GCR has upgraded Resilient Property Income Fund’s (“Resilient”) domestic ZAR currency rating to A (single A), while the short term rating was upgraded to A1 (single A one). The rating upgrade reflected the strong performance of the fund, despite the worsening conditions in the property sector.
Resilient’s robust performance could be attributed to its focus on regional shopping centres, supported by a sizeable listed property portfolio. With 76% of tenants comprising large national retailers, vacancies remained at 3% in F10, below the industry average of 5% for retail properties. On the back of ongoing development activity, rental income increased at a cumulative average growth rate of 32% over the review period, to R588m in F10. Combined with distributions from the listed property investments, income from operations rose to R625m in F10 (F09: R605m), three times the F06 level. Accordingly, net interest income climbed to 4.4x, above the 4x benchmark for similarly rated funds internationally.
Besides for improved earnings, Resilient’s rating was supported by its relatively moderate gearing ratios. Net debt to EBITDA of 409% at FYE10 was only marginally above the 400% industry norm. However, the group’s LTV in relation to the entire investment portfolio remained at 26%, well below the 40% benchmark for highly rated property funds. While Resilient does evidence a high proportion of short term debt, liquidity risk is mitigatied by sufficient access to funding facilities and a demonstrated ability to refinance maturing debt. Resilient’s large portfolio of listed property (R2.6bn) was also considered in support of its liquidity position, albeit cognisance was taken of the potential difficulties in realising value in a stress situation.
As the rating relates to unsecured debt, the high level of encumbered assets relative to total investment assets (80%) constrained the rating. Comfort was, however, provided by the low LTV ratio, suggesting strong recoveries for unsecured investors. Nevertheless, GCR will continue to monitor the protection afforded to unsecured debtors closely, particularly in light of further issuances under the DMTN programme.
Going forward, Resilient is forecasting strong rental growth in F11, as the large Mall of the North shopping centre begun trading in April 2011. However, management did caution that steep increases in municipal costs would constrain earnings growth somewhat. This notwithstanding, profitability and gearing metrics are budgeted to remain in line with those reported in F10.
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