Johannesburg, 02 Jul 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Investec Property Fund of A-(ZA) and A1-(ZA) in the long and short term respectively; with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Investec Property Fund (“IPF”) based on the following key criteria:
Despite a reduction in Investec Limited’s (“Investec”) direct stake to 46% at FYE14 (FYE13: 50%), IPF’s branding underlines a beneficial relationship that provides an essential competitive advantage. The relationship is strengthened by the fund’s management by an Investec subsidiary, as well as access to; inter alia, facilities from Investec Bank, the group’s intellectual capital, systems and procedures, as well as relationships with Investec’s corporate clients. The fund has more than trebled in value over its short track record, with investments (including a 19% stake in Investec Australia Property Fund, “IAPF”) valued at R6.1bn at FYE14, from a listing value of R1.7bn.
The top 10 properties accounted for 44% of the property portfolio’s carrying value at FYE14 (FYE13: 55%), from 75% at FYE12. Despite the moderate decreases reported, the fund reflects a high proportion of single tenancies (47% of revenue, from 55% previously), while 70% of its rental income is derived from A-grade tenants (FYE13: 73%). Revenue growth is underpinned by extensive acquisitive activity, with rental income rising by 51% to R566m in F14. The higher weighting of retail centres saw the operating margin ease to 78.3% in F14 (F13: 78.5%), from a high of 79.2%. Rising cost pressures, especially from utilities, rates and taxes, are also expected to raise tenants’ all-in costs of occupancy despite efforts to rein in expenses. Vacancies remain very low at 2.6% of gross lettable area (“GLA”), with leases averaging 4.3 years at FYE14, reflecting the quality of assets acquired.
Growth in the past 2 years has been mainly funded by equity, with R2.1bn raised from a rights offer and an accelerated book build. As such, debt of R1bn (FYE13: R450m) translated to a gross loan to value (“LTV”) of 17% at FYE14 (FYE13: 11%). Gross debt to EBITDA of 231% was well below GCR’s comfort level (FYE13: 153%), with the spike due to an earnings drag from acquisitions finalised late in the year. Net interest cover remained robust at 9.5x (gross: 7.7x), with covenants comfortably adhered to. In June 2014, IPF announced agreements to purchase Dihlabeng Mall (for a R358m consideration) and the Foschini Building within Johannesburg’s inner city retail node (R77m). This will bring investments to around R7bn once the pending asset transfers are finalised. In this respect, a further R450m was raised from unsecured notes (with tenors ranging from 3-5 years). This increased debt to R1.6bn, bringing the gross LTV to around 23%. Liquidity is underlined by unutilised banking facilities, flexibility from the DMTN programme and enhanced cash generation. This is supported by the low percentage of encumbered properties (FYE14: 36%). While additional debt will be raised to fund new acquisitions, the LTV ratio is not projected to rise above 30%-35% in the medium term, and encumbrances are not expected to change materially.
Looking ahead, the fund’s ability to sustain robust medium term growth and operational performance despite the weakening operating environment would be positively viewed. Achieved in conjunction with conservative gearing metrics, this could place upward pressure on the ratings. However, challenges in integrating new acquisitions (due to deteriorating market fundamentals or unanticipated capital and investment risk) could warrant negative rating action. In addition, materially higher than projected debt and gearing levels would be negatively viewed.
For a detailed glossary of terms utilised in this announcement please click here
NATIONAL SCALE RATINGS HISTORY
Initial rating (Nov/2011)
Long term: BBB+(ZA); Short term: A2(ZA)
Last rating (Jul/2013)
Long term: A-(ZA); Short term: A1-(ZA)
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated August 2013
Criteria for Rating Property funds, updated July 2013
Investec Property Fund Limited rating reports, 2011-2013
Investec Property Fund Limited R450m Senior Secured Notes: New Issuance/Surveillance Reports 2012-2014
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.
Investec 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 rating/s has been disclosed to Investec Property Fund with no contestation of the rating.
The information received from Investec Property Fund and other reliable third parties to accord the credit rating included 2014 audited financial statements, (plus two years of comparative numbers), corporate governance and enterprise risk framework, 2015 profitability projections, industry comparative data and regulatory framework, as well as 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.
GCR affirms Investec Property Fund rating of A-(ZA); Outlook Positive.