Johannesburg, 25 May 2018 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Fortress REIT Limited at AA-(ZA) and A1+(ZA) for the long and short term respectively; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit ratings to Fortress REIT Limited (“Fortress”, “the REIT”) based on the following key criteria:
Notwithstanding recent negative press and share price volatility, as per GCR’s analysis there is no impact to the current ratings at this time. However, developments with regards to ongoing investigations by financial regulators will be monitored, as any adverse findings that materially impact on the REIT’s business and/or financial profile could pressurise the ratings.
The current rating is supported by Fortress’ large portfolio of physical properties valued at R28bn at 1H FY18. Portfolio growth has been sustained by a strong management team with a track record of developing properties that can deliver long term growth. Much of the logistics portfolio comprises large modern facilities that have attracted national and international blue chip tenants, while retail assets are positioned in the CBD or rural areas close to transport nodes, generating high demand from national retailers. The resulting extended lease maturity profile and strong escalations, should support long term rental and cash flow growth.
Notwithstanding the sharp decline in equity values, which has seen the value of the equity portfolio decline to around R23bn at 2 May 2018 (around 40% lower than the valuation at 1H FY18), robust dividend flows earned from these holdings continue to bolster operating income. Although the market volatility should have no impact on dividend income, even if the inflows were significantly impaired the operating margin would still exceed GCR’s threshold of 60% for highly rated REITs.
Conservative leverage policies have seen Fortress maintain very low LTV’s, of around 25%, across the review period, but the marked erosion in the value of the listed securities post 1H FY18 has pushed up gearing metrics. Based on GCR’s adjusted calculations the fund’s fair value LTV is estimated to trend higher at c.31% for FY18 (1H FY18: 23%). GCR believes that the REIT has enough rating headroom to withstand the current share price volatility, although a sustained breach of the LTV above c.35% could place downward pressure on the ratings.
Ensuring sufficient funding for its capex pipeline has become more important in light of the diminished appetite for a capital raise until the negative sentiment settles. Providing comfort, Fortress reports a well-diversified debt profile, with large facilities being availed by leading domestic banks and insurers. Bank facilities are smoothed over a 1 to 5 year period, while the loans from insurers extend up to 10 years. Although some restructuring of the securities provided to banks has been necessary, Fortress maintains facility LTVs well within its covenant limits. Fortress also enjoys a strong liquidity position, supported by R2.6bn in unutilised facilities at February 2018, secured by existing mortgages and listed securities. While the REIT does not retain cash, it should receive around R700m in biannual cash dividend inflows from equity holdings. There is also approximately R13.4bn in unencumbered equity which could be sold to meet liquidity requirements, as well as around R3bn in assets earmarked for sale.
Negative rating action would materialise if credit risk metrics weaken such that the net LTV persists above c.35% and/or net interest cover falls below 3.5x, due to continued volatility in listed equities or adverse changes in its portfolio. Any adverse findings by regulatory investigations, would also be negatively considered. Conversely, sustained growth in the size and quality of the property portfolio, reflected in strong property performance metrics and steady income and cash flow growth could lead to positive rating movement. Maintenance of a conservative debt profile and strong liquidity factors is also necessary.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2012)|
|Long term: A-(ZA); Short term: A1-(ZA)|
|Last rating (April 2017)|
|Long term: AA-(ZA); Short term: A1+(ZA)|
|Sector Head: Corporate & Public Sector Debt Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Property Funds and Commercial Real Estate companies, updated February 2018
Global Master Criteria for Rating Corporate Entities, updated February 2018
Fortress Rating Reports, 2012-2017
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.
|Balance Sheet||Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|Debt Service Ratio||A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows over a period to the sum of interest and principal payments over the same timeframe.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Hedging||A financial risk management process or function to take a market position to protect against an eventuality. Taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.|
|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.|
|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||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||A long-term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Multinational||A company that operates commercially in a number of countries outside of the one wherein it is based. Such companies are often listed on more than one stock exchange or have shares available via depository receipts.|
|Operating Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Portfolio||A collection of investments held by an 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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short-term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12-month period, including interest payments and debt redemptions.|
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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
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 credit ratings have been disclosed to Fortress REIT Limited with no contestation of the ratings.
The information received from Fortress REIT Limited and other reliable third parties to accord the credit ratings include:
- the 2017 audited annual financial statements (plus four years/periods of comparative numbers);
- condensed unaudited interim financial statements for the six months ended 31 December 2017;
- SENS guidance to shareholders regarding the restructuring of the Siyakha Trusts;
- Income statements and balance sheet forecasts for FY18 and FY19;
- a breakdown of facilities available and related counterparties at 31 December 2017 and 28 February 2018.
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.
GCR affirms Fortress REIT Limited’s rating at AA-(ZA), Stable outlook