Johannesburg, 28 February 2018 — 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 term and short term respectively; with the outlook accorded as Positive. The ratings will be reviewed again in July 2018 in order to align with Vukile Property Fund Limited’s full year results.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Vukile Property Fund Limited (“Vukile”) based on the following key criteria:
In line with its refocused retail-oriented investment strategy, Vukile has steadily expanded and improved the quality of its total investment portfolio through acquisitions and redevelopments, which was valued at R20.2bn at 1H FY18, from R10.7bn at FY14. Concurrently, Vukile has increased its exposure towards core international geographies (representing 24% of the total property pool), which should help to provide a level of downside protection in the face of a lacklustre local economy. Specifically, the REIT continues to pursue Spanish retail acquisitions to further strengthen its presence in this region, with these assets currently valued just over R4bn (1H FY18: R3.6bn).
The portfolio’s robust performance is evidenced by low vacancy levels at 3.7%, strong trading densities, positive rental reversions of 5.2% on the retail assets and a lease profile averaging 3.7 years. National tenants comprise 77% of the tenant mix. Accordingly, the base portfolio achieved growth in net property income of 9.9% and 6.1% in FY17 and 1H FY18 respectively, owing to robust letting activity and sound rental escalations. Operating margins remain sound, although sustained margin progression will be tested against the resilience of retail industry fundamentals.
As a result of Vukile’s debt funded offshore acquisitions, the net LTV rose to 28% and net debt to operating income registered at a higher 431% (FY17: 202%) as at 1H FY18. Nevertheless, gearing metrics remain conservative and continue to align with management’s mandated limits and GCR benchmarks for highly rated REITs. Net interest cover remains strong, having remained above 4x throughout the review period.
Vukile reflects adequate liquidity, with cash balances of R443m and undrawn committed facilities of R489m at 1H FY18, which is sufficient to cover debt expiries over the next 12 months. Cognisance is also taken of the fund’s diversified funding sources, longstanding banking relationships and strong institutional shareholder support. Furthermore, the debt maturity profile has lengthened through refinancing post 1H FY18. Nonetheless, the REIT’s credit profile is constrained by its relatively limited pool of unencumbered assets, which implies restrained recoveries for potential unsecured creditors.
Vukile’s ability to successfully bed down new assets and sustain high quality cash flows and grow earnings in line with the articulated retail strategy could provide ratings uplift. Maintaining conservative gearing and solid liquidity are also key determinants. The ratings could come under downward pressure from a weakening trend in profitability levels and/or any pressure on the REIT’s liquidity position or a material increase in gearing.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (February 2012)
|Long term: A(ZA)
Short term: A1(ZA)
Last rating (March 2017)
|Long term: A(ZA)
Short term: A1(ZA)
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
Global Criteria for Rating Property Funds, updated February 2017
Vukile Issuer rating reports, 2012-17
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.
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.|
|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.|
|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.|
|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||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.|
|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.|
|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||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.|
|Mandate||Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|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).|
|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 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 ratings have 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 ratings included:
- The 2017 audited annual financial statements (plus prior four years of comparative numbers)
- 1H 2018 unaudited interim accounts
- A breakdown of debt facilities available and related counterparties at 1H 2018 and at 31 January 2018
- 1H 2018 analyst presentations
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.