HMK Real Estate Investment Trust Accorded BBB(NG)(F) Indicative Rating.
Lagos, 03 December 2014—Global Credit Ratings has accorded an indicative, public national scale long term rating of BBB(NG)(f) to HMK Real Estate Investment Trust; with the outlook accorded as Evolving. RATING RATIONALE Global Credit Ratings (“GCR”) has accorded the above credit rating based on the following key criteria: The properties identified for inclusion in HMK Real Estate Investment Trust (“the REIT” or “the trust”) show strong potential for stable income generation, given their strategic location and condition. The preliminary due diligence report on the properties indicates that 5 of the properties have a 100% occupancy rate, while that of a major commercial property (representing 43.7% of the estimated gross rental value of the physical asset portfolio) is 60%. Subsequent listing of the REIT on the Nigerian Stock Exchange (“NSE”) and availability of a primary market maker also offer unitholders some degree of liquidity . The accorded rating reflects the strong corporate profile of the asset manager, including its performance track record, and the technical competence and experience of its management team. Notwithstanding the current high occupancy rates, the short-dated nature of the tenancy contracts exposes the trust to notable vacancy risk, especially given the concentrated nature of the tenant base. Hence, unitholders are partly protected against disruptions in cash flows via a bank guarantee provided by Zenith Bank Plc. Note was also taken of the status of the identified properties in terms of legal and beneficial ownership. While 4 of the properties are legally owned by the sponsor, and the remaining 2 by third parties, all the properties are presently encumbered by mortgages. As a safeguard, the legal documentation requires the legal owners of the identified properties to procure the removal of all encumbrances, and deposit draft deeds of release, and other documents required for transfer of title in respect of the assets with the REIT Custodian prior to the opening of the Issue. One of the creditors, the Asset Management Corporation of Nigeria has indicated (through a comfort letter) its willingness to release 5 of the properties (4 owned by the sponsor and 1 by a director in the company) upon the full payment of an outstanding debt of N6.3bn plus the accrued interest, while Guaranty Trust Bank Plc has also given a written assurance of its intention to execute the necessary title transfer documents in respect of one other property upon the payment of the agreed sale price of N1.8bn. Furthermore, the Nigerian Securities and Exchange Commission regulations and rules require the registrar to an aborted Issue to return the proceeds of such offer to the subscribers. Successful removal of all encumbrances on the identified properties, and the fund manager’s ability to meet or outperform the fund’s objectives, could result in upward rating momentum. The rating will also be sensitive to inability of the sponsor to successfully transfer the identified properties into the REIT, subsequent absence of the bank guarantee, as well as a negative rating action on the Fund manager. NATIONAL SCALE RATINGS HISTORY Initial/last rating (not applicable) Long term: (first time/new rating) Outlook: (first time/new rating)