Announcements Corporate Rating Alerts

GCR affirms Emira Property Fund’s national scale issuer rating of A(ZA)/ A1(ZA), whilst maintaining the Negative Outlook due to increased funding risk amidst a weak operating environment

Rating Action

Johannesburg, 06 May 2021 – GCR Ratings (“GCR”) has affirmed the national scale long- and short-term issuer ratings assigned to Emira Property Fund Limited (“Emira”, or “the REIT”) of A(ZA) and A1(ZA) respectively, with a Negative Outlook. Concurrently, GCR has affirmed the long-term issue ratings of AA+(ZA)(EL) assigned to Emira’s Senior Secured Notes, with a Negative Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Emira Property Fund Limited Long Term Issuer National A(ZA) Negative Outlook
Short Term Issuer National A1(ZA)
Senior Secured EPF016 Notes Long Term Issue National AA+(ZA)(EL) Negative Outlook
Senior Secured EPF017 Notes Long Term Issue National AA+(ZA)(EL) Negative Outlook
Senior Secured EPF018 Notes Long Term Issue National AA+(ZA)(EL) Negative Outlook
Senior Secured EPF021 Notes Long Term Issue National AA+(ZA)(EL) Negative Outlook

Rating Rationale

The Negative Outlook on Emira’s rating continues to reflect the challenging operating environment, exacerbated by the fund’s exposure to the risky office segment and rising leverage. This increases refinancing risk over the coming 12 months.

Emira’s property portfolio had a higher vacancy rate of 5.9% at 1H FY21 (FY20: 4.1%), largely driven by the office segment where vacancies doubled as the consolidation of space requirements by tenants remains a major constraint on demand. 1H FY21 revenue declined by 2.8% year-on-year due to negative rental reversions on new and renewed leases, as well as continued rental concessions to assist certain struggling tenants (albeit much lower than the relief provided in FY20). Together with rising property expenses, this has placed renewed strain on margins, with the operating margin reducing to a review period low in 1H FY21. Although there is an increased risk of additional tenant failures and higher debtor costs, the fund has aimed to mitigate this by increasing provisions to 68.9% of debtors (FY20: 40.5%). GCR still positively regards the granular tenant mix and offshore portfolio to be supportive of the portfolio quality assessment.

The gearing profile has deteriorated, with the LTV ratio increasing to 43.0% at FY20, albeit moderating slightly to 42.5% at 1H FY21 relative to 35.1% reported at 1H FY20. The sharp increase was a result of the combined effect of a drop in the fair value of properties, combined with unfavourable foreign exchange movements on the cross-currency swaps. In GCR’s view, there is limited scope for the significant reduction of the LTV ratio in the short to medium term. Emira has R1.3bn in bank facilities and debt capital market issuances maturing before December 2021. The elevated refinancing risk in the current environment is mitigated by the demonstrated successful refinance of c.R500m in debt since 1H FY21 and proactive engagement with funders for the early refinance of additional facilities by year-end. Nevertheless, GCR views the generally high level of short-term maturities in most years under review to be an ongoing rating constraint. The low interest rate environment has helped to manage the interest cover ratio at 3x, comfortably within covenant limits.

Emira continues to limit capital expenditure and deferred a small portion of the 1H FY21 distribution to year end, subject to performance. The REIT increased available unutilised facilities to R800m, which together with cash flow and refinance facilities (conservatively assumed by GCR) were sufficient to maintain a 12-month liquidity coverage of approximately 1.0x. Although Emira still has comfortable headroom to their covenants, the reduced level of unencumbered properties dampens its capacity to secure additional facilities to shore up liquidity should the need arise.

The Senior Secured Notes’ ratings are derived by applying a notching-up approach, starting from the long-term issuer credit rating. The number of notches granted depends on the recovery prospects in the event of default and enforcement of the security in a fire-sale scenario, as modelled by GCR. One of the properties in the secured portfolio was sold during the period under review and Emira has added two new properties to the pool. Nonetheless, the LTV ratio increased to 39.2%, reducing headroom to the covenant limit. The estimated overall recovery rate remained very strong at 93.9%, qualifying for a four-notch uplift from the issuer’s rating. As such, GCR affirmed the ratings of the Senior Secured Notes of AA+(ZA)(EL).

