Johannesburg, 27 September 2019 – GCR Ratings (“GCR”) has affirmed the long-term national scale Issuer rating assigned to Octodec Investments Limited (“Octodec” or “the REIT”) of A-(ZA) and revised the short-term Issuer rating to A2(ZA) (on the change in GCR’s Rating Scales, Symbols and Definitions, May 2019); with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Octodec Investments Limited||Issuer Long Term||National||A-(ZA)||Stable Outlook|
|Issuer Short Term||National||A2(ZA)|
Octodec’s portfolio quality is constrained by its concentration to properties in the inner cities of Pretoria and Johannesburg, which target lower to middle LSM tenants. The REIT has developed strong management processes and systems to manage its large and higher risk tenant base, reflected in bad debts being contained around 1% of revenue. Moreover, the high foot traffic in the inner cities has allowed Octodec to attract a number of national retailers to its properties. Aside from some national retailers and government departments, the majority of leases are short term, particularly in the residential sector. Core vacancies remain high, at around 11.3% at 1H FY19, as is expected to remain largely stable at the full year FY19.
The weaker operating environment has impacted Octodec’s performance, with low rental income growth since FY17, and continued pressure on direct property costs. As the operating environment is expected to remain constrained, GCR expects only moderate income growth from Octodec, albeit that this may be offset by continued pressure on expenses. Accordingly, the REIT is expected to report relatively stable cash flows in FY19 and FY20.
Gearing levels have been moderately high but stable over the review period. Specifically, the net LTV has trended around 38%, while net debt to EBITDA has been around 5x. Similarly net interest cover remains around 2.2x. Funding concentration is evidenced, with just two bank funders and the largest accounting for more than 50% of facilities. That said, Octodec has demonstrated ongoing access to capital markets and is finalising the introduction of third funder which should address concentration somewhat. No meaningful increase in debt utilisation is expected over the next 12 months.
Octodec is in the process of extending its debt maturities, both through new funding lines and by early refinancing existing facilities. This would improve the weighted average maturity profile to around 2.9 years (1H FY19 2.2 years), albeit this still remains shorter than some of its peers. A further concern is the short term nature of the DMTN issuances but this is covered by unutilised facilities. Accordingly, the REIT still achieves liquidity coverage in excess of 1x, which GCR views as adequate..
GCR has introduced a positive peer adjustment to better reflect the credit strengths of Octodec, being the strong risk protocols underpinning its stable operating performance, which are not apparent in a review of traditional portfolio quality and performance metrics.
The stable outlook reflects the view that that Octodec will continue to manage it portfolio in a conservative manner, thereby generating steady cash flows, despite the weaker operating environment. GCR does not foresee a notable change in the gearing profile or credit protection metrics.
Upward rating progression is not expected over the rating horizon, but would be dependent on substantial growth and diversification of the portfolio, leading to sustained earnings growth. Conversely, negative rating action could result from 1) continued earnings strain due to the weak operating environment 2) a deterioration in credit protection metrics 3) a decrease in the debt maturity profile.
|Primary analyst||Eyal Shevel||Sector head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Patricia Zvarayi||Deputy Sector head: Corporate Ratings|
|Johannesburg, ZA||Patricia@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|
|GCR’s Country Risk Score report, published June 2019|
|GCR’s SA Sector Risk Score report, published June 2019|
|GCR’s Industry Research on the SA Commercial Property Market, July 2019|
Octodec Investments Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Issuer Long term||Initial||National||A-(ZA)||Stable Outlook||Nov 2014|
|Issuer Short Term||Initial||National||A1-(ZA)|
|Issuer Long term||Last||National||A-(ZA)||Stable Outlook||Feb 2019|
|Issuer Short Term||Last||National||A1-(ZA)|
Risk Score Summary
|Country risk score||7.50|
|Sector risk score||7.00|
|Management and governance||0.00|
|Leverage and Capital Structure||-1.00|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Concentrations||A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.|
|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.|
|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|
|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||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.|
|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.|
|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 Outlook||See GCR Rating Scales, Symbols and Definitions.|
|REIT||Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.|
|Renewal||The re-establishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed.|
|Rent||Payment from a lessee to the lessor for the temporary use of an asset.|
|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.|
|Weighted Average||An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.|
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 Octodec Investments 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.
Octodec Investments 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 Octodec Investments 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 results for 1H FY19
- results presentations;
- a breakdown of debt facilities available and related counterparties at 31 August 2019.