Johannesburg, 29 Feb 2016 — 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 Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Vukile Property Fund Limited (“Vukile”, or “the REIT”) based on the following key criteria:
The F15 Synergy Income Fund takeover and recent R2bn in acquisitions boosted the value of direct and indirect property investments to R15.1bn at 1H F16 (FYE15: R13.8bn), from R6.6bn at FYE11. This has kept Vukile at the upper end of medium scale local REITs and aligned to similarly rated funds. Management’s focus on strategic, yield enhancing acquisitions pushed up the retail sector weighting to 67% of portfolio value at 1H F16, from 54% 12 months earlier. While most of the growth will continue to derive from direct property purchases (including modest participation in residential), Vukile also plans to enlarge its Rand hedge indirectly via AltX-listed Atlantic Leaf, and will keep a modest exposure to local developments.
The improvement and expansion of existing retail properties continues apace, with a R429m capex budget committed at 1H F16. Management also continues to recycle capital vested in non-core assets, albeit that the overall value of the earmarked industrial and office assets has been markedly reduced. The proven ability to successfully redeploy these proceeds over the review period bodes positively.
Government, national and listed tenants, together with franchises and professional firms occupied 71% of GLA at 1H F16 (FYE15: 70%). Robust property management continues to enhance the lease maturity profile and occupancy rates. At 1H F16, the REIT’s GLA vacancy rate excluding developments was at 4.7% (FYE15: 4.6%), while positive reversions have been sustained over the five-year review period.
The appreciation in distributions per share has been steady since the REIT’s inception, and rose by a normalised 8.1% in F15 (1H F16: 7% YoY). The property expense ratio eased to a new low of 36.6% in 1H F16 (F15: 37.1%), while the overall EBITDA margin has stayed around the 60% threshold for highly rated funds. The especially challenging operating environment, is, however, expected to check retail-oriented REITs’ performance, slowing earnings progression in the next two years.
The R4.4bn in equity raised in the 42 months to September 2015 reflects sustained shareholder support. While debt rose to R4.7bn (FYE15: R3.9bn), it remained at a conservative 31% LTV and 383% of EBITDA. The refinance of R1.4bn in debt during 1H F16 pushed out certain lumpy maturities, while the REIT plans to maintain a comfortable split between bank and capital market funding. That said, Vukile faces material refinancing risk in the next 24 months, and while advanced plans are in place, the REIT has to contend with considerable debt/capital market volatility, compounded by a steep swap curve amidst rising interest rates.
Upward rating pressure could stem from sustained growth on the back of a strong retail portfolio and participation in new sectors and markets, achieved in conjunction with high occupancies and margin enhancement. The finalisation of negotiations on new bank facilities/refinancing will also be required to sustain the current ratings. Although Vukile’s retail properties are deemed to be largely defensive, the ratings may be negatively impacted by the weak economy, significantly curtailed consumer spending, and/or adverse regulatory changes.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (February 2012)|
|Long term: A(ZA); Short term: A1(ZA)|
|Last rating (March 2015)|
|Long term: A(ZA); Short term: A1(ZA)|
|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
Vukile Property Fund Limited (“Vukile, the fund, or the REIT”) issuer rating reports, 2012-2015
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|GLA||GLA is the portion of the total floor area of a building that is available for tenant leasing, and is usually expressed in square meters or square feet.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|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 Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|LTV||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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||A REIT is a company that owns or finances income-producing real estate. REITs are subject to special tax considerations and generally pay out all of their taxable income as distributions to shareholders.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Swap||An exchange of payment streams between two parties for their mutual benefit. Swaps can involve an exchange of debt obligations, interest payments or currencies, with a commitment to re-exchange them at a specified time.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate. Also an agricultural term describing output in terms of quantity of a crop.|
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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(s) included;
- the 2015 audited annual financial statements (plus four years of comparative numbers);
- corporate governance and enterprise risk framework;
- an unaudited financial review for 1H 2016;
- budgets to 31 March 2016;
- industry comparative data; and
- 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 Stable.