Johannesburg, 01 April 2019 — 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:
Despite relief from early settlement of R733m in debt in 1H FY19, Fortress’ reported LTV ratio continues to be distorted by development risk, while also reflecting the adverse impact of substantial write downs against indirect investments and equity-backed loan exposures after the investees’ share prices fell sharply in 2018. Although the metric remains below an internal threshold of 35% when stressed to exclude the exposure to the Siyakha Trusts, it reflects reduced headroom to comfortably absorb material market volatility.
The funding profile is deemed to be evolving, given the sizeable development schedule to be undertaken over the medium term and constrained progression in the value of the base property portfolio due to weak market fundamentals. Conversely, development risk is being largely offset by capital released from office and industrial assets being recycled into the logistics projects, with some comfort taken from R3.9bn in FY17-18 sales, achieved at a modest combined premium to book value. Clarity on the future of the BEE structure would also go further towards finalising actions taken to address perceptions in respect of the historical relationship with Resilient REIT Limited.
Market support for capital market issuances post the sharp falloff in Fortress’ market capitalisation is yet to be proven, although advanced plans are in place to refinance most of the DCM exposures maturing in the short term. Access to liquidity from highly-rated funders is demonstrated by R17.4bn in credit lines available at 1H FY19. In addition, undrawn facilities comfortably covered maturing DCM issues, albeit falling short of full coverage of short-term debt. Facilities that were approved post 1H FY19 will maintain the cap on annual expiries at 25%, but lumpy maturities would still elevate the quantum of debt expiring in FY20/21.
Most of the property portfolio is pledged against existing facilities, although this entrenches bank relationships. Security encumbrances are being reduced from elevated levels at FY18, which would enhance the liquidity assessment, while engagement to equalise funders in respect of security held against facilities and to standardise covenants is ongoing.
Performance is anchored by retail and logistics properties presenting well-managed vacancies, moderate tenant/asset concentration and low arrears, with efficiencies drawn from sound property management. Cash flows are also underpinned by a medium-term lease expiry profile and rising national and international tenant representation. Coupled with listed portfolio distributions, this is expected to support margins comfortably above the industry mean. Pressure is, however, expected from lessees’ efforts to manage down all-in occupancy costs amidst rates and utilities’ inflation in a weak operating climate.
GCR notes that the Financial Sector Conduct Authority recently cleared Fortress of allegations made in 2018 of insider trading. The regulator’s investigation into prohibited trading practices, as well as PricewaterhouseCoopers’ review of past property transactions and share trades are ongoing, and continue to be monitored.
Looking ahead, a sound debt expiry profile and liquidity enhancements, partly achieved by continuing to term out lumpy maturities and releasing scrip would further entrench the ratings. Timely completion of the current development cycle that enhances property performance metrics and free cash flows would bode positively. Conversely, negative rating action could be taken if there is sustained pressure on LTV and interest coverage metrics despite existing headroom on covenants. Adverse findings from investigations would also be negatively considered.
|NATIONAL SCALE RATINGS HISTORY
|Initial rating (April 2012)||Last rating (May 2018)|
|Long term: A-(ZA); Short term: A1-(ZA)||Long term: AA-(ZA); Short term: A1+(ZA)|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Deputy Sector Head: Corporate & Public Sector Debt Ratings||Sector Head: Corporate & Public Sector Debt Ratings|
|(011) 784-1771||(011) 784-1771|
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 Issuer Rating Reports, 2012-18
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ 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.|
|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.|
|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.|
|Loan to value||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market values, or relative to the original property market values.|
|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.|
|Market Capitalisation||The total value of a company’s shares as quoted on a stock exchange. It is calculated by multiplying the total number of shares in issue by the market price.|
|Pledge||An asset or right delivered as security for the payment of a debt or fulfilment of a promise, and subject to forfeiture on failure to pay or fulfill the promise.|
|Portfolio||A collection of investments held by an individual investor or 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.|
For a detailed glossary of terms utilised, please click here
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.
The information received from Fortress REIT Limited and other reliable third parties to accord the credit ratings include:
- the 2018 audited annual financial statements (plus four years of comparative numbers);
- unaudited interim financial statements for the six months ended 31 December 2018;
- related presentations and applicable SENS announcements;
- details 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.
GCR affirms Fortress REIT Limited’s rating at AA-(ZA), Stable outlook