Johannesburg, 08 August 2018 — 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 ratings placed on Rating Watch.
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:
GCR noted that as at FY18 Delta still presented a curtailed weighted average lease expiry (“WALE”) profile of 1.5 years (FY17: 1.7 years), while vacancies registered at a relatively high 11.8% (FY17: 10.7%) on the back of continued office pressures within Sunninghill and the Free State provincial node. As a consequence of the lease profile, Delta’s mean debt expiry profile is very short dated, registering at 1.5 years (FY17: 1.9 years). Management is currently actively engaging with the Department of Public Works (“DPW”) to secure renewals on a tranche of bulk leases, which is expected to be finalised imminently, and would lengthen the REIT’s lease expiry and debt maturity profiles through the refinancing of short term debt. In this regard, GCR will closely monitor the timely finalisation of the DPW lease renewals, which would be required to stabilise Delta’s credit risk profile, as they would be supportive of sound annuity income flows.
At the same time, Delta until recently was trading under cautionary, on the back of an anticipated transaction which is expected to see a management led consortium invest in new equity to raise at least R4.5bn. The proceeds will be used to fund yield enhancing acquisitions and other capex. The transaction is expected see the consortium subscribe for new shares equating to c.42.2% of Delta’s issued share capital, which will raise and sustain Delta’s black ownership above 51%, reduce its cost of funding and enhance its broad-based empowerment credentials. It will also bolster the investment portfolio to c.R16bn, placing Delta within the mid-tier range of domestic REITs (FY18: c.R12bn). The improved B-BBEE shareholding would also potentially allow Delta to sustain a lengthy weighted average lease expiry through the cycle, in line with revisions to the procurement policy recently promulgated by the DPW.
Positive rating factors include the fact that the LTV ratio has improved progressively, registering at 41.9% at FY18 (FY17: 42.3%), just above the 40% threshold for highly rated funds. Looking ahead, new equity capital is required to stabilise the LTV at management’s target of c.35% for the medium term, with the earnings from new assets and longer lease tenors expected to see net debt to operating income approximate 400%.
Internal efficiencies continue to support strong recurring margins. Despite the exogenous cost pressures that will continue to elevate tenants’ all-in costs of occupancy and potential pressure on rental escalations, the operating profit margin is expected to remain above the 60% minimum expected of highly rated REITs in the medium term.
Delta’s liquidity profile is significantly constrained by limited unutilised facilities, as well as the encumbered property portfolio. In addition, current short-dated debt maturity profile serves to elevate refinancing risk. However, cognisance is taken of the R2bn DMTN programme, well-established banking relationships and facility overcollateralisation.
To stabilise the ratings, the REIT would be expected to finalise the DPW bulk leases, supporting a lengthier lease expiry and an improved debt maturity profile. Conversely, protracted delays in renewing bulk leases would warrant negative rating action. In addition, failure to appropriately term out the debt profile and to secure adequate utilised facility coverage of short term debt would place downward pressure on the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2013)||Last rating (September 2017)|
|Long term: BBB+(ZA); Short term: A2(ZA)||Long term: BBB+(ZA); Short term: A2(ZA)|
|Outlook: Stable||Outlook: Evolving|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Sheri Morgan|
|Senior Analyst: Corporate Ratings||Senior Analyst: 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
Delta Property Fund Limited Issuer rating reports, 2013-17
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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 and contested by Delta Property Fund Limited and were amended.
The information received from Delta Property Fund Limited and other reliable third parties to accord the credit rating included:
- the 2018 audited financial statements (plus four years of comparative, audited numbers);
- detailed portfolio statistics at 28 February 2018;
- medium term forecasts; and
- a breakdown of facilities available as at 30 June 2018.
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); Rating Watch