Announcements

GCR affirms Premium Properties Limited’s rating of A-(ZA); accords Octodec Investments Limited an

Johannesburg, 01 October 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to Premium Properties Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively; with the outlook accorded as Stable.

Concurrently, GCR has accorded initial national scale ratings 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 has accorded the above credit rating(s) to Premium Properties Limited (“Premium”) and Octodec Investments Limited (“Octodec”) based on the following key criteria:

Effective 1 September 2014, Premium was acquired as a wholly owned subsidiary by Octodec (along with the joint venture fund IPS). Nevertheless, registration of the DMTN programme remains in the name of Premium Properties Limited, which remains a separate legal entity within Octodec (albeit not listed). It is anticipated that the DMTN programme will be guaranteed by the enlarged Octodec, with bondholders having recourse to the combined property portfolio. The process of amending the DMTN legal documentation and receiving the necessary approvals has begun, but until the process is complete, bondholders’ recourse remains solely to the properties within the Premium portfolio. Accordingly, a standalone rating for Premium continues to be accorded.

While the larger Octodec has been accorded the same national scale ratings as Premium, GCR considers the latter to be the best performing and lowest credit risk amongst the three funds that now comprise Octodec.

The acquisition of Premium by Octodec is positively considered as it creates a larger, more diversified portfolio, with 325 properties with a value in excess of R10bn. While the fund remains concentrated in Gauteng, Octodec’s dominance of the Pretoria and (to a lesser extent) Johannesburg CBDs is a key competitive advantage. This is complemented by the management expertise within City Property and the robust systems developed to operate in the inner city property market.

Few challenges in integrating Octodec and Premium are expected as the two funds have always had a common management team and have been using the same operating systems and process through City Property. While this will minimise any efficiency and scale benefits, cost savings on directors and listing fees are expected.

Both Premium and Octodec have evidenced double digit rental income growth over the review period, with a similar performance expected for the combined fund. However, the relatively more management intensive portfolio, combined with rising administrative costs has seen the operating margin slip to around 48%.

Combined gearing is relatively high, with debt having increased to R4.4bn at August 2014. On a pro-forma basis the LTV ratio would have registered at 40.4% at February 2014 and is likely to be around this level at August 2014, with gross debt to EBITDA of around 500%. This is above GCR’s 40% LTV benchmark and 400% for debt to EBITDA. Only around R300m in unutilised facilities were available at August 2014, with an additional R110m in cash. However, available facilities and commitments had increased to around R800m in September 2014 (16.5% of the total). While this is sufficient to meet projected capex costs, the fund evidences a high level of debt maturities during F15. Some comfort is taken in the fund’s banking relationships and committed shareholder base. Improving access to funding, and obtaining lower interest rates is a key objective of the merger.

For the combined Octodec, a reduction in gearing metrics to below GCR’s benchmarks is critical for positive rating action. In addition, the proven ability to extract value from the combined fund through cost savings and access to cheaper funding would be positively considered. Conversely, a deterioration of the inner city environment would likely bode negatively from a letting perspective, and impact the tenanting of new developments. A sustained increase in the LTV ratio to the 45% level could have a negative impact on the rating.

NATIONAL SCALE RATINGS HISTORY – Accorded to Premium Properties Limited

Initial rating (Aug/2011)
Long term: BBB+(ZA); Short term: A2(ZA)
Outlook: Stable

Last rating (Aug/2013)
Long term: A-(ZA); Short term: A1-(ZA)
Outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Committee Chairperson
Omega Collocott
Sector Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Property Funds, July 2014
Criteria for Rating Corporate Entities, updated August 2014
Premium rating reports (2011-2013)
Octodec rating report 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.

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.

Premium Properties Limited and 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 rating/s has been disclosed to Premium Properties Limited and Octodec Investments Limited with no contestation of the rating.

The information received from Premium Properties Limited and Octodec Investments Limited and other reliable third parties to accord the credit rating(s) included the 2014 audited annual financial statements for Premium (plus four years of comparative numbers), 2013 audited annual financial statements for Octodec (plus four years of comparative numbers), reviewed results for Octodec for the 6-months to 28 February 2014, presentations to investors for the period to 28 February 2014, shareholder circulars detailing the effects of the acquisition and the pro-forma position of the combined Octodec, details of the property portfolios, full details of combined Octodec funding facilities, corporate governance and enterprise risk framework, industry comparative data and regulatory framework, as well as other industry data.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

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.

EBITDA

Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.

Interest Rate

The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

Operating Margin

Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.

Operating Profit

Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.

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.

GCR affirms Premium Properties Limited’s rating of A-(ZA); accords Octodec Investments Limited an A-(ZA) rating.

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