Johannesburg, 16 July 2018 – Global Credit Ratings has today affirmed SA Corporate Real Estate Limited’s national scale Issuer ratings of A(ZA) and A1(ZA) in the long term and short term respectively. The ratings have been accorded a Positive outlook.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to SA Corporate Real Estate Limited (“SAC”) based on the following key criteria:
SAC continues to target niche segments of the property sector where it expects above average growth to be evidenced. The largest acquisition in this regard was the AFHCO portfolio in 2014, which gave the group substantial exposure to the inner city residential segment. The management skills developed are now being applied to suburban residential properties. At the same time, SAC gained cross border exposure through assets in Zambia and more recently entered the storage sector. The reliance on traditional sectors has lessened, providing the diversity to weather the current cyclical challenges. Although there are some concerns regarding SAC’s ability to efficiently manage an increasingly diverse portfolio over the economic cycle, the group’s partnerships with leading players in each segment serve to mitigate risk.
Ongoing redevelopments and extensions across all sectors, and the disposal of certain underperforming properties, has ensured the continued improvement in the quality of the traditional and AFHCO portfolios. This has been evidenced in rising property values and a decline the traditional portfolio vacancies to 2.3% at FY17 (FY16: 2.7%). However, large negative reversions have been necessary to retain and attract tenants, across the industrial, office and residential segments.
Overall income growth is likely to be sustained by acquisitions and new developments coming on line, as well as the improvements to the retail portfolio. Nevertheless, pressure on like-for-like rentals is likely to persist. Although the property expense ratio rose to 34.2% in FY17 (FY16: 33.8%) due to the growing portfolio, measures are being implemented to reduce expenditure despite rising administered costs.
The growth in the asset base saw debt increase from a low R1.7bn at FY13 to R5.8bn at FY17. SAC’s relatively conservative funding mix has sustained gearing metrics well within GCR’s benchmark for ‘A’ rated REITs, with the net LTV at 30.3% at FY17 (including investments) and net debt to EBITDA at 367% (FY16: 346%). Similarly gross and net interest coverage have been high over the review period (FY17: 3.9x; 4.9x respectively), indicating strong debt serviceability. Liquidity factors are moderate, with fairly low unutilised facilities of R575m at FY17, whilst the bulk of asset are encumbered. Nevertheless, this is mitigated by the demonstrated ability to raise funding from a diverse range of funders, well ahead of maturity.
SAC’s total committed capex of R2.6bn is relatively high and implies a element of development and tenanting risk, amidst the more challenging property environment. As this will be implemented over a two to three year period, GCR will continue to monitor the level of available facilities relative to capex and refinancing requirements.
Upward rating movement will be premised on bringing the current capex pipeline to fruition, whilst maintaining moderate gearing metrics, which could substantially increase income and lead to a positive rating movement. An improvement in the leasing environment could also serve to bolster earnings. Conversely, raising additional debt such that the LTV ratio is sustained above 35% could lead to negative rating action. Similarly, a further deterioration in the environment could negatively impact earnings, amidst the current development cycle, resulting in constrained debt service metrics.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2013)|
|Long term: A-(ZA), Short term: A1-(ZA)|
|Rating outlook: Positive|
|Last rating (July 2017)|
|Long term: A(ZA), Short term: A1(ZA)|
|Rating outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Danisile Munyai|
|Sector Head: Corporate and Public Sector Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Analyst: 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
SAC rating reports (2013-17)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S Corporates GLOSSARY
|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.|
|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.|
|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 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||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.|
|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.|
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 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 rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
SA Corporate Real Estate 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 rating/s has been disclosed to SA Corporate Real Estate Limited with no contestation of the rating.
The information received from SA Corporate Real Estate Limited and other reliable third parties to accord the credit ratings included;
- the 2017 Integrated Report and AFS, as well as preceding Integrated Reports and AFSs for four years;
- analyst presentations;
- a comprehensive listing of the company’s property portfolio;
- comprehensive details of SAC’s funding facilities as at 30/06/2017.
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 SA Corporate Real Estate Limited’s rating of A(ZA), Outlook Positive.