Announcements Financial Institutions Rating Alerts

GCR affirms Dipula Income Fund Limited’s ratings of BBB(ZA)/A3(ZA), and revises the outlook to Stable as credit metrics are expected to remain at moderate levels

Rating Action

Johannesburg, 07 July 2021 – GCR Ratings (“GCR”) has affirmed the national scale long term and short term issuer ratings of BBB(ZA) and A3(ZA) assigned to Dipula Income Fund Limited (“Dipula” or “the REIT”). The Outlook has been revised to Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Dipula Income Fund Limited Long Term Issuer National BBB(ZA) Stable
Short Term Issuer National A3(ZA)

Rating Rationale

The stable outlook on the ratings reflects GCR’s expectations that Dipula’s credit risk metrics will remain within the current rating thresholds. The REIT has performed better than initially anticipated and we expect a fairly resilient earnings performance to ensue despite the ongoing challenges faced by the South African property sector.

Although the REIT’s vacancy rate increased to 7.6% in 1H FY21 (FY20: 6.9%) led by its office exposure, collections through the 12-month period to April 2021 were strong, with an average of 98% of billings. As a result, operating profit at 1H FY21 was reported in line with the pre-COVID-19 level observed in 1H FY20. Whilst the operating environment remains uncertain, with the resurgence of infection rates bound to pressurise earnings as certain tenants are yet again faced with restricted trading conditions, GCR is of the view that the REIT will continue to report relatively sound performance metrics. To this end, whilst the portfolio is retail oriented (64% of revenue), it defensively focuses on convenience, rural and township centres that are mostly occupied by large national tenants, which performed well through periods of lockdown. Nevertheless, the relatively small size of its property portfolio, as well as its geographic concentration to South Africa does constrain our assessment.

To support its funding profile and ensure necessary cash resources are available to withstand the COVID-19 disruptions, Dipula deferred the payment of its dividend for FY20. The unpaid dividend was temporarily utilised to reduce outstanding revolving facilities, which helped reduce the LTV ratio to 35.7% at 1H FY21 (FY20: 38.9%). Dipula received a temporary dispensation to withhold the FY20 dividend, and its board is considering various options to balance its obligations to shareholders with the need to sustain financial flexibility. If a decision is taken to pay out the distribution in cash, the LTV ratio could rise to around 40%. Net debt to EBITDA registered at 4.0x at 1H FY21 (FY20: 4.5x), while interest coverage was stronger at 3.1x (FY20: 2.6x). Despite uncertainty about the dividend payment, credit protection metrics are likely to continue being reported within the range supportive of the rating

Liquidity coverage remains adequate, underpinned by available facilities of R340m, minimal short term debt maturities and limited capex plans. As a result, the uses-vs-sources coverage was unchanged at 1.2x. The REIT is currently in negotiations to extend the term on upcoming maturities, which would further improve its debt maturity profile. GCR notes that Dipula managed to dispose of some non-core assets despite the constrained environment during the review period, however, highly conservative assumptions were made in respect of assets held for sale at the interim reporting period as the market remains weak. A high proportion of encumbered properties, coupled with the potential for limited covenant headroom should a cash dividend be paid, further constrain the assessment.

Outlook Statement

The stable outlook reflects GCR’s view that Dipula should continue to display earnings resilience and that credit protection metrics will be consistent with expectations for the rating level. The outlook is also anchored around GCR’s assumptions that the LTV ratio is expected to trend in the 35% to 40% range and strong interest cover above 2.5x be maintained over the rating horizon.

Rating Triggers

Negative rating movement could arise if there is a sustained increase in the LTV ratio above 40%, which results in concerns about Dipula’s covenant compliance cushion; and/or if liquidity coverage deteriorates below 1.0x. A deterioration in performance metrics could also result in GCR lowering the ratings, whether due to internal factors or as a result of weakening in the operating environment.

Positive rating action is unlikely until the operating environment improves. However, if Dipula finalises facility negotiations and there is a meaningful reduction in debt, or if there is a marked improvement in earnings and property performance metrics, this would be positively considered.

Analytical Contacts

Primary analyst Tinashe Mujuru Credit Analyst: Corporate Ratings
Johannesburg, ZA tinashem@GCRratings.com +27 11 784 1771
Committee chair Sheri Morgan Senior Analyst: Corporate Ratings
Johannesburg, ZA morgan@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019
GCR Rating Scales, Symbols and Definitions, May 2019
GCR’s Country Risk Score report, June 2021
GCR’s SA Sector Risk Score report, April 2021

Ratings History

Dipula Income Fund Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term Issuer Initial National BBBZA) Stable Outlook September 2014
Short Term Issuer Initial National A3(ZA)
Long Term Issuer Last National BBB(ZA) Negative Outlook September 2020
Short Term Issuer Last National A3(ZA)

Risk Score Summary

Rating Components & Factors Risk scores
Operating environment 13.00
Country risk score 7.00
Sector risk score 6.00
Business profile (1.00)
Portfolio quality (1.00)
Management and governance 0.00
Financial profile (2.00)
Leverage and Capital Structure (1.00)
Liquidity (1.00)
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00
Total Risk Score 10.00

Glossary

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Bond A long-term debt instrument issued by either a company, institution or the government to raise funds.
Capital The sum of money that is invested to generate proceeds.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Concentrations A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.
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.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
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. In insurance, it refers to an individual or company’s vulnerability to various risks
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.
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.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
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 See GCR Rating Scales, Symbols and Definitions.
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.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
REIT Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.
Rent Payment from a lessee to the lessor for the temporary use of an asset.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Weighted Average An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Dipula Income Fund Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

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 information received from Dipula Income Fund Limited and other reliable third parties to accord the credit ratings included:

  • the 2020 audited annual financial statements (plus four years of audited comparative numbers);
  • the interim results at 28 February 2021;
  • investor presentations, SENS announcements and roadshows;
  • breakdown of debt facilities available and related counterparties.


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