Johannesburg, 24 April 2015 — Global Credit Ratings has today upgraded the national scale long term rating assigned to Resilient Property Income Fund Limited to A+(ZA) and affirmed the national scale short term rating of A1(ZA); with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Resilient Property Income Fund Limited (“Resilient”) based on the following key criteria:
GCR placed Resilient’s long term rating on a positive outlook in March 2014. The upgrade of Resilient’s long term rating follows the sustained strong performance of the fund’s direct property investments, as well continued fair value gains and income growth from its listed equities portfolio.
Resilient is a large listed property fund focused on dominant regional malls. This focus has seen the fund’s direct property investments rise to over R16bn at 1H F15, consisting of 28 active properties, 6 vacant lots and the joint venture in Nigeria. Direct property investments are complemented by a large portfolio of listed property equities, with a market value of R11.6bn at 1H F15. Through these, Resilient is exposed to other segments of the local market, as well as to the European and North American markets. Resilient’s direct property portfolio is characterised by the high quality of its tenant base (consisting mostly of A and B grade tenants) and very low vacancies (of just 2.2% at 1H F15); attesting to the strong demand for its lettable area and the sound administrative ability of management.
Sustained investment activity has seen rental income rise from R588m in F10 to R1.3bn and R833m in F14 and 1H F15 respectively. This has filtered through to earnings, with income from operations and investments rising from R625m in F10 to R1.3bn and R814m in F14 and 1H F15 respectively. Although this growth has been outpaced by rising interest costs, net interest cover has remained sound at 3.5x in 1H F15 (F14: 2.9x).
As a REIT, Resilient distributes all its operating income to shareholders. Nonetheless, fair value gains have totalled R8.6bn over the review period (FYE14: R1.9bn; 1H F15: R1.6bn), ensuring that net gearing and LTVs have remained comfortable. In this regard, Resilient reported gross debt of R8.4bn at 1H F15 (FYE14: R6.9bn), with net debt to equity and the net LTV thus comfortable. Due to the lagged impact of earnings from acquisitions, the continuous pipeline of property development, and debt raised at the end of 1H F15, Resilient has reported net debt to EBITDA above GCR’s 400% benchmark for “A-band” rated funds since FYE10. However, the high quality of properties and investments (with low vacancies, long leases and strong cash yields) and the long term nature of these assets provide comfort in this regard. The REIT also reports sounds liquidity as a function of significant unused bank facilities, overcollateralisation of existing loans, longstanding relationships with banks, and the ability to raise debt through its listed debt programme. In addition, the wholly unencumbered equity portfolio provides further liquidity support, covering gross debt by 1.3x at 1H F15.
Notwithstanding the above, the domestic operating environment remains constrained, with slow economic growth, high unemployment and ongoing consumer duress affecting Resilient’s underlying tenants. Furthermore, Resilient is reporting heightened competition and limited acquisition opportunities, given the state of the economy and the consolidation that the property market has reported over the past decade. Accordingly, and given the rating upgrade attained, upward rating migration would only likely occur over the long term and would be predicated upon substantial growth and diversification of the fund, as well as a material improvement in key credit risk metrics. Conversely, macroeconomic trends which negatively affect consumer spending patterns and domestic funding costs could result in negative trends in portfolio performance, arrears and vacancies. To the extent that this results in the fund underperforming expectations, gearing may rise further and could place downward pressure on the rating.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May/2010)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (Mar/2014)|
|Long term: A(ZA); Short term: A1(ZA)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, February 2015
Criteria for Rating Property Funds, April 2015
Resilient Rating Reports, 2010-2014
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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.|
|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.|
|Joint Venture||A project or other business activity in which two persons or companies partner together to conduct the project.|
|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 (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.|
|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.|
|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.|
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.
Resilient Property Income 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 Resilient Property Income Fund Limited with no contestation of the rating.
The information received from Resilient Property Income Fund Limited and other reliable third parties to accord the credit rating(s) included the 2014 Integrated Report (including the audited financial statements), unaudited 1H 2015 interim results, 2015 budgeted financial statements, the corporate governance and enterprise risk framework, industry comparative data and the regulatory 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.