Johannesburg, 25 April 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Resilient REIT Limited of AA-(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 Resilient REIT Limited (“Resilient”) based on the following key criteria:
Recent adverse market events have given rise to reputational risks leading to some level of negative credit development. Nevertheless, as per GCR’s analysis, there is no impact to the current ratings or outlook at this time. GCR will closely monitor developments and would take appropriate rating action if risks to Resilient’s reputation and financial profile rise considerably. That said, the REIT’s ratings are supported by its large, quality property portfolio, valued at R22.5bn at 1H FY18, that mostly consists of properties that are highly competitive in their submarkets. Management has a track record of developing and operating large retail centres, that can sustain positive rental increases and low vacancy rates. This has translated into stable cash flows and earnings, which is considered a credit strength. Planned capex consists of lower-risk refurbishments and extensions, which should continue to support high tenant retention and rental growth.
Notwithstanding the sharp plummet in the share prices of listed securities, which has seen the equity portfolio value drop to R15.8bn as at 10 April 2018 from R29bn at 1H FY18, comfort continues to derive from the strong dividend flows earned from these holdings. Moreover, post the forthcoming Fortress-B share unbundling, Resilient will still hold a large equity portfolio of substantial value (c.R13bn at 10 April 2018), which is predominately unencumbered and could be accessed for liquidity needs.
Cognisance is taken of the fact that Resilient has not breached any of its bank and bond covenants since the collapse in the listed security values. This is due to the fact that the majority of debt is secured by the core property portfolio. Management has indicated that they continue to engage actively with all banking counterparties and that most facility LTV’s remain well below the respective covenant levels. This stems from management’s adherence to conservative financial policies throughout the review period, whereby Resilient has maintained very low LTV’s. Nevertheless, the marked erosion in the value of the listed securities post 1H FY18 has pushed up gearing metrics. Based on GCR’s adjusted calculations, the fund’s fair value LTV is estimated to trend higher at c.31% for FY18 (1H FY18: 20%). GCR believes that the REIT has enough rating headroom to withstand the current share price volatility, although a sustained breach of the LTV above c.35% could place downward pressure on the ratings.
GCR expects debt serviceability to decrease but remain sound. In this regard, the additional loans extended to the BEE trust to facilitate its restructuring will incur interest charges, while net interest will not be cushioned to the same extent by the interest previously received from these loans. All other things being equal, assuming the BEE restructure and Fortress-B share unbundling were implemented at 1H FY18, net interest cover would equate to c.5.6x, compared to the 12.8x reported.
Liquidity has become more critical given the diminished appetite for a capital raise until the negative sentiment settles. Nevertheless, with c.R500m cash on call at 1H FY18, Resilient appears to have sufficient excess cash on hand, while certain non-core assets could be sold. Comfort is also provided by R1.9bn in unutilised committed facilities that are already secured by property mortgages, whilst the REIT does not reflect material near-term refinancing risk.
Any positive rating action would depend on the REIT’s ability to continue to expand the scale and diversity of its portfolio with high-quality properties, thereby sustaining a strong operating performance. This would need to be accompanied by sustained low gearing metrics and increasing unencumbered assets to total assets. The ratings could come under downward pressure if credit risk metrics weaken such that the net LTV persists above c.35% and/ or net interest cover falls below 3.5x due to continued volatility in listed equities or adverse changes in its portfolio. Further, a weaker liquidity risk profile, or any adverse findings by regulatory investigations, would be negatively considered.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (June 2010)
Last rating (March 2017)
|Long term: A-(ZA)
Short term: A1-(ZA)
|Long term: AA-(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
Resilient Issuer rating reports, 2010-17
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY>
|Bond||A long term debt instrument issued by either a company, institution or the government to raise funds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|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.|
|Fair Value||The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.|
|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||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|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.|
|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.|
|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.|
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.
Resilient REIT 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 Resilient REIT Limited with no contestation of the rating.
The information received from Resilient REIT 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
- Analyst presentations 1H FY18
- A breakdown of debt facilities available and related counterparties at December 2017 and April 2018
- A full breakdown of the property portfolio at 1H FY18
- Financial forecasts for FY18 and FY19
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 Resilient REIT Limited’s rating of AA-(ZA); Outlook Stable.