Announcements

GCR affirms Fortress Income Fund Limited’s rating of A(ZA); Outlook Stable

Johannesburg, 28 April 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Fortress Income Fund Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Fortress Income Fund Limited (“Fortress”) based on the following key criteria:

Fortress has reported a fourfold appreciation in the value of its investments over the review period to R14.7bn at 1H F15. This growth has seen it transition into a truly hybridised fund, with listed securities representing R7.5bn of total investments at 1H F15, and the balance vested in wholly and jointly owned properties. Fortress also reports geographic diversification and a Rand hedge through its burgeoning offshore exposure, enabled by equity investments. These equity investments aside, the higher regional mall exposure now reported by the fund has largely countered the impact of disposals of marginal industrial/office assets over the review period. The property portfolio reflects sound fundamentals, with well-spaced lease maturities (of which ‘A’ grade tenants account for 64% of both GLA and contractual rentals) and above inflation renewals/escalations. The vacancy rate tapered further to 4.1% of GLA at 1H F15 (FYE14: 4.6%), and is expected to remain well contained going forward.

Rental income rose by 13% to R763m in F14, albeit with growth moderating to an annualised 8% in 1H F15. The operating margin has remained above GCR’s threshold for ‘A(ZA)’ band rated funds, at around 64% since F13, although cost pressures from utilities and rates are likely to temper consumer spend and retail REITs’ earnings going forward. Income from the actively managed equity portfolio rose to R301m in F14 (1H F15: R132m). Coupled with steady rental earnings growth, this saw operating cash flow climb to the R500m mark in F14, and has supported a five-year CAGR in distributions of 35%. Although gross interest cover had fallen to 2.6x at F14 (1H F15: 2.8x), from levels above 3x in prior years, this remains above GCR’s 2x benchmark for ‘A(ZA)’ band rated funds.

The progressive elevation in debt to R3.4bn (FYE14: R3bn) has been outstripped by the accumulation in equity, which has risen more than fourfold since FYE10 to R11.6bn at 1H F15. Strong institutional support has enabled comfortable LTVs (1H F15: 23%), and net debt to EBITDA has remained within the 400% threshold at 394% as at 1H F15 (FYE14: 24%; 384%). Unencumbered equities covered unsecured debt 2.6x at FYE14 (1H F15: 4.6x), implying fairly robust recoveries for unsecured creditors than those evidenced by most REITs. Stringent haircuts applied to the securities indicate that LTVs would still likely fall below GCR’s 40% benchmark. Coupled with ample overcollateralisation on its bank facilities (R4.4bn at 1H F15), this enhances the REIT’s funding flexibility.

Looking ahead, positive rating action would likely only follow measured and appropriately timed acquisitions, supporting sustainable annuity income streams and further diversification despite a constrained operating environment. Coupled with conservative gearing and sound debt serviceability buffers, this could result in a rating uplift in the medium term. In contrast to this, credit protection metrics materially/persistently worse than GCR’s benchmarks for ‘A(ZA)’ band rated REITs, due to (inter alia) adverse regulatory and/or macroeconomic developments, could warrant a ratings downgrade.

NATIONAL SCALE RATINGS HISTORY

   
     
Initial rating (April 2012)    
Long term: A-(ZA); Short term: A1-(ZA)    
Outlook: Stable    
     
Last rating (April 2014)    
Long term: A(ZA); Short term: A1(ZA)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

Primary Analyst    
Patricia Zvarayi    
Senior Analyst    
(011) 784-1771    
Patricia@globalratings.net    
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate Ratings    
(011) 784-1771    
Shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, February 2015

Criteria for Rating Property Funds, April 2015

Fortress Rating Reports, 2012-2014

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.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. 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.NET.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

CAGR The compound annual growth rate is the year-on-year percentage growth rate of an investment over a given period of time. It is found by calculating:
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
Diversification Spreading risk by constructing a portfolio that contains different investments, 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.
EBITDA Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.
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.
Liquidity Risk The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Operating Margin Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
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.
Secured Debt Debt backed with or secured by collateral to reduce lending risk and thus the interest rate charged.

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

Fortress Income 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 credit rating/s has been disclosed to Fortress Income Fund Limited with no contestation of the rating.

The information received from Fortress Income Fund Limited and other reliable third parties to accord the credit rating included the 2014 audited annual financial statements (plus four years/periods of comparative numbers), full year budgeted financial statements for 2015, condensed unaudited interim financial statements for the six months ended 31 December 2014, corporate governance and enterprise risk framework, industry comparative data, regulatory framework and a breakdown of facilities available and related counterparties.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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