Johannesburg, 10 August 2017 — Global Credit Ratings has today affirmed the national scale issuer 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 (“GCR”) has accorded the above credit ratings to Accelerate Property Fund Limited (“Accelerate”) based on the following key criteria:
Following several large transactions, Accelerate has grown its property pool rapidly to nearly R12bn at FY17 from R5.4bn since listing in FY13. The REIT plans to continue to invest in dominant assets with earnings growth potential, whilst also targeting higher-quality assets that fit into its nodal and offshore strategy, which should further enhance cash flow stability going forward. As the fund has attained scale, the portfolio has shown greater diversity, although it remains concentrated with respect to its top-tier properties (5 largest assets represented a combined 48% of the total investment pool value). This is mitigated by the quality of the assets, given their prime locations (with critical mass attained in certain nodes) and generally high occupancies leased to a diversified and good quality tenant base.
The fund’s rental income exceeded the R1bn mark in FY17 and reflects a favourable long term lease profile (WALE: 5.6 years), with average escalations of 6.9% (FY16: 8%). Nonetheless, overall core vacancies remain relatively high (particularly for a retail orientated fund), indicating scope to enhance yields and thus earnings generation. Note is taken of the higher cost base reported in FY17 (due to once-off expenditures related to the European assets), with the additional once-off costs associated with the tenanting of Fourways Mall expected to be margin dilutive in FY18.
The significant acquisitions undertaken in FY17 saw debt rise to R4.9bn (FY16: R3bn), against R1.1bn raised from shareholders. As such, the LTV climbed to 41% (FY16: 35%), breaching the top end of management’s internal limits, while net debt to operating income spiked due to the earnings drag of new acquisitions (FY17: 670%; FY16: 527%). Management has indicated that this is temporary, with gearing metrics expected to trend down as the portfolio is bedded down, although this needs to be demonstrated.
The REIT’s liquidity and funding flexibility are deemed to be somewhat constrained, as investments are almost entirely encumbered and although unutilised committed facilities have increased these remain limited. This in view of a sizeable amount of debt to refinance in the next 24 months, whilst narrow headroom under certain covenants could limit its ability to take on further debt in the absence of new equity capital. Cognisance is, however, taken of the fund’s proven access to equity and debt markets.
An upgrade would require Accelerate to exhibit a growing earnings base and improved portfolio fundamentals, with the successful bedding down and letting of the Fourways Mall redevelopment a potential catalyst. Positive rating action would also depend on the REIT’s ability to demonstrate a track record of financial discipline, while improving liquidity. The ratings could, however, be pressurised if elevated gearing ratios are reported for a sustained period and/or if the weaker operating environment results in a material downward shift in rentals and earnings.
NATIONAL SCALE RATINGS HISTORY
Initial rating (February 2014)
Long term: BBB+(ZA)
Short term: A2(ZA)
Last rating (February 2017)
Long term: BBB+(ZA)
Short term: A2(ZA)
Sector Head: Corporate ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for rating corporate entities, updated February 2017
Criteria for rating property funds, updated February 2017
Accelerate issuer rating reports (2014-2017)
RATING LIMITATIONS AND DISCLAIMERS
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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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|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).|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate. Also an agricultural term describing output in terms of quantity of a crop.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was 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 is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Accelerate 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 Accelerate Property Fund Limited with no contestation of the ratings.
The information received from Accelerate Property Fund Limited and other reliable third parties to accord the credit ratings included:
• The 2017 audited annual financial statements (plus prior years of comparative audited numbers),
• A breakdown of debt facilities, security pool and debt maturity profile per counterparty at FY17
• Investor presentations
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.