Outlook Statement

The Negative Outlook reflects Emira’s heightened refinancing risk, amidst ongoing pressures in the South African property environment, particularly in the office segment. This has resulted in rising gearing metrics, and a reduction in the weighted average maturity profile.

Rating Triggers

Negative action may be taken if 1) the LTV ratio remains above 40% over the medium term or increases above 45%, 2) the debt maturity profile is not sustainably improved 3) the liquidity coverage reduces below 1.0x, 4) GCR considers the risk of accelerated debt repayments to be heightened due to unremedied covenant strain.

Positive rating action is considered unlikely in the current operating environment, although the outlook may be revised to stable if credit protection metrics improve.

Analytical Contacts

Primary analyst Tinashe Mujuru Credit Analyst: Corporate Ratings
Johannesburg, ZA TinasheM@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 Real Estate Investment Trusts and Other Commercial Property Companies, May 2019
Criteria for Rating Secured Bonds, November 2018
GCR Rating Scales Symbols and Definitions, May 2019
GCR’s Country Risk Score report, March 2021
GCR’s SA Sector Risk Score report, April 2021

Ratings History

Emira Property Fund Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long Term Issuer Initial National A-(ZA) Positive Outlook May 2011
Short Term Issuer Initial National A1(ZA)
Long Term Issuer Last National A(ZA) Negative Outlook September 2020
Short Term Issuer Last National A1(ZA)
Stock code Review Rating scale Rating* Outlook/Watch Date
EPF016 Initial National AA(ZA) Stable Outlook September 2018
Last National AA+(ZA)(EL) Negative Outlook September 2020
EPF017 Initial National AA(ZA) Stable Outlook September 2018
Last National AA+(ZA)(EL) Negative Outlook September 2020
EPF018 Initial National AA(ZA) Stable Outlook December 2018
Last National AA+(ZA)(EL) Negative Outlook September 2020
EPF021 Initial National AA+(ZA)(EL) Negative Outlook September 2020
Last National AA+(ZA)(EL) Negative Outlook September 2020

* GCR’s Secured Note ratings are based on an estimate of the expected loss in the event of an Issuer default and are a function of the estimated probability of default of the Issuer and the potential losses that may be incurred. As such, the ratings carry an ‘EL’ suffix. The ratings are derived by applying a notching approach, starting from the long-term Issuer rating. Should the Issuer rating or the estimated recovery rate calculated by GCR change, the ratings assigned to the Senior Secured Notes may also change. Prior to the publication of GCR’s Rating Scales, Symbols and Definitions in May 2019, Secured Note ratings did not carry the ‘EL’ suffix.

RISK SCORE SUMMARY

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 (1.50)
Leverage and Capital Structure (1.00)
Liquidity (0.50)
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 12.50

Glossary

Collateral Asset provided to a creditor as security for a loan or performance.
Cost Ratio The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.
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 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.
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.
DMTN Domestic Medium-Term Note.
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
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 EBITDA, the value of investments, or by operating income.
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 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.
Lessee The party that enjoys temporary use of a corporeal thing.
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.
Loan To Value 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.
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.
Long Term Rating See GCR Rating Scales, Symbols and Definitions.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
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.
Proceeds Funds from issuance of debt securities or sale of assets.
Property Movable or immovable asset.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Horizon The rating outlook period
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.

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 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, tele-conferences 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 2020 audited annual financial statements (plus four years of audited comparative numbers);
  • unaudited consolidated results for the six months ended December 2020;
  • presentations, SENS announcements and roadshows;
  • facility schedules at December 20 and March 2021;
  • secured property portfolio vacancies and arrears at February 2021;
  • security documents in respect of new secured properties;
  • December 2020 compliance certificate.
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