or arrears levels arose, and this negatively affected profitability and debt serviceability.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (Feb/2014)
Long term: BBB+(ZA)
Short term: A2(ZA)
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, February 2015
Criteria For Rating Property Funds, July 2014
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|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.|
|EBITDA||Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.|
|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)||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.|
|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.|
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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 Ltd and other reliable third parties to accord the credit rating(s) included the 2014 Integrated Report and 1H 2015 interim accounts, full year budgeted financial statements from the pre-listing statement, corporate governance and enterprise risk framework, industry comparative data and regulatory framework, and a breakdown of debt facilities.
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 affirms Accelerate Property Fund Limited’s rating of BBB+(ZA); Outlook Stable