Johannesburg, 28 September 2017 — Global Credit Ratings has today affirmed the national scale Issuer 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 Evolving.
SUMMARY RATING RATIONALE
GCR has accorded the above credit ratings to Delta Property Fund Limited (“Delta”, “the REIT” or “the fund”) based on the following criteria:
Delta is in the midst of a transaction that is expected to see an empowered consortium that includes management contribute a cash injection in excess of R4bn, which will be used to finance yield accretive acquisitions and other capex. This transaction, together with the sale of Redefine’s interest in the fund to another B-BBEE group, will increase Delta’s black ownership in excess of 51%, and will favourably align its broad-based empowerment credentials with the revised procurement framework expected to be adopted by the Department of Public Works (“DPW”).
The re-capitalisation initiative is essential to Delta’s strategic objectives, in view of the REIT’s strong focus on the sovereign sector. While the consortium will use funds from institutional investors to finance the transaction, the obligations are expected to be non-recourse to the fund and will be secured by the Delta shares acquired. Accordingly, the transaction is expected to reduce the REIT’s net LTV ratio to below 25%, to be managed at or below 35% in the medium term. With a projected investment portfolio of over R16bn, Delta will also be comfortably within the mid-tier range of domestic REITs by scale (FY17: c.R11.8bn), while its continued inclusion in the SA Property Index will support the share’s liquidity.
GCR has also considered the long-dated leases that will accrue to Delta from meeting the more rigorous DPW procurement policies. This could enhance its mean lease expiry to above 7 years and may see commitments from the state to support maintenance capex and broader growth objectives for the fund, with strong annuity income flows supportive of upward correction in property values.
With both the equity-raising initiative and DPW’s leasing policy still to be finalised, the REIT currently presents a constrained lease maturity profile of c.1.7 years, with vacancies of c.9%, while the average debt maturity profile sits just below two years. Given the uncertainty of the timing and final terms of these key developments, the ratings have been placed on Evolving Outlook until they are finalised, and the fund deploys the capital raised into strongly performing properties, as projected.
While Delta’s LTV ratio improved materially after the scrip-financed Redefine portfolio acquisition, pressure on asset valuations is likely to see it trend within the 40-45% range despite the disposal of non-core assets to enhance liquidity. New equity is therefore needed to stabilise gearing, and would also see net debt to EBITDA, which has been improving steadily over the years, range comfortably below the 400% level. Internal efficiencies continue to support strong recurring margins. Despite the moderation in sovereign rental rates and escalations and exogenous cost pressures that will continue to elevate tenants’ all-in costs of occupancy, the operating profit margin is expected to remain above the 60% minimum expected of highly rated REITs in the medium term.
Positive liquidity considerations include flexibility from Delta’s DMTN programme, entrenched banking relationships and 2.3x facility collateralisation. Comfort would be taken from maintaining ample unencumbered assets, which would ameliorate the risk of maintaining limited untapped facilities.
Looking ahead, an upgrade would arise from the successful bedding down of acquisitions funded from timely conclusion of the equity transaction (and the attainment of long-term sovereign leases), achieved in conjunction with LTV and debt to EBITDA ratios within the 40% and 400% respective thresholds for highly rated funds. Conversely, failure to meet or sustain empowerment objectives required to comply with the more stringent DPW leasing requirements, or other factors delaying key lease renewals, would result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2013)||Last rating (July 2016)|
|Long term: BBB+(ZA); Short term: A2(ZA)||Long term: BBB+(ZA); Short term: A2(ZA)|
|Outlook: Stable||Outlook: Stable|
|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 2017
Global criteria for rating property funds, updated February 2017
Delta Property Fund Limited Issuer rating reports, 2013-16
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|Consortium||A group of companies that combine some or all of their resources to undertake a joint project.|
|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.|
|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.|
|Institutional Investors||Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.|
|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.|
|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.|
|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.|
|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.|
SALIENT POINTS 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.
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 ratings were disclosed to Delta Property Fund Limited, with no contestation of the ratings.
The information received from Delta Property Fund Limited and other reliable third parties to accord the credit rating included:
- the 2017 audited financial statements (plus four years of comparative, audited numbers);
- detailed portfolio statistics at 28 February 2017;
- the DPW’s Property Management Empowerment Policy draft (v. 10) and related PMTE publications;
- details of the proposed capital structure; and
- a breakdown of facilities available as at 28 February 2017.
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 Delta Property Fund Limited’s rating of BBB+(ZA); Evolving Outlook