Johannesburg, 8 Apr 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Emira Property Fund (to be superseded by Emira Property Fund Limited)* of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.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 has accorded the above credit rating(s) to Emira Property Fund* (“Emira”) based on the following key criteria:
Emira’s improved performance in F14 and 1H F15 evidences the success of its initiatives to strengthen operations and return to a sustainable growth path. These initiatives have been underpinned by a strong focus on property management, which has seen vacancies decreased from 11.1% at FYE11, to 4.5% at FYE14 and 4.9% at 1H F15, with improvements across all classes. Accordingly, vacancy metrics are now below the industry average. Although this has been achieved at the cost of negative rental reversions on both new leases and renewals, the quantum of the reversions has begun to decline. Moreover, a combination of disposals acquisitions and enhancements has seen an increase in both the size and quality of property assets, as evidenced by rising average rental rates. Following some large acquisitions over the past 12 months, combined with strong asset price appreciation, Emira’s investment portfolio has increased by 56% to R13.2bn since FYE11, making it one of the larger mid-sized South African property funds.
On the back of improved property performance, Emira reported strong growth in like for like income in F14, which was further bolstered by acquisitions in 1H F15, suggesting that total revenue is likely to rise by 15-20% in F15. Whilst municipal expenses continue to increase above inflation, Emira’s administrative expenses have been well contained. As a result, the property management expenses ratio decreased to 35.2% in 1H F15 (F14: 38.6%), albeit that operating profit has remained around 56%, but below the 60% benchmark.
Although net debt has increased substantially over the review period, gearing metrics remain moderate. At 34.7%, the net LTV is well within GCR’s 40% benchmark for A-band rated property funds, while net interest cover of 2.5x is in line with the benchmark. Debt to EBITDA has risen above the 400% benchmark, but this can be attributed to the lagged impact of acquisitions on earnings. Interest cover and debt to EBITDA should strengthen slightly at FYE15 and into F16.
Emira’s liquidity position has improved substantially, with short term debt accounting for less than 15% of total debt following the refinancing of facilities post 1H F15. While the proportion of unutilised facilities remains low, funding flexibility is enhanced by the wide diversity of banks with which Emira now has facilities, as well as the mix between stable longer dated facilities and flexible revolving facilities. R2.2bn of its properties are unencumbered, as is the R707m stake in Growthpoint Properties Australia Limited. This is positively considered and suggests improved recoveries for unsecured bond holders.
Positive rating action is likely to derive from continued robust property performance leading to sustained income growth over the medium term, as well as the successful implementation of capex projects and value enhancing acquisitions. Conversely, further economic weakness could see vacancies in the core office segment increase, which would have a negative impact on income and warrant negative rating action. Delays in implementing large capex projects, or tenanting newly developed space, could also increase funding pressure.
* Emira Property Fund is in the process of converting to a corporate REIT (effective date expected 1 July 2015), which will result in a change of its name to Emira Property Fund Limited. While GCR’s credit rating is currently accorded to Emira Property Fund, it will automatically convert to a rating for Emira Property Fund Limited on the date the amalgamation becomes effective.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May/2011)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (May/2014)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Criteria for Rating Property Funds, updated July 2014
Emira rating reports (2011-2014)
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.
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 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 rating/s has been disclosed to Emira Property Fund with no contestation of the rating.
The information received from Emira Property Fund and other reliable third parties to accord the credit rating(s) included the 30 June 2014 audited annual financial statements (plus four years of comparative numbers), reviewed interim financial statements for the 6 months to 31 December 2014, full details of the property portfolio, full details of current and proposed funding facilities, draft amalgamation agreement, corporate governance and enterprise risk framework (as outlined in the integrated annual report), 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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER
|Annual Report||A status report on the current financial condition of a company. It usually includes the chairman’s report, the auditor’s report and detailed financial statements. It is issued once a year for shareholders to examine before the annual general meeting (AGM). In many markets, comprehensive Integrated Reports covering a wide spectrum of information have replaced traditional annual reports.|
|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.|
|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 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.|
|Loan To Value (LTV)||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.|
|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.|
|Real Estate Investment Trust (REIT)||A REIT is a company that owns or finances income-producing real estate. REITs are subject to special tax considerations and generally pay out all of their taxable income as distributions to shareholders.|
GCR affirms Emira Property Fund’s* rating of A(ZA); Outlook Stable