Johannesburg, 29 June 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Rebosis Property Fund Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively; with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Rebosis Property Fund Limited (“Rebosis”) based on the following key criteria:
The recent finalisation of key transactions to reposition the fund has led to the simplification of the REIT’s corporate profile, with the domestic property portfolio now comprised of wholly-owned assets valued at R18.9bn at 1H FY18 (FY17: R18.5bn). Nonetheless, these transactions have added significant debt and placed notable upward pressure on Rebosis’ gearing ratios. The consolidated net LTV stood at 46% and 48% in FY17 and 1H FY18 (vs. previous levels of below 40% on a standalone company basis), whilst net earnings based gearing ratios continue to trend around 6.5x. These levels fall beyond GCR’s pro forma expectations, as well as limits for ‘A’ band rated REITs. Thus, the ratings have been placed on Negative outlook.
In view of the above, management is prioritising efforts to de-risk the balance sheet over the next six months through R5.5bn in office asset disposals. The proceeds will be used to settle debt, which is expected to see the LTV trend below 35% by December 2018 as per management’s targets. Once concluded, this would enhance Rebosis’ credit risk profile. This notwithstanding, GCR considers the high execution risk involved given the amount of assets to be sold over a short period and the need to attract prices close to book value, which may be difficult in view of current market conditions despite potential buyers already having been identified.
Rebosis’ liquidity score also remains weak. The current high front-loaded and lumpy debt maturity profile is of concern (47% of debt due in 12 months at 1H FY18), exacerbated by the fact Rebosis does not maintain a facility buffer, whilst all the investment properties are encumbered. Some comfort is provided by the new longer tenor bank facilities recently secured and the refinancing of near-term maturities until the property sales proceeds are received to discharge the short term debt. Overall, the REIT will need to show a longer and smother debt expiry profile to sustain stronger ratings.
Although organic growth will be tempered by the rental foregone from office sales, the property portfolio is likely to sustain quality cash flows overall. GCR also notes the more clearly defined retail strategic direction, which should enable current management to show strong execution in augmenting organic performance of the base portfolio over the medium to longer term as the fund repositions itself. A level of comfort is derived from the retail assets’ medium-term lease expiry profile, above-inflation rental escalations and generally good vacancy profile. Continued active asset management will be required on the remaining office portfolio, as risks persist in both the private and sovereign segments.
Failure to reduce the LTV towards GCR’s 40% threshold and/or if the short dated maturity profile is not adequately addressed could lead to a downgrade. In addition, any weakness in the performance of the property portfolio could also warrant negative rating action. Conversely, the Negative outlook could be removed if Rebosis reduces it debt leverage to acceptable levels for the rating category and lengthens its debt maturity profile. Over the medium term, ratings uplift could derive from sustaining conservative leverage metrics and improving liquidity parameters, whilst demonstrating a strong and sustainable earnings trajectory.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (April 2015)
Last rating (June 2017)
|Long term: A-(ZA)
Short term: A1-(ZA)
|Long term: A-(ZA)
Short term: A1-(ZA)
|Outlook: Stable||Outlook: Evolving|
|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
Rebosis Issuer rating reports, 2015-17
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>
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing 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.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Loan to value||The principal balance of a loan divided by the value of the property funded. LTVs can be computed as the loan balance to current property market value, or the original property market value.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|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||Real Estate Investment Trusts are JSE listed companies that own operate and manage a real estate portfolio consisting of income producing property (office parks, industrial parks or retail centres).|
|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.|
|Tenor||The time from the value date until the expiry date of an instrument, typically a loan or option.|
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 rating was 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 rating 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 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 rating.
The information received from Rebosis Property Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2017 audited annual financial statements (plus prior four years of comparative numbers)
- 1H 2018 unaudited interim accounts to February 2018
- Analyst presentations 1H FY18
- A breakdown of debt facilities available and related counterparties post 1H FY18
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.