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Rating Action

GCR Ratings (“GCR”) has assigned Centum Real Estate Limited national scale long and short-term issuer ratings of BBB+(KE) and A2(KE) respectively, with the Outlook accorded as Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Centum Real Estate Limited Long Term issuer National BBB+KE) Stable Outlook
Short Term issuer National A2(KE)

Rating Rationale

The ratings accorded balance Centum Real Estate Limited (“Centum RE”) strong competitive position, conservative liquidity and adequate leverage levels against the substantial risks inherent in real estate development.

As part of its medium-term strategy, Centum Investment Company PLC (“CICP”) has consolidated nearly all its property development assets (the exception being the Two Rivers Development Limited) into a single entity, Centum RE, which has been tasked with bringing the various projects within the broad development areas to fruition. However, the rating is constrained by the very high risks associated with real estate development, given the sector’s susceptibility to economic cycles and other risk factors such as construction delays and cost overruns. These concerns are currently heightened by the uncertain economic environment considering COVID-19 disruptions, and the substantial amount of residential units being developed in Nairobi.

Counterbalancing these risks, GCR has considered Centum RE’s strong brand recognition (as part of CICP) in support of the rating, given CICP’s track record of creating projects and investments in various industries. This reputation has helped encourage pre-sales for the real estate pipeline, which have exceeded initial projections (75% of its current projects under construction have been pre-sold), whilst also attracting interest for residential units from institutional investors. Accordingly, although sales activity slowed because of COVID-19 disruptions, Centum RE continues to make progress with regards to new sales and deposit/pre-payment collections.

GCR has also considered the substantial investment Centum RE has already funded in its current real estate development projects, combined with stringent project approval protocols, that has helped to de-risk the projects somewhat. This includes thorough market analysis using varied sources, and a sales led approach, with all projects requiring at least 30% pre-sales before getting final approval. Delivery risk is also mitigated through the use of inhouse professionals to oversee the design and construction phase.

Centum RE generates revenue from land development right sales, which provides an important income stream during the longer earnings cycle characteristic of residential development. Concentration risk is also mitigated by geographic and target market diversification. In Nairobi there are several residential projects, mainly around the Two Rivers site, with other large developments in Mombasa (Vipingo) and Entebbe, Uganda (Pearl Marina). Each development caters to various market segments, from affordable housing to high end units, albeit with a bias to affordable housing due to current market demand dynamics.

The rating is constrained by the fact that the current projects are mainly in the construction phase and will only be completed within 12 – 36 months. Accordingly, earnings and credit protection metrics remain weak in the initial two years, and will only reach levels associated with higher rated companies in year three, as the projects reach fruition and final income is received. Mitigating this risk, GCR has considered that the first phase of several projects will be completed by the end of FY21, while initial profitability and cash flow will be further bolstered by a large land sale at Vipingo. Similarly, the sales pipeline for projects to be completed in FY22 is relatively advanced and construction on most projects has begun, with the current receivables on sold units sufficient to cover the projected construction costs.

Notwithstanding that costs are expected to increase substantially over the next 12-18 months, GCR has assessed the liquidity position to be a rating positive. This is supported by the consistent collection of deposits and pre-payments, the additional cash to be provided by equity and land sales, as well as the proposed medium-term bullet-payment note to be issued.

Outlook Statement

The stable outlook reflects GCR’s expectation that the current projects will largely progress according to projections, ensuring adequate liquidity over the construction phase and ample cash resources to settle debt at maturity.

Rating Triggers

The rating could be upgraded if first phase of projects is completed on time and projected cash flows materialise, such that Centum RE could complete further phases with less recourse to external funding. The rating uplift could also derive from further land sales that significantly improve the cash and liquidity position.

Weaker than expected sales or delays to the completion of projects, would result in operating cash flows below projections, which may necessitate additional debt funding. Similarly, if such delays persist there may be insufficient cash to put into the sinking fund to ensure resources are available to redeem the bond at maturity

Analytical Contacts

Primary analyst Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771
Secondary analyst Eleanor Kigen Senior Analyst
Nairobi, KE EleanorK@GCRratings.com +254 20 367 3618
Committee chair Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Risk Score Summary

Rating Components and Factors Risk Scores
Operating environment 5.25
Country risk score 3.75
Sector risk score 1.50
Business profile 1.25
Competitive position 1.25
Management and governance 0.00
Financial profile 1.25
Earnings performance 0.25
Leverage and Cash Flow 0.00
Liquidity 1.00
Comparative profile 0.00
Peer comparative 0.00
External support 0.00
Total risk score 7.75

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for corporate Entities, May 2019
GCR Ratings Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, May 2020
GCR Corporate Sector Risk Scores, July 2020

Ratings History

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial/ last National BBB+(KE) Stable October 2020
Short Term Issuer Initial/ last National A2(KE) October 2020

Glossary

Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
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 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.
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.
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.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating 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 instruments.

Subsequent to an appeal by the rated entity, the rating on the national scale long term issuer rating was revised as reflected in the announcement. The credit ratings have been disclosed to Centum Real Estate 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.

Centum Real Estate Limited participated in the rating process through 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 Centum Real Estate Limited and other reliable third parties to accord the credit ratings included:

  • Five-year financial projections
  • Historical accounts or relevant entities
  • Company presentations
  • Draft bond programme memorandum
  • Year-to date sales figure
  • Industry research reports