Wrap Text
Short-form announcement for the six months ended 31 December 2022
Fortress Real Estate Investments Limited
(formerly Fortress REIT Limited)
Incorporated in the Republic of South Africa
Registration number:
2009/016487/06
JSE share code: FFA ISIN: ZAE000248498
JSE share code: FFB ISIN: ZAE000248506
LEI: 378900FE98E30F24D975
Bond company code: FORI
("Fortress" or "the group" or "the company")
Short-form announcement for the six months ended 31 December 2022
"The 1H2023 reporting period has seen a record low vacancy rate in our
logistics portfolio, coupled with solid trading within our retail assets. The
successful roll-out of our development pipeline of logistics assets continued
as planned. However, the unrelenting electricity crisis in South Africa is now
creating headwinds for both us and our tenants and this is requiring our
immediate attention. We are confident in addressing the majority of this risk
within the next 12 months and view this painful period as an opportunity to
progress embedded generation within our assets.
Fortunately, we hold a significant portion of our assets in fast-growing and
lower-risk Central and Eastern European countries ("CEE"), which acts as a
counterbalance to the South African direct property portfolio. The very strong
operational performance of our associate, NEPI Rockcastle N.V. ("NEPI
Rockcastle"), is pleasing and highlights the return of pre-COVID-19 consumer
habits as it pertains to bricks and mortar retail shopping. The general trend
of rising e-commerce penetration, and a requirement for a strong logistics
backbone to any retail offering, continues to provide an underpin to demand
and rental growth for our logistics assets.
The company's equity capital structure and our dual-share classes of Fortress A
("FFA") and Fortress B ("FFB") shares have remained front of mind for us and
our shareholders. The board remains open to workable solutions to solve the
problem of Fortress Real Estate Investments Limited's ("Fortress") sub-optimal
capital structure, but, at this time, is not intending on proposing another
potential solution to shareholders in the near term. It is important to note
that existing and new shareholders have the option of neutralising their
positions as it pertains to the capital structure by acquiring, in equal
numbers, both FFA and FFB shares, which then allows participation in the equity
of Fortress at a large discount to our NAV.
The business is in a solid and robust position to provide growth going forward,
and staff and management continue to work tirelessly toward achieving
operational excellence. The team's focus on our core strategic goals of
disposing of underperforming and non-core assets and using this capital to grow
our core portfolios of logistics and retail real estate, with a long-term total
return mindset, has made and will continue to make Fortress a dominant player
in the markets in which it operates."
Steven Brown, CEO
Nature of the business
Fortress is a real estate investment company with a focus on developing and
letting premium-grade logistics real estate in South Africa ("SA") and CEE, as
well as growing our convenience and commuter-oriented retail portfolio which
currently comprises 51 shopping centres and includes properties co-owned with
partners. Fortress also holds a strategic 23,7% interest in NEPI Rockcastle, a
retail real estate investor with a EUR6,6 billion portfolio across nine CEE
countries.
Capital structure and REIT status
The capital structure comprises two classes of ordinary shares, each with equal
voting rights, but different entitlements to distributions and capital
participation on redemption or winding up. The FFA share has a preferential
right to capital participation upon winding up or redemption, which is
calculated as the 60-day volume-weighted average price ("VWAP") on the JSE
Limited ("JSE"), subject to a floor of R8,11 if redeemed. The FFB share has
entitlement to the residual distribution of capital upon winding up.
FFB shares can be issued without issuing FFA shares, however, FFA shares must
be issued contemporaneously with an equal number of FFB shares. Investors are
able to capture the full equity value of Fortress, at a significant discount to
NAV, by buying FFA and FFB shares in roughly equal numbers. This allows
investors to take a neutral stance as it pertains to differences between the
share classes.
The Memorandum of Incorporation ("MOI") governs the distribution in any
six-month income period and defines a first and a second income period. The FFA
share has a dividend benchmark which is the prior comparative period's dividend
benchmark, escalated by the lower of the Consumer Price Index ("CPI") or 5%
("the FFA dividend benchmark"). Should distributable earnings be in excess of
the FFA dividend benchmark in any income period, the board may declare a
dividend equal to the FFA dividend benchmark to the holders of FFA shares and
any residual to the holders of FFB shares. Should distributable earnings be
below the FFA dividend benchmark, the board is not authorised to declare any
distribution from income earned in that specific income period to either FFA or
FFB shareholders.
Other than these differences mentioned above, all shares rank pari passu in all
respects in accordance with clause 34.7 of the MOI.
Fortress was required to meet the minimum distribution requirement for a Real
Estate Investment Trust ("REIT"), per the JSE Listings Requirements, being
an annual distribution of at least 75% of distributable profit ("Minimum
Distribution Requirement"), in respect of the year ended 30 June 2022
("FY2022"). Fortress' MOI prevents the payment of a distribution where
distributable earnings are less than the FFA dividend benchmark in respect
of that period, which was the case for both the interim reporting period
for the six months ended 31 December 2021 ("1H2022") and the final
reporting period for the six months ended 30 June 2022 ("2H2022").
In these circumstances, Fortress could not comply with the Minimum
Distribution Requirement and, as a consequence, the JSE removed
Fortress' REIT status with effect from 1 February 2023.
The removal of our REIT status has tax consequences, impacting both the
company and its shareholders, which were outlined in a SENS announcement
released on 20 January 2023.
