Johannesburg, 29 June 2017 — Global Credit Ratings has today affirmed the national scale ratings accorded to Rebosis Property Fund Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively, with the outlook accorded as Evolving.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Rebosis Property Fund Limited (“Rebosis, the REIT, or the fund”) based on the following key criteria:
GCR has considered the finalisation of the Billion and Ascension transactions, which has facilitated the simplification of the underlying structure to comprise of a domestic portfolio of properties valued at R18.2bn, wholly-owned asset and property management businesses, and a 67.5% stake in SEM/JSE AltX-listed New Frontier, whose portfolio was valued at c.R4.4bn as at 1H FY17. As such, the consolidated balance sheet has advanced markedly from R4.6bn at FY12, to R24.4bn at 1H FY17, albeit falling below prior guidance of c.R28bn due the Billion transaction being revised to R5bn from R6bn, and R856m in goodwill stripped out per GCR’s criteria.
Rebosis continues to present elevated group gearing metrics, with the distortion largely ascribed to the consolidation of New Frontier, which operates in a market with inherently higher leveraged property exposures. The Billion acquisition raised group debt to R12.6bn at 1H FY17 (FY16: R9.3bn), and while the consolidated net LTV ratio has improved from levels of c.50% seen since FY15, it remains slightly above the 40% threshold for highly rated REITs. The effect of New Frontier debt on consolidated earnings based gearing and interest coverage has also been exacerbated by the structure of the Billion acquisition. In mitigation, GCR has considered that New Frontier debt is non-recourse to Rebosis, which limits its exposure to the value of its investment and debt raised to fund the same.
Company debt has risen from just R1.7bn at FY12 to c.R10bn post the full absorption of Ascension effective May 2017. As such, while company gross and net LTVs have ranged between 25-39% since FY12, the pro forma metric registers just above the 40% mark. In this regard, management has earmarked certain non-core investment assets for disposal in order to sustain the consolidated LTV to c.35% in the medium term. Accordingly, the ratings remain on Evolving Outlook until planned transactions crystallise, translating to a normalisation of group LTV metrics. The directly-owned properties reflect robust fundamentals, with weighted average lease expiries ranging from 3.6 to 4.7 years, a predominantly ‘A’ grade lessee profile, in-force escalations of at least 7% and low vacancies, on the back of active asset management.
While the REIT continues to evidence strict cost rigour supporting atypically low property expense ratios, the operating margin is expected to remain below review highs, trending between 60-70%, given the higher retail exposure, pressure on utility tariffs, rates and taxes amidst macroeconomic challenges that continue to curtail tenants’ ability to absorb above-inflation escalations and place pressure on market rental rates.
Rebosis has limited untapped facilities on hand, and has a sizeable amount of debt to refinance in the next 12 months. The bond programme lends funding flexibility, although note is taken of restrained DCM activity amidst investor uncertainty. Some comfort is taken from ample collateralisation of debt, which implies strong recoveries for unsecured creditors.
Looking ahead, upward rating pressure would arise from the reduction of debt, sustaining consolidated LTVs below 40%, with debt to EBITDA and gross interest cover approximating the 400% and 2x respective limits for highly rated REITs. An improved debt maturity profile would also be positively considered. Conversely, group LTVs persisting above the 40% threshold, and/or material earnings deterioration due to adverse regulatory outcomes or the weak operating climate would warrant a downgrade.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2015)||Last rating (June 2016)|
|Long term: A-(ZA); Short term: A1-(ZA)||Long term: A-(ZA); Short term: A1-(ZA)|
|Outlook: Stable||Outlook: Evolving|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Sheri Few|
|Senior Analyst: Corporate Ratings||Senior Analyst: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
Global Criteria for Rating Property Funds, updated February 2017
Rebosis Issuer Reports, 2015-16
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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 Rating Agency||An entity that provides credit rating services.|
|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.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|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.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|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.|
|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.|
|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.|
|Secured Debt||Debt backed with or secured by collateral to reduce lending risk and thus the interest rate charged.|
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.
Rebosis Property Fund Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of the information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Rebosis Property Fund Limited with no contestation of the ratings.
The information received from Rebosis Property Fund Limited and other reliable third parties to accord the credit ratings included:
• audited financial results for 2016 and four years of audited, comparable financial statements;
• unaudited interim results for the six months ending 28 February 2017;
• a breakdown of facilities available and related counterparties at 28 February 2017; and
• SENS notices and circulars on the Billion Group and Ascension transactions, inter alia.
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 Rebosis Property Fund Limited’s rating of A-(ZA); Outlook Evolving.