Announcements

GCR affirms Dipula Income Fund Limited’s rating of BBB(ZA); Outlook Stable

Johannesburg, 11 Sep 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Dipula Income Fund Limited of BBB(ZA) and A3(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 Dipula Income Fund Limited (“Dipula”) based on the following key criteria:

Dipula’s sound real estate credentials and strong B-BBEE rating have been instrumental in growing the portfolio to around R6.5bn. This has been facilitated by the formation of strong relationships with established REITs, property developers and private vendors, which are expected to lead to future acquisition opportunities. Dipula’s strategy is to maintain a balance between market sectors, but in practice recent acquisitions have been of retail assets and to a lesser extent industrial properties. With growth likely to slow in the traditional segments, the fund is targeting the residential sector with plans to partner with development companies to acquire low rise complexes for rental stock.

A greater focus on tenant retention and letting saw the overall vacancy rate decline from around 9/10% over the F12 to F14 period, to a low 7% in May 2015 (despite the temporary increase due to the liquidation of Ellerines). Vacancies are expected to be maintained around the 7% level at FYE15. Higher retention rates have not been achieved at the expense of negative rental reversions, with both the industrial and office segments reporting double digit average increases in rental rates upon renewal and above inflation rental escalations.

Rental income has risen more than four-fold since F11 to R486m in F14 and R301m in 1H F15, driven by acquisitions and improved tenanting. However, expenses have been increasing faster than rentals, on the back of higher municipal expenses and administrative costs. Thus, the property expense ratio has climbed from 19.3% in F12 to 21.4% in 1H F15, whilst the cash operating margin decreased from 79% at F13 to 73.4% at 1H F15. Given the continued inflationary pressures and the weak economy, such margin pressure is likely to persist.

Acquisition funding has been weighted towards equity, and as such Dipula has maintained its LTV around 40% over the review period (despite some fluctuation due to the timing of transactions). While the LTV ratio of 40.2% (FYE14: 38.3%) and the debt to EBITDA ratio of 416% at 1H F15 (FYE14: 416%) slightly exceed GCR’s benchmarks for ‘A’ rated REITS, they align comfortably with Dipula’s current rating. Dipula’s funding flexibility is underpinned by strong shareholder support and close relationships with Standard Bank and Nedbank. However, both banks now have a relatively high exposure to the fund, which may limit their ability to provide further credit lines. Thus, the launch of its DMTN programme is positively considered as it will provide alternate funding, through the capital market.

Steady growth in rental income and profitability, translating to sustainable medium term cash flows, could lead to positive rating action. In addition, the bedding down of large acquisitions, as well as successfully entering into new market segments, would create value for the fund. Conversely, LTVs persistently above the 45% mark could limit Dipula’s funding flexibility and ability to conduct transactions and, if sustained, could potentially lead to negative rating action. The failure to timeously deal with the concentration of debt maturities in F18 could also lead to significant liquidity constraints.

NATIONAL SCALE RATINGS HISTORY  
   
Initial/last rating (Sep/2014)  
Long term: BBB(ZA); Short term: A3(ZA)  
Outlook: Stable  
   

ANALYTICAL CONTACTS

Primary Analyst    
Eyal Shevel    
Sector Head: Corporate & Public Sector Debt Ratings    
(011) 784-1771    
shevel@globalratings.net    
     
Committee Chairperson    
Patricia Zvarayi    
Senior Analyst    
(011) 784-1771    
patricia@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015

Criteria for Rating Property Funds, updated April 2015

Dipula rating report 2014

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

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
Liquidation Liquidation is the process by which a company is wound up and its assets distributed. It can be either compulsory or voluntary. It can also refer to the selling of securities or the closing out of a long or short market position.
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.
   

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.

Dipula Income 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 Dipula Income Fund Limited with no contestation of the rating.

The information received from Dipula Income Fund Limited and other reliable third parties to accord the credit rating(s) included;

  • Audited financial results of Company per 31/08/2014
  • 3 prior years of comparative audited financial results
  • Unaudited interim results of Company per 28/02/2015
  • Analysts presentations
  • REIT conversion circular, May 2015
  • Applicable SENS announcements
  • A breakdown of facilities available and related counterparties
  • Corporate governance and enterprise risk framework
  • Industry comparative data

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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