GCR places Equites’ rating of AA-(ZA) on positive outlook

GCR places Equites Property Fund Limited’s rating of AA-_(ZA) on positive outlook due to strong portfolio performance and wide access to capital. 

Rating Action

Johannesburg, 29 August 2022 – GCR Ratings (“GCR”) has affirmed the national scale long and short-term issuer ratings of Equites Property Fund Limited (“Equites” or “the REIT”) at AA-_(ZA)and A1+_(ZA), respectively. The Outlook has been revised to Positive.

Rating Rationale

The Positive Outlook reflects Equites’ sustained robust operating performance, as evidenced by the substantial growth in the property portfolio, both in South Africa (“SA”) and the United Kingdom (“UK”). This is facilitated by wide access to capital, providing the resources for continued portfolio expansion.

Equites’ robust operating performance was evidenced in the 33% increase in the portfolio value R25.7bn at FY22, driven by a mix of internal developments and acquisitions, both in SA and the UK. Equites utilises a number of channels to sustain growth, including the acquisition of vacant land for development, partnering with other funders to make acquisitions and extending its relationships with tenants to additional properties. In this regard, the transaction for the large R2bn DSV campus was undertaken in partnership with the Eskom Pension and Provident Fund, whilst the REIT has also established relationships with key local retailers Shoprite and The Foschini Group to develop and manage logistics warehouses on their behalf.

In the UK, Equites established Equites Newlands Group Limited (“ENGL”), in partnership with Newlands Development LLP (60%/40% ownership respectively). ENGL is involved in the acquisition and rezoning of strategically located vacant land, and thereafter undertaking the development of logistics properties, largely for international blue-chip tenants. These properties may be sold to the tenant after development, owned in partnership or acquired outright by Equites to grow its own portfolio. There are currently around R2bn in developments in the planning or construction phase in South Africa, and a medium-term pipeline of around GBP1bn in the UK. While the high level of development activity does imply additional risk for the REIT, this is mitigated by the quality of tenants and flexibility in structuring the development and funding thereof.

Performance metrics on Equites’ property portfolio remain very strong, underpinned by the robust demand for logistics properties, which account for 96% of income. The weighted average lease expiry profile across the portfolio is 13.7 years in both South Africa and the UK, with an average escalation rate of 6.6% in South Africa. The vacancy rate was again less than 1% at FY22.

GCR’s assessment of Equites’ financial profile has improved on the back of the REIT’s widening access to capital. To this end, it raised R2bn in new equity during FY22, despite investors’ cautious approach to the property sector, as well as issuing R1bn in new DMTN notes (and R300m in May 2022). Gross debt has risen substantially, from R4.8bn at FY20 to R9bn at FY22 to fund development activity, but leverage metrics remain stable due to strong property value accretion and continuous ability to raise fresh equity. The net LTV ratio has trended at a low 32% since FY20 (FY22: 32.8%), whilst interest coverage remains strong at around 3.2x at FY22. However, the net debt to operating income ratio is moderately high registering at 6.6x at FY21 and 6.5x at FY22, due to the lagged impact of developments on earnings. While there may be some upwards movement in the net LTV ratio to around 35% due to additional debt, and interest coverage may decline slightly due to rising interest rates, GCR expects metrics to remain moderate and well within covenant levels.

Equites’ liquidity assessment is underpinned by its strong access to capital. The REIT has around R570m in available cash and over R500m in unutilised committed facilities. In addition, profits from the sale of development properties will provide an important source of internal funding. The refinancing of much of its FY23 debt is almost complete, with the major source of cash utilisation being the substantial development pipeline. To fund this, a number of existing facilities, particularly in the UK are being increased, and new debt and equity is likely to be raised, given the strong demand from investors. GCR’s liquidity coverage metrics of 1.2x indicates that there are adequate resources to fund the 24-month development pipeline, albeit that the ongoing need for development funding does imply continued liquidity pressure. Only around 52% of the current property portfolio is currently encumbered which does add to financial flexibility.

Outlook Statement

The Positive outlook reflects GCR’s view that Equites will continue to expand its portfolio of high-quality logistics assets that evidence robust performance metrics and are able to generate strong returns. Moreover, the increasing exposure to the UK offers significant diversification into a more stable and developed property market.

Rating Triggers

The rating may be upgraded if Equites 1) increases the scale and diversity of its portfolio by bringing the current development pipeline to fruition; 2) increases its exposure to more stable and developed markets; 3) achieves a sustained moderation of the net debt to operating income ratio and improves interest coverage.

Negative rating action is considered unlikely, but may be triggered by an unexpected decline in portfolio quality or deterioration of the leverage profile.

Analytical Contacts

Related Criteria and Research

Ratings History

Equites Property Fund Limited

Risk Score Summary

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