Johannesburg, 23 Aug 2017 — 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 continues to evidence good progress in realigning its investment portfolio, leading to a marked improvement in the scale and quality of assets over recent periods. This has seen the value of the property portfolio rise to R6.9bn at 1H FY17 from R3.7bn at FY13, whilst retail properties now account for more than 70% of the total. More significantly, the value per property has increased and is expected to be around R50m upon completion of the current round of transactions, in line with target.
With a large number of properties, Dipula’s portfolio evidences low concentration risk. However, its performance has been impacted by the high proportion of mid-sized properties, a category that has underperformed the market. Thus, Dipula has reported higher vacancy rates than the market average across all sectors. This has been partially mitigated by a high proportion of A-grade tenants, intensive property management to retain tenants, as well as more aggressive pricing on lease renewals and new leases. Positively, Dipula has been able to maintain robust escalations on contracts of 7%-8%.
While income growth has been driven by acquisitions and escalations, 1H FY17 saw fairly tepid growth from the standing portfolio due to rising vacancies and some pressure on rental rates, which is likely to persist. Within this environment, Dipula has continued to implement strong cost controls, with a stable property expense ratio around 35%, and an operating ratio of around 62% over the review period. However, some cost pressure have been evidenced in 1H FY17, reflecting the weaker property sector. In addition, long outstanding debtors have been rising, leading to working capital pressure, although payment terms have been reached with most debtors and only a small portion has been impaired to date.
Debt increased to a high of R2.9bn at FY16 and 1H FY17, with the LTV ratio stable at 42% in both periods. The LTV is consistent with funds in the ‘BBB” rating range. To maintain gearing metrics at acceptable levels, GCR would thus expect all new funding to be in line with the fund’s target ratio of 60%/40% equity to debt. Dipula’s maturity profile remains concentrated in the one to three years bucket, similar to other smaller REITs. Mitigating this, is the fund’s demonstrated ability to refinance facilities as required (over R1bn refinanced in 2H FY17).
Nevertheless, GCR considers Dipula’s liquidity position to be relatively weak as the fund has few unutilised facilities available and almost its entire portfolio is encumbered to existing funders. GCR thus considers it prudent that negotiations with new funding counterparties are finalised to increase funding flexibility. The proposed DMTN issuance will also help to ease funding concentration somewhat, although note is taken of the subdued capital market activity that currently elevates refinancing risk.
Positive rating movement is dependent on 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. Conversely, the current gearing profile and credit protection metrics suggest there is very little scope to increase debt further without negatively impacting the credit rating. Failure to timeously deal with the concentration of debt maturities would be viewed negatively.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (Sep 2014)
|Long term: BBB(ZA)
Short term: A3(ZA)
Last rating (Aug 2016)
|Long term: BBB(ZA)
Short term: A3(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2017
Criteria for rating property funds, updated February 2017
Dipula issuer rating reports (2014-2016)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|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.|
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|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.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
SALIENT FEATURES 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 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 2016 audited annual financial statements (plus prior four years of comparative numbers)
- 1H 2017 unaudited interim accounts
- A breakdown of debt facilities available and related counterparties at July 2017
- A full breakdown of the property portfolio at 1H 2017
- Analyst presentations
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.