Johannesburg, 09 December 2020 – GCR Ratings (“GCR”) has affirmed Fortress REIT Limited’s (“Fortress”) national scale long and short term issuer ratings of AA-(ZA) and A1+(ZA) respectively, with a Stable Outlook.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Fortress REIT Limited||Long Term Issuer||National||AA-(ZA)||Stable Outlook|
|Short Term Issuer||National||A1+(ZA)|
The affirmation of Fortress’ ratings reflects the REIT’s large, diverse, and high-quality portfolio, through-the-cycle earnings enhancement from its pan-European exposure, as well as the headroom in financial metrics to withstand the weak letting environment.
Fortress’ strong business profile benefits from its scale and bias towards good quality logistics and retail assets in a portfolio that is well diversified by asset, tenant and geography. Fortress’ growth strategy is centred on ongoing asset recycling to expand its portfolio towards the more defensive logistics sector. Together with well-located convenience retail centres, this continues to underpin overall asset quality. That said, the prevailing weak property fundamentals in South Africa and the negative impact of the coronavirus pandemic have affected all REITs, even those with high quality portfolios, although Fortress’ portfolio diversification has enabled more durable cash flows compared to many of its peers.
In view of the shorter average lease expiry of 3.1 years, there is greater potential for renegotiation of rental rates, but we believe that Fortress’ steady occupancies and quality tenants in core sectors remain supportive of a sound cash flow base. Overall margins are also likely to come off historical highs as offshore earnings are tempered until trading conditions stabilise. The REIT continues to demonstrate flexibility in its development project rollout, which we view as prudent given the uncertain environment.
Amidst the market uncertainty and notable decrease in the value of its investments, Fortress’ net LTV climbed to 38.7% in FY20, from 32.7% previously. Net debt to operating income was sustained near 5.0x in FY20, but rental pressure and the anticipated pull back in offshore cash earnings is likely to see this metric temporarily weaken. Net interest cover also moderated and is expected to remain low. Nevertheless, we consider there still to be headroom under our leverage sensitivities and believe that the REIT will return to its stated long-term leverage policy of between 30-35% over the next 24 months. Our view of leverage also factors in Fortress’ prudent financial risk management and our expectation that the REIT will maintain adequate headroom under all covenants. Beyond the current COVID-19 related uncertainty, material, unforeseen pressure on values and/or earnings could, however, could weaken our leverage assessment.
Fortress’ liquidity assessment is underpinned by coverage of at least 1.5x coverage of 12-months’ requirements. This is supported by the REIT’s measured approach to its development rollout, ample committed facility headroom of R2.2bn, and no meaningful short-term debt expiries. Maturities do amount to around R4.5bn in FY22, although GCR expects proactive refinancing of debt well ahead of scheduled expiries to continue in order for the REIT to sustain a stable funding profile. To this end, note is taken of the REIT’s good access to funding, underpinned by well-established relationships with a broad range of banks and the demonstrated appetite for its debt instruments on the JSE. While the property portfolio encumbrance is high, a significant portion of the securities portfolio is unencumbered, which even under a stressed scenario gives rise to additional financial flexibility.
The Stable Outlook reflects our expectations that, notwithstanding the heightened uncertainty in the wake of the COVID-19 crisis, Fortress’ financial profile will remain relatively stable due to its defensive logistics portfolio, proactive treasury management and the measured approach to its developments.
Upward rating migration beyond the COVID-19 crisis could result from; 1) a recovery in the operating environment that translates into stronger earnings; 2) lengthening of the weighted average debt maturity profile combined with a strengthening in credit metrics. Conversely, GCR could take negative rating action if 1) the operating environment deteriorates; 2) unmitigated value attrition and/or earnings underperformance that persists beyond the current market uncertainty; 3) or if the REIT’s credit metrics were to deteriorate more than anticipated, such that the LTV rises above 40% and net debt/EBITDA above 5x on a sustained basis.
|Primary analyst||Sheri Morgan||Senior Analyst: Corporate Ratings|
|Johannesburg, ZA||Morgan@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019|
|GCR’s Country Risk Score report, November 2020|
|GCR Rating Scales Symbols and Definitions, May 2019|
|GCR’s Commercial Property Sector Risk Score report, August 2020|
|GCR places South African commercial property on negative trend as fragile economy continues to drive high asset, liquidity and funding risks, August 2020|
Fortress REIT Limited
|Rating scale||Review||Rating class||Rating||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||A-(ZA)||Stable Outlook||Apr 2012|
|Short Term Issuer||National||A1-(ZA)|
|Long Term Issuer||Last||National||AA-(ZA)||Stable Outlook||Sep 2020|
|Short Term Issuer||National||A1+(ZA)|
Risk Score Summary
|Rating components & factors||Risk scores|
|Management & governance||0.00|
|Leverage and capital structure||(0.50)|
|Total Risk Score||15.50|
|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.|
|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.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings 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 instrument.
The credit ratings have been disclosed to Fortress REIT 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.
to Fortress REIT 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 information received from to Fortress REIT Limited and other reliable third parties to accord the credit ratings included:
• The 2020 annual financial statements (plus four years of audited comparative numbers)
• The 2020 integrated report
• Results presentations and market/trading updates
• A breakdown of utilised and available debt facilities at September 2020
• Covenant calculation schedule at June 2020