Johannesburg, 29 March 2019 — 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:
The ratings are supported by the high quality of Resilient’s mid-sized South African retail property portfolio of R22.8bn, which continues to drive stable cash flows and earnings, with the overall portfolio 98.2% leased. The REIT also reflects a well-laddered lease expiry schedule, which together with distributions from the listed share portfolio should provide for sound income visibility, although potential pressure on rental rates and escalations on lease renewals is noted. Counterbalancing rating factors incorporate Resilient’s geographic, asset and tenant concentrations.
Whilst GCR recognises that Resilient’s large listed equity portfolio (1H FY19: R9.3bn) does provide a level of geographic diversity and liquidity support (as it is predominantly unencumbered), the high market risk attached is noted, and given the size of the interests held could further impede sellable values (also in view of contagion perceptions of the respective entities).
Resilient’s credit profile also benefits from its maintenance of low LTVs. Based on adjusted calculations (to exclude the BEE trust consolidation) the fund’s fair value LTV is estimated at 25.7% at 1H FY19 (IFRS: 37%). In GCR’s view, gearing levels remain within rating tolerance levels, even adjusting the calculation to stress for the Siyakha exposure, loans to staff and other (combined R68m at 1H FY19), as well as conservative haircuts to the listed portfolio/general market risk. Interest cover ratios have also been impacted by the Siyakha Trusts’ consolidation and should correct to more comfortable levels in the 3x-3.5x range after the envisioned restructuring of the trusts.
The REIT’s liquidity profile is considered strong in view of available sources of liquidity, including R2.5bn in unutilised committed facilities (incorporates a newly approved Nedbank facility) and the unencumbered listed securities portfolio (with a conservative hair cut applied). Furthermore, in implementation of the new Nedbank facility, R500m of cash on balance sheet will be released from collateral. This would cover obligations (debt and assumed capex) due over the next two years by at least 1x. This mitigates the liquidity weakness implied by Resilient’s mostly encumbered property pool (84%), although this entrenches relationships with a range of banking counterparties and good access to funding. However, capital market access (bond and equity markets) is yet to be properly proven in the wake of the notable repricing of the stock in 2018.
GCR notes that the recently released findings by the Financial Sector Conduct Authority (“FSCA”) cleared Resilient of allegations made in 2018 of insider trading. Investigations into market manipulation of its shares remain ongoing, and thus developments in this regard will continue to be monitored.
Positive rating action could arise if the REIT grows larger and more diverse, while maintaining solid property performance and credit metrics. Conversely, downward rating pressure could result from weaker liquidity management and/or persistently higher leverage or interest coverage weakness beyond GCR’s expectations. Any adverse findings by regulatory investigations, would also 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, 2010-18
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.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|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.|
|Haircut||The percentage by which the market value of a security used as collateral for a loan is reduced. The size of the haircut reflects the expected ease of selling the security and the likely reduction necessary to realised value relative to the fair value.|
|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.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|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.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|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 ratings 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.
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.
The information received from Resilient REIT Limited and other reliable third parties to accord the credit ratings include:
• the 2018 audited annual financial statements (plus four years/periods of comparative numbers);
• condensed unaudited interim financial statements for the six months ended 31 December 2018;
• a breakdown of facilities available and related counterparties at 31 December 2018 and 28 February 2019.
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.