Johannesburg, 15 Nov 2013 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to Hospitality Property Fund Limited of BBB-(ZA) and A3(ZA) respectively; with the outlook accorded as Positive.
RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on Hospitality Property Fund Limited based on the following key criteria:
With a portfolio of 27 hotels, Hospitality Property Fund Limited (“HPF”) is South Africa’s largest multi-brand hotel group. The fund’s investment strategy has increasingly shifted to focus on marque properties, targeting the upper end of the business and leisure market as such hotels proved more resilient during the recent industry slump than the smaller, leisure focussed hotels. In line with this, HPF acquired the Radisson Blu Gautrain hotel for R443m during F13. Concentration towards the top five properties remained high at 60% at FYE13 (FYE12: 62%), while the ten largest properties accounted for 82% of portfolio value (FYE12: 81%).
Rental income rose 9% to R356m in F13, as HPF benefitted from the improved performance at the underlying hotels. In this regard, higher occupancy levels were evidenced and average room rates increased. With expenses well maintained, operating income climbed 18% to R326m in F13. Net profit was also bolstered by a lower tax charge, as the high interest rate on the bridging finance in F12 was not repeated. As a result, net interest cover recovered to 2.5x in F13, from the low 1.6x in F12.
At FYE13, total debt rose to R1.6bn, as HPF tapped the bond market under its R2bn DMTN programme. While net debt to EBITDA remains above the 400% benchmark for highly rated property funds, it is expected to decline over the coming year. Moreover, with the LTV around 35%, the fund evidences a more sustainable capital structure.
HPF is on track to slightly exceed its original forecast for F14 , due to the stronger tourism market. Including the acquisition, rental income is likely to be around 10% to 15% higher. However, cognisance is taken of the volatile nature of the hospitality industry, where economic shocks or security concerns can have a sudden and severe effect on occupancy levels and pricing.
A rating upgrade would be driven by sustainable growth in rental income and operating profit. Moreover, such growth would likely have a positive impact on property valuations, which in turn would reduce gearing levels. In contrast, an internal or exogenous shock to HPF or the industry, could see earnings decrease substantially and lead to negative property revaluations. Liquidity constraints could also potentially affect operations. Were gearing to rise above GCR’s benchmark, even to fund an acquisition, this would be negatively considered.
NATIONAL SCALE RATINGS HISTORY | |
Initial rating (Nov/2012) | |
Long term: BBB-(ZA); Short term: A3(ZA) | |
Outlook: Stable | |
Last rating (Nov/2012) | |
Long term: BBB-(ZA); Short term: A3(ZA) | |
Outlook: Stable | |
ANALYTICAL CONTACTS | |
Primary Analyst | |
Eyal Shevel | |
Sector Head: Corporates | |
+27 11 784 1771 | |
shevel@globalratings.net | |
Committee Chairperson | |
Marc Chadwick | |
Regional Sector Head: Insurance | |
+27 11 784 1771 | |
chadwick@globalratings.net | |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria for Rating Corporate Entities
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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.
Hospitality 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 rating/s has been disclosed to Hospitality Property Fund Limited with no contestation of the rating.
The information received from Hospitality Property Fund Limited and other reliable third parties to accord the credit rating included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), 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, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.