Announcements

GCR affirms SA Corporate Real Estate Fund’s rating at A-(ZA); Outlook Positive.

Johannesburg, 30 Jul 2014 — Global Credit Ratings has today affirmed the national scale ratings assigned to SA Corporate Real Estate Fund at A-(ZA) in the long term and A1-(ZA) in the short term; with the outlook retained as Positive.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to SA Corporate Real Estate Fund (“SAC”) based on the following key criteria:

While historically the portfolio has comprised a large proportion of B or C grade assets, recent disposal and acquisitions, combined with value accretive refurbishments to existing properties, have seen a general improvement in the quality of assets. Added to this was the acquisition of the Afhco portfolio (effective 1 July 2014), providing SAC with exposure to inner city residential and retail property. Although inner city properties and their tenant base adds to the risk profile, the class has outperformed over recent years, with very low vacancies and negligible bad debts, as a result of the excess demand for space. Afhco also offers substantial development opportunities, which would see the class make up around 12.5% of the portfolio.

Key performance metrics continued to improve in F13, with the vacancy rate declining across all property classes, higher tenant retentions and overall positive reversions on renewals. As a result, while total rental income decreased slightly in F13 (due to earnings drag from disposals), income from the standing portfolio rose by 6.7%. However, earnings continue to be impacted by rising administered charges, which resulted in a steady decline in the EBITDA margin from 61.9% in F10 to 58.1% in F13. Moreover, the sector remains highly competitive, constraining pricing power. With few disposals during F13, and a number of large acquisitions, stronger rental growth is expected in F14, whilst the internalisation of the management company should ease margin pressure.

SAC has reported very low gearing metrics over the review period, but as the Afhco transaction (as well as other recent acquisitions) has been funded substantially by debt, the LTV is likely to rise above 30%, with net debt to EBITDA registering between 350% and 400%, levels well within GCR’s benchmarks for ‘A’ rated funds. Interest coverage will remain strong at between 4x and 5x. SAC’s portfolio encumbrance was 50% at FYE13 and has declined to around 41% post Afhco, well below the industry norm. This improves funding flexibility, and implies strong recoveries would be available for unsecured creditors.

Positive rating action will likely result from the integration of recent acquisitions and the demonstrated ability to extract sustained medium to long term growth from the portfolio, even amidst a more challenging property sector. The bedding down of proposed debt funding facilities would also be positively considered. Conversely, challenges integrating Afhco could have a negative impact on SAC’s earnings, and exhaust substantial management time. Further large increases in debt to fund development/acquisitive opportunities could see gearing metrics rise above GCR’s benchmarks if not accompanied by equity issuances. Such factors could lead to negative rating action.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Jun/2013)
Long term: A-(ZA); Short term: A1-(ZA);
Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Committee Chairperson
Marc Chadwick
Sector Head: Insurance
(011) 784-1771
chadwick@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated August 2013
Criteria for Rating Property funds, updated July 2013
SA Corporate Real Estate Fund rating report 2013

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.

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.

SA Corporate Real Estate Fund 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 rating/s has been disclosed to SA Corporate Real Estate Fund with no contestation of the rating.

The information received from SA Corporate Real Estate Fund and other reliable third parties to accord the credit rating(s) included the 2013 audited annual financial statements (plus four years of comparative numbers), details of the Afhco transaction, full year budgeted financial income statement, full details of funding facilities and proposed refinancing, corporate governance and enterprise risk framework, industry comparative data and regulatory framework.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Bad Debt

When a business recognises that a debt is unlikely to be repaid. It is classified as defaulted and written-off as an expense in the profit and loss account.

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.

Income Statement

A summary of all the expenditure and income of a company over a set period.

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.

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 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.

GCR affirms SA Corporate Real Estate Fund’s rating at A-(ZA); Outlook Positive.

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