Johannesburg, 20 August 2015 — Global Credit Ratings has today upgraded the national scale ratings assigned to Investec Property Fund to A(ZA) and A1(ZA) in the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Investec Property Fund (“IPF, the fund or the REIT”) based on the following key criteria:
The R7.1bn Zenprop portfolio acquisition and the R826m Griffin transaction will raise the value of investments to c.R16.4bn, versus R8.7bn at FYE15, and just R1.7bn at listing. This comfortably places the REIT on the upper end of middle tier domestic REITs in terms of scale. Albeit initially income dilutive for shareholders, the Zenprop deal adds quality, defensiveness and income predictability to an already robust portfolio, enhancing (inter alia) the weighted average lease expiry and tenant quality. Investec Limited’s (“Investec”) direct stake has been progressively reduced (FYE15: 34%; FYE14: 45%), although note is taken of the continued support to IPF. Specifically, the fund’s branding represents reliance on the group network, which underpins performance through a strong asset manager with proven real estate credentials, liquidity support, access to Investec’s clientele, systems and substantial property stable.
Prior to the Zenprop and Griffin acquisitions, IPF’s top 10 properties made up 41% of its portfolio’s carrying value at FYE15, from a high of 75% at FYE12. IPF reflects a high proportion of single-tenanted buildings (45% of revenue), and while ‘A’ grade tenancies were diluted to 63% by the higher retail exposure at FYE15, the incorporation of Zenprop properties should see it revert to around the 70% level. Vacancies have been kept at very low levels over the review period (F15: 2.8%), and are expected to ease further with the inclusion of the Zenprop assets, while the fairly long average lease expiry reflects the quality of properties held and strong management execution.
Acquisitions supported a 50% increase in rental income to R846m in F15, while the base portfolio achieved growth of 9.4% (F14: 5.5%), on the back of robust letting activity and escalations. Despite a higher retail weighting, the operating margin rose to 80.7% in F15 (F14: 78.3%), supported by sound recoveries and cost rigour. Rising utility costs, taxes and rates are, however, likely to curtail industry margins, as will pressure on renewal rates from stressed tenants in the medium term.
The funding profile is very conservative, on the back of R5.8bn in equity raised since listing to July 2015. Despite a R1.3bn net rise in debt to R2.1bn at FYE15, the net LTV remained below GCR’s 40% benchmark for ‘A’ rated REITs, at 24% (FYE14: 11%). Albeit having risen to 292% (FYE14: 150%) due to the earnings drag attributed to assets transferred in 2H F15, net debt to EBITDA is comfortable compared to GCR’s 400% threshold for ‘A’ rated funds. The LTV ratio is projected at 35% post the Zenprop deal, and will be managed around that level going forward. Interest cover decreased to 5.4x in F15 (F14: 9.5x), but remains above the 2.5x benchmark for ‘A’ rated funds. Liquidity is supported by an atypically low asset encumbrance (FYE15: 26%), ample untapped facilities (with the Investec Bank relationship giving added comfort), the DMTN programme and proven shareholder support.
The ability to sustain high quality cash flows despite the challenging operating environment would result in an upward review in the medium term. As such, robust execution in respect of securing and bedding down well-timed acquisitions, and maintaining prudent credit protection factors would bode positively. Albeit considered unlikely, much higher than planned gearing levels (due to deteriorating market fundamentals or unanticipated financial risk) could exert downward pressure on the ratings.
NATIONAL SCALE RATINGS HISTORY
Initial rating (November 2011)
Long term: BBB+(ZA); Short term: A2(ZA)
Last rating (July 2014)
Long term: A-(ZA); Short term: A1-(ZA)
Sector Head: Corporate Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2015
Criteria for rating property funds, updated April 2015
Investec Property Fund Limited rating reports, 2011-2014
IPF R450m Senior Secured Notes: New Issuance/Surveillance Reports, 2012-2015
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.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|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.|
|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.|
|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||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.|
|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 Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|LTV||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|REIT||A REIT is a company that owns or finances income-producing real estate. REITs are subject to special tax considerations and generally pay out all of their taxable income as distributions to shareholders.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|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.|
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.
Investec Property Fund 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 Investec Property Fund with no contestation of the rating.
The information received from Investec Property Fund and other reliable third parties to accord the credit rating(s) included;
• 2015 audited financial statements (plus three years of comparative numbers);
• the May 2015 board pack;
• corporate governance and enterprise risk framework;
• profitability projections for 2016;
• SENS announcements and other information related to 2015 acquisitions, and
• a breakdown of facilities available and related counterparties.
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.