Johannesburg, 28 February 2019 — Global Credit Ratings (“GCR”) has today affirmed the national scale Issuer ratings assigned to Octodec Investments Limited of A-(ZA) and A1-(ZA) for the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
GCR has accorded the ratings to Octodec Investments Limited (“Octodec” or the “REIT”) based on the following key criteria:
Octodec has successfully termed out a sizeable proportion of its debt, materially alleviating refinancing risk over the rating horizon. In addition, the ongoing terming-out of imminent maturities is expected to further smooth out the REIT’s debt expiry profile.
The liquidity profile is, however, currently constrained by the lack of committed facilities, a highly encumbered investment portfolio, and the sizeable exposure to a single financial institution (56% of total debt at FY18). That said, GCR has considered Octodec’s well-entrenched banking relationships, potential moderation of the primary bank exposure and access to liquidity from other untapped bank facilities. Unutilised facilities cover debt capital market (“DCM”) maturities to February 2020, albeit falling short of full short-term debt coverage. Additional funding flexibility from DCM access and support for Octodec’s unsecured issuances is positively noted, although the overall exposure remains mostly short-dated.
The LTV ratio continues to trend comfortably below covenants, with a view to being managed at a maximum of 35% in the medium term. Earnings based gearing ratios, however, still evidence drag from vacancies. Pressure on interest coverage and gearing covenants could arise from a higher cost of funding (due to the sustained rigour in managing the debt expiry profile) in a weak earnings growth environment, the lumpy lease expiry profile and, as continues to be evidenced in the industry, downward pressure on property values.
The residential portfolio and a relatively sizeable exposure to SMMEs translates to an inherently short-dated lease expiry profile, with further pressure arising from month-on-month sovereign leases that are in the process of being regularised. Specifically, 50% of the REIT’s GLA had FY19 lease maturities as of August 2018, with a further 13% expiring in FY20, and much lumpier exposures based on rental income.
Furthermore, core vacancies remain elevated, registering at 11.6% at FY18 (FY17: 10.7%). Earnings and capital risk are exacerbated by the gap between core and total vacancies in a downcycle, as income is forfeited in the short term due to mothballed properties and the deferral of material (re)developments and upgrades until more favourable yields can be obtained. GCR, however, notes the baseline demand for strategically-positioned properties and the REIT’s competitive rental rates, which are expected to support moderately strong cash flows through the cycle.
Contractual income growth will continue to be restrained by the macroeconomic climate, with certain structural features, such as the residential exposure limiting the average rental escalation. Operating margin progression is also expected to be restricted by pressure arising from tenants’ curtailed ability to absorb higher all-in occupancy costs.
Upward rating migration may be achieved by renewed strong earnings growth, while maintaining conservative gearing policies and enhancing the liquidity profile. This would likely entail a sustainable reduction in vacancy rates, cost rigour, and competitive weighted average rental rates. Conversely, failure to sustain a smoothed-out, medium term debt expiry profile would be negatively considered. An erratic earnings profile that curtails the REIT’s debt service and overall credit risk metrics could also result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (October 2014)||Last rating (August 2018)|
|Long term: A-(ZA)
Short term: A1-(ZA)
|Long term: A-(ZA)
Short term: A1-(ZA)
|Outlook: Stable||Outlook: Stable|
|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, 2014-18
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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 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.|
|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.|
|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.|
|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.|
|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||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.|
|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.|
|Portfolio||A collection of investments held by an individual investor or institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|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.|
|SMME||Small to medium and micro-scale enterprises.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, 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.
The information received from Octodec Investments Limited and other reliable third parties to accord the credit ratings included:
- Integrated annual report 2018 (plus prior four years of comparative audited numbers)
- Investor presentations
- Treasury management report at 31 August 2018
- Loan schedules as at 31 August 2018, 31 December 2018, 31 January 2019 and related projections
- Breakdown of the property portfolio and an encumbrance profile at 31 August 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.