Johannesburg, 29 Feb 2016 — 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:
The ratings are supported by Accelerate’s high quality, well positioned retail assets (accounting for 69% of the fund property value at 1H F16), complemented by an increasing contingent of high-end office properties. This has seen the value of the property portfolio increase by 1.4x since listing in December 2013 to R7.6bn at 1H F16. Access to a largely captive deal pipeline of properties (through strategic legacy relations) bodes well for future asset growth and potential diversification. This includes the option to purchase up to 50% of the super-regional Fourways mall development once the material extensions have been completed in 2018. Accelerate’s credit profile also benefits from modest development risk.
While Accelerate is geographically concentrated in Gauteng (particularly the Fourways strategic node), the portfolio is backed by good-quality tenants and improving vacancies, largely borne by the retail sector. In this regard, core vacancies reduced to 5.5% at 1H F16 (FYE15: 7.5%), whist the lease maturity profile has also lengthened. As such, the REIT is expected to maintain sound rental income growth over the rating horizon (despite the weaker outlook for the retail sector), underpinned by ongoing value enhancing acquisitions and above inflation escalations on in-force contracts. Earnings also remain resilient, with the operating margin reported at 68% in 1H F16 (FYE15: 66%). Accelerate reported sound net interest cover, which registered around the 3x mark in 1H F16. The REIT also remains relatively conservative in respect of interest-rate exposure, which should provide a level of relief to interest serviceability amidst the current upward rate cycle.
Portfolio growth has been funded by a mix of debt and equity, with debt having increased by R604m to R3bn over the 18-months to 1H F16. Thus, the fund’s LTV has risen from 35% at FYE15 to 39% at 1H F16. Recent debt funded acquisitions are likely to see the loan to value ratio exceed the upper 40% limit of management’s benchmark over the short-term. Similarly, with net debt to EBITDA registering at an annualised 511% at 1H F16 (FYE15: 510%), gearing metrics exceed GCR’s limit for ‘A’ rated property funds. As such, management has indicated that they may look to dispose of a limited number of non-core properties to decrease gearing. In the absence of this, further acquisitions will likely have to be funded by a higher portion of equity. To this end, the fund has demonstrated good access to capital in both the equity and debt markets. Unutilised banking facilities remain limited, although are sufficient to cover ongoing capex expenses, whilst short term debt maturities are small.
Upward rating movement would be based on Accelerate solidifying its gearing metrics within the ‘A’ band rating range. Further, the fund would need to continue to exhibit growing revenues, stable operating margins and solid interest cover levels. However, a ratings downgrade could be promoted by a more aggressive risk appetite following debt-funded acquisitions, resulting in elevated leverage and LTV ratios for a sustained period. Further, a weakening trend in profitability levels, owing to the tougher economic climate, and/or any pressure on the REIT’s liquidity position may also result in a ratings downgrade.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (February 2014)
|Long term: BBB+(ZA)
Short term: A2(ZA
Last rating (March 2015)
|Long term: BBB+(ZA)
Short term: A2(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2015
Criteria for rating property funds, updated April 2015
Accelerate rating reports (2014-2015)
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>
|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.|
|Gross lettable area||Gross lettable area, or GLA, is a term used in commercial property to indicate the amount of floor space rented or available for rental.|
|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.|
|Leverage||Or Gearing, 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 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.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|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.|
|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).|
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 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 rating.
The information received from Accelerate Property Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2015 audited annual financial statements (plus prior year of comparative numbers),
- 1H 2016 unaudited interim accounts
- Corporate governance and enterprise risk framework
- A breakdown of debt facilities available and related counterparties at 1H 2016
- A full breakdown of the property portfolio at 1H 2016
- Other 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 affirms Accelerate Property Fund Limited’s rating of BBB+(ZA); Outlook Stable.