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Short-form announcement for the year ended 30 June 2022
Fortress REIT Limited
Incorporated in the Republic of South Africa
(Approved as a REIT by the JSE)
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 year ended 30 June 2022
"The 2022 financial year has seen historic events, both locally and abroad,
from the riots and looting seen in South Africa to the war in Ukraine impacting
many European nations and further impacting global rates of inflation not seen
in multiple generations. We certainly are living in interesting times. COVID-19
and the concern around the Omicron variant seem to be a distant memory in a
volatile global environment where a perpetual increase in the pace of change
seems to be the only constant. In this global environment of uncertainty, we
continually strive for a simple and robust business that seeks to add real
economic value for our stakeholders, as well as to impact the broader
environment and communities in which we operate in a positive manner.
The core Fortress business has seen an improvement in conditions. The strategic
focus on logistics, logistics developments and retail real estate is beginning
to pay off and the operational metrics for the year are testament to this. The
team has worked tirelessly to execute our strategy, while dealing with a
variety of unforeseen events. We are constantly striving to optimise our assets
to ensure both current tenant appeal and longevity, through investment in
technology, as well as more sustainable building designs. It is remarkable to
be part of an organisation with people who give so much of themselves to create
and protect value for all of our stakeholders." Steven Brown, CEO
Nature of the business
Fortress REIT Limited ("Fortress") is a Real Estate Investment Trust ("REIT"),
at 30 June 2022 and at the date of this announcement, specialising in the
logistics and retail property sectors with an established in-house development
track record.
Our focus is on developing and in letting premium-grade logistics real estate
in South Africa ("SA") and Central and Eastern Europe ("CEE"), as well as
growing our convenience and commuter-oriented retail portfolio which currently
comprises 52 shopping centres, and includes properties co-owned with partners.
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 Fortress A ordinary share
("FFA"; share code: FFA) 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 Fortress B ordinary share ("FFB"; share code: FFB) has
entitlement to the residual distribution of capital upon winding up.
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 the company earn distributable earnings
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 the company earn
distributable earnings 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, as provided in the MOI, all
shares rank pari passu in all respects in accordance with clause 34.7 of the
MOI.
The board recently proposed a scheme of arrangement to shareholders, requiring
75% approval, to collapse the dual-share structure into a single share.
However, this scheme failed to pass and as such Fortress remains listed with
the dual-share structure in place. Fortress is required to meet the Minimum
Distribution Requirement, per the JSE Listings Requirements, of a REIT
("minimum distribution requirement") in respect of FY2022 by 31 October 2022.
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 six-month period ended 31 December 2021
("1H2022") and the final six-month period ended 30 June 2022 ("2H2022") of the
financial year ended 30 June 2022 ("FY2022"). In these circumstances, Fortress
cannot comply with the minimum distribution requirement.
The board has not resolved to make any other proposal to facilitate the payment
of a distribution in respect of FY2022. Accordingly, the company will engage
with the JSE given its inability to comply with the JSE Listings Requirements
pertaining to REITs, to proactively manage the process.
For so long as Fortress is not a REIT, it will retain distributable earnings
rather than make distributions, until such time as the ratio of distributable
earnings to the FFA dividend benchmark has increased to a level which mitigates
the risk of distributable earnings being below the FFA dividend benchmark for
the foreseeable future, at the time of electing to resume dividend payments.
Distributable earnings will be applied to reduce debt or pursuant to other
capital allocation decisions of the board.
Summary of financial performance
Jun 2022 Jun 2021 % change
Dividend declared per share
- FFA (cents) - 74,70 #
- FFB (cents) - - #
# Percentage change not meaningful to disclose or not applicable.
International Financial Reporting Standards ("IFRS") information
Jun 2022 Jun 2021 % change
Revenue from direct property
operations (R'000) 3 446 471 3 231 356 6,7
Total revenue (including revenue
from investments) (R'000) 3 446 471 3 233 454 6,6
Net asset value ("NAV") (R'000) 26 740 401 27 257 162 (1,9)
NAV per equity share (going concern)^
(Rand) 12,70 12,63 0,6
Basic earnings per share
- FFA (cents) 36,94 156,17 (76,3)
Basic earnings per share
- FFB (cents) 36,94 156,17 (76,3)
Headline earnings per share
- FFA (cents) 119,84 89,50 33,9
Headline earnings per share
- FFB (cents) 119,84 89,50 33,9
^ The NAV per equity share is calculated as the total NAV divided by the
aggregate number of FFA and FFB shares in issue, less shares held in treasury.
Management accounts information
Jun 2022 Jun 2021 % change
Loan-to-value ("LTV") ratio* (%) 40,0 36,7 #
NAV (R'000) 26 968 303 27 436 274 (1,7)
NAV per equity share (going concern)^
(Rand) 12,43 12,34 0,7
Direct property portfolio (completed
buildings, including held for sale)
(R'million) 27 743 25 601 8,4
Investment property under development
(R'million) 3 708 3 074 20,6
Direct property disposals (R'million) 577 1 650 (65,0)
Listed equity portfolio (R'million) 12 542 14 577 (14,0)
Vacancy based on GLA (%) 5,4 7,4 #
^ The NAV per equity share is calculated as the total NAV divided by the
aggregate number of FFA and FFB shares in issue, less shares held in treasury.
