Announcements

GCR Affirms UPDC Real Estate Investment Trust rating of BBB(NG)(f).

Lagos, 31 January 2019 — Global Credit Ratings has affirmed the national scale long term fund rating# assigned to UPDC Real Estate Investment Trust of BBB(NG)(f); with a Stable Outlook. The rating valid until October 2019.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above fund rating to UPDC Real Estate Investment Trust based on the following key criteria:

UPDC Real Estate Investment Trust (“UPDC REIT” or “the fund”) is a closed-ended real estate investment trust, invested exclusively in Nigerian commercial/residential property, mortgage related assets, and liquid assets.

FSDH Asset Management Limited’s (“FSDH AM” or “the manager”) competitive position, performance track record including demonstrated financial sustainability, skill and experience in portfolio management are considered adequate. FSDH AM has been accorded a management quality rating of A-(NG)(mq) by GCR.

The fund is exposed to significant income/ returns volatility through the concentrated nature of the assets and tenant base. Although the property portfolio appears to be of strong quality in reference to condition, location and potential for stable income generation, as seen so far, high concentration by property/tenant has impacted negatively on revenue generation in the three years to FY17.A major residential property with capacity to generate over 35% of the fund’s annual rental income, has remained vacant since November 2015 due to non-renewal of the tenancy contract by the sole tenant. Although a new corporate tenant has been sourced for the concerned property recently, tenancy concentration risk still remains a key issue for the fund.

The fund’s performance improved in FY17, with the forecast profit for the year exceeded. However, performance was mainly supported by interest income and fair value gain on investment properties, as rental income remained flat at N1.1bn, lagging forecast by 9.6%. Albeit operating expenses escalated by 29.4%, the fund’s key efficiency metrics ended stronger on account of the outpacing income growth. Overall, total distribution per unit improved to N0.52 in FY17, compared to N0.45 in FY16.

A positive rating action would follow a sustained strong performance track record, positive developments in the local real estate market (in terms of property valuation and rental income generation capacity), significant reduction in tenant concentration, as well as a positive rating action on the fund manager. A negative rating action would result from sustained pressure on performance due to non-normalisation of the current exceptionally high vacancy rate and/ or a general downturn in the country’s real estate market.

# Note that fund ratings provide an opinion regarding the fund’s ability to preserve principal value under varying market conditions, with reference to the relevant asset management environment (refer to GCR’s published rating scales and definitions).

NATIONAL SCALE RATINGS HISTORY
Initial rating (March 2013)
Long term: BBB(NG)(f)
Outlook: Stable

Last rating (December 2017)
Long term: BBB(NG)(f)
Rating Watch: Yes

ANALYTICAL CONTACTS

Primary Analyst
Julius Adekeye
+23 41 904-9462-3
adekeye@globalratings.net

Committee Chairperson
Dave King
king@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Funds and Asset Managers, updated March 2017
Criteria for Rating Property Funds, updated May 2017
UPDC REIT rating reports (2013-17)
Glossary of Terms/Ratios (February 2016)

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.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. 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.COM.NG.

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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the rating is for 12 months, or as indicated by the applicable credit rating document.

The rating was solicited by, or on behalf of, UPDC Real Estate Investment Trust, and therefore, GCR has been compensated for the provision of the rating.

UPDC Real Estate Investment Trust and FSDH Asset Management 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 rating above was disclosed to UPDC Real Estate Investment Trust and FSDH Asset Management Limited with no contestation of/changes to the rating.

The information received from UPDC Real Estate Investment Trust and other reliable third parties to accord the rating included the audited financial statements for the year ended 31 December 2017, most recent year to date management accounts up to 30 September 2018, latest asset valuation report as at 13 December 2017, tenant schedule as at 31 December 2017, tenant schedule as at 31 October 2018, corporate governance and enterprise risk framework, and other relevant legal and operational policies.

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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