Johannesburg, 31 Aug 2018 — 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:
The ratings take cognisance of the continued growth in Dipula’s assets through acquisitions and redevelopments, with the property portfolio increasing to over R8.5bn post 1H FY18. The defensive nature of the portfolio is underpinned by its retail bias, with most assets being niche community centres that have demonstrated higher trading densities amidst the weak macroeconomic environment. The fund also evidences good granularity, with the top 10 assets accounting for 29% of the portfolio’s value at 1H FY18.
Amidst the competitive environment, much of Dipula’s focus has been on tenant retention, underpinned by enhanced in-house property management capacity. However, in line with the weakening property sector, portfolio vacancies increased to 10.4% at 1H FY18 (FY17: 8.5%). The consolidation of the R1.2bn Setso portfolio with vacancy rates of just 0.3% will, however, result in overall vacancies declining to under 10%. Ongoing remedial action, including plans to repurpose certain assets, redevelopments and proactive letting activity are expected to sustain relatively sound occupancies in the medium term.
Like-for-like revenue growth has been subdued, on the back of pressure on rental rates, albeit that traction is set to derive from contributions of the acquired assets in 2H FY18 and FY19. Note is also taken of robust escalations of 7.6% achieved in 1H FY18, which should be supportive of organic rental income growth from the base portfolio.
The property expense ratio has remained within a narrow range, trending below 35% over the review period, attesting to relative cost rigour. Accordingly, Dipula has achieved a five-year average operating profit margin of 62.5%, albeit that upward margin progression is expected to be constrained by the challenging operating environment, which could curtail tenants’ ability to absorb higher all-in occupancy costs.
Debt increased to a review period high of R3.4bn at July 2018 (FY17: R2.9bn), on the back of acquisition-led growth. The LTV ratio registered slightly higher than historic levels, having previously been managed below the 40% level. Going forward, the fund intends to manage the metric within a range of 38%-40%. The net debt to operating income ratio is expected to remain relatively conservative, supported by largely predictable cash flows backed by a medium-term lease profile.
The liquidity profile is constrained by the short maturity profile of the debt, while high asset encumbrance to existing funders leaves the fund with limited sources of alternate funding. Other key liquidity concerns include the unavailability of unutilised bank facilities, albeit that the fund has demonstrated ability to timeously refinance maturing facilities. The support shown by various institutional investors, as evidenced by over-subscribed share issues and over R2.5bn in direct equity injections since FY14, is also positively considered.
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 ratings. 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 2017)
|Long term: BBB(ZA)
Short term: A3(ZA)
|Primary Analyst||Secondary Analyst|
|Patricia Zvarayi||Tavonga Muchemedzi|
|Senior Analyst: Corporate Ratings||Junior Analyst: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
|Senior Analyst: Corporate Ratings|
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
Dipula Income Fund Limited issuer rating reports (2014-17)
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.|
|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.|
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.
The information received from Dipula Income Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2017 audited annual financial statements (plus prior four years of comparative numbers)
- 1H 2018 unaudited interim accounts
- A breakdown of debt facilities available and related counterparties at July 2018
- 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.
GCR affirms Dipula Income Fund Limited’s rating of BBB(ZA); Outlook Stable