Johannesburg, 30 November 2018 — Global Credit Ratings has today downgraded the national scale Issuer ratings assigned to Delta Property Fund Limited to BBB-(ZA) and A3(ZA) in the long term and short term respectively, with the outlook accorded as Evolving.
SUMMARY RATING RATIONALE
GCR has accorded the above credit ratings to Delta Property Fund Limited (“Delta”, “the REIT” or “the fund”) based on the following criteria:
The downgrade reflects the persistent delays in renewing Department of Public Works (“DPW”) leases, a drawn-out process which began in 2014. This has seen the fund’s weighted average lease expiry (“WALE”) decline to just 1.3 years. As a result, Delta’s mean debt expiry profile has been reduced to 1.1 years, with a number of facilities being rolled over on a month-to-month basis. Together with low undrawn facilities and limited unencumbered assets, this materially elevates refinancing risk and curtails Delta’s liquidity assessment.
GCR has taken cognisance of the DPW’s commitment to finalise the bulk lease renewals by December 2018/February 2019, although in the absence of an empowered shareholding of a certain threshold, the current dispensation limits lease tenors to five years. The renewals are expected to extend the WALE to approximately three years, and could see the fund secure refinancing tenors of up to five years. GCR has considered scope for access to funding via the DMTN programme, as well as continued support from banking counterparties, albeit Delta will be expected to successfully term out its facilities for this support to be fully factored into the ratings.
Vacancies continued to tick up, registering at a high of 13.3% at 1H FY19 (FY18: 11.8%), with pressure mostly emanating from the Bloemfontein portfolio and the Sunninghill node. A key imminent lease renewal, dedicated capex, planned disposals, as well as Provincial Government and DPW tenders in the pipeline are expected to see vacancies moderate over the rating horizon.
Delta continues to negotiate with prospective lenders/stakeholders, with a view to finalising a management-driven empowerment transaction meant to raise at least R4.5bn and increase the black ownership level above 51%, while supporting a medium-term LTV of c.35%. The transaction would allow Delta to secure DPW leases of up to nine years, 11 months, but this has not been factored into the ratings in view of the uncertainty of the timing of the transaction.
The LTV ratio ticked up to 43% at 1H FY19 (FY18: 41%), following new facilities awarded. The gearing metrics of the base portfolio are projected to ease to c.40% post the disposal of R969m in non-core properties and the increased portfolio valuation once the bulk leases are signed, although the pace at which assets meant for disposal are being traded out of the portfolio is being impacted somewhat by impending lease renewals. Cognisance is also taken of the uptick in earnings-based gearing, partly due to a once-off provision raised in respect of a GLA dispute on Forum Building and the impact on cash flows of rising vacancies, with metrics expected to stabilise over the rating horizon.
Income progression remains constrained, on the back of disposals, modest positive reversions and elevated vacancies amidst a challenging operating climate. While the cost to income ratio was distorted in 1H FY19, internal efficiencies continue to support strong baseline margins. Looking ahead, some pressure may arise from negative reversions/moderating escalations on certain contracts, as lessees’ ability/willingness to absorb material increases in the all-in cost of tenancy is compromised by rising utility costs and market forces.
Upward rating migration is dependent on the finalisation of the DPW bulk leases. This would support a medium-term lease expiry profile, which would in turn improve valuations and allow Delta to lengthen its debt maturity profile. Timely disposal of non-core assets would also support a moderation in the gearing of the base portfolio. Conversely, protracted delays in renewing the bulk leases and/or failure to term out the debt profile and to secure adequate unutilised facility coverage of short-term debt could warrant further negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (July 2013)||Last rating (August 2018)|
|Long term: BBB+(ZA); Short term: A2(ZA)||Long term: BBB+(ZA); Short term: A2(ZA)|
|Outlook: Stable||Outlook: Rating Watch|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Analyst: Corporate Ratings||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, Updated February 2018
Global Criteria for Rating Property Funds and Commercial Real Estate Companies, Updated February 2018
Delta Property Fund Limited Issuer rating reports, 2013-18
RATING LIMITATIONS AND DISCLAIMERS
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|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|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.|
|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 institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|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.|
|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.|
|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.|
|Tenor||The time from the value date until the expiry date of an instrument, typically a loan or option.|
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SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Delta 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 Delta Property Fund Limited.
The information received from Delta Property Fund Limited and other reliable third parties to accord the credit rating included:
- the interim results for the six months ending 31 August 2018; and
- the 2018 audited financial statements (plus four years of comparative, audited numbers).
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 downgrades Delta Property Fund Limited’s rating to BBB-(ZA); Outlook Evolving