Announcements Fund Rating Alerts

GCR upgrades Dipula Income Fund Limited’s rating to BBB+(ZA); Stable outlook

Johannesburg, 12 March 2019 — Global Credit Ratings has today upgraded the national scale Issuer ratings assigned to Dipula Income Fund Limited to BBB+(ZA) and A2(ZA) in the long term and short term respectively; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Dipula Income Fund Limited (“Dipula”) based on the following key criteria:

The ratings reflect the continued growth in Dipula’s assets through acquisitions and redevelopments, with the property portfolio increasing to over R8.7bn at FY18. The defensive nature of the portfolio is underpinned by its retail bias, with most assets being niche community centres that have demonstrated higher trading densities amidst the weak macroeconomic environment. The fund also evidences moderate granularity, with the top 10 assets accounting for 27% of the portfolio’s value at FY18.

Despite the weak economic environment, Dipula’s portfolio has evidenced relative resilience on the back of a focus on tenant retention and enhanced in-house property management, with vacancies declining to 7.5% at FY18 (FY17: 8.5%). The weighted average lease expiry also increased from 3 years at FY17 to 4 years and the portfolio evidences a good mix between multi-tenanted and singled tenanted properties. This tends to smooth out the lease maturity profile and provides a high level of predictability of revenue over the medium term.

Like-for-like revenue growth has been subdued, on the back of pressure on rental rates. Nevertheless, rental income growth for FY19 is set to derive from contributions from the acquired assets. Note is also taken of above-inflation escalations of 7.6% achieved on the portfolio, which should be supportive of organic rental income growth from the base portfolio.

The gross property expense ratio has been maintained below the 35% mark over the review period, indicating sustained cost rigour and supporting an increase in the operating margin to a review period high of 65.3% in FY18 (FY17: 63.4%). The internalisation of property management and consolidation of operations into a single location, completed in FY18, is also expected to result in further cost savings. Nevertheless, margin progression may be constrained by the challenging operating environment, which could curtail tenants’ ability to absorb higher all-in occupancy costs.

To complete the sizeable acquisitions, debt increased to a review period high of R3.5bn at FY18 (FY17: R2.9bn). This saw the LTV ratio increase marginally to 40.6% at FY18 (FY17: 38.9%), within the covenant level of 45%, albeit with limited room to raise additional debt. Going forward, the fund intends to manage the metric around the 40% mark. Despite increasing to 4.75x in FY18 as a result of the timing in debt drawdown, net debt to operating income ratio is expected to remain relatively conservative in the medium term. Debt serviceability also improved, with net interest cover up to 3.2x in FY18 (FY17: 2.6x).

While Dipula has termed out the debt maturity profile, the liquidity assessment is constrained by the unavailability of unutilised committed facilities and the high asset encumbrance to existing funders, which leaves the REIT with limited sources of alternate liquidity. That said, GCR notes the long-standing bank relationships which have sustained the timely renewal/refinance of facilities over the years under review.

Positive rating movement is dependent on sustained sound rental and cash flow growth, despite the challenging operating environment. This should be achieved in tandem with conservative gearing and enhanced liquidity. Conversely, the current gearing profile and credit protection metrics suggest there is limited scope to increase debt further without negatively impacting the credit ratings. Failure to sustain a smoothed-out, medium term debt expiry profile would be viewed negatively.

NATIONAL SCALE RATINGS HISTORY    

Initial rating (Sep 2014)

   
Long term: BBB(ZA)    
Short term: A3(ZA)    
Outlook: Stable    
Last rating (Aug 2018)    
Long term: BBB(ZA)    
Short term: A3(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst

Committee Chairperson

Tavonga Muchemedzi Eyal Shevel
Credit Analyst: Corporate Ratings Sector Head: Corporate Ratings
(011) 784-1771 (011) 784-1771
tavongam@globalratings.net shevel@globalratings.net
   

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

Dipula Income Fund Limited issuer rating reports (2014-18)

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.
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.
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.
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.
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. 
Loan to value The principal balance of a loan divided by the value of the property funded. LTVs can be computed as the loan balance to current property market value, or the original property market value.
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.
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.
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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.

SALIENT FEATURES 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 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.

Dipula Income 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 Dipula Income Fund Limited.

The information received from Dipula Income Fund Limited and other reliable third parties to accord the credit ratings included:

  • The 2018 audited annual financial statements (plus prior four years of comparative numbers)
  • A breakdown of debt facilities available and related counterparties at December 2018
  • Analyst presentations

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.

GCR upgrades Dipula Income Fund Limited’s rating to BBB+(ZA); Stable outlook

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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