Johannesburg, 21 Feb 2014 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to Vukile Property Fund Limited of A(ZA) and A1(ZA) respectively; with the outlook accorded as Stable.
RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) on Vukile Property Fund Limited based on the following key criteria:
Vukile Property Fund Limited (“Vukile”) has made notable progress in enhancing both the scale and quality of its portfolio in recent years, boosting the market value of the fund to R10.3bn at 1H F14, from R4.6bn at FYE09. By shedding smaller, non-core properties and securing larger, yield enhancing acquisitions, the fund has achieved progressive appreciation in average values and rentals per square metre over the review period.
The Encha empowerment deal has helped to boost the quality of the fund’s tenancy profile, introducing a sub-portfolio of government tenanted office space, which at 1H F14, accounted for 10% of Vukile’s market value. Coupled with the acquisition of a 50% interest in East Rand Mall and enhancements to key properties, this has improved the lease maturity profile and vacancy rates. The fund has registered sound top line and earnings growth over the review period, largely derived from value enhancing acquisitions. Cognisance is also taken of the improving performance of Vukile’s stable portfolio, underpinned by positive reversions and above inflation escalations on in-force contracts. While increasing pressure continues to emanate from utility price hikes as well as rates and taxes, the fund remains focused on cost containment. Together with well-developed tenant profiling and credit controls, this has enhanced the predictability of cash flows.
The acquisitive drive in the 18 months to 1H F14 was partially funded by equity, with R1.6bn raised from linked unit holders. As such, while debt registered at a new high of R3.4bn as at 1H F14 (FYE13: R2.9bn), the net LTV remained below GCR’s 40% benchmark for highly rated funds, at 29% (FYE13: 22%). Net debt to EBITDA was contained within GCR’s 400% comfort level, at 317% (FYE13: 225%), with the sharp increase mainly attributed to the distortive impact of recent acquisitions, which will only make a full year’s earnings contribution in F15.
Net interest coverage remains robust, at 4.7x (F13: 4.5x), and all covenants are comfortably adhered to. Liquidity is underlined by unutilised banking facilities, flexibility from the DMTN programme and enhanced cash generation. Albeit mitigated by material over-collateralisation, the high proportion of encumbered properties remains a constraint to the Senior Unsecured Rating.
Upward rating migration could emanate from progressive scale enhancement, together with sustained growth in rental income over the medium term. Continued improvement in asset quality, reflected by lengthening overall lease maturities, well managed vacancy rates and margin enhancement would also be positively viewed. Persistent or material deterioration in Vukile’s credit risk profile, emanating from (inter alia) a more aggressive stance towards the funding of acquisitive growth, weakening industry/macro- economic fundamentals or more stringent regulatory changes could, however, warrant negative rating action.
NATIONAL SCALE RATINGS HISTORY | |
Initial rating (Feb/2012) | |
Long term: A(ZA); Short term: A1(ZA) | |
Outlook: Stable | |
Last rating (Feb/2013) | |
Long term: A(ZA); Short term: A1(ZA) | |
Outlook: Stable | |
ANALYTICAL CONTACTS | |
Primary Analyst | |
Patricia Zvarayi | |
Senior Analyst | |
+27 11 784 1771 | |
patricia@globalratings.net | |
Committee Chairperson | |
Eyal Shevel | |
Sector Head: Corporates | |
+27 11 784 1771 | |
shevel@globalratings.net | |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria for Rating Corporate Entities
GCR’s Criteria For Rating Property Funds
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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 2013 audited annual financial statements (plus four years of comparative numbers), corporate governance and enterprise risk framework, an unaudited financial review for 1H 2014, profit and loss projections for 2014, industry comparative data and regulatory framework, as well as a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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.