Announcements Corporate Rating Alerts

GCR affirms National Scale Issuer Rating on Dipula Income Fund Limited at BBB+(ZA), Outlook Stable.

Rating Action

Johannesburg, 06 September 2019 – GCR Ratings (“GCR”) has affirmed the national scale Issuer rating accorded to Dipula Income Fund Limited (“Dipula”) of BBB+(ZA) and A2(ZA) for long and short term respectively, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Dipula Income Fund Limited Issuer Long Term National BBB+(ZA) Stable Outlook
Issuer Short Term National A2(ZA)

Rating Rationale

The ratings reflect Dipula’s continued sound performance and defensive positioning of its assets, which serves to offset concerns regarding the moderately high gearing and somewhat limited scale and diversification.

Dipula’s portfolio has demonstrated sustained sound performance, on the back of defensively positioned retail assets that have demonstrated higher trading densities amidst the weak macroeconomic environment. The fund also reflects a smoothed lease expiry profile underpinned by a high quality tenant base, which provides a level of predictability of revenue over the medium term. The sound performance has also been reflected in the average operating margin of c.65% over a five-year period. Note is also taken of above-inflation escalations of 7.3% achieved on the portfolio which will offset negative reversions on some large properties, and be supportive of organic rental income growth from the base portfolio. Nevertheless, GCR expects margin progression to be constrained by the challenging operating environment, which could curtail tenants’ ability to absorb higher all-in occupancy costs.

Gearing metrics remain moderately high, with the LTV being managed within a narrow range round the 40% mark over the five-year review period. Interest coverage and debt to operating income have improved somewhat on the back of the earnings contribution of the assets acquired in FY18, registering at 3.1x and 4.2x respectively at 1H FY19. As no significant capital expenditure or acquisitions are planned over the rating horizon, GCR expects both debt and credit protection metrics to remain largely within current range. The well-laddered debt maturity profile is positively considered, although the limited headroom on existing facility covenants, as well as concentration of funding counterparties somewhat constrains the ratings.

While Dipula has termed out the debt maturity profile, the liquidity assessment is constrained by the unavailability of unutilised committed facilities and the high asset encumbrance to existing funders, which leaves the REIT with limited sources of alternate liquidity. That said, the fund is still expected to achieve liquidity coverage of at least 1x in respect of its one-year requirements, on the back of small near-term debt maturities and negligible capital expenditure requirements. GCR is also of the view that long established funding relationships with highly rated domestic financial institutions somewhat mitigate the refinancing risk.

Outlook Statement

The Stable Outlook reflects GCR’s expectation that earnings will continue to evidence gradual growth over the rating horizon on the back of sound performance from the underlying portfolio, while credit protection metrics will largely remain within current range.

Rating Triggers

Positive rating action could arise from sustained sound rental and cash flow growth, achieved in tandem with a moderation in gearing metrics and enhanced liquidity. Conversely, a downgrade could arise from material earnings underperformance or higher leverage due to aggressive funding for growth. Failure to sustain a smoothed-out, medium term debt expiry profile would be viewed negatively.

Analytical Contacts

Primary analyst Tavonga Muchemedzi Analyst: Corporate Ratings
Johannesburg, ZA tavongam@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Real Investment Trusts and Other Commercial Property Companies, May 2019
GCR’s Country Risk Score report, published June 2019
GCR’s Corporate Sector Risk Score reports/Market Alerts, published June/July 2019
GCR’s Industry Research on the SA Commercial Property Market, July 2019

Ratings history

Dipula Income Fund Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Issuer Long term Initial National BBBZA) Stable Outlook September 2014
Issuer Short Term Initial National A3(ZA)
Issuer Long term Last National BBB+(ZA) Stable Outlook March 2019
Issuer Short Term Last National A2(ZA)

Risk Score Summary

Risk score 12.00
Operating environment 14.50
Country risk score 7.50
Sector risk score 7.00
Business profile -1.00
Portfolio quality -1.00
Management and governance 0.00
Financial profile -1.50
Leverage and Capital Structure -1.00
Liquidity -0.50
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00

Glossary

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.

Country Risk The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.
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.
DCM Debt Capital Market(s).
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.
Debt Service Ratio A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows

over a period to the sum of interest and principal payments over the same timeframe.

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.
Downgrade The rating has been lowered on its specific scale.
Facility The grant of availability of money at some future date in return for a fee.
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 shareholders’ funds, EBITDA or operating income.
Hedge A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.
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.
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
Market value An assessment of the property value, with the value being compared to similar properties in the area.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
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.
Rating Horizon The rating outlook period.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
REIT Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.
Rent Payment from a lessee to the lessor for the temporary use of an asset.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short Term Current; ordinarily less than one year.
Upgrade The rating has been raised on its specific scale.
Yield Percentage return on an investment or security, usually calculated at an annual rate.

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 Dipula Income 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.

Dipula Income 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 information received from Dipula Income Fund Limited and other reliable third parties to accord the credit ratings included:

  • the 2018 audited annual financial statements (plus four years of audited comparative numbers);
  • unaudited financial statements for the half year to February 2019
  • presentations, SENS announcements and roadshows;
  • a breakdown of debt facilities available and related counterparties at 30 June 2019 (including related debt covenants)
  • a breakdown of the property portfolios at 28 February 2019
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