Johannesburg, 25 Apr 2016 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to Emira Property Fund Limited of A(ZA) and A1(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 Emira Property Fund Limited based on the following key criteria:
Successful execution of strategic interventions to reposition Emira as a growing mid-sized REIT is borne out by the noticeable improvement in value and asset quality of the property portfolio. To this end, the property portfolio’s value has increased by 48% since FYE12 to R13bn at 1H F16. Emira’s small investment in an offshore listed property fund has also provided some diversification benefits.
Note is also taken of the steady reduction in vacancies to 4.7% at 1H F16 from 10% at the start of the review period, with all sectors reporting vacancies below median national levels. This has been as a result of management’s increased focus on leasing in the office sector in particular, improving overall tenant retention and successful strategic sales of properties that reflected low occupancies. Given the progress in terms of letting activity, combined with significant acquisitions and completed upgrades, rental income surged by 16% to R1.7bn in F15 (compared to historical levels of below 8%). While growth moderated to an annualised 5% in 1H F16, planned redevelopments are expected to provide uplift in 2H F16 and F17. This, together with more rigorous cost management, has seen operating margins strengthen to the 60% level over the last 18 months (F12: 54%).
While gross debt has doubled over the review period to R4.7bn at 1H F16 to fund growth, gearing metrics remain conservative. At 34% at 1H F16, the net LTV is well within GCR’s 40% benchmark for highly rated property funds. This rating strength is, however, countered somewhat by the higher debt to EBITDA ratios. Nonetheless, comfortable gearing metrics are expected to be sustained notwithstanding the new acquisitions and upgrades underway. In 1H F16, net interest cover receded to 2.7x (F15: 2.9x), albeit remaining above the 2.5x threshold for highly rated funds.
Emira’s liquidity profile has shown a notable improvement over the past 18 months following the successful refinancing of certain facilities. This has lengthened the debt expiry profile, whilst the well spread maturity profile reduces refinancing risk. This is complemented by the extension of funding sources and unutilised facilities, together with the increasing level of unencumbered properties.
Progressive scale enhancement, together with sustained growth in rental income could result in positive ratings migration over the medium term. Continued improvement in asset quality, reflected by lengthening overall lease maturities, well managed vacancy rates and margin enhancement would also bode positively. Conversely, persistent or material deterioration in the credit risk profile, emanating from a more aggressive stance towards funding acquisitions/large capex projects, or pressure from weakening industry/macroeconomic fundamentals may warrant negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (May 2011)
|Long term: A(ZA)
Short term: A1(ZA)
Last rating (April 2015)
|Long term: A(ZA)
Short term: A1(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Criteria for rating property funds, updated April 2015
Emira issuer rating reports (2011-2015)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY>
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|EBITDA||Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.|
|Gross lettable area||Gross lettable area, or GLA, is a term used in commercial property to indicate the amount of floor space rented or available for rental.|
|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.|
|Leverage||Or Gearing, 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.|
|Loan to value||The principal balance of a loan divided by the value of the property funded. LTVs can be computed as the loan balance to current property market value, or the original property market value.|
|Liquidity Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.|
|REIT||Real Estate Investment Trusts are JSE listed companies that own operate and manage a real estate portfolio consisting of income producing property (office parks, industrial parks or retail centres).|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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.
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 rating.
The information received from Emira Property Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2015 audited annual financial statements (plus prior year of comparative numbers)
- 1H 2016 unaudited interim accounts
- A breakdown of debt facilities available and related counterparties at 1H 2016
- A full breakdown of the property portfolio at 1H 2016
- Other public information
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); Outlook Stable.