Announcements Corporate Rating Alerts

GCR Places Investec Property Fund Limited’s rating on ‘Evolving Outlook’ due to Ongoing Measures to Address High Leverage

Rating Action

Johannesburg, 8 April 2020 – GCR Ratings (“GCR”) has affirmed Investec Property Fund Limited’s (“IPF”) national scale long and short term Issuer ratings at A+(ZA) and A1(ZA) respectively. The Rating Outlook has been changed to ‘Evolving’.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Investec Property Fund Limited Long Term Issuer National A+(ZA) Evolving
Short Term Issuer National A1(ZA)

Rating Rationale

The ratings affirmation balances the improved geographic diversity and portfolio quality following the increase in IPF’s shareholding in its Pan European Logistics (“PEL”) platform to 75%, against the much higher gearing that the REIT has incurred to complete the acquisition. The Evolving Outlook recognises both the potential for negative rating action if the current high debt level is not adequately addressed, as well as the potential for positive rating action should debt levels reduce meaningfully.

The current rating review follows the increase of IPF’s stake in its PEL portfolio from 42.9% to 75%, as well as several smaller acquisitions that increase in presence in Western Europe. In GCR’s view, the transaction improves IPF’s operating environment risk profile by raising its international exposure to low risk territories to 32%. The majority of investments are in highly rated countries in Western Europe, whilst the small investment in Investec Property Fund Australia remains. Notwithstanding the current challenges posed by the COVID-19 pandemic across all its markets, GCR considers the property markets in Western Europe to be more favourable than in South Africa, due to stronger underlying economic fundamentals.

GCR’s assessment of IPF’s portfolio quality has also strengthened post the European transactions, as they provide IPF with exposure to the logistics sector. The PEL portfolio consists of 45 properties spread across six countries with a value of c.EUR900m, as well as 2 properties located in Belgium, acquired in December 2019 for c. EUR70m. The vacancy rate is currently at 2.1% and the portfolio reports a WALE of 4.9 years, with properties largely occupied by high quality tenants. Moreover, the portfolio has reported strong positive reversions in excess of 9.2% on new and renewed leases, with demand for space remaining firm through the COVID-19 pandemic. Positively, the acquisitions have reduced IPF’s exposure to retail to 26% of portfolio income, as the sector is expected to be most impacted by the global shutdowns. The South African portfolio remains under significant pressure due to the weak domestic economy, but the overall vacancy rate is expected to have improved to 3.5% at FY20 (1H FY20: 3.9%), below the industry average. GCR expects IPF’s South African portfolio to report significant strain due to the unprecedented shutdowns. However, performance metrics should be relatively more resilience than the broader property sector, due to its diversification by class and geography, as well as the high quality of tenants.

Significantly constraining the current rating is the high level of debt assumed to conclude the European transactions. In this regard, net debt is expected to register around R13.9bn at FY20, translating into a look through LTV ratio of around 57.5% (45.8%). This reflects the additional EUR205m in bridging finance assumed to complete the PEL transaction, as well as EUR40m in debt to fund the Belgium acquisitions. Funding risk is further heightened by the COVID-19 pandemic, which has forced banks to reconsider all new loans, with greater risk aversion likely to impact ongoing liquidity in the global banking markets. To this end, IPF’s planned refinancing of PEL has been delayed, adding to its funding risk. Positively, IPF has outlined a clear path to reducing gearing, but certain aspects are also likely to face delays due to the current shutdown and market uncertainty. However, even if IPF is able to deleverage its reported balance sheet to an LTV ratio around 34%, the LTV in the PEL portfolio is intended to remain at 60%, which would result in a still high look-through LTV of around 50%.

As a consequence of the highly geared position, IPF’s liquidity has deteriorated. The REIT has R1.7bn in facilities maturing during FY21, as well as the refinancing of the EUR205m bridge facility. While note is taken of initiative underway to refinance these facilities well ahead of time, GCR calculates liquidity 12-month coverage to just short of 1x as at FY20. This position should improve if planned refinancing initiatives are implemented, particularly the finalisation of the long term PEL facility. Liquidity concerns are somewhat mitigated by the expected headroom relative to debt covenants for FY20, while the relatively low level of asset encumbrances in South Africa provide financial flexibility.

Outlook Statement

The Evolving Outlook reflects both the potential for negative and positive rating action over the short to medium term, largely determined by progress (or lack thereof) in refinancing and reducing gearing. This is complicated by the current COVID-19 related disruptions.

Rating Triggers

Positive rating movement is dependent on 1) a meaningful reduction the look through LTV towards the 40% level; 2) strengthening/maintaining the interest coverage ratio around 3.5x; 3) extending the maturity of debt facilities and thereby improving liquidity coverage. Negative rating action could arise from 1) persistently high gearing metrics; 2) failure to timeously secure refinancing of current debt; 3) underperformance of the PEL portfolio relative to expectations; 4) protracted shutdown due to COVID-19 that materially impacts overall income and cash flows.

Analytical Contacts

Primary analyst Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771
Committee chair Patricia Zvarayi Deputy Sector Head: Corporate Ratings
Johannesburg, ZA Patricia@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019
GCR Rating Scales, Symbols and Definitions, May 2019
GCR’s Country Risk Score report, January 2020
GCR’s SA Sector Risk Score report, March 2020
Pressure on valuations, soft equity prices signal weakening REIT financial profiles, March 2020
GCR Special Report – Corporate Performance in Infected by COVID-19, March 2020

Ratings history

Investec Property Fund Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long term Issuer Initial National BBB+(ZA) Stable Outlook November 2011
Short Ter

m Issuer

Initial National A2(ZA)
Long term Issuer Last National A+(ZA) Stable Outlook September 2019
Short Term Issuer Last National A1(ZA)

Risk Score Summary

Risk score Investec Property Fund Limited
Operating environment 16.5
Country risk score 9.5
Sector risk score 7.0
Business profile 1.50
Portfolio quality 1.50
Management and governance 0.00
Financial profile (3.50)
Leverage and Capital Structure (3.00)
Liquidity (0.50)
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00
Total Risk Score 14.50

Glossary

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Bond A long-term debt instrument issued by either a company, institution or the government to raise funds.
Capital The sum of money that is invested to generate proceeds.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Concentrations A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.
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.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
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. In insurance, it refers to an individual or company’s vulnerability to various risks
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.
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.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
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 See GCR Rating Scales, Symbols and Definitions.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
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.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
REIT Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.
Rent Payment from a lessee to the lessor for the temporary use of an asset.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Weighted Average An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.
WALE Weighted Average Lease Expiry. The average number of year sto maturity of the tenant leases in a particular property portfolio.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings 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.

The credit ratings have been disclosed to Investec Property Fund Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Investec 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 information received from Investec Property Fund Limited and other reliable third parties to accord the credit ratings included:

  • Audited annual financial statements for FY19 (plus four years of audited comparative numbers);
  • Reviewed financial statements for the 1H FY20;
  • Investor Presentations concerning the PEL transaction;
  • Pre-closing investor presentation – March 2020;
  • a breakdown of debt facilities available and related counterparties at – (including related debt covenants).
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