Johannesburg, 26 Oct 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Hospitality Property Fund Limited of BBB(ZA) and A3(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 Hospitality Property Fund Limited (“HPF”) based on the following key criteria:
HPF is South Africa’s largest multi-brand hotel group. Amidst the volatile hospitality industry, HPF has been successful in shifting its portfolio towards higher value marque assets targeting the comparatively stable upper end of the travel sector, whilst disposing of those that are highly reliant on one source of income. However, this has resulted in high portfolio concentration, with the largest hotel (Westin) accounting for 28% of portfolio value and the top five and ten properties for 64% and 86% of value respectively (FYE14: 62%; 83%). Concentration is partly a factor of the superior occupancy levels and room rates achieved at these hotels, which has seen their valuations increase while those of the general portfolio have decreased.
Rental income increased by 2% to R433m in F15, but fell 6% below budget. With administrative costs in line with budget, this had a knock-on effect to operating income, which rose by a lesser 3% to R393m, 7.2% short of budget. The lower income relative to budget was attributed to the underperformance of several hotels that are more dependent on conferencing revenue, as well as the impact of weaker than expected tourist arrivals and curbs on government spend. With these factors still impacting the sector, relatively low growth is projected for F16.
Gross debt rose by R85m to R1.86bn at FYE15, but the appreciation in the property portfolio value resulted in a slight decline in the gross LTV to 36.2% (FYE14: 36.7%), whilst the high cash holdings saw the net LTV reduce to 32.2% (FYE14: 32.8%). Weaker earnings, however, resulted in a slight rise in gross debt to EBITDA to 473% (FYE14: 463%), and net interest cover decreased to 2.4x (F14: 2.6x), albeit remaining in line with the metrics reported since FYE12 and with those reported by similarly rated REITs. HPF met its debt covenant limits at FYE15, which require the portfolio LTV ratio to remain below 40% and net interest cover to be above 2x.
HPF’s short term liquidity is underpinned by the high cash balance and expected inflows from disposals, which will enable it to settle or refinance its short term obligation. However, the more significant refinancing risk will arise in F17, when R600m in secured DMTN notes mature. Thus, it is critical that refinancing arrangements are made well in advance of maturity and that there is no over reliance on a single source of funding.
GCR considers the potential transaction with Tsogo Sun Holdings Limited (“Tsogo”) to be ratings positive for HPF, given the scale and expertise that Tsogo would bring. Nevertheless, as there are currently scant details regarding the size or terms and conditions of the transaction, as well as the potential regulatory hurdles or objections the deal may encounter, no ratings uplift can be given until the transaction is finalised.
The successful conclusion of the Tsogo deal could substantially improve HPF’s corporate profile, giving it greater scale and financial support. In the absence of the Tsogo deal, the ratings are unlikely to improve until there is an improvement in the current environment and meaningful growth in rental income and operating profit. Conversely, a deterioration of market conditions that negatively impacts hotel revenue and thus rental income could result in negative ratings action. Failure to adequately and timeously refinance maturing facilities on favourable terms would also be ratings negative.
| NATIONAL SCALE RATINGS HISTORY | |
| Initial rating (November 2012) | |
| Long term: BBB-(ZA); Short term: A3(ZA) | |
| Outlook: Stable | |
| Last rating (November 2014) | |
| Long term: BBB(ZA); Short term: A3(ZA) | |
| Outlook: Stable | |
ANALYTICAL CONTACTS
| Primary Analyst | |
| Eyal Shevel | |
| Sector Head: Corporate & Public Sector Debt Ratings | |
| (011) 784-1771 | |
| Shevel@globalratings.net | |
| Committee Chairperson | |
| Patricia Zvarayi | |
| Senior Analyst | |
| (011) 784-1771 | |
| patricia@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Criteria for Rating Property Funds, updated April 2015
Hospitality Property Fund Limited rating reports (2012-2014)
Senior Secured Bond Issuance reports, May 2013, April 2014, and February 2015
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
| bond | A long term debt instrument issued by either a company, institution or the government to raise funds. |
| Budget | Financial plan that serves as an estimate of future cost, revenues or both. |
| Corporate Governance | Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders. |
| 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. |
| Credit Rating | An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories. |
| Credit Rating Agency | An entity that provides credit rating services. |
| 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. |
| Default | Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default. |
| EBITDA | EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations. |
| 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. |
| 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 Rate | The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis. |
| LC | An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations. |
| Liquidity Risk | The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market. |
| 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. |
| Maturity | The length of time between the issue of a bond or other security and the date on which it becomes payable. |
| National Scale Rating | The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state. |
| Operating Profit | Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs. |
| Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
| 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. |
| 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. |
RATING LIMITATIONS AND DISCLAIMERS
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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(s) included;
- Audited financial results of Company per 30 June 2015
- Four years comparative audited financial statements
- Full details of the property portfolio
- Full details of funding facilities
- Corporate governance and enterprise risk framework
- 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.
