Johannesburg, 29 Aug 2016 — Global Credit Ratings has today affirmed the national scale issuer 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 (“GCR”) has accorded the above credit ratings to Dipula Income Fund Limited (“Dipula”) based on the following key criteria:
Dipula has shown good progress in terms of realigning its investment portfolio, leading to a marked improvement in the scale and quality of assets over recent periods. Consequently, this has seen the value of the property portfolio rise 1.5x in the 18 months to R6.6bn at 1H F16, accompanied by higher average rental rates. Acquisitions have been the primary driver of the growth evidenced, underpinned by Dipula’s empowerment credentials. While the ongoing portfolio rebalancing has resulted in a relative retail bias (which should prove more defensive in tough trading conditions), the fund remains committed to retaining exposure across all property classes, which is likely to include the residential sector over the short term.
Significant effort continues to be applied to strengthening asset management processes given the recent internalisation of the property management function, which has seen tenant retention increase and vacancies decline, albeit that vacancies remain above national levels in office and retail. While mean escalations secured on renewals have been stable at around 7-8%, the tough operating environment is borne out by the aggressive pricing needed on new leases, which are given at steep rental discounts compared to average portfolio rates. Acquisitions and revamps have yielded a strong rental income growth trajectory, with revenue registering a 26% rise to R725m in F15 and an annualised 36% increase in 1H F16. Operating margins, however, have tapered off, but remain sound at 60% at 1H F16. This has been on the back of higher municipal rates and taxes, which have been increasing faster than rentals and the amount that can be clawed back from tenants.
Dipula’s debt has risen sharply to fund the rapid growth, peaking at R2.9bn at 1H F16 (FYE15: R2bn; FYE14: R1.6bn). As a result, the gross LTV ratio rose to a high of 44% in 1H F16 (FYE15: 37%), breaching management’s targeted 40% threshold. Similarly, with total debt to EBITDA registering at an annualised 484% at 1H F16 (FYE15: 455%), gearing metrics exceed GCR’s limit for ‘A’ rated property funds. As such, further investments will need to be backed by shareholders to sustain sound credit protection factors.
Funding capacity and liquidity is limited by Dipula’s relatively high gearing metrics, compounded by high encumbrances and the low level of unutilised facilities on hand. While the funding flexibility derived from the DMTN programme is noted, subdued DCM activity and the steep swap curve has limited appetite for new issuances. Some comfort is nonetheless drawn from continued shareholder support evidenced and the long standing relationships maintained with two bankers.
Rating uplift going forward could derive from operational strengthening and development opportunities that create value for the fund, leading to improvements in key performance metrics. This should be achieved in tandem with conservative gearing and enhanced liquidity. Materially or persistently higher than planned gearing ratios outside the upper limits for ‘BBB’ band rated REITs, even to finance strategic acquisitions, could potentially lead to negative rating action. Failure to timeously deal with the concentration of debt maturities in F18, would also be viewed negatively.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (Sep 2014)
|Long term: BBB(ZA)
Short term: A3(ZA)
Last rating (Sep 2015)
|Long term: BBB(ZA)
Short term: A3(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Criteria for rating property funds, updated April 2016
Dipula issuer rating reports (2014-2015)
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>
|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.|
|Gross lettable area||Gross lettable area, or GLA, is a term used in commercial property to indicate the amount of floor space rented or available for rental.|
|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.|
|Leverage||Or Gearing, 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.|
|Loan to value||The principal balance of a loan divided by the value of the property funded. LTVs can be computed as the loan balance to current property market value, or the original property market value.|
|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.|
|REIT||Real Estate Investment Trusts are JSE listed companies that own operate and manage a real estate portfolio consisting of income producing property (office parks, industrial parks or retail centres).|
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 ratings have 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 ratings included:
- The 2015 audited annual financial statements (plus prior four years of comparative numbers)
- 1H 2016 unaudited interim accounts
- A breakdown of debt facilities available and related counterparties at 1H 2016
- A full breakdown of the property portfolio at 1H 2016
- Other public information
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.