Rating Action
Johannesburg, 15 April 2020 – GCR Ratings (“GCR”) has affirmed the national scale long-term and short-term Issuer ratings assigned to Emira Property Fund Limited (“Emira”, “the REIT” or “the fund”) of A(ZA) and A1(ZA), respectively, with a Stable Outlook. Concurrently, GCR has affirmed the long-term Issue ratings of AA+(ZA)(EL) assigned to Emira’s Senior Secured Notes, with a Stable Outlook.
Rating Rationale
The sound performance of Emira’s small but relatively diverse portfolio continues to underpin the ratings, despite heightened funding and asset risk faced by the South African property sector.
The rebalanced Emira portfolio is weighted towards retail (48%, versus 41% at December 2018), although the REIT also has moderate exposures to office, industrial and a small residential investment. At 1H FY20, the USA investment still accounts for 9% of the overall portfolio, providing only minimal diversification from the challenging domestic operating environment. That said, GCR has noted that the investment is considered core to the fund, and is expected to continue to be cautiously expanded over the medium term.
As anticipated, gross rental income contracted in 1H FY20, although the base portfolio continues to generate positive growth, on the back of sound escalations, high tenant retention and low vacancy rates. Margin progression, however, will continue to be constrained by a rising cost base, largely attributed to rates and utilities, amidst pressure on rental rates. This will be exacerbated in the short term by the restrictive measures to contain the COVID-19 pandemic.
Emira is moderately geared in comparison to peers, with an improved LTV ratio of 35.1% at 1H FY20, compared to the previous high of 37.9% at FY18, which registers at a slightly higher c.36.0% with the inclusion of the recently issued guarantee in respect of the fund’s BEE vehicle. Earnings based gearing remains in the 4.0x-5.0x range, while interest coverage has also been maintained comfortably above the 2.0x covenant limit, and was reported at 3.2x at 1H FY20, from 2.9x at FY19. Debt maturities in the coming 12-month period with an aggregate of R1.2bn are expected to be refinanced, thereby sustaining Emira’s relatively smooth debt maturity profile. That said, downside risks to the leverage assessment mostly arise from distortion in synthetic debt related to its long-dated cross-currency swaps, which, coupled with the rental agreement reached by the industry with tenants, elevate covenant risk. Emira’s 12-month liquidity coverage of approximately 1.0x is supported by diversified funding sources, demonstrated access to debt capital markets, and reasonable coverage of unsecured debt by the unencumbered asset pool. Cash is also being further preserved by implementing only committed and necessary capital expenditure until the operating climate stabilises.
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 in a fire-sale scenario, as modelled by GCR, assuming that secured debt is in issue at the maximum covenant LTV of 45%. The estimated overall recovery rate remained relatively unchanged at 96.7%, from 95.4% previously. As such, GCR maintained its four-notch uplift from the Issuer’s rating and affirmed the ratings of the Senior Secured Notes of AA+(ZA)(EL).
The Stable Outlook takes into account our expectations that Emira will sustain sound through-the-cycle earnings from its rebalanced portfolio. Coupled with initiatives taken to conserve cash and sustain liquidity, this should enable the REIT to withstand short-lived COVID-19 related disruptions.
Rating Triggers
Negative action may be taken if 1) protracted COVID-19 related disruptions have a larger impact on industry performance than envisaged 2) sustained currency volatility leads to a material deterioration in leverage 3) GCR considers the risk of accelerated debt repayments to be heightened due to unremedied covenant strain 4) the fund fails to maintain liquidity coverage of at least 1.0x. Positive rating action is considered unlikely in the current operating environment.
Analytical Contacts
| Primary analyst | Tinashe Mujuru | Credit Analyst |
| Johannesburg, ZA | TinasheM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Yohan Assous | Sector head: Structured Finance Ratings |
| Johannesburg, ZA | Yohan@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’s Country Risk Score report, published January 2020 |
| GCR’s SA Sector Risk Score report, published March 2020 |
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) | Stable Outlook | Jul 2019 |
| Short Term Issuer | Last | National | A1(ZA) |
| Stock code | Review | Rating scale | Rating* | Outlook/Watch | Date |
| EPF007 | Initial | National | AA(ZA) | Stable Outlook | Aug 2015 |
| Last | National | AA+(ZA)(EL) | Stable Outlook | Oct 2019 | |
| EPF016 | Initial | National | AA(ZA) | Stable Outlook | Sep 2018 |
| Last | National | AA+(ZA)(EL) | Stable Outlook | Oct 2019 | |
| EPF017 | Initial | National | AA(ZA) | Stable Outlook | Sep 2018 |
| Last | National | AA+(ZA)(EL) | Stable Outlook | Oct 2019 | |
| EPF018 | Initial | National | AA(ZA) | Stable Outlook | Dec 2018 |
| Last | National | AA+(ZA)(EL) | Stable Outlook | Oct 2019 |
* 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 | 14.00 |
| Country risk score | 7.50 |
| Sector risk score | 6.50 |
| Business profile | 1.00 |
| Portfolio quality | 1.00 |
| Management and governance | 0.00 |
| Financial profile | (1.00) |
| Leverage and Capital Structure | (0.50) |
| Liquidity | (0.50) |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 14.00 |
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; 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.
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 2019 audited annual financial statements (plus four years of audited comparative numbers);
- unaudited consolidated results for the six months ended December 2019;
- presentations, SENS announcements and roadshows;
- facility schedules at December 2019 and March 2020;
- secured property portfolio vacancies and arrears at December 2019;
- the latest property valuation reports.
