GCR accords an initial rating of BBB+(NA) to Oryx Properties Limited; Outlook Stable
Johannesburg, 25 Feb 2015—Global Credit Ratings has today assigned first-time national scale ratings to Oryx Properties Limited of BBB+(NA) and A2(NA) in the long term and short term respectively; with the outlook accorded as Stable. The rating(s) are valid until 02/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Oryx Properties Limited (“Oryx”) based on the following key criteria:
Oryx is a leading player in the Namibian property sector, with a property portfolio of just under NAD2bn and is strongly supported by domestic financial institutions and shareholders. Thus, while properties are geographically concentrated in Windhoek, the fund’s local knowledge remains its core competitive advantage, driving robust distribution growth and value enhancement over the review period.
The fund evidences a high quality tenant profile, with around 87% of leases with South African national retailers or large local companies. Moreover, close relationships with most tenants has seen over 90% of expiring leases retained in each year and the overall vacancy rate reported at below 1%. Where vacancies have arisen, the space has been quickly let. Nevertheless, Oryx’s performance is highly reliant on its largest property, Maerua Mall, which accounts for 48% of portfolio value. This poses concentration risk, particularly in light of the increased competition in the retail sector.
Operating income increased at a CAGR of 20% over the review period to a high NAD152m in F14, driven by a mix of expansionary activity and rental escalations. However, rising interest charges have mitigated the impact on distributions (13% CAGR compared to 20% CAGR in operating profit), and interest coverage has decreased steadily from 6.2x in F10 to 3x in F14, albeit still above the benchmark for highly rated funds.
To fund expansion, gross debt has risen four-fold over the review period, with particularly large increases at FYE13 and FYE14. Thus, the gross LTV ratio climbed from 20.6% at FYE10 to 39.8% at FYE13 and 41.3% at FYE14 (slightly above the 40% benchmark for highly rated funds). Similarly, gross debt to EBITDA spiked from 264% at FYE10 to 535% at FYE14. While this is well above the level typical of highly rated funds, the metric is likely to decrease in F15 as the retail properties contribute for a full period.
Although liquidity for smaller acquisitions/refurbishments is readily available, for larger transactions GCR considers Oryx’s financial position to be somewhat constrained by the high LTV and fully encumbered asset base. The DMTN programme could alleviate this constraint somewhat, as it would introduce a new pool of funders, being asset managers, as well as allowing Oryx to borrow on an unsecured basis. In addition, management has indicated that larger projects will combine a greater weighting of equity funding.
Positive rating action is premised upon sustained long term growth in operating income and distributions. A large acquisition that significantly increases the size of the fund and strengthens its financial position, without impacting gearing levels substantially, could also see the rating improve. However, an increase in debt and gearing metrics to levels incongruent with highly rated property funds would likely lead to a downgrade. Underperformance from the Maerua Mall due to competitive pressures or the loss of key tenants would also be negatively considered.