Johannesburg, 02 Apr 2014 — Global Credit Ratings has today upgraded the long term national scale and upgraded the short term national scale issuer ratings assigned to Fortress Income Fund Limited to A(ZA) and A1(ZA) respectively; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) on Fortress Income Fund Limited based on the following key criteria:
The investment portfolio of Fortress Income Fund (“Fortress”) has more than trebled to R10.4bn since listing. Acquisition and development activities have focused on rural retail centres close to commuter transport nodes, with retail accounting for 87% of direct property holdings. Investments in listed property securities (37% of assets) offer geographical, sectoral and currency diversification. The rural retail sector is somewhat defensive in the increasingly difficult macroeconomic environment, attracting national anchor tenants and primarily selling consumer essentials and fashion to cash customers. Development/refurbishment of these centres has enabled Fortress to lengthen lease terms, improve tenant profiles and rentals, manage vacancies, and enhance trading density.
Annualised rental income grew 20% to R414m in the interim period, driven by portfolio growth, greater exposure to mid-market retail assets, and rising tenant quality. While cost pressure continues to affect earnings, cost containment saw operating margins rise to 67% (F13: 64%). A much higher R121m inflow was generated from listed investments, and operating cash flow totalled R321m for the interim period.
Portfolio growth has been funded by a mix of debt and equity, with debt having increased by over R2bn to R3.3bn in the 18-month period to 1H F14. Thus the fund’s LTV has risen from 20.8% at FYE12 to 32% at 1H F14, comfortably below the 40% benchmark for “A” rated companies. While gross debt to EBITDA of 420% is above the 400% benchmark, note is taken that newly-acquired assets and developments have not contributed to earnings for the full period. Fortress evidences an improved funding diversification (50:50 split of unsecured, listed debt and secured bank facilities) and extended tenor. Short-term debt is now 23% of the total (1H F13: 69%), and covenants are well-covered. Available liquidity sources cover total outstanding borrowings by 1.16x, bank facilities of R2.8bn are 38% unutilised, and R2.7bn in listed investments are unencumbered.
As GCR’s rating relates to senior unsecured debt, comfort is taken from the low encumbrance levels (57%) relative to other domestic REITs. With unencumbered assets to unsecured debt cover at 3x at 1H F14 (FYE13: 4.2x) and secured debt overcollateralised by 3.8x, unsecured debt holders can expect strong recoveries in a default situation.
Growth in the investment portfolio, coupled with a longer track-record of extracting value from portfolio assets, while maintaining gearing at acceptable levels, supported the upgrade. Successful integration of new acquisitions and developments in a manner which enhances earnings quantum and diversification remain key. Conversely, macroeconomic trends which negatively affect consumer spending patterns and domestic funding costs could result in negative trends in portfolio performance, arrears and vacancies. A general reduction in gearing ratios, but particularly debt to EBITDA, which currently falls outside GCR benchmarks would be supportive of ratings at current levels. Gearing rising above GCR benchmarks, even to fund good acquisition activities, may, however, be negatively viewed.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Apr/2012)
Long term: A-(ZA); Short term: A1-(ZA)
Last rating (Mar/2013)
Long term: A-(ZA); Short term: A1-(ZA)
+27 11 784 1771
Sector Head: Corporates
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria for Rating Corporate Entities
GCR’s Global Summary Criteria for Rating Property Funds
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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 audited annual financial statements for the year to 30 June 2013 (plus four years/periods of comparative numbers), internal and/or external management reports, full year budgeted financial statements
for F14, condensed unaudited interim financial statements for the six months ended 31 December 2013, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity
and/or industry was also received.
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.