Announcements

GCR affirms SA Corporate Real Estate Limited’s rating of A(ZA), Outlook Stable.

Johannesburg, 28 July 2017 – 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 Stable 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 substantially reconfigured its portfolio over the past four years to affirm its position as a diversified, mid-sized REIT. Whilst the group continues to develop its traditional competencies in the retail, industrial and commercial sectors, the acquisition of AFHCO has given it exposure to the inner city residential and retail sectors, whose performance is less correlated to the traditional sectors. Furthermore, the Zambian acquisition gives SAC a platform to develop in markets outside South Africa.

The ongoing redevelopment of existing assets (and sale of those with weaker prospects) has seen a substantial increase in the quality of SAC’s portfolio. Combined with a stronger focus on tenant retention, this has allowed SAC to maintain vacancy rates below the industry average. Whilst some rental reversions have been necessary in the industrial and commercial portfolios, retail assets continue to show strong escalations. However, tenants in the AFHCO portfolio have become much more price sensitive, resulting in a spike in standing portfolio residential vacancies to 9.6% at FY16. This is of concern as much of the development pipeline is focused on bringing new residential units to the market. Mitigating the inner city concentration are the transactions with major developers, which will see AFHCO acquire and manage residential units in other areas, primarily in Gauteng.

Net property income has risen strongly over the review period due to a mix of acquisitions and redevelopments, as well as due to rental escalations. At the same time, costs have been tightly controlled, with the overall property expense ratio falling to 33.8% in FY16 (FY15: 34.5%). Measures are continuously being implemented to monitor and reduce administered costs, which make up around 63.5% of property costs, although operating expenses have little room to decrease as they already accounted for a low 12% of costs in FY16.

SAC has received strong support from funders, as evidenced by the oversubscribed rights issues that have raised almost R2bn in the past two years, as well as from debt funders, with debt facilities climbing from R1.1bn in FY12 to R4.6bn in FY16. The relatively conservative funding mix, has seen the net LTV remain around 30% and net debt to EBITDA below 400%, both well within GCR’s benchmarks for an ‘A’ rated REITs. Although SAC had R900m in unutilised debt facilities at FY16, much of this has since been drawn, with R341m unutilised. Nevertheless, funding flexibility is supported by the wide range of financial institutions who currently provide facilities to SAC.

SAC is forecasting gearing to increase in FY17 and FY18, given the large acquisition pipeline (primarily residential units), albeit the LTV ratio should remain in the 33-37% range. However, income should be bolstered by a number of large redevelopments that will begin contributing during 2H FY17 and into FY18.

Upward rating movement will be premised on the successful transfer and tenanting of the new residential properties. This would bolster property income and help mitigate the slowdown in other property sectors. It would also demonstrate SAC’s ability to leverage existing capabilities to enter new market segments. Conversely, if tenting the residential acquisitions is slower than expected, amidst the more challenging operating environment, SAC’s debt coverage metrics could be prejudiced, particularly as debt is expected to increase to fund the acquisition of the residential complexes.

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (July 2013)  
Long term: A-(ZA), Short term: A1-(ZA)  
Rating outlook: Positive  
   
Last rating (July 2016)  
Long term: A(ZA), Short term: A1(ZA)  
Rating outlook: Stable  

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate and Public Sector Ratings
(011) 784-1771
shevel@globalratings.net
 
Committee Chairperson
Patricia Zvarayi
Senior Analyst: Corporate Ratings
(011) 784-1771
patricia@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2017

Global Criteria for Rating Property Funds, updated February 2017

SAC rating reports (2013-16)

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 Corporates GLOSSARY

Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
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.
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.
Rights Issue One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held. 
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.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.

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 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 rating(s) included;

  • the 2016 Integrated Report and AFS, as well as preceding Integrated Reports and AFSs for four years;
  • 2016 results presentation;
  • a comprehensive listing of the company’s property portfolio;
  • comprehensive details of SAC’s funding facilities.

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 Stable.

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