Johannesburg, 01 July 2019 – GCR Ratings (“GCR”) has affirmed Emira Property Fund Limited’s national scale Issuer ratings of A(ZA) and A1(ZA) in the long term and short term respectively, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Emira Property Fund Limited||Issuer Long Term||National||A(ZA)||Stable Outlook|
|Issuer Short Term||National||A1(ZA)||–|
The ratings are underpinned by a sound domestic operating environment, with regulatory quality and institutional strength, monetary policy flexibility and the rigour of the domestic financial system, combined with the below average cyclicality of the property sector counterbalanced by protracted macroeconomic pressures. GCR also considered the real estate investment trust’s (“REIT”) modest exposure to the US, with increasing diversification in this regard having the potential to improve the REIT’s country risk score in the medium term.
Emira’s intermediate scale and discrete asset concentration is counterbalanced by sectoral diversification and a moderately high exposure to national/multinational tenants in the underlying property portfolio, with cognisance taken of the enhanced performance mainly achieved through recycling capital from the more fraught property segments, which has progressively improved Emira’s average property values. In this regard, the REIT is expected to continue to show low vacancies and competitive rental rates across its portfolio, while direct earnings should continue to be anchored by medium-term lease expiries and sound tenant retention.
While the disposal of the R1.8bn Inani portfolio will see rental revenue decline, moderate base rental growth is expected to be sustained by sound escalations amidst high occupancies. The property portfolio’s margin progression is vulnerable to vagaries of the challenging domestic macroeconomic environment, including pressure as tenants continue to try to manage down their all-in occupancy costs, the potential for a deterioration in arrears and debtors, and additional costs of tenant retention initiatives. That said, the combined margin is expected to trend above 65%, with margin variability mitigated by a growing contribution from ZAR-hedge investments.
The repayment of over R1.2bn in debt since 1H FY19 has brought the LTV within range of management’s expectations of c.37% at FY19. Emira reflects moderate levels of gearing, although its leverage metrics are viewed to be vulnerable to higher perceived asset risk associated with loan advances. In this regard, gearing inclusive of adjustments for loan advances/market risk stresses and a put option in respect of Enyuka’s bank debt would trend in the 40-45% range. Interest coverage is expected to be somewhat impacted by higher costs associated with terming out debt, but this is counteracted by c.R3.3bn in refinancing and debt repayments in the year to June 2019, supporting materially reduced debt concentration, from 80% in expiries falling within the 18-month bucket at 1H FY18, to the c.46% that is now scheduled to mature through to FY21.
The liquidity profile is supported by stressed expectations of at least 1.0x coverage of 12 month’s requirements, strong coverage of unsecured debt by unencumbered properties and liquid securities, as well as proven access to DCM and a range of bank funding sources, with well-managed concentrations across facilities. That said, full coverage of at least six months’ unsecured commercial paper expiries by secured/committed bank facilities would give further comfort in this regard.
The Outlook is Stable. GCR expects portfolio quality to continue to be anchored by strong occupancy levels, competitive rental rates and escalations, while pressure on recurring margins is expected to be mitigated by contributions from the burgeoning international portfolio. GCR also expects the financial profile to be managed in line with moderately conservative gearing levels, with a sustained improvement in the debt maturity profile.
The rating could improve 1) as Emira profitably increases its scale in the US market, 2) due to a sustainable enhancement of recurring margins and cash flows, underpinned by strong property fundamentals, including low vacancy rates, a reasonable weighted lease expiry profile and cost rigour, 3) on the back of a sustained strengthening of debt service ratios alongside conservative leverage metrics, and improved secured or committed facility coverage of short-term DCM maturities.
Conversely, sustained increases in gearing metrics, materially reduced covenant headroom, or failure to consistently term out large debt maturities could place downward pressure on the ratings.
|Primary analyst||Patricia Zvarayi||Deputy Sector head: Corporate Ratings|
|Johannesburg, ZA||patricia@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector head: Corporate Ratings|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Entities, May 2019|
|Criteria for Rating Real Investment Trusts and Other Commercial Property Companies, May 2019|
|GCR’s Country Risk Score Report, June 2019|
|GCR’s South Africa Corporate Sector Risk Score Report, June 2019|
|Emira Property Fund Limited Credit Rating report, 2011-18|
Emira Property Fund Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Issuer Long Term||Initial||National||A-(ZA)||Positive Outlook||May 2011|
|Last||National||A(ZA)||Negative Outlook||May 2018|
|Issuer Short Term||Initial||National||A1(ZA)||–||May 2011|
RISK SCORE SUMMARY
|Country risk score||8.00|
|Sector risk score||7.00|
|Management and governance||0.00|
|Leverage and capital structure||-1.50|
|Commercial Paper||A negotiable instrument with a maturity of less than one year.|
|Committed Facility||A line of credit extended to a borrower that is guaranteed to be available for a specified period. The lender is obliged to lend the predetermined amount for the defined period under the terms of the agreement.|
|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.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Credit||A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company|
|Debt Service Ratio||A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows over a period to the sum of interest and principal payments over the same timeframe.|
|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.|
|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|
|Facility||The grant of availability of money at some future date in return for a fee.|
|Property||Movable or immovable asset.|
|Put Option||An option giving the holder the right, but not the obligation to sell the underlying instrument at an agreed price or strike price within a specified time. The seller or writer has the obligation to buy if the holder exercises the option to sell.|
|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 chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short-term rating||See GCR Rating Scales, Symbols and Definitions.|
|Securities||Various instruments used in the capital market to raise funds.|
|Settlement||Full repayment of an obligation.|
|Vacancy||In commercial property, usually expressed as a percentage of unoccupied floor space in relation to the GLA.|
|Gearing||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, by EBITDA or operating income.|
|Hedge||A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.|
|Issuer Ratings||See GCR Rating Scales, Symbols and Definitions.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|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.|
|Loan||A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.|
|Loan to value||The principal balance of a loan divided by the value of the property and other investments that it funds.|
|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.|
|Option||An option gives the buyer or holder the right, but not the obligation, to buy or sell an underlying financial asset at a pre-determined price.|
|Portfolio||A collection of investments held by an individual/institutional investor. 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 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The credit ratings have been disclosed to Emira Property 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.
Emira Property 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 Emira Property Fund Limited and other reliable third parties to accord the credit ratings included:
- the 2018 audited annual financial statements (plus four years of audited comparative numbers);
- 1H 2019 unaudited interim financial statements and presentations;
- presentations and SENS announcements in respect of material disposals, roadshows, and the US portfolio;
- a breakdown of debt facilities available and related counterparties at 31 March 2019 and 30 April 2019; and
- a breakdown of the property portfolio at 1H 2019.