Rating Action
Johannesburg, 28 August 2019 – GCR Ratings (“GCR”) has revised the Long term national scale Issuer rating assigned to Equites Property Fund Limited (“Equites” or “the REIT”) to A+(ZA) and affirmed the Short term rating at A1(ZA); with a Stable Outlook.
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| Equites Property Fund Limited | Issuer Long Term | National | A+(ZA) | Stable Outlook |
| Issuer Short Term | National | A1(ZA) |
Rating Rationale
The ratings are underpinned by Equites’ portfolio of high-quality logistics assets located in South Africa and growing presence the UK, giving rise to stable rentals and cash flows. GCR also notes the REIT’s demonstrated ability to grow its portfolio and cash flows while maintaining a sound capital structure.
Reflecting the strength and high quality of its prime located assets, Equites’ portfolio is 99.1% leased, with positive reversions achieved on the latest renewals. Cash flows and margins further benefit from long-term triple net leases with strong quality tenants, modest annual expirations and contractual rent increases. These strengths are however, tempered by the REIT’s smaller scale and weaker portfolio diversity in terms of sector, asset and tenant concentrations, as well as its limited track record through the cycle in the UK (currently facing Brexit headwinds).
On the back of its sound track record of developing modern big-box logistics properties in attractive areas, the REIT is well positioned to benefit from sustained demand trends in global logistics, supported by the rise of e-commerce and supply chain optimisation strategies. The minimal exposure to speculative developments and high pre-leasing of projects is also favourably considered as risk mitigants. Nevertheless, GCR, does recognise the REIT’s high development appetite as part of its growth strategy (representing 12% of the total investment portfolio at FY19), which encompasses more risky ground-up builds.
Equites’ financial profile is strong, where it aims to maintain its LTV between 25% and 35%. Thus far, the REIT has consistently managed its net LTV below 30% since listing, and it is expected to continue to trend around this level as the development-led growth strategy is funded in a leverage-neutral manner. Compared with previous levels, net debt to EBITDA and debt service coverage at 582% and 3x at FY19 are hovering at relatively weaker levels as pending developments are partly funded with debt and cash flows temporarily lag. Equites has also extended it weighted average debt maturity to 3.6 years (FY18: 2.8 years), however, some lumpiness remains evident in the debt profile.
The REIT’s liquidity profile is supported by expectations of 1.4x coverage of 12 month’s cash requirements, as well as good access to a range of banks and more recently the domestic bond market. However, in GCR’s view financial flexibility remains constrained by the high asset encumbrances.
Outlook Statement
The outlook is Stable, which reflects GCR’s expectation that Equites will continue to generate stable income from its high-quality properties rented out under long-term lease contracts, whilst prudently managing its financial policies when expanding its portfolio.
Rating Triggers
The ratings could improve on the back of sustained sound rental and cash flow growth together with enhanced scale and greater geographic and tenant diversification and/or improved earnings-based credit metrics. Conversely, If the REIT embarks on more aggressive financial policies, and/or if the portfolio quality declines, such that credit metrics weaken, there could be downward pressure on the ratings.
Analytical Contacts
| Primary analyst | Sheri Morgan | Senior Credit Analyst |
| Johannesburg, ZA | Morgan@GCRratings.com | +27 11 784 1771 |
| Committee chair | Eyal Shevel | Sector head: Corporate Ratings |
| Johannesburg, ZA | Shevel@GCRratings.com | +27 11 784 1771 |
Related Criteria and Research
| Criteria for the GCR Ratings Framework, May 2019 |
| Criteria for Rating Real Investment Trusts and Other Commercial Property Companies, May 2019 |
| GCR’s Country Risk Score report, published June 2019 |
| GCR’s SA Sector Risk Score report, published June 2019 |
| GCR’s Industry Research on the SA Commercial Property Market, July 2019 |
Ratings history
Equites Property Fund Limited
| Rating class | Review | Rating scale | Rating | Outlook/Watch | Date |
| Issuer Long term | Initial | National | A(ZA) | Stable Outlook | Oct 2018 |
| Issuer Short Term | Initial | National | A1(ZA) | ||
| Issuer Long term | Last | National | A(ZA) | Stable Outlook | Oct 2018 |
| Issuer Short Term | Last | National | A1(ZA) |
Risk Score Summary
| Risk score | 15.00 |
| Operating environment | 16.00 |
| Country risk score | 9.00 |
| Sector risk score | 7.00 |
| Business profile | -0.50 |
| Portfolio quality | -0.50 |
| Management and governance | 0.00 |
| Financial profile | -0.50 |
| Leverage and Capital Structure | 0.00 |
| Liquidity | -0.50 |
| Comparative profile | 0.00 |
| Group Support | 0.00 |
| Peer analysis | 0.00 |
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. |
| Debt Service Ratio | A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows
over a period to the sum of interest and principal payments over the same timeframe. |
| 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 |
| Financial Flexibility | The company’s ability to access additional sources of capital funding. |
| 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. |
| 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. |
| 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. |
| Renewal | The re-establishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed. |
| Rent | Payment from a lessee to the lessor for the temporary use of an asset. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| 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. |
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 Equites 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.
Equites 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 Equites Property Fund Limited and other reliable third parties to accord the credit ratings included:
- the 2019 audited annual financial statements (plus four years of audited comparative numbers);
- presentations and SENS announcements in respect of material transactions;
- a breakdown of debt facilities available and related counterparties at 28 Feb 2019;
- projections of capex for FY20;
