Johannesburg, 29 May 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Emira Property Fund of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) to Emira Property Fund based on the following key criteria:
Emira’s diversified property portfolio (valued at R9.7bn at 1H F14) has grown modestly in recent years. In order to improve the quality of the portfolio, Emira has undertaken targeted disposals. The portfolio re-alignment has yielded reduced vacancies (1H F14: 5.1%, FYE13: 5.6%), longer leases and rising values per square metre. However, lower vacancies have come at the cost of negative reversions in office and industrial leases. Emira’s financial performance has shown steady improvement since F12. Rental income grew an annualised 10.4% to R741m, and cost containment saw operating margins rising slightly to 57.7% (F13: 57.4%).
Emira’s gearing ratios have shown relative stability over time and are well within GCR benchmarks for ‘A’ rated property funds. At 1H F14, the LTV ratio was 31% (FYE13: 29%), and earnings-based gearing was 360% (F13: 353%), whilst net interest cover was comfortable at 3.5x (F13: 3.3x).
Of concern, however, was the high level of short-term debt (R1.9bn or 58% of total) and reduced liquidity at 1H F14. While this has been partly addressed by the new R500m RMB facility agreed in 2H F14 and the refinancing and term extension of maturing facilities, the ratio of unutilised facilities to 12 months’ cash requirements is far below the 1.2x that GCR expects for ‘A’ rated property funds. Even including the R626m in listed investments, potential liquidity facilities covered a low 56% of short-term debt at 1H F14. Going forward, Emira has committed to refinance maturing CP issues with two- or three-year paper to extend its debt maturity profile. Liquidity risk is also partly mitigated by the predictability of Emira’s cash needs, its track record of refinancing public issues, and overcollateralisation of existing facilities (implying they could be raised).
As GCR’s rating relates to senior unsecured debt, rising unsecured debt could negatively impact expected recoveries. At 1H F14, unsecured debt had risen to R1.2bn or 35% of total debt (compared to negligible levels prior to FYE12). Combined with high asset encumbrances, GCR considers unsecured bondholders’ risk to have increased and potential recoveries have reduced.
Positive rating factors include stable revenue and earnings growth over the medium term, driven by sustained lower vacancies, positive rental reversions, and improving tenant quality. However, failure to extend debt tenors (as indicated in debt forecasts), or to adequately address liquidity constraints could lead to a further decline in recovery prospects for unsecured debt holders and would be negatively viewed.
NATIONAL SCALE RATINGS HISTORY
Initial rating (May/2011)
Long term: A(ZA); Short term: A1(ZA);
Last rating (Jul/2013)
Long term: A(ZA); Short term: A1(ZA);
Senior Credit Analyst
Sector Head: Corporate & Public Sector Debt Ratings
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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 ratings have 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 audited annual financial statements for the year to 30 June 2013 (plus four years/periods of comparative numbers), internal and/or external management reports, full year budgeted financial statements for F14, condensed unaudited interim financial statements for the six months ended 31 December 2013, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
The ratings above were solicited by the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR affirms Emira Property Fund’s rating of A(ZA); Outlook Stable.