Johannesburg, 30 November 2016 — 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”) based on the following key criteria:
The ratings reflect Octodec’s strong positioning in Gauteng’s inner city nodes across multiple sectors, including office, retail, industrial and residential, with the total portfolio value (including joint ventures) reaching R12.1bn at FYE16. The residential market, in particular, is viewed as the primary growth area for the fund, given favourable urbanisation trends that are driving solid demand for units in Octodec’s core markets. Octodec’s properties are all located in Gauteng with a concentration, by rentals, of around 32% in the Tshwane CBD. Nonetheless, the fund displays a highly granular tenant base, whilst its dominant position in key nodes allow it to be a price setter in terms of residential rentals, which should sustain revenue growth.
The asset quality of the REIT’s property portfolio is mixed owing to its strategy to acquire under-managed properties for their turnaround potential. Management has demonstrated their ability to redevelop properties and unlock value in the portfolio over time. Central to this strategy is that acquisitions are only made in its core area of expertise, while developments are undertaken gradually and in line with market demand. While competition for property in the inner city is intensifying, the REIT is well positioned to grow organically through its existing property redevelopment pipeline.
Driven largely by core rental income growth, revenue rose by 7.8% to R1.8bn in F16. Although the F16 operating margin of 52% remains below levels prior to the merger, operating profit is substantially higher than historic years. In this regard, strict control of property expenses remains a priority in the face of the more administratively intense infrastructure required for Octodec’s business model.
In order to fund growth, debt ramped up to R4.8bn at FYE16 (FYE15: R4.4bn). This saw Octodec’s LTV ratio rise close to the 40% upper limit of its stated target band and GCR’s benchmark for highly rated REITs, which constrains funding flexibility. As such, Octodec plans to manage its net LTV ratio down over the rating horizon, by raising equity and through some asset disposals. Earnings based gearing remains above the 400% benchmark, partially attributable to earnings drag as a result of slow development progress. Positively, Octodec refinanced most of its short term debt in F16 and there are no material debt maturities in the next 12 months. Liquidity is further supported by the longstanding banking relationships and adequate committed unutilised facilities.
Given its current size, geographic concentration and gearing metrics, there is limited potential for a further ratings upgrade in the short to medium term. Ratings downside could result if the LTV ratio rises and remains above 40%. Any external factors that impact the desirability of the key nodes Octodec operates in could also negatively impact the rating.
NATIONAL SCALE RATINGS HISTORY
Initial rating (October 2014)
|Long term: A-(ZA)
Short term: A1-(ZA)
Last rating (November 2015)
Long term: A(ZA)
Short term: A1(ZA)
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Criteria for Rating Property Funds, updated May 2016
Octodec issuer rating reports (2014-2015)
Premium issuer rating reports (2011-2014)
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
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|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.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|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.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
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.
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 rating.
The information received from Octodec Investments Limited and other reliable third parties to accord the credit ratings included:
- The F16 audited annual financial statements (plus prior four years of comparative numbers)
- The F16 integrated annual report
- Investor presentations
- Treasury management report at FYE16
- Breakdown of the property portfolio at FY16
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.