DIFC - Dubai, April 24, 2019 -- Moody's Investors Service ("Moody's") has assigned
a corporate family rating (CFR) of Ba1 and has withdrawn Fortress REIT
Limited's ("Fortress") long-term Baa3 issuer rating,
in line with the rating agency's practice for corporates with non-investment-grade
ratings. Please refer to the Moody's Investors Service's Policy
for Withdrawal of Credit Ratings, available on its website,
www.moodys.com. Moody's has also downgraded the short-term
rating to Not Prime from Prime-3 (P-3). Concurrently,
Moody's has assigned a long term CFR national scale rating of Aa3.za
and has withdrawn Fortress' long-term Aa1.za national
scale issuer rating. At the same time, Moody's has
affirmed the short-term national scale rating of Prime-1.za.
The outlook is negative.
This concludes our review of the ratings that was announced on 14 February
2019.
RATINGS RATIONALE
"The downgrade reflects our view that Fortress has reduced access
to capital and a weakening liquidity profile based on our liquidity assessment"
says Lahlou Meksaoui, a Moody's Lead Analyst.
Moody's estimates that Fortress' ability to access the equity
and bond markets is likely to remain constrained until the conclusion
of the South African Financial Sector Conduct Authority's ("FSCA")
investigation. Access to multiple sources of capital is a feature
of investment grade rated REITs given their reliance on refinancing activities
to repay debt coming due. In a press release dated 4 March 2019,
the FSCA has decided to close the investigations on possible insider trading
but the investigation into the allegation of possible prohibited trading
practices remains ongoing. No guidance on the timing of a resolution
has been provided. Whilst the FSCA has noted that Fortress is not
the subject of its investigation, the company is exposed to investor
sentiment in rolling bonds, especially those coming due in the next
12 months.
The downgrade also reflects Fortress' weakening liquidity profile.
Moody's approach to liquidity analysis is to assess a company's
ability to meet its funding requirements under a conservative scenario
without having market access to new funding over the next 12 months.
Under this scenario, Fortress has insufficient cash and undrawn
credit lines to cover debt coming due. Fortress has ZAR3.7
billion of debt maturing in the next 12 months including ZAR0.9
billion of bonds. This compares to undrawn credit lines of ZAR1.8
billion and unrestricted cash of ZAR86 million as of 31 December 2018.
Furthermore, Moody's expects Fortress to retain its current
dividend policy leading to the assumption that any internally generated
cash flows will be used to pay dividends.
The rating agency recognizes that the investments in unencumbered shares
of NEPI Rockcastle Plc, Resilient REIT and Lighthouse Capital Limited
are sizeable and were worth around ZAR10.4 billion as of 18 April
2019. Fortress has stated its intention to sell shares in Resilient
REIT and Lighthouse Capital Limited, however, the timing of
any future sale is uncertain. Furthermore, Moody's
consider the investment in NEPI Rockcastle to be long term and strategic
in nature and a significant contributor to the company's dividend
yield. Therefore, Moody's does not expect any notable
reduction in its 24% stake giving Fortress one board seat on NEPI's
board of directors.
Fortress' level of unencumbered assets is low at 31.2% and
only 9.9% of the value of its investment properties is unencumbered.
This leaves unsecured bondholders subordinated to secured debt.
In Moody's view, the amount of a commercial real estate firm's
unencumbered assets relative to gross assets is important because properties
that are free and clear of mortgages are sources of alternative liquidity.
More positively, the company has successfully refinanced matured
bank debt in the last twelve months and Moody's understands that
the company will settle R450 million of bonds maturing in May and June
2019 through new banking facilities, secured against properties.
Fortress has solid access to a diversified group of local banks.
Fortress' Ba1/Aa3.za ratings are underpinned by (1) its niche sector
exposure to regional retail centres along key transportation nodes and
high quality logistics properties across South Africa; (2) stable
recurring income and moderate to low vacancy rates; (3) a broadly
diversified portfolio by property sectors, tenants and locations,
and offshore listed investments, (4) low leverage for the rating
with debt-to-assets of 32.9% and net debt
to EBITDA of 4.3x as of 31 December 2018.
At the same time, the ratings also factor: (1) Fortress' exposure
to the current weak South African economy, notably through its income
exposure to regional shopping centers; (2) its equity stakes in listed
local and offshore property investments, which expose Fortress to
market volatility, given they represented 32% of total assets
as of December 2018; (3) a low percentage of unencumbered properties;
and (5) a high proportion of debt maturing in the next 12 months.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects the risks related with the refinancing of
debt becoming due in the next 12 months.
FACTORS THAT COULD LEAD TO AN UPGRADE
Any positive rating action would depend on: (1) the company's
ability to re-establish a track record of access to bond and equity
capital; (2) a sustained improvement in the company's liquidity profile
including the refinancing of debt well ahead of its due date or backed
by undrawn credit lines; (3) an increasing trend of unencumbered
properties to total assets; (4) stable to positive trend in rental
growth and profitability; (5) maintaining leverage - as measured
by adjusted total debt/gross assets below 35% on a sustainable
basis and fixed-charge coverage above 2.5x on a sustainable
basis.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Fortress' rating would come under downward pressure in the event of any
of the following: (1) Fortress fails to improve its liquidity profile
within the next 12 to 18 months; (2) if adjusted total debt/gross
assets is trending above 45% or fixed-charge coverage trends
below 2.0x on a sustainable basis.
LIST OF AFFECTED RATINGS
Assignments:
..Issuer: Fortress REIT Limited
.... Corporate Family Rating, Assigned
Ba1
.... NSR Corporate Family Rating, Assigned
Aa3.za
Affirmations:
..Issuer: Fortress REIT Limited
.... NSR ST Issuer Rating, Affirmed
P-1.za
Downgrades:
..Issuer: Fortress REIT Limited
.... ST Issuer Rating, Downgraded to
NP from P-3
Withdrawals:
..Issuer: Fortress REIT Limited
.... LT Issuer Rating, Withdrawn ,
previously rated Baa3
.... NSR LT Issuer Rating, Withdrawn
, previously rated Aa1.za
Outlook Actions:
..Issuer: Fortress REIT Limited
....Outlook, Changed To Negative From
Rating Under Review
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was REITs and Other Commercial
Real Estate Firms published in September 2018. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn"
country modifier signifying the relevant country, as in ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.
COMPANY PROFILE
Fortress REIT Limited is a hybrid Real Estate Investment Trust listed
on the Johannesburg Stock Exchange (JSE). Fortress owns and operates
commercial properties across South Africa, as well as invests in
listed property securities in South Africa and Europe. Fortress'
direct properties comprise predominately of regional retail centers close
to public transport nodes and logistics warehouses across South Africa.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Lahlou Meksaoui
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Middle East Limited
Regulated by the DFSA
Gate Precinct 3, Level 3
P.O. Box 506845
DIFC - Dubai
UAE
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
