Announcements

GCR affirms Delta Property Fund Limited’s rating of BBB+(ZA); Outlook Stable

Johannesburg, 27 July 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Delta 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 Delta Property Fund Limited (“Delta”) based on the following key criteria:

Delta identifies as a sovereign fund, leveraging its manager’s strong BEE credentials and established experience within this niche. The REIT recently signed a new asset management contract, which freed the fund of onerous legacy clauses, while retaining the expertise of MPI Property Asset Management’s (“MPI PAM”) employees.

The value of Delta’s portfolio rose more than fourfold in the 36 months to FYE15 to R8.9bn, including its strategic investment in Delta International (“DI”). The stake in DI has been reduced to c.32%, valued at R502m, from a temporary increase to 52.4% at FYE15. The REIT plans to maintain an interest in DI of around 25% in the long term, and may make other indirect property investments should the right opportunities arise.

State tenants made up 59% of rentals at FYE15 (FYE14: 64%), and quasi-government entities a further c.10%, while overall, A-grade tenants accounted for 81% of total GLA (FYE14: 83%). The lease expiry profile is underpinned by long term contracts with ‘B’ grade tenants, while average escalations secured on renewals have been stable at around 8%. Vacancies rose to 7.1% at FYE15 (1H F15: 4.7%) due to recent property transfers and ongoing enhancements, but are expected to decrease going forward, notwithstanding recent (and planned) acquisitions. The weighted mean rental rose to R95.8/m2, from R93.7/m2 at 1H F15, reflecting some headroom above industry rates, attributed to assessment rate claw backs structured into state leases. This is partly borne out by the alignment of margins to those of REITs dominated by single-tenanted properties, although progressive dilution of the EBITDA margin (FYE15: 72%; FYE14: 71%) from historic highs is also reflective of Delta’s rising exposure to mounting pricing pressure in the private commercial space.

Debt has risen sharply to fund rapid growth, registering at R4.5bn at FYE15 (FYE14: R3.5bn), while R4.2bn has been raised from shareholders since listing. Note is taken of the distortion due to the full consolidation of DI, which if excluded, would have seen net LTV register at 49.8% (May 2015: 46.7%), well above a 40% benchmark for ‘A’ band rated funds. Albeit improved, debt to EBITDA ratios remain aligned to those of ‘BBB’ rated REITs, as rapid capital accumulation has exacerbated the drag on earnings. Delta plans to gradually manage its net LTV ratio down to 40%, with the metric expected to potentially register at 30%-40% for some of the planned acquisitions. While investments remain wholly encumbered, note is taken of collateralisation on standing facilities of nearly 2x, ready access to capital markets, and strong recent shareholder support.

Looking ahead, measured growth, coupled with a demonstrable ability to achieve and sustain gearing metrics within GCR’s benchmarks for ‘A’ band rated REITs would place upward pressure on the ratings. However, failure to manage LTV ratios down to the target level of around 40%-45% in the medium term would exert downward pressure on the ratings. Given that Delta primarily identifies as a sovereign REIT, a weakening in empowerment credentials or other factors leading to deterioration in the relationship with the Department of Public Works would negatively impact the credit risk profile, and would warrant negative ratings action.


NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (June 2013)    
Long term: BBB+(ZA); Short term: A2(ZA)    
Outlook: Stable    
     
Last rating (August 2014)    
Long term: BBB+(ZA); Short term: A2(ZA)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

Primary Analyst    
Patricia Zvarayi    
Senior Analyst    
(011) 784-1771    
patricia@globalratings.net    
     
Committee Chairperson    
Richard Hoffman    
Senior Analyst    
(011) 784-1771    
hoffman@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for rating corporate entities, updated February 2015

Criteria for rating property funds, updated April 2015

Delta Property Fund Limited rating reports, 2013-14

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Corporate Governance Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Credit Rating Agency An entity that provides credit rating services.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
EBITDA EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.
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.
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.
GLA GLA is the portion of the total floor area of a building that is available for tenant leasing, and is usually expressed in square meters or square feet.
Income Statement A summary of all the expenditure and income of a company over a set 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.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
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. 
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
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.
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.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
REIT A REIT is a company that owns or finances income-producing real estate. REITs are subject to special tax considerations and generally pay out all of their taxable income as distributions to shareholders.
REPO In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
Risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.

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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.


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.

Delta 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 rating/s has been disclosed to Delta Property Fund Limited with no contestation of the rating.

The information received from Delta Property Fund Limited and other reliable third parties to accord the credit rating(s) included:

  • the 2015 audited financial statements (plus four years of comparative numbers);
  • the projected 2016 income statement;
  • capex projections for 2016;
  • detailed portfolio statistics, including forecast rental income for 2016;
  • corporate governance and enterprise risk framework;
  • industry comparative data and regulatory framework and
  • a breakdown of facilities available and related counterparties.

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.

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