Johannesburg, 21 September 2018 — Global Credit Ratings has today upgraded the long term national scale Issuer rating assigned to Investec Property Fund Limited to A+(ZA) and affirmed the short term rating at A1(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Investec Property Fund Limited (“IPF”) based on the following key criteria:
The upgrade of IPF’s rating is in recognition of its solid credit metrics and earnings resilience at a time when the macroeconomic environment remains weak. Further, IPF’s strong liquidity is viewed as a key credit strength. Undrawn credit lines of R1.4bn and held for sale assets of R181m, are more than sufficient to cover R839m in maturing debt and capex costs coming due in the next 12 months. Further the REIT is far advanced with discussions to early refinance certain FY20 maturities that will lengthen the debt profile. IPF’s asset encumbrances remained very low, at 34% of total investments at FY18, comparing favourably to most local peers and gives rise to significant financial flexibility, as does the REIT’s good track record of access to debt and equity capital markets.
IPF has successfully integrated key portfolio acquisitions, with the high-quality direct property pool of R17.6bn displaying good diversity across sectors, assets and tenants. The REIT continues to deliver sound rental growth and operating results, which demonstrates resiliency of its portfolio in the challenging operating climate. A degree of softness in operating metrics as the REIT fills an increase in vacant space and applies rental incentives is expected but is viewed in terms of manageable leases expiries of around 15% YoY and offset by sound, above inflation rental escalations for in-place tenants.
At FY18 the net LTV ratio equated to 32.6%, although it ticked up to around 36% post FY18 on account of acquisition activity. Nonetheless, GCR expects that IPF will continue to finance acquisitions in a leverage-neutral manner so as to adhere to its conservative gearing target of around 35% and maintain ample headroom under the financial covenants in its debt agreements. Moreover, net debt to operating income has been stable in the 4-4.5x range over the past two years, reflecting predictable income streams, while net interest coverage is adequate at 2.8x.
Positive ratings momentum would be dependent on a material increase in scale and diversity. Further, a recovery in the general property environment that supports improved fundamentals could also have a positive bearing on the rating outlook. The REIT’s ratings could be downgraded if there is significant deterioration in earnings, and/or a sharp rise in gearing or weaker fixed charge coverage on a sustained basis.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2011)|
|Long term: BBB+(ZA)|
|Short term: A2(ZA)|
|Last rating (August 2017)|
|Long term: A(ZA)|
|Short term: A1(ZA)|
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
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
IPF Issuer rating reports, 2011-17
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|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.|
|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.|
|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.|
|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.|
|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 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; d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
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 credit ratings have been disclosed to Investec Property Fund Limited.
The information received from Investec Property Fund Limited and other reliable third parties to accord the credit ratings included;
- 2018 audited financial statements (plus four years of prior comparative audited numbers);
- Investor presentation,
- a breakdown of facilities available and related counterparties, and
- Other non-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 Investec Property Fund Limited’s rating to A+(ZA); Stable outlook