Announcements

GCR upgrades Hospitality Property Fund Limited’s rating to BBB(ZA); Outlook Stable .

Johannesburg, 11 Nov 2014 — Global Credit Ratings has today upgraded the national scale long term rating assigned to Hospitality Property Fund Limited to BBB(ZA) and affirmed the national scale short term rating of A3(ZA); with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Hospitality Property Fund Limited (“HPF”) based on the following key criteria:

HPF’s strategy is to focus on higher value marque assets targeting the more stable upper end of the travel sector. Thus, while the total number of properties was unchanged at 26 at FYE14, portfolio value is increasingly concentrated amongst a few large metropolitan hotels, with many of the smaller properties being held for sale. The benefits of this strategy are evident in the outperformance of core properties relative to their peer groups, both in terms of occupancy levels and room rates. While this has led to strong property value appreciations at some properties (particularly in the Western Cape), the performance of other hotels has fallen below budget, resulting in fair value depreciations.

Whereas in previous years rental income growth was driven by acquisitions, growth of 19% to R423m in F14 was largely organic, underpinned by the improved performance of the underlying hotels. Some once off charges saw expenses at the fund level increase, but operating income still rose by 17% to R383m. This covered the higher interest charge by a firmer 2.6x (F13: 2.5x).

Despite gross debt rising from R1.4bn at FYE12 to R1.8bn at FYE14 (FYE13: R1.6bn), gearing ratios have remained relatively stable. Nevertheless, the gross LTV edged up to 36.7% at FYE14, while the gross debt to EBITDA ratio decreased to 463.3%. The LTV ratio is thus within the benchmark for ‘A’ band rated funds, while the gross debt to EBITDA ratio compares to ‘BBB’ band rated funds. The lack of unutilised debt facilities to shore up liquidity, as well as the reliance on a single banking partner gives rise to some concentration risk. This is, however, mitigated by HPF’s inherently low on-going cash requirements, and the conservative approach to funding capex and redemptions, whereby additional facilities are secured well in advance of utilisation and the cash held on balance sheet.

Forecasts indicate the domestic tourism industry is likely to remain robust, with increasing inbound tourism sustaining higher occupancy levels and room rates over the medium term. Nevertheless, cognisance is taken of the volatile nature of the hospitality industry, where economic shocks or sovereign security concerns can have a sudden and severe effect on demand.

Given the positive rating movement, a further upgrade is unlikely in the short term. However, over the longer term, value enhancing acquisitions in line with HPF’s strategy could have a positive impact, if funded on a conservative gearing metric. Sustained, long term profitability from existing properties would also be positively considered. Conversely, negative rating action may arise from internal or exogenous shocks to the travel industry that see earnings decrease substantially and lead to negative property revaluations. Liquidity constraints could also potentially affect operations, where cash is required on short notice.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Nov/2012)
Long term: BBB-(ZA); Short term A3(ZA)
Outlook: Stable

Last rating (Nov/2013)
Long term: BBB-(ZA); Short term: A3(ZA)
Outlook: Positive

ANALYTICAL CONTACTS

Primary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Committee Chairperson
Patricia Zvarayi
Senior Analyst
(011) 784-1771
patricia@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, August 2014
Criteria for Rating Property Funds, July 2014
Hospitality Property Fund Limited previous rating reports (2012-2013)
HPF R150m Senior Secured Bond issuance report, May 2013
HPF R650m Senior Secured Bond issuance report, April 2014

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.

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 rating/s has 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 rating included the 2014 audited annual financial statements (plus four years of comparative numbers), details of the property portfolio, internal and/or external management reports, full year budgeted financial accounts for the years F15 to F17 (as published in the annual report), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.

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.

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

Annual Report

A status report on the current financial condition of a company. It usually includes the chairman’s report, the auditor’s report and detailed financial statements. It is issued once a year for shareholders to examine before the annual general meeting (AGM). In many markets, comprehensive Integrated Reports covering a wide spectrum of information have replaced traditional annual reports.

Balance Sheet

Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.

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.

EBITDA

Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.

Fair Value

The fair value of a security, an asset or a company is the rational view of its worth. It may be different from cost or market value.

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.

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.

GCR upgrades Hospitality Property Fund Limited’s rating to BBB(ZA); Outlook Stable .

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