# Percentage change not meaningful to disclose or not applicable.
* The LTV ratio is calculated by dividing the total interest-bearing borrowings
adjusted for cash on hand by the total of investments in property, listed
securities and loans advanced, and is based on management accounts information.
SA REIT Best Practice disclosure
Jun 2022 Jun 2021 % change
NAV per share 12,22 12,17 0,4
Loan-to-value ("LTV") ratio (%) 38,7 36,6 #
Funds from operations 1 911 378 1 746 465 9,4
# Percentage change not meaningful to disclose or not applicable.
Distributable earnings and dividend benchmark
Distributable earnings, based on our communicated Fortress distribution
methodology for FY2022 were R1,707 billion, compared to R1,713 billion
for FY2021.
Distributable earnings for 2H2022 were R876,9 million, which was below the FFA
dividend benchmark of R967,9 million and accordingly no dividends may be
declared by the board. Distributable earnings were R830,5 million in 1H2022
which were also below the 1H2022 FFA dividend benchmark of R979,7 million for
that income period.
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 2H2022 income period was 6,19% and therefore
the FFA benchmark has been escalated by 5,0%. On this basis, the FFA benchmark
base is 83,10 cents per share for future comparable income periods.
Consistent with the distribution policy of recent reporting periods and as
previously communicated, we do not distribute capitalised interest and include
the dividends received from listed investments in distributable earnings in the
period in which they are received.
Prospects
We have revised our distributable earnings guidance for the year ending
30 June 2023 ("FY2023") as published on SENS on 6 June 2022 from R1,91 billion
to R1,60 billion.
The downward revision primarily results from an estimated tax charge of
approximately R350 million included in the FY2023 forecast of R1,60 billion
above. This FY2023 tax charge stems from Fortress' current inability to meet
the Minimum Distribution Requirements for a REIT per the JSE Listings
Requirements in respect of FY2022. The cash retained in the business due to no
dividends being paid for FY2022 has been conservatively assumed to repay debt
and therefore lowers the absolute interest cost. However, the sharp rise in
interest rates since the previous guidance was published, largely negates this
assumed interest saving on cash retained. The revised upward distribution
guidance published by NEPI Rockcastle on 23 August 2022 has been taken into
account in our forecast.
This forecast is based on the following assumptions:
Fortress specific assumptions
- Fortress ceases to be a REIT on or about 31 October 2022;
- No material sales nor acquisitions, outside of our planned pipeline, occur
which necessitate a revision to this forecast;
- 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; and
- Tenants will be able to absorb the recovery of rising utility costs and
municipal rates.
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 increases the repurchase rate by a further
75 basis points during the remainder of FY2023.
This forecast has not been audited, reviewed or reported on by Fortress'
auditor.
Short-form announcement
This short-form announcement of the summarised audited consolidated financial
statements ("full announcement") for the year ended 30 June 2022 is a summary
of the information in the full announcement and does not contain full or
complete details of the financial results that were published on SENS on
1 September 2022 and is the responsibility of Fortress' board of directors.
The information in this short-form announcement has been extracted from the
full announcement for the year ended 30 June 2022. Any investment decisions
should be based on consideration of the full announcement published on SENS
and Fortress' website as a whole. The full announcement has been published
on Fortress' website at: https://cmsignition.co.za/download/files_1184/
Resultsannouncement30June2022.pdf and available on the JSE's website
at: https://senspdf.jse.co.za/documents/2022/jse/isse/FFAE/FY2022.pdf
In accordance with section 3.46A(g) of the JSE Listings Requirements, the
audited consolidated annual financial statements together with the audit
report thereon have been published on Fortress' website and are available at:
https://cmsignition.co.za/download/files_1184/Annualfinancialstatements
30June2022.pdf
The audit report on the annual financial statements in respect of which an
unmodified opinion was expressed, notes the valuation of investment properties
as a key audit matter.
Copies of the full announcement and the audited consolidated annual financial
statements are available for inspection during business hours at the registered
offices of Fortress or its sponsors, Java Capital and Nedbank Limited, acting
through its Corporate and Investment Banking Division. Such inspection will be
at no charge and investors may request a copy of Fortress' condensed audited
consolidated financial statements for the year ended 30 June 2022 from
tamlyn@fortressfund.co.za.
The short-form announcement itself is not audited or reviewed by Fortress'
auditor, but extracted from audited results.
By order of the board
Steven Brown Ian Vorster Johannesburg
Chief executive officer Chief financial officer 1 September 2022
Block C, Cullinan Place, Cullinan Close, Morningside, 2196
PO Box 138, Rivonia, 2128
Lead sponsor
Java Capital
Joint sponsor
Nedbank Corporate and Investment Banking,
(a division of Nedbank Limited)
Debt sponsor
Rand Merchant Bank
(a division of FirstRand Bank Limited)
Date: 01-09-2022 02:30:00
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