Johannesburg, 06 Mar 2015 — Global Credit Ratings has today affirmed the national scale issuer ratings assigned to Vukile Property Fund Limited of A(ZA) and A1(ZA) in the long and short term respectively; with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Vukile Property Fund Limited (“Vukile”) based on the following key criteria:
Vukile continues to focus on strategic, yield enhancing acquisitions, while upgrading its key retail assets and disposing of marginal properties. Accordingly, its property portfolio was valued at R10.6bn at 1H F15 (FYE14: R10.3bn), from R4.6bn at FYE10. The recently finalised Synergy Income Fund takeover will enable the consolidation of its R2.5bn portfolio, which, together with pipeline acquisitions of approximately R1bn, will bring the value of Vukile’s overall property portfolio to around R14.4bn by FYE15. The acquisitions will also see retail account for approximately 60% of the property portfolio’s value, in keeping with management’s medium term target weighting for the sector.
Space is mostly let to large, national listed corporates and franchises, which together with government, accounted for 58% of tenanted GLA at 1H F15. Vacancy rates have been managed down in recent years, with the adjusted GLA vacancy rate having declined to 4.2% by 1H F15 (FYE14: 6.5%), while positive reversions have been sustained across all sectors. Acquisitional growth, coupled with continued cost rigour, has supported a 7% compounded appreciation in distributions per linked unit over the 5-year review period. As expected, however, exogenous costs continue to pressure the operating margin, which has fluctuated narrowly around the 60% threshold for highly rated funds over the review period, easing to 58% at 1H F15 (F14: 62%).
Growth in the past 30 months has been largely funded by equity, with a cumulative R3.2bn raised from linked unit holders. Debt thus declined by 17% to R2.8bn at 1H F15, translating to respective LTV and debt to EBITDA ratios of 25% and 333% (FYE14: 31%; 352%). Gearing metrics are projected to remain comfortably within GCR’s respective benchmarks of 40% and 400%, with the LTV ratio not expected to exceed 30%. Net interest cover remains sound, at 4.1x (F14: 4.6x), while liquidity derives from untapped credit facilities, the R5bn DMTN programme and the REIT’s strongly cash generative investment properties. As with most REITs, the high level of encumbered assets constrains the Senior Unsecured Issuer rating, although GCR takes cognisance of the material over-collateralisation with respect to Vukile’s investments.
Upward rating migration could result from the successful integration of new acquisitions, coupled with the proven ability to broaden the fund’s reach into new property sub-sectors; while sustaining sound asset quality, low vacancy rates and earnings growth. However, a material deterioration in Vukile’s credit risk profile, due to (inter alia); highly leveraged acquisitions, weakening industry and/or macroeconomic fundamentals or punitive regulatory changes may warrant negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Feb/2012)
Long term: A(ZA); Short term: A1(ZA)
Last rating (Feb/2014)
Long term: A(ZA); Short term: A1(ZA)
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria For Rating Property Funds, July 2014
Criteria for Rating Corporate Entities, February 2015
Vukile Property Fund rating reports, 2012-2014
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.
|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.|
|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.|
|Gross lettable area||Gross lettable area, or GLA, is a term used in commercial property to indicate the amount of floor space rented or available for rental.|
|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.|
|Leverage||Or Gearing, 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.|
|Loan to value||The principal balance of a loan divided by the value of the property funded. LTVs can be computed as the loan balance to current property market value, or the original property market value.|
|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 Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|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.|
|REIT||Real Estate Investment Trusts are JSE listed companies that own operate and manage a real estate portfolio consisting of income producing property (office parks, industrial parks or retail centres).|
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.
Vukile Property Fund 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 Vukile Property Fund Limited with no contestation of the rating.
The information received from Vukile Property Fund Limited and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years of comparative numbers), corporate governance and enterprise risk framework, an unaudited financial review for 1H 2015, profit and loss projections for 2015, industry comparative data and regulatory framework, as well as a breakdown of facilities available and related counterparties.
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 Vukile Property Fund Limited’s rating of A(ZA); Outlook Positive