Summary of financial performance
Dec 2022 Dec 2021 % change
Distributable earnings (R'000) 800 947 830 507 (3,6)
Dividend declared per share
- FFA (cents) - - -
- FFB (cents) - - -
International Financial Reporting Standards ("IFRS") information
Dec 2022 Dec 2021 % change
Revenue from direct property
operations (R'000) 1 871 919 1 688 947 10,8
Total revenue (including revenue
from investments) (R'000) 1 871 919 1 688 947 10,8
Net asset value ("NAV") (R'000) 29 711 989 27 476 126 8,1
NAV per equity share (going
concern)^ (Rand) 14,11 13,05 8,1
Basic earnings per share - FFA (cents) 132,98 104,38* 27,4
Basic earnings per share - FFB (cents) 132,98 29,92* 344,5
Headline earnings per share - FFA (cents) 38,86 80,59* (51,8)
Headline earnings per share - FFB (cents) 38,86 6,14* 532,9
^ The NAV per equity share (going concern) for IFRS accounting is calculated
as the total NAV per the IFRS statement of financial position divided by
the aggregate number of FFA and FFB shares in issue, less shares held in
treasury.
* Restated.
SA REIT Best Practice Recommendations disclosure
Dec 2022 Dec 2021 % change
NAV per share 13,70 12,93 6,0
Loan-to-value ("LTV") ratio (%) 36,9 38,9 #
Funds from operations (R'000) 1 088 334 814 582 33,6
# Percentage change not meaningful to disclose or not applicable.
Distributable earnings and dividend benchmark
Distributable earnings, based on our communicated Fortress distribution
methodology, for 1H2023, were R800,9 million, compared to R830,5 million for
the prior comparable six-month period. The distributable earnings for 1H2023
were below the FFA dividend benchmark of R1 028,7 million and accordingly no
dividends may be declared by the board.
The dividend benchmark for the FFA share is increased by the lower of CPI or
5,0% over the prior comparable income period, using the CPI figures supplied
by Statistics SA. CPI growth for the 1H2023 income period was
7,09% and therefore the FFA benchmark has been escalated by 5,0%. On this
basis, the FFA benchmark base is 88,32 cents per share for future comparable
income periods.
Given that the board is limited in its authority, by restriction in the MOI,
to distribute the retained distributable earnings, it intends to reserve this
capital by reducing debt and retaining it in liquid assets for deployment, in
time, to resolve the capital structure. For 1H2023, the amount of R800,9
million will be retained in this manner. This capital retained is viewed as
distinct from the capital generated from asset sales, which has and will
continue to be earmarked for deployment into funding the pipeline of logistics
developments, as well as enhancements to the retail portfolio.
The company remains liquid and solvent and the board is willing to declare
dividends to shareholders, provided it is authorised to do so and this does
not jeopardise the sustainability and predictability of future dividends to
shareholders.
Prospects
We have revised our distributable earnings guidance for the year ending
30 June 2023 as published on SENS on 21 November 2022 from R1,60 billion
to R1,66 billion. The upward revision primarily results from better than
expected forecast operational performance and dividends received from
NEPI Rockcastle, offset marginally by a rise in interest rates since
the previous guidance was published.
This forecast is based on the following assumptions:
Fortress specific assumptions
- There is no unforeseen failure of material tenants in our portfolio;
- Contractual escalations and market-related renewals will be achieved with
no major change in vacancy rates;
- Tenants will be able to absorb the recovery of rising utility costs,
municipal rates and electricity interruption costs; and
- The estimated tax payable is R330 million for the year ending 30 June 2023.
Macroeconomic and regulatory assumptions
- There is no unforeseen material macroeconomic deterioration in the markets
in which Fortress has exposure; and
- The South African Reserve Bank repurchase rate remains unchanged during the
forecast period.
This forecast has not been audited, reviewed or reported on by Fortress'
auditor.
Short-form announcement
This short-form announcement is a summary of the condensed unaudited
consolidated interim financial statements for the six months ended 31 December
2022 ("full announcement"), is the responsibility of Fortress' board of
directors and is only a summary of the information in the full announcement and
does not contain full or complete details. The information in this short-form
announcement has been extracted from the full announcement. Any investment
decisions should be based on consideration of the full announcement, published
on 8 March 2023 on Fortress' website at:
https://fortressfund.co.za/financials/view-pdf?id=Interim%20results%
20announcement%2031%20December%202022
and on the JSE's website at:
https://senspdf.jse.co.za/documents/2023/jse/isse/FFAE/1H2023.pdf
Copies of the full announcement and the condensed unaudited consolidated
interim financial statements are available for inspection, during business
hours, at the registered offices of Fortress or its sponsors, Java Capital
Trustees and Sponsors Proprietary Limited and Nedbank Limited, acting through
its Corporate and Investment Banking Division. Such inspection will be at no
charge during normal business hours from Wednesday, 8 March 2023. Copies of the
full announcement may be requested by emailing tamlyn@fortressfund.co.za.
The short-form announcement itself is not audited or reviewed by Fortress'
auditor.
By order of the board
Steven Brown Ian Vorster
Chief executive officer Chief financial officer
Johannesburg
8 March 2023
Lead sponsor
Java Capital
Joint sponsor
Nedbank CIB
Debt sponsor
RMB
Block C, Cullinan Place, Cullinan Close, Morningside, 2196
PO Box 138, Rivonia, 2128
Date: 08-03-2023 03:18:00
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