Johannesburg, 25 July 2016 — Global Credit Ratings has today affirmed the national scale long term debt rating for SA Corporate Real Estate Limited at A(ZA), whilst the national scale short term debt rating has been affirmed at A1(ZA). The ratings have been accorded a stable outlook.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to SA Corporate Real Estate Limited (“SAC”) based on the following key criteria:
SAC has successfully restructured its property portfolio over the past three years and now evidences a well-diversified portfolio, with income underpinned by quality industrial and retail assets. Complementing this is the diversification offered by the AFHCO inner-city residential portfolio, which provides exposure to the residential property class, and to the unique dynamics of inner-city retail and commercial space. The investment in three Zambian properties adds further diversification, albeit it remains relatively small in a group context.
Ongoing upgrades and extensions to industrial and retail assets have resulted in an improvement in key performance metrics, with an increase in the per square meter valuations across the portfolio and a decrease in vacancies in the traditional portfolio to 2.4% of GLA at FYE15 (FYE14: 3.1%). Only the commercial portfolio saw higher vacancies but this remains a small component of SAC’s total portfolio. Accordingly, net property income rose to exceed R1bn in F15, more than 40% above the F13 level, on the back of a full year’s contribution from AFHCO and strong growth in rental income from existing assets. In addition, strict cost management has seen the property expense ratio decrease over the past three years, despite rising administered costs.
With the growth in the asset base, debt utilisation has increased from the low R1.1bn at FYE12 to R3.8bn at FYE15. Notwithstanding, the net LTV of 29% (including the Zambian properties) and the net debt to EBITDA of 337.1% at FYE15 (FYE14: 28.8%; 331.4%) are conservative and remain within GCR’s gearing benchmarks for ‘A’ band rated REITs. Interest coverage remained high at 4.1x at FYE15 (FYE14: 4.3x). 87% of interest rate exposure is hedged, further mitigating risk.
SAC evidences strong liquidity characteristics, with over R300m in cash holdings in all years under review due to the ongoing asset sales. The company also had R500m in unutilised revolving facilities at FYE15, and calculated around R600m in debt funding capability (based on the potential to raise the LTV ratio to 40%), excluding the investment in the Zambian properties. In addition, positive investor sentiment towards SAC has enhanced its ability to raise capital through equity issues, as evidenced by the R1.2bn raised via a rights issue in FYE15.
The domestic property environment continues to deteriorate, given the lack of economic growth. This may negatively impact rental reversions in the industrial portfolio in the medium term, although retail reversions are likely to remain strong. Growth opportunities are underpinned by the AFHCO portfolio, which has a 3-year development pipeline and benefits from strong demand for inner-city residential space. SAC should also benefit from the ongoing redevelopments to core retail properties.
Upwards rating movement would be premised on the sustained growth in the property portfolio and thus earnings over the medium term. Successfully bringing the current large development projects to fruition would help in this regard. Conversely, a marked increase in vacancies in any of the core sectors could undermine income levels. Particularly if this were to coincide with a rise in gearing to meet capex this could lead to a ratings downgrade.
| NATIONAL SCALE RATINGS HISTORY | |
| Initial rating (June 2013) | |
| Long-term: A-(ZA); Short-term: A1-(ZA) | |
| Rating outlook: Positive | |
| Last rating (July 2015) | |
| 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 Credit Analyst |
| (011) 784-1771 |
| Patricia@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Property Funds, updated May 2016
Criteria for Rating Corporate Entities, updated February 2016
SAC rating reports (2013-2015)
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
| Capital | The sum of money that is invested to generate proceeds. |
| 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. |
| Diversification | Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in. |
| Downgrade | The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade. |
| 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. |
| GLA | Gross lettable area |
| Hedge | A form of insurance against financial loss or other adverse circumstances. |
| Interest | Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan. |
| 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. |
| Interest Rate | The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis. |
| 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. |
| 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. |
| 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. |
| Under Review | Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing. |
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 2015 Integrated Report and AFS, as well as preceding Integrated Reports and AFSs for four years;
- 2015 results presentation;
- a comprehensive listing of the company’s property portfolio;
- management presentation to GCR
- comprehensive details of SAC’s funding facilities as at 30/04/2015.
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.
