Johannesburg, 18 Oct 2016 — Global Credit Ratings has today upgraded the national scale issuer ratings assigned to Hospitality Property 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 Hospitality Property Fund Limited (“HPF”) based on the following key criteria:
The rating upgrade reflects HPF’s strengthened credit profile and increased portfolio scale following the recently concluded transaction with Tsogo Sun Holdings Limited (“Tsogo”), which brought on 10 established properties, raising the value of its consolidated property investments from R5.3bn at FYE16 to c.R7.1bn. Furthermore, the ratings take cognisance of HPF’s strong anchor shareholder in Tsogo, off which the REIT can leverage on its expertise and track record within the hospitality sector, as well as opening up a potential pipeline of future acquisition opportunities.
Following an uptick in tourist activity, and despite several asset disposals, HPF reported improved rental income growth of 9% to R475m in F16. The performance was also reflective of the good progress made in rebalancing its portfolio towards high-quality, well-located, largely upper-tier hotel properties over the past few years. HPF should continue to benefit from its muli-brand competitiveness and relatively high occupancy levels, whilst the increased income diversity across different asset classes and customer profiles should translate to stronger margins as the growth strategy gains traction in the medium term. While consideration is taken of the newly enlarged portfolio, the fund’s performance remains materially exposed to the flagship Westin property in Cape Town. Nonetheless, this risk is mitigated by the high quality and defensiveness of the asset, with note also taken of the granularity of the remainder of the portfolio.
At FYE16, HPF’s LTV ratio was reported at a conservative 33%. With the Tsogo transaction being ungeared, GCR expects that HPF’s leverage will fall to the lower end of its targeted range of 25%-35% over the intermediate term unless major acquisitions materialise. Other key credit metrics, such as interest coverage and earnings based gearing are also expected to remain at stronger levels due to moderate debt increases and cash flow growth.
GCR expects timely refinancing of forthcoming debt maturities, with comfort derived from sufficient headroom under its existing debt covenants post the Tsogo transaction (with these assets completely unencumbered), as well as the strong network of new banking relationships that can be leveraged from the majority shareholder. The large cash balance at year end and further asset disposals are also noted.
Over the medium term ratings uplift could be derived from continued scale enhancement of the portfolio, leading to growth in rental income and profits, as well as reduced asset concentration. Downgrade pressure would occur should the REIT experience liquidity challenges or an unexpected drop in demand due to a worsening of market conditions that negatively impacts hotel revenue and thus rental income. A shift toward a more aggressive debt acquisition-oriented growth strategy may also be viewed negatively.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (Nov 2012)
|Long term: BBB-(ZA)
Short term: A3(ZA)
Last rating (Oct 2015)
|Long term: BBB(ZA)
Short term: A3(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Criteria for rating property funds, updated April 2016
HPF issuer rating reports (2012-2015)
RATING LIMITATIONS AND DISCLAIMERS
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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.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|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.|
|Leverage||Or Gearing, 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 Risk||The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.|
|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.|
|REIT||Real Estate Investment Trusts are JSE listed companies that own operate and manage a real estate portfolio consisting of income producing property (office parks, industrial parks or retail centres).|
|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 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.
Hospitality 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 Hospitality Property Fund Limited with no contestation of the rating.
The information received from Hospitality Property Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2016 audited annual financial statements (plus prior four years of comparative numbers)
- A breakdown of debt facilities available and related counterparties, and security pledged at FYE16
- A full breakdown of the property portfolio at 1 September 2016 and management forecasts for F17
- Investor presentations
- Circular to HPF shareholders in respect of the Tsogo transaction and revised listing particulars document
- Other public information
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 upgrades Hospitality Property Fund Limited’s rating to BBB+(ZA); Outlook Stable.