Johannesburg, 31 July 2019 – GCR Ratings (“GCR”) has upgraded the national scale Issuer ratings assigned to Vukile Property Fund Limited (“Vukile”, “the REIT” or “the fund”) to AA-(ZA) and A1+(ZA) for the long and short term respectively, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Vukile Property Fund Limited||Issuer Long Term||National||AA-(ZA)||Stable Outlook|
|Issuer Short Term||National||A1+(ZA)|
The Vukile Issuer ratings are underpinned by sound operating environment exposures, taking cognisance of regulatory quality and institutional strength applicable to both South Africa and Spain, and the below average cyclicality of the property sector.
While the REIT is retail-focused, its portfolio reflects geographic, nodal and tenant diversification, the dominance of national lessees, and deliberate positioning towards demographics that have evidenced more resilience to economic downturns in key jurisdictions. The REIT has also demonstrated the ability to sustain performance through fraught cycles, with positive reversions, relatively strong tenant retention and low vacancies evidencing the benefits of specialisation. Somewhat counteracting these demonstrated strengths is the high concentration of Castellana Properties SOCIMI S.A’s (“Castellana”) earnings/portfolio value to its top 10 properties, and Vukile’s short investment track record in Spain.
Retail vacancies remain relatively well controlled in Southern Africa, edging down to 3% at FY19, and largely aligning with national ranges. In Spain, FY19 acquisitions had no vacancies, while the overall rate is expected to remain at low levels (FY19: 2%), barring modest structural vacancies. Cost ratios continue to trend within a narrow range that is closely aligned to market leaders in the key jurisdictions. The South African portfolio’s gross and net ratios have shown significant stability, averaging 38% and 18% respectively over a five-year period. While margin progression is expected to be constrained in South Africa as tenants manage down their all-in occupancy expenses amidst the rising costs of utilities and rates, Castellana’s base portfolio is expected to register sound net property income growth, supported by active asset management, including a focus on asset enhancement through ongoing capex.
R2.6bn raised from share issues, a R1.8bn contribution from non-controlling shareholders, as well as net debt of R5.6bn were used to fund R10.1bn in assets acquired in FY19, being mostly the Morzal portfolio (four shopping centers acquired from Unibail-Rodamco-Westfield) and other properties in Spain. This saw the group LTV rise to c.37% (adjusted for restricted cash), weighed down by a 46% ratio for Castellana against the more conservative South African portfolio gearing of c.30%. Gearing is expected to remain moderate, with the LTV adjusted for distortions from the timing of certain transactions expected to range between 35-40%. Debt to operating income ratios should still reflect drag from ongoing investing activity in FY20, before substantively correcting from FY21, on the back of uplift from completed capex projects and recent investments. Debt service excluding hedges is expected to strengthen within the 4.0-5.0x range over the rating horizon.
The REIT is expected to achieve liquidity coverage of at least 1.0x in respect of its one-year requirements, anchored by a reasonable debt expiry profile of c.4 years, maturities of c.35% through to July 2021, and no DCM maturities until June 2020. There is sustainable headroom on group and transactional covenants, with FY19 interest cover at 6.1x versus a 2.0x requirement, and the group LTV at 37.2%, against a 50% limit. Note is, however, also taken of certain covenants related to the encumbrance of Castellana shares, which despite current headroom, may be susceptible to market risk. GCR has also noted proven access to diverse funding sources and support from shareholders, which should enable Vukile to sustain a moderate financial profile. That said, appetite for acquisitions and high asset encumbrances curtail the liquidity assessment somewhat. In this regard, the REIT is viewed to have limited scope to materially increase unsecured debt, and low headroom to leverage new acquisitions and capex beyond guidance in anticipation of cash flows from disposals.
The stable outlook reflects GCR’s view of sustained earnings rigour, with margin progression supported by low vacancies, strong tenant retention and rental yield improvement underpinned by ongoing asset enhancement.
A downgrade could arise from 1) material earnings underperformance 2) higher group leverage due to aggressive funding for growth and capex in Spain in particular, 3) weakening in liquidity due to pressure from debt funded acquisitions or low unutilised facility headroom. Conversely, upward rating migration could arise from reduced concentration of Castellana’s earnings/valuation by property as the European portfolio expands further, and a demonstration of management’s commitment to reducing Castellana’s leverage amidst continued investment in Spain.
|Primary analyst||Patricia Zvarayi||Deputy Sector head: Corporate Ratings|
|Johannesburg, ZA||Patricia@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Real Investment Trusts and Other Commercial Property Companies, May 2019|
|GCR’s Country Risk Score report, published June 2019|
|GCR’s Corporate Sector Risk Score reports/Market Alerts, published June/July 2019|
|GCR’s Industry Research on the SA Commercial Property Market, July 2019|
Vukile Property Fund Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Issuer Long term||Initial||National||A(ZA)||Stable Outlook||Feb 2012|
|Issuer Short Term||Initial||National||A1(ZA)|
|Issuer Long term||Last||National||A+(ZA)||Stable Outlook||July 2018|
|Issuer Short Term||Last||National||A1(ZA)|
RISK SCORE SUMMARY
|Country risk score||9.00|
|Sector risk score||7.50|
|Management and governance||0.00|
|Leverage and Capital Structure||-1.00|
|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.|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|DCM||Debt Capital Market(s).|
|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.|
|Debt Service Ratio||A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows over a period to the sum of interest and principal payments over the same timeframe.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures 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.|
|Downgrade||The rating has been lowered on its specific scale.|
|Facility||The grant of availability of money at some future date in return for a fee.|
|Gearing||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, EBITDA or operating income.|
|Hedge||A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.|
|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||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.|
|Issuer Ratings||See GCR Rating Scales, Symbols and Definitions.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Market value||An assessment of the property value, with the value being compared to similar properties in the area.|
|Policy||The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.|
|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.|
|Rating Horizon||The rating outlook period.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|REIT||Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.|
|Rent||Payment from a lessee to the lessor for the temporary use of an asset.|
|Retention||The net amount of risk the ceding company keeps for its own account.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
|Upgrade||The rating has been raised on its specific scale.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The credit ratings have been disclosed to Vukile Property Fund Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Vukile Property 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 information received from Vukile Property Fund Limited and other reliable third parties to accord the credit ratings included:
- the 2019 audited annual financial statements (plus four years of audited comparative numbers);
- the external auditors report;
- presentations and SENS announcements in respect of material transactions and roadshows;
- a breakdown of debt facilities available and related counterparties at 31 March 2019;
- projections of group capex and cash flows for 2020 and 2021; and
- a breakdown of the property portfolios at 2019.