Announcements Corporate Rating Alerts

GCR affirms SA Corporate Real Estate Limited’s ratings of A(ZA)/A1(ZA). Outlook Negative on portfolio quality pressure.

Rating Action

Johannesburg, 08 October 2019 – GCR Ratings (“GCR”) has affirmed the long and short term national scale Issuer ratings assigned to SA Corporate Real Estate Limited (“SAC” or “the REIT”) of A(ZA) and A1(ZA) respectively, with the Outlook revised to Negative.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
SA Corporate Real Estate Limited Issuer Long Term National A(ZA) Negative Outlook
Issuer Short Term National A1(ZA)

On May 22, 2019 GCR announced that it had released a new rating framework and sectoral criteria. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the SAC rating review under the new Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the ratings reviewed in line with the new methodology.

Rating Rationale

The Negative Outlook reflects pressure on SAC’s portfolio quality in an increasingly challenging market. Although the REIT continues to demonstrate low vacancies in its traditional portfolio in particular, GCR is of the view that it is susceptible to high letting risk due to the somewhat lumpy and relatively shorter overall weighted average lease expiry profile. As such, while negative reversions on the traditional portfolio had narrowed significantly at 1H FY19, SAC’s overall margins remain susceptible to pressure on rental rates as tenants seek to manage down rising all-in costs of occupancy. SAC also has to contend with intensifying competition, with industrial especially vulnerable as new builds continue. Cost discipline in respect of the residential portfolio remains evident, although this is partly counterbalanced by the inherently higher administrative cost base, together with the potential for churn and seasonality in the sector.

Management continues to reposition the direct property portfolio by (inter alia) changing the tenant mix of core retail assets, investing in industrial assets, recycling capital from the office properties, and continuing to develop residential stock in strategic nodes. Development risk is higher than that of peers. While it is not currently viewed as a credit negative as it had declined relative to the scale of the portfolio, it could weaken portfolio quality going forward if deemed aggressive. GCR also noted the REIT’s international exposure, which is considered ratings neutral at present.

Cognisance was taken of various management and governance developments, including the effective reconstitution of the board and ultimate retention of the executives, while GCR also noted drivers behind expressions of interest in SAC. Further comfort would be taken from finalisation of a clear succession plan, as well as timely completion of the strategy to enhance overall portfolio quality, translating to sustainable margin enhancement in the medium term.

SAC continues to present a relatively conservative financial profile, with LTV ranging between 35-40% including guarantees. Interest cover is projected to range between 3.0-3.5x, although net debt to operating income is expected to reflect some drag due to the (re)development cycle. SAC refinanced short-term debt amounting to R4.7bn during the first half of 2019, achieving a weighted average debt expiry profile of 3.5 years and lengthening the weighted average tenor of its interest rate hedges. The improved debt maturity profile and contracted asset disposal agreements helped support 12 months’ liquidity coverage of at least 1.0x. Counterbalancing this is the encumbrance of most of the direct property portfolio, as well as low undrawn facility headroom post the refinancing.

Outlook Statement

The Negative Outlook reflects the view that sustained pressure on property portfolio quality could result in a deterioration in the REIT’s credit protection metrics.

Rating Triggers

Successful repositioning of the traditional portfolio and timely completion of planned residential builds, supporting sustainable margin enhancement, would be required to stabilise the ratings. Conversely, negative rating action could arise from further pressure on the portfolio fundamentals that results in a sustained deterioration in margins and weaker leverage metrics. A deterioration in liquidity metrics would also be negatively viewed.

Analytical Contacts

Primary analyst Patricia Zvarayi Deputy Sector head: Corporate Ratings
Johannesburg, ZA Patricia@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019
GCR’s Country Risk Score report, published June 2019
GCR’s SA Sector Risk Score report, published June 2019
GCR’s Industry Research on the SA Commercial Property Market, July 2019

Ratings history

SA Corporate Real Estate Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Issuer Long term Initial National A-(ZA) Positive Outlook July 2013
Issuer Short Term Initial National A1-(ZA)
Issuer Long term Last National A(ZA) Positive Outlook July 2018
Issuer Short Term Last National A1(ZA)

Risk Score Summary

Risk score 14.00
Operating environment 14.50
Country risk score 7.50
Sector risk score 7.00
Business profile 0.50
Portfolio quality 0.50
Management and governance 0.00
Financial profile -1.00
Leverage and Capital Structure -0.50
Liquidity -0.50
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00

Glossary

Credit Rating See GCR Rating Scales, Symbols and Definitions.
Guarantee An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for the debt of a third person (the debtor) to the creditor, upon default of the debtor.
Hedge A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.
Income Money received, especially on a regular basis, for work or through investments.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a REIT’s operating income by its net 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.
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.
Issuer The party indebted or the person making repayments for its borrowings.
Lease Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
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.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings 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 ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The credit ratings have been disclosed to SA Corporate Real Estate Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

SA Corporate Real Estate Limited did not participate in the rating process, although GCR considered the publicly available information on the entity sufficient for the purposes of reviewing the ratings. The information used to accord the credit ratings included:

  • the condensed unaudited consolidated interim financial results for the six months ended 30 June 2019
  • the 2018 audited annual financial statements (plus four years of audited financials) and annual report(s)
  • results presentations and SENS announcements


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