Johannesburg, 30 Nov 2015 — Global Credit Ratings has today upgraded the national scale ratings assigned to Octodec Investments Limited to A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
The ratings for Premium Properties Limited of A-(ZA) and A1-(ZA) in the long and short term respectively have now been withdrawn.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Octodec Investments Limited (“Octodec”) based on the following key criteria:
The acquisition of Premium by Octodec has created a much larger fund, with a portfolio value of R11.4bn, in line with the scale of other medium sized domestic property funds. While the overall focus remains on inner city properties and redevelopments, the enlarged portfolio does evidence greater diversification by node and property type. Geographic concentration is inherent to Octodec, with investment properties located solely in Gauteng. However, this is mitigated by the competitive advantage provided by the fund’s strong positioning in these nodes, allowing it to be a price setter in terms of rentals and to capture the full economic benefits from improvements to properties in areas wherein it has a number of assets.
Although the inner-city focus also implies greater risk, Octodec is a conservatively manged fund, only making acquisitions in its core area of expertise and undertaking developments gradually and in line with market demand. This is supported by its significant experience in developing and managing such properties.
Octodec has closely focussed on managing property expenses amidst the rising cost environment, resulting in a lower property expense ratio in F15 than initially forecast, and thus slightly higher operating profit. Going forward, steady growth in rental income and operating profit is forecast on the back of rental escalations and new properties being released. While interest coverage of just 2.1x in F15 is only slightly above GCR’s benchmark for highly rated REITs, this should increase to 2.4x in F16 (post the new share issue) and risk has been substantially reduced by the increase in hedges to 94% of interest rate exposure.
The fund does have some concentration to Nedbank and facility maturities are relatively short dated. However, this is mitigated by the longstanding relationship with Nedbank, which has allowed for facilities to be refinanced and extended when necessary, as well as the substantial capacity available under the DMTN programme. More significantly, Octodec is supported by committed shareholders, who have demonstrated their support for the fund by supporting past new share issues, most recently subscribing for R390m in new shares just prior to FYE15. These have been used to maintain the LTV ratio at the Board’s stated target of between 35% and 40%, with the net LTV at 37.5% at FYE15.
Registration of the DMTN programme remains in the name of Premium Properties Limited, but the bond issuances are now irrevocably and unconditionally guaranteed by Octodec. As such, GCR has withdrawn the ratings accorded to Premium and will only accord ratings to Octodec going forward
With the recent ratings’ upgrade, further positive rating action is only likely over the medium to long term and will be dependent on sustained growth in income generating properties, translating into rental income and operating profit growth. Conversely negative rating action if the LTV ratio rises and remains above 40%. Any external factors that impact the desirability of the key nodes Octodec operates in could also negatively impact the rating.
| NATIONAL SCALE RATINGS HISTORY | |||
| Octodec Investments Limited | Premium Properties Limited | ||
| Initial/last rating (October 2014) | Initial rating (August 2011) | ||
| Long term: A-(ZA); Short term: A1-(ZA) | Long term: BBB+(ZA); Short term: A2(ZA) | ||
| Outlook: Stable | Outlook: Stable | ||
| Last rating (October 2014) | |||
| Long term: A-(ZA); Short term: A1-(ZA) | |||
| Outlook: Stable |
ANALYTICAL CONTACTS
| Primary Analyst | ||
| Eyal Shevel | ||
| Sector Head: Corporate & Public Sector Debt Ratings | ||
| (011) 784-1771 | ||
| Shevel@globalratings.net | ||
| Committee Chairperson | ||
| Richard Hoffman | ||
| Senior Analyst | ||
| (011) 784-1771 | ||
| hoffman@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
Criteria for Rating Property Funds, updated April 2015
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
| Bond | A long term debt instrument issued by either a company, institution or the government to raise funds. |
| 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. |
| 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. |
| 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. |
| Hedge | A form of insurance against financial loss or other adverse circumstances. |
| 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. |
| 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. |
| 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 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. |
| Real Estate Investment Trust (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. |
| Shareholder | An individual, entity or financial institution that holds shares or stock in an organisation or company. |
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.
Octodec Investments 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 Octodec Investments Limited with no contestation of the rating.
The information received from Octodec Investments Limited and other reliable third parties to accord the credit rating(s) included;
- audited financial results of Company per 31 August 2015
- four years audited financial statements for Octodec Investments Limited
- full details of the property portfolio
- full details of funding facilities
- updated DMTN programme memorandum– February 2015
- income projections for F16
- breakdown of facilities available and related counterparties
- corporate governance and enterprise risk framework
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 Octodec Investments Limited’s rating to A(ZA); Withdraws Premium Properties Limited’s ratings.
