Announcements Corporate Rating Alerts

GCR affirms Accelerate’s Issuer rating of BBB+(ZA) on more prudent gearing expectations, Outlook Stable

Rating Action

Johannesburg, 27 August 2019 – GCR Ratings (“GCR”) has affirmed the national scale Issuer ratings assigned to Accelerate Property Fund Limited (“Accelerate”, “the REIT” or “the fund”) of BBB+(ZA) and A2(ZA) for the long and short term respectively, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Accelerate Property Fund Limited Issuer Long Term National BBB+(ZA) Stable Outlook
Issuer Short Term National A2(ZA)

Rating Rationale

Accelerate’s Issuer ratings are underpinned by a sound domestic operating environment, which counterbalances the effect of structural weaknesses in the South African economy. While cognisance is taken of the REIT’s exposure to Austria and Slovakia, which collectively accounted for c.9% of revenue in FY19, Accelerate is expected to primarily reflect risks that are similar to those faced by players mainly focused on the South African property segment over the rating horizon.

Constraining the rating somewhat is the significant nodal and property concentration in the portfolio, with Fourways Mall and the top 10 properties having accounted for a respective 48% and 66% of its overall value at FY19. This is set to increase following the Fourways Mall equalisation. However, concerns are somewhat mitigated by the REIT’s retail focus and the strong growth in the core Fourways node. Moreover, apart from OBI and KPMG (which represented c.9% and 6% of revenue in FY19), the remainder of the portfolio reflects a fairly granular tenant diversification, largely consisting of national lessees.

Vacancies remain elevated, but the disposal of certain non-core properties and the reprofiling of the tenant mixes at earmarked centres should see an improvement in overall occupancies (albeit with potential for negative reversions). South African escalations are under pressure, but remain competitive, at 7.4%, with strong tenant retention expected to be sustained across key assets. The overall weighted average lease expiry (“WALE”) is relatively competitive, at 5.3 years (FY18: 5.5 years), with the offshore WALE at 11.8 years. Although fairly well-controlled historically, the gross and net cost ratios and arrears spiked in FY19, mainly due to additional costs associated with the Fourways Mall redevelopment, and once-off provisions related to the introduction of IFRS 9. A normalisation in the domestic cost ratios is projected over the rating horizon, which together with the contribution from international assets, should support sound margins despite pressures from rising all-in costs of occupancy in South Africa.

External debt registered at R5.4bn at FY19, translating to a loan to value (“LTV”) of c.40% (inclusive of receivables from the Fourways Mall developer). Despite c.R700m meant to be raised to fund the Fourways Mall equalisation, gearing is expected to moderate towards 35%, as proceeds from asset disposals are being used to settle certain legacy facilities. Coupled with the correction in the operating profit margin, this is expected to support an improvement in net debt to operating income to fall within the 5.0x-6.0x range, and a further strengthening of net interest coverage towards 2.5x over the rating horizon.

Liquidity coverage approximates 1.0x in respect of its one-year requirements, with cognisance taken of cash flows realised from ongoing disposals, and facilities secured ahead of the Fourways Mall equalisation. Approximately 40% of debt expiries fall within the 24-months through to September 2021, shortly to be reduced to c.35% with the refinancing of a DMTN programme exposure of R285m. Headroom on debt covenants should continue to be improved, with performance relative to SPV 1 covenants in particular to be enhanced through increased collateral. That said, the historically low undrawn facilities maintained and high asset encumbrances curtail the liquidity assessment somewhat.

Outlook Statement

The Stable Outlook takes cognisance of the more prudent financial policies that management has adopted. It also reflects GCR’s expectation that the medium-term lease profile, mostly anchored by nationals and other well-positioned lessees, will continue to sustain a relatively resilient earnings stream despite pressures from a challenging South African operating environment.

Rating Triggers

Higher than anticipated leverage metrics, a deterioration in the debt maturity profile, or low undrawn committed facilities that curtail the liquidity ratio, would be negatively considered. A volatile earnings trajectory, weak interest coverage or low covenant headroom arising from the fragile domestic operating environment would also exert negative pressure on the ratings. Upward rating progression could be achieved in the medium term should the fund sustain its LTV ratio around its targeted level of 35%, combined with an improvement in other leverage and debt service metrics. The timely bedding down of the Fourways Mall extension and improved occupancies across the SA portfolio should also further support the credit risk profile.

Analytical Contacts

Primary analyst Patricia Zvarayi Deputy Sector head: Corporate Ratings
Johannesburg, ZA Patricia@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019
GCR’s Country Risk Score report, published June 2019
GCR’s Corporate Sector Risk Score reports, published June 2019
GCR’s Industry Research on the SA Commercial Property Market, July 2019

Ratings history

Accelerate Property Fund Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Issuer Long term Initial National BBB+(ZA) Stable Outlook Feb 2014
Issuer Short Term Initial National A2(ZA)
Issuer Long term Last National BBB+(ZA) Stable Outlook Sep 2018
Issuer Short Term Last National A2(ZA)

RISK SCORE SUMMARY

Risk score 12.00
Operating environment 14.50
Country risk score 7.50
Sector risk score 7.00
Business profile -0.50
Portfolio quality -0.50
Management and governance 0.00
Financial profile -2.00
Leverage and Capital Structure -1.00
Liquidity -1.00
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00

Glossary

Collateral Asset provided to a creditor as security for a loan or performance.
Cost Ratio The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.
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.
Coverage The scope of the protection provided under a contract of insurance.
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.
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 exposures 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.
DMTN Domestic Medium Term Note.
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. In insurance, it refers to an individual or company’s vulnerability to various risks
Gearing Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by EBITDA, the value of investments, or by operating income.
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.
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.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
Issuer The party indebted or the person making repayments for its borrowings.
Lease Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.
Lessee The party that enjoys temporary use of a corporeal thing.
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.
Loan To Value 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.
Loan A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
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.
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.
Proceeds Funds from issuance of debt securities or sale of assets.
Property Movable or immovable asset.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings 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.

The credit ratings have been disclosed to Accelerate Property Fund Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Accelerate Property Fund Limited participated in the rating process via face-to-face management meetings, tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Accelerate Property Fund Limited and other reliable third parties to accord the credit ratings included:

  • the 2019 audited annual financial statements (plus four years of audited comparative numbers);
  • presentations, SENS announcements and roadshows;
  • a breakdown of debt facilities available and related counterparties at 31 March 2019 and 31 July 2019;
  • a breakdown of the property portfolios at 31 March 2019.
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