Johannesburg, 12 Sep 2018 – Global Credit Ratings has today affirmed Safari Investments Limited’s national scale Issuer ratings of BBB(ZA), and A2(ZA) in the long term and short term respectively; with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Safari Investments Limited (“Safari”) based on the following key criteria:
Safari’s property portfolio predominantly consists of well-positioned retail centres situated in rural arears. Ongoing redevelopments and extensions have seen the portfolio value increase to R2.8bn at FY18 (FY17: R2.6bn). However, Safari is a small REIT which is characterised by high geographic, asset and tenant concentration. Positively, the tenant mix primarily consists of national tenants at 88% of GLA. The portfolio evidenced a strong rental performance on the back of consistently low overall vacancy rate of 2% (despite challenges at its new development), steady trading densities, and sound escalations across the portfolio. Safari continued to display strong cost management, which has sustained robust and stable operating margins across the rating period, with the fund reporting a 73% margin in FY18.
Following the R909m equity raise in FY18, gross debt declined to a review period low of R336m (FY17: R948m). As such, the net LTV ratio registered at just 11.6% (FY17: 35.9%) and net debt to operating income at 189.3% (FY17: 661.1%). In view of the fund’s current pipeline and possible acquisitions the reduced gearing provides the required headroom for execution, as management intends to manage the LTV at around 30% in the medium term.
GCR notes that Safari provided a R455m guarantee (capital and interest) on a third party loan granted to Southern Palace Capital Proprietary Limited (“Southern Palace”), its largest shareholder, to fund its share participation. This structure adds a level of financial risk to the fund, and thus GCR considers it prudent to regard the guarantee as debt, particularly as Southern Palace has evidenced its own liquidity issues post FY18 leading to a cross-default notification on account of a related loan. Nevertheless, even under such a consideration, GCR views the adjusted net LTV to be conservative at 27%, which would still allow for funding capacity for project capex.
Safari displays a low LTV which suggests sufficient access to new funding. Although the unutilised facilities at FY18 were R564m there are no material near-term refinancing, financial flexibility is limited as most assets are encumbered.
Upward rating movement would require the resolution of the events leading to the cross-default notification in regards to the Southern Palace equity transaction. Furthermore, the letting of new developments is expected to support steady growth in earnings. Conversely, any decline in earnings due to the impact of the weak consumer environment, or challenges at any individual centres impacting the portfolio quality could place downward pressure on the rating. A material rise in gearing levels could also adversely impact ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2014)||Last rating (September 2017)|
|Long term: BBB (ZA), Short term: A2(ZA)
Rating outlook: Stable
|Long term: BBB (ZA), Short term: A2(ZA)
Rating outlook: Positive
|Primary Analyst||Committee Chairperson|
|Sheri Morgan||Eyal Shevel|
|Senior Analyst: Corporate Ratings||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
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
Safari Issuer rating reports (2014-17)
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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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||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.|
|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.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|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.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
SALIENT FEATURES 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 rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Safari Investments 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 ratings has been disclosed to Safari Investments Limited.
The information received from Safari Investments Limited and other reliable third parties to accord the credit ratings included;
- the 2018 Integrated Report and AFS, as well as preceding four years of comparable information;
- 2018 results presentation;
- a comprehensive listing of the REIT’s property portfolio;
- comprehensive details of Safari’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 Safari Investments Limited’s rating of BBB(ZA), Outlook Positive.