Johannesburg, 24 April 2017 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Emira Property Fund Limited of A(ZA) and A1(ZA) for the long and short term respectively; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Emira Property Fund Limited (“Emira”, “the REIT”, or “the fund”) based on the following key criteria:
Subdued market demand and overcapacity has negatively affected letting in the office space, which has seen Emira’s vacancies in the sector rise to 16% in 1H F17 (FY16: 10.5%), exceeding national averages. This pushed up the overall vacant GLA to 7%, from 5.3% at FY16, while the overall reversion was further weighed down by pressure on new office rental rates. Together with rising utility costs, higher vacancies, and negative office rental reversions, this has adversely impacted net rental income flows and the fund’s operating profit margin. Pressures are expected to persist, amidst weak economic growth and constrained business confidence, which continue to curtail tenants’ ability to absorb above-inflation rental escalations across the REIT universe. GCR has, however, noted the remedial action being taken by Emira to ensure sustainable medium term income growth, including proactive letting activity, plans to repurpose certain assets, as well as ongoing redevelopments.
Continued rebalancing, underpinned by efficient capital recycling, has translated to a discernible enhancement in overall asset quality. Office in particular, was 75% comprised of Prime and ‘A’ grade properties at 1H FY17, and reported a mean value of R96m, versus the FY11 position, when the average asset value was just R52m, while ‘B’ and ‘C’ grade space accounted for 63% of the sector’s value. Together with continued enhancement of assets through phased capex projects, the property portfolio’s value had advanced to R13.3bn by 1H FY17, from R8.8bn at FY12. Albeit modest, Emira’s Growthpoint Australia (“GOZ”) investment provides a strategic liquidity buffer.
Gross debt rose by a cumulative R859m to R5.4bn in the 18 months to 1H FY17, mostly to fund capex projects. While R1.4bn has been freed up from property disposals since FY12, and the REIT’s acquisitions and redevelopments have been moderately leveraged, the net LTV ratio has risen progressively from historical lows to register at 38% at 1H FY17 (FY16: 35%). This remains below the 40% threshold for highly rated REITs, but ranges above levels reported by a number of similarly rated funds. Net debt to EBITDA spiked to 504% in 1H FY17 (FY16: 432%), and although it is expected to moderate over the rating horizon, it is projected to trend above the 400% benchmark.
Net interest cover registered at the 2.5x threshold for highly rated funds in 1H FY17, and is expected to trend within acceptable range in the medium term. Note is also taken of comfortable adherence to debt service covenants which should be sustained through the cycle. With respect to liquidity and funding flexibility, GCR has noted the advanced plans underway to enhance the debt maturity profile and to increase untapped facilities, as well as capital expected to be released from sale of certain properties. The unencumbered assets also imply sound recoveries for unsecured creditors, and are positively viewed.
Upward rating pressure could arise from sustained growth in earnings and free cash flows, underpinned by a stabilisation of vacancies, improved lease expiries, and margin enhancement. Conversely, the continued or material weakening of margins, debt serviceability and loan to value metrics due to persistent economic pressures, or aggressive leverage for acquisitions and capex projects, would warrant negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May 2011)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (April 2016)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Property Funds, updated February 2017
Criteria for Rating Corporate Entities, updated February 2017
Emira Issuer rating reports, 2011-16
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|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|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.|
|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.|
|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.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Portfolio||A collection of investments held by an 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.|
|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.|
SALIENT POINTS 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 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.
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 credit ratings have been disclosed to Emira Property Fund Limited with no contestation of the ratings.
The information received from Emira Property Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2016 audited annual financial statements (plus four years of audited comparative numbers);
- 1H 2017 unaudited interim accounts;
- a breakdown of debt facilities available and related counterparties at 1H 2017;
- a full breakdown of the property portfolio at 1H 2017 and
- industry comparative data.
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 Emira Property Fund Limited’s rating of A(ZA), Negative outlook