Johannesburg, 07 September 2018 — 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:
Cognisance is taken of the progression of the REIT’s property portfolio to R12.5bn at FY18, from R5.4bn at listing. Management continues to pursue growth through the acquisition, development and upgrade of high quality, dominant properties that are aligned to Accelerate’s nodal strategy, complemented by a European pool of assets that serves as a Rand hedge. While its portfolio has advanced in terms of scale, Accelerate still evidences relatively high concentration, with 65% of its portfolio value deriving from 10 properties. That said, note is taken of the strong positioning of the marquee assets with respect to locality, tenant profile, occupancy rate and consistency of cash flows.
Rental income advanced by 9% to R1.2bn in FY18, with growth exceeding inflation amidst a challenging operating climate. The REIT continues to reflect a sound weighted average lease profile, registering at 5.5 years, with competitive rental escalations of 7.1% including the offshore portfolio. This notwithstanding, core vacancies increased to 10% (FY17: 6.9%), mainly due to tenants vacating two key properties. Efforts to closely monitor vacancies and active (re)letting activity are expected to contribute to the stability of the performance of the base portfolio over the rating horizon.
Cost rigour translated to an improvement in the net cost to income ratio to 14.8%, from 16.9% previously. Overall, the REIT’s operating margin remained strong, registering comfortably above the 60% threshold. While stringent expense management initiatives are expected to be sustained, pressure is likely to arise from tenants’ constrained capacity to absorb higher all-in occupancy costs over the rating horizon.
Having risen markedly to R4.9bn at FY17 on the back of acquisitions, debt increased by a modest 6% to R5.1bn at FY18, with borrowings expected to increase as the Fourways Mall extension is completed and as other assets are traded into the portfolio or developed. The LTV ratio was relatively stable at 40.5%, while net debt to operating income remained above historical levels, at 647% (FY17: 670%), continuing to reflect some earnings drag. Looking ahead, management would be expected to manage the LTV ratio between the 30% to 40% internal target for the long term as the portfolio progresses in scale.
Accelerate had limited unutilised facilities of R274m as of early August 2018, as well as low headroom under the SPV1 LTV covenant of 45% and internal targets, in the absence of a further equity raise. The fund also presents an encumbered property portfolio, which further constrains its liquidity profile. Note is, however taken of the R5bn DMTN programme, under which maturities amounting to R750m have been refinanced with tenors of three and five years since FY18 (thereby extending the weighted average debt term from 2.1 years), overcollateralisation of facilities and well-entrenched bank relationships.
Positive rating action would be predicated on a sustained reduction of the LTV ratio towards the 35% level, combined with an improvement in other debt service and liquidity metrics. The timely bedding down of the Fourways extension should support a firmer earnings trajectory. Conversely, unduly high leverage metrics due to aggressive acquisition led or development driven growth, or a constrained debt maturity profile would be negatively considered. A volatile earnings trajectory and weak debt serviceability arising from the fragile operating environment would also warrant negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (February 2014)
Long term: BBB+(ZA)
Short term: A2(ZA)
Last rating (August 2017)
Long term: BBB+(ZA)
Short term: A2(ZA)
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Analyst||Sector Head: Corporate ratings|
|(011) 784-1771||(011) 784-1771|
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
Accelerate issuer rating reports (2014-17)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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||The holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|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.|
|Tenor||The time from the value date until the expiry date of an instrument, typically a loan or option.|
For a detailed glossary of terms please click here
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.
The information received from Accelerate Property Fund Limited and other reliable third parties to accord the credit ratings included:
• The 2018 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 year end FY18
• 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.