Johannesburg, 21 August 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Octodec Investments Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Octodec Investments Limited (“Octodec” or the “REIT”) based on the following key criteria:
The ratings are underpinned by strong execution of the REIT’s strategy of redeveloping and upgrading properties to unlock value. This has seen the overall portfolio advance to R12.9bn across 309 properties at 1H FY18. Although the focus on inner city nodes implies a higher level of risk, cognisance is taken of Octodec’s strategic positioning and extensive experience in these nodes.
The REIT reflected a short-dated debt maturity profile at 1H FY18, with the weighted average expiry of its loans registering at 1.4 years. However, note is taken of initiatives being put in place to term out the expiry profile to well over two years, with almost R2bn in facilities in the process of being refinanced or already having maturities extended to between three to five years. Management is also putting in place mechanisms to ensure that a maximum of 30% of debt is allowed to mature in any one year, albeit these changes will elevate the all-in cost of debt somewhat.
Octodec reflects a moderately high level of encumbrances, with 75% of its properties pledged against its existing bank facilities. That said, cognisance is taken of ample collateralisation of facilities and longstanding bank relationships. With respect to liquidity, note is also taken of R838m in unutilised facilities at 1H FY18, which covered maturing commercial paper 1.1x.
The LTV ratio trended within a narrow range over the review period, registering at a stable 37% at 1H FY18. Looking ahead, management plans to manage the metric around the 35% mark, on the back of the disposal of non-core properties. Net debt to operating income remained elevated at 500% in 1H FY18 (FY17: 507%) and is likely to continue to trend in the 450%-550% range, given that the REIT registers a level of earnings drag due to vacancies inherent in certain properties meant for potential redevelopment.
The sizeable residential portfolio translates to a fairly short-dated lease expiry profile, with further pressure arising from monthly commercial contracts, a phenomenon expected to persist over the medium term. Core vacancies remained elevated, at 10.8% (FY17: 10.7%), albeit note is taken of the improvement in residential vacancies to 3.7% post February 2018 (1H FY18: 5.4%; FY17: 7.2%), amidst a challenging operating environment. While the baseline demand for key properties should support sound occupancy levels through the cycle, some variability in vacancies is likely to persist until the operating climate normalises.
Octodec registered YoY growth in contractual revenue of 3.5% in 1H FY18 (FY17: 5.3%), constrained by macroeconomic pressures. However, the letting of three key property developments will support growth in 2H FY18 and FY19. The REIT’s administratively intensive operating model is expected to see the operating margin continue to trend below the 60% threshold for highly rated funds, with further pressure arising from tenants’ curtailed ability to absorb increases in occupancy costs.
Looking ahead, upward rating migration could arise from medium term earnings progression, supported by sustained improvement in vacancies and competitive rental rates. Conservative gearing policies, strong liquidity and a medium term debt expiry profile. Conversely, failure to sustainably term out the debt profile would be negatively considered. In addition, constrained performance due to persistent macroeconomic pressures that curtail the REIT’s credit risk metrics would place downward pressure on the ratings.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (October 2014)
|Long term: A-(ZA)
Short term: A1-(ZA)
|Last rating (December 2017)
Long term: A-(ZA)
Short term: A1-(ZA)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, Updated February 2018
Global Criteria for Rating Property Funds and Commercial Real Estate Companies, updated February 2018
Octodec Issuer rating reports, 2014-17
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Commercial Paper||Commercial paper is a negotiable instrument with a maturity of less than one year.|
|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 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.|
|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.|
|Gearing||With regard to corporate analysis, 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 or by EBITDA.|
|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.|
|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.|
|Long-Term Rating||A long-term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|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.|
|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 Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Pledge||An asset or right delivered as security for the payment of a debt or fulfillment of a promise, and subject to forfeiture on failure to pay or fulfill the promise.|
|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.|
|Real Estate Investment Trust (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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short-term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms utilised in this announcement please click here
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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.
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 credit ratings have been disclosed to Octodec Investments Limited with no contestation of the ratings.
The information received from Octodec Investments Limited and other reliable third parties to accord the credit ratings included:
• Unaudited interim results for the six months ending 28 February 2018
• Integrated annual report 2017 (plus prior four years of comparative audited numbers)
• Investor presentations
• Treasury management report at 28 February 2018
- Loan schedules as at 28 February 2018 and 30 June 2018
• Breakdown of the property portfolio at 28 February 2018
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 Octodec Investments Limited’s rating of A-(ZA); Outlook Stable.