Johannesburg, 13 July 2015 — Global Credit Ratings has today upgraded the national scale ratings assigned to SA Corporate Real Estate Limited to A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to SA Corporate Real Estate Limited (“SAC” or “the REIT”)* based on the following key criteria:
In June 2013 GCR assigned initial ratings to SAC of A-(ZA) and A1-(ZA) in the long and short terms respectively, with the ratings placed on a Positive outlook, pending the completion of the entity’s restructuring process. These ratings, as well as the Positive outlook, were maintained in the June 2014 review of the REIT, as certain elements of the restructuring and the acquisition of Afhco Holding Proprietary Limited (“AFHCO”) were still ongoing. With the restructuring process and the integration of AFHCO largely complete, GCR has upgraded SAC’s ratings to the current level.
SAC is a large and well diversified property fund, with exposure to all key segments of the domestic property market. The restructuring process undertaken over the past five years has seen the disposal of underperforming properties, the acquisition of higher-quality properties, and the initiation of refurbishments/redevelopments on select retail properties. In addition, the acquisition of the AFHCO inner city residential property as of 1 July 2014 has further diversified earnings and provided the group with a footprint in the vibrant inner city market. The realignment of the property portfolio has seen improvements in all key property performance metrics. In this regard, weighted average vacancies for the traditional portfolio amounted to just 3.7% at FYE14 (FYE13: 4%), while that of the AFHCO portfolio amounted to 6.1%. Moreover, the weighted average rental rate had risen to R76.3/m2 at FYE14 (F13: R73.8/m2), with the portfolio reporting a well-weighted lease expiry profile and sound escalations.
Despite cumulative disposals of R1.6bn over the five-years to FYE14, SAC’s property portfolio rose to R10.7bn at FYE14. While in part driven by acquisitions (particularly the AFHCO portfolio), this has also resulted from fair value gains totalling R1bn in the three years to FYE14. Although revenue was stagnant in the F11-F13 period, strong growth was reported in F14, with revenue rising by 19% to R1.4bn (driven by core rental income growth). Thus, and despite the F14 EBITDA margin of 59.7% remaining below the 61.9% reported in F10, EBITDA was R109m higher than the F10 level at R841m in F14.
Debt utilisation has increased markedly over the past three years, rising from R1.1bn at FYE12 to R3.1bn at FYE14 (FYE13: R1.6bn). This has seen gross debt to equity and the gross LTV rise to 41% and 30% respectively at FYE14, with gross debt to EBITDA increasing to 369%. Moreover, net interest cover receded to 5.2x in F14 (F13: 9.3x), albeit still remaining comfortable. Higher debt levels have been intentionally assumed by SAC’s management, in an effort to improve value to shareholders. However, debt is now at management’s prudential limit, and no further increases in gearing are expected.
Looking ahead, given the recent ratings upgrade, positive ratings action is unlikely over the short to medium term, particularly given the embattled state of the domestic economy (with inflationary pressures, low growth, high unemployment and significant consumer duress, inter alia). In this context, the domestic property market continues to report strain in the commercial and industrial sectors, while the retail market is witnessing rising competitive forces. As such, positive ratings action is only likely once improved conditions manifest in the domestic market, and such an upgrade would require key credit risk metrics to remain around current levels. In contrast to this, should materially higher vacancies be reported in the retail or AFHCO portfolios, this could undermine the portfolio’s overall performance and see a deterioration in credit risk metrics. In this respect, should the LTV materially exceed 40%, debt to EBITDA materially exceed 400%, or net interest cover fall below 2x, this could trigger negative ratings action
* The credit rating above is now accorded to SA Corporate Real Estate Limited, following the conversion of SA Corporate Real Estate Fund into a public limited liability company on 1 July 2015.
NATIONAL SCALE RATINGS HISTORY
|Initial rating (June 2013)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (July 2014)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Sector Head: Corporate & Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
SAC rating reports, 2013-2014
RATING LIMITATIONS AND DISCLAIMERS
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|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.|
|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.|
|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.|
|LC||An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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 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.|
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.
SA Corporate Real Estate 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 SA Corporate Real Estate Fund with no contestation of the rating.
The information received from SA Corporate Real Estate Fund and other reliable third parties to accord the credit rating(s) included:
- 2014 Integrated Report and AFS, as well as preceding Integrated Reports and AFSs for four years;
- 2010-2014 results presentations;
- a comprehensive listing of the fund’s property portfolio;
- forecast distribution statement for 2015;
- fund register of compliance with the King III Code of Corporate Governance; and
- comprehensive details of SAC’s funding facilities as at 30/04/2015.
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.