Johannesburg, 31 July 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Safari Investments (RSA) Limited of BBB(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Safari Investments (RSA) Limited (“Safari”) based on the following key criteria:
Safari has developed a portfolio of dominant retail centres, focused on the high growth township areas. The centres have reported negligible vacancies, high sales densities and strong rental escalations over the review period. National retailers on long term leases accounted for 91% of GLA at FYE15, enhancing the predictability and quality of future cash flows. Nevertheless, with only four centres, the fund is highly concentrated and small in the listed property context, which curtails the ratings.
Rental income growth has been robust over the last four years supported by enhancements, albeit that operating profit growth has lagged somewhat, due to the treatment of maintenance costs. Going forward, strong rental income growth is expected to be sustained by the development pipeline and favourable rental escalations.
Although gross debt decreased to R263m at FYE15 (FYE14: R386m), ongoing projects could see debt rise as available facilities (R700m) are utilised. Accordingly, the LTV and debt to EBITDA ratios fell materially to 15% and 18% respectively at FYE15 (FYE14: 29% and 35%), and despite the planned drawdown the LTV is not expected to exceed the 30% to 40% target range. Further to this, Safari has maintained its strong relationship with its primary funder, Absa Bank. While most highly rated REITs reflect more banking counterparties, comfort is drawn from the collateralisation of 2.7x with respect to the facilities, which gives scope to raise credit lines further.
Safari’s development pipeline and strategic focus on greenfield acquisitions (as opposed to brownfield acquisitions) elevates capital risk. However, GCR notes the conservative, phased nature of development activity and management’s strong execution, as evidenced by successfully completed projects to date. Risk is however, exacerbated by the increasingly challenging retail environment, underpinned by slowing consumer spend.
Upward ratings migration is dependent on stable medium to long term revenue and operating profit growth. The inclusion of additional income generating properties (including pipeline projects) that contribute materially to earnings would help to diversify the portfolio and would also be positively considered. Conversely, given the small scale of the fund, underperformance at any centre could negatively impact group earnings and credit protection metrics. Delays and problems with any of the developments would also be negatively considered, particularly if they result in cash drain and rising gearing.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/Last rating (July 2014)|
|Long term: BBB(ZA); Short term: A2(ZA)|
|Primary Analyst||Secondary Analyst|
|Patricia Zvarayi||Farai Mauchaza|
|Senior Analyst||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Criteria for Rating Property Funds, updated April 2015
Safari Investments 2014 report
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Drawdown||When a company utilises facilities availed by a financial institution or an international lender there is said to be a drawdown of funds.|
|EBITDA||Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.|
|Liquidity Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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 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.
Safari Investments (RSA) 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 Safari Investments (RSA) Limited with no contestation of the rating.
The information received from Safari Investments (RSA) Limited and other reliable third parties to accord the credit rating(s) included;
- Audited financial results of Company per 31 March 2015 (plus four years of comparative numbers)
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Detailed performance metrics of the properties as at FYE15
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.