GCR affirms UPDC Real Estate Investment Trust Rating of BBB(NG)(f); Outlook Stable.

30 Sep 2016 In Rating Notifications

GCR affirms UPDC Real Estate Investment Trust Rating of BBB(NG)(f); Outlook Stable.

Lagos, 29 September 2016—Global Credit Ratings has affirmed the national scale long term rating* assigned to UPDC Real Estate Investment Trust of BBB(NG)(f); with the outlook accorded as Stable.

RATING RATIONALE

Global Credit Ratings has accorded the above fund rating to UPDC Real Estate Investment Trust based on the following key criteria:

UPDC Real Estate Investment Trust (“UPDC REIT”, “the fund”) is a closed-ended real estate investment trust (“REIT”) with its portfolio primarily invested in Nigerian commercial/residential property, and liquid assets.

FSDH Asset Management Limited (“FSDH AM”, “the manager”) has established a good performance record as the fund manager of UPDC REIT, which is one of several funds it manages on an outsourced basis. Global Credit Rating Company Limited (“GCR”) has accorded a manager quality rating of BBB+(NG)(mq) to FSDH AM.

The fund’s investment property portfolio has displayed good quality (in terms of condition, location and potential for stable income generation), but high concentration by property/tenant (highlighted in the previous rating report) impacted negatively on revenue generation in F15. A major residential property has been vacant since 4Q 2015, following non-renewal of the tenancy contract by the sole tenant. Furthermore, the manager has yet to comply with the asset mix prescribed by the Trust Deed, and the fund’s liquid asset portfolio has significantly exceeded the specified maximum limit from inception to date. The manager has, attributed this breach to limited availability of real estate-related assets that meet the fund’s investment criteria. On the positive side, the fund is considered to exhibit low levels of liquidity risk.

Given illiquidity in listed units of the fund (which is closely held/closed-ended), and its portfolio of primarily non-traded assets, NAV variability and unit price have limited value as measures of fund performance. The fund’s financial performance (which takes into account rental and other revenues, property valuation variation and distribution trends) provides a clearer measure of fund performance. In F15, the fund generated profit after tax of N2.99bn, annualised 2.3% lower than in F14. Rental income increased by annualised 28.4% to N1.6bn, while interest income also rose by annualised 43.7% over F14. The fair value gain on investment properties, however, amounted to N0.4bn, compared to N2.3bn in the 19 month period to 31 December 2014. The sale of two residential flats during the review year partly constrained the reported fair value gain. An interim distribution of N1.14bn was made during F15, and a further distribution of N1.09bn was made post the balance sheet date (translating to N0.84 (F14: N1.19) per unit overall).

Asset/tenancy concentration could lead to increased volatility in fund returns, and diminished property valuations, raising NAV variability. Prolonged mandate non-compliance may raise regulatory risk and/or result in investor dissatisfaction.

Positive rating action would follow a satisfactory performance track record, positive developments in the local real estate market (in terms of property valuation and rental income generation capacity), significant reduction in tenant concentration, as well as a positive rating action on the fund manager. A negative rating action could result from a significant rise in vacancy rates and a general downturn in the country’s real estate market.

* Note that fund ratings provide an opinion regarding the fund’s ability to preserve principal value under varying market conditions, with reference to the relevant asset management environment (refer to published rating scales and definitions).


NATIONAL SCALE RATINGS HISTORY

Initial rating (March 2013)
Long term: BBB(NG)(f)
Outlook: Stable

Last rating (August 2015)
Long term: BBB(NG)(f)
Outlook: Stable


ANALYTICAL CONTACTS

Primary Analyst

Julius Adekeye
+23 41 462 2545
.(JavaScript must be enabled to view this email address)

Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Funds and Asset Managers, updated March 2016
Criteria for rating Property Funds, updated May 2016
Glossary of Terms/Ratios (February 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.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:  HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. 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.COM.NG.

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; c.) such rating was an independent evaluation of the risks and merits of the rated entity; and d.) the validity of the rating is for 12 months, or as indicated by the applicable credit rating document.

The rating was solicited by, or on behalf of, UPDC Real Estate Investment Trust, and therefore, GCR has been compensated for the provision of the rating.

UPDC Real Estate Investment Trust and FSDH Asset Management 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 rating above was disclosed to UPDC Real Estate Investment Trust and FSDH Asset Management Limited with no contestation of/changes to the rating.

The information received from UPDC Real Estate Investment Trust and other reliable third parties to accord the rating included the audited financial statements for the year ended 31 December 2015, most recent year to date management accounts up to 31 March 2016, latest asset valuation report as at 31 December 2015, tenant schedule as at 30 June 2016, corporate governance and enterprise risk framework, and other relevant legal and operational policies.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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