Johannesburg, 7 Apr 2016 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to Resilient REIT 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 (“GCR”) has accorded the above credit ratings to Resilient REIT Limited, previously Resilient Property Income Fund Limited (“Resilient”) based on the following key criteria:
Resilient has demonstrated a successful growth track record through acquisitions and development, underpinned by a clear strategy focusing on dominant regional retail centres. This has seen its direct portfolio double in size since FYE12 to R20bn at 1H F16. Portfolio diversification is supported by strategic holdings of listed property equities, which exposes the fund to other segments. More significantly, substantial investments in international listed property funds have further broadened Resilient’s exposure, providing a significant base of hard currency earnings.
Despite the weaker operating environment, rental stability should be supported by the high quality of its tenant base, well-spaced lease maturity profile, combined with above inflation contractual escalations. Furthermore, the fund continues to display very low vacancies (1.7% at 1H F16), attesting to the strong demand for its lettable space. The fund’s complementary two-prong investment approach has been borne out by the robust growth recorded in operating income in F15 and 1H F16. Whilst the property expense ratio is likely to remain elevated compared to historic years (given the increasing burden of rising administered costs), earnings uplift is expected to continue to emanate from the REIT’s foreign interests (albeit this may be impacted by adverse currency movements).
Resilient’s conservative funding profile follows from the successive share issuances, totalling nearly R6bn, over the last 18 months, which has seen gearing metrics moderate to review lows. In this regard, the net LTV ratio (based both on IFRS and the true fair value gearing position) has been maintained well below 30%, with net debt to EBITDA receding below 4x. Both metrics are within GCR’s benchmarks for highly rated property funds. Even excluding listed investments, the LTV based solely on direct properties was below 40% in FYE15 and 1H F16. In view of the challenging operating environment and interest rate upcycle, management has confirmed that the conservative gearing stance will be maintained. Credit risk is further mitigated by the protection to interest serviceability stemming from the very conservative hedge position.
The REIT’s funding flexibility is considered high, given the R2.6bn in unutilised committed credit facilities. This is complemented by access to diversified sources of funding, as well as adequate headroom under its debt covenants, indicating that banking lines can be increased against existing properties. Further liquidity support emanates from Resilient’s entirely unencumbered share portfolio, which at R18bn at fair value (excluding the Hammerson derivative) in 1H F16 (FYE15: R13.5bn) covered total debt by a strong 2.6x (FYE15: 2.3x).
The current rating fully reflects Resilient’s robust profitability and low credit risk metrics. Nevertheless, a greater than expected increase in vacancies or negative rental growth could exert downward pressure on the rating. A material increase in gearing would also be negatively considered.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (June 2010)
|Long term: A-(ZA)
Short term: A1-(ZA)
Last rating (April 2015)
|Long term: A+(ZA)
Short term: A1(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Criteria for rating property funds, updated April 2015
Resilient rating reports (2010-2015)
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>
|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.|
|Gross lettable area||Gross lettable area, or GLA, is a term used in commercial property to indicate the amount of floor space rented or available for rental.|
|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||Or Gearing, 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 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.|
|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).|
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.
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 2015 audited annual financial statements (plus prior year of comparative numbers)
- 1H 2016 unaudited interim accounts
- A breakdown of debt facilities available and related counterparties at 1H 2016
- A full breakdown of the property portfolio at 1H 2016
- Other public information
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 A+(ZA); Outlook Stable.