GCR affirms Vukile Property Fund Limited’s rating of A(ZA); Outlook Positive
Johannesburg, 15 March 2017—Global Credit Ratings has today affirmed the national scale issuer ratings assigned to Vukile Property Fund Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Positive.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Vukile Property Fund Limited (“Vukile”) based on the following key criteria:
Vukile’s refocused investment strategy has seen it transition into a predominantly retail-oriented fund, geared at improving the overall quality and size of the portfolio. Post finalisation of the forthcoming transaction with GemGrow Properties Ltd (“GemGrow”), Vukile’s total property investments are expected to be valued at c.R14.7bn at year-end FY17 (FY13: R7.7bn). The GemGrow transaction will see Vukile acquire all 14 of the ex-Synergy retail assets for R2.5bn via an asset swap agreement, thus taking Vukile’s direct retail weighting to c.86% of the total portfolio (FY16: 67%), from around 48% four years ago.
In the interim, the fund’s focus is on optimising the existing portfolio by recycling existing capital sources into yield enhancing upgrades and developments, with two retail centres expected to be completed in 2017. GCR also notes management’s intention to further diversify earnings offshore, which should provide an effective Rand hedge through the cycle.
Tenant quality is fairly high, with ‘A’ grade lessees’ contributing c.65% of GLA, whilst the lease maturity profile is well-dispersed, with at least 44% of in-force rental contracts expiring in FY20 and beyond. The vacancy rate increased to 5% in 1H F17 (FY16: 3.9%), although is expected to moderate going forward as certain office assets are anticipated to be traded out of the portfolio.
The 32% increase in rental income to R2.1bn achieved in FY16 was mainly driven by acquisitions. While growth moderated to an annualised 4% in 1H FY17, the completion of planned developments and higher average base rentals off the back of the enlarged retail portfolio of direct assets is expected to provide revenue uplift in FY18. Medium term margins are expected to be relatively resilient, backed by robust in-force escalations and cost control initiatives.
The cumulative R5.3bn in cash raised from shareholders since FY13 and dividend reinvestments have kept gearing metrics conservative. Vukile’s LTV ratio reduced to a low of 28% at 1H FY17, which is well below management’s upper target threshold of 35% and aligns to levels reported by highly rated REITs. Debt to operating income metrics also registered at a review low of 308% at 1H FY17 (FY16: 424%) on the back of sizeable debt repayments. Note is taken of the large debt maturities over the next 24 months, although potential refinancing risk is mitigated by the low LTV, sufficient unutilised facilities and the discretionary cash balance of R871m reported at 1H FY17.
Vukile’s ability to successfully bed down new assets and sustain high quality cash flows and grow earnings in line with the articulated retail strategy could provide ratings uplift. Moreover, the lengthening of the debt maturity profile would also be positively viewed. On the contrary, downward rating pressure could arise from a notable slowdown in the retail sector, thereby weakening the fund’s performance benchmarks, and/or a material increase in gearing.
|NATIONAL SCALE RATINGS HISTORY|
Initial rating (February 2012)
Long term: A(ZA)
Short term: A1(ZA)
Last rating (February 2016)
Long term: A(ZA)
Short term: A1(ZA)
|Sector Head: Corporate ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2017
Criteria for rating property funds, updated February 2017
Vukile rating reports (2012-2016)
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>
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
|Gross lettable area||Gross lettable area, or GLA, is a term used in commercial property to indicate the amount of floor space rented or available for rental.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|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.|
|Leverage||Or Gearing, 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.|
|Loan to value||The principal balance of a loan divided by the value of the property funded. LTVs can be computed as the loan balance to current property market value, or the original property market value.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|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.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|REIT||Real Estate Investment Trusts are JSE listed companies that own operate and manage a real estate portfolio consisting of income producing property (office parks, industrial parks or retail centres).|
|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.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate. Also an agricultural term describing output in terms of quantity of a crop.|
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.
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 credit ratings have been disclosed to Vukile Property Fund Limited with no contestation of the rating.
The information received from Vukile Property Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2016 audited annual financial statements (plus prior year of comparative numbers)
- 1H 2017 unaudited interim accounts
- A breakdown of debt facilities available and related counterparties at 1H 2017
- Other public information
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.