GCR places Equites Property Fund Limited’s rating of AA-(ZA) on positive outlook due to strong portfolio performance and wide access to capital.
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.
| Rated Entity / Issue | Rating class | Rating scale | Rating | Outlook / Watch |
| Equites Property Fund Limited | Long Term Issuer | National | AA-(ZA) | Positive Outlook |
| Short Term Issuer | National | A1+(ZA) |
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
| Primary analyst | Eyal Shevel | Sector Head: Corporate Ratings |
| Johannesburg, ZA | shevel@GCRratings.com | +27 11 784 1771 |
| Committee chair | Yohan Assous | Sector Head: Structured Finance |
| Johannesburg, ZA | Yohan@GCRratings.com | +27 11 784 1771 |
Related Criteria and Research
| Criteria for the GCR Ratings Framework, Jan 2022 |
| GCR Rating Scales Symbols and Definitions, May2022 |
| Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, Jan 2022 |
| GCR’s Country Risk Score report, Aug 2022 |
| GCR’s SA Corporate Sector Risk Score report, March 2022 |
| GCR’s Commercial Property Sector Risk Score report, June 2022 |
Ratings History
Equites Property Fund Limited
| Rating class | Review | Rating scale | Rating | Outlook/Watch | Date |
| Long Term Issuer | Initial | National | A(ZA) | Stable Outlook | October 2018 |
| Short Term Issuer | National | A1(ZA) | |||
| Long Term Issuer | Last | National | AA-(ZA) | Stable Outlook | August 2021 |
| Short Term Issuer | National | A1+(ZA) |
| Rating factors and sub-factors | Risk scores |
| Operating environment | 15.50 |
| Country risk score | 8.75 |
| Sector risk score | 6.75 |
| Business profile | 0.75 |
| Portfolio quality | 0.75 |
| Management and governance | 0.00 |
| Financial profile | (0.50) |
| Leverage and Capital Structure | (0.00) |
| Liquidity | (0.50) |
| Comparative profile | 0.00 |
| Group support | 0.00 |
| Peer analysis | 0.00 |
| Total Score | 15.75 |
| Asset | A resource with economic value that a company owns or controls with the expectation that it will provide future benefit. |
| Bond | A long-term debt instrument issued by either a company, institution or the government to raise funds. |
| 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. |
| 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 | 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. |
| Long Term Rating | See GCR Rating Scales, Symbols and Definitions. |
| Margin | A term whose meaning depends on the context. In the widest sense, it means the difference between two values. |
| 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. |
| 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. |
| Short Term Rating | See GCR Rating Scales, Symbols and Definitions. |
| Weighted Average | An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities. |
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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to Equites 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.
Equites 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 Equites Property Fund Limited and other reliable third parties to accord the credit ratings included:
