Wrap Text
Pre-close operational update
FORTRESS REAL ESTATE INVESTMENTS LIMITED
(Formerly Fortress REIT Limited)
(Incorporated in the Republic of South Africa)
(Registration number 2009/016487/06)
JSE share codes: FFA ISIN: ZAE000248498
FFB ISIN: ZAE000248506
Bond company code: FORI
LEI: 378900FE98E30F24D975
("Fortress" or "the Company")
PRE-CLOSE OPERATIONAL UPDATE
Shareholders and noteholders are referred to the results announcement for the interim period ended 31 December 2022
("1H2023"), released on SENS on 8 March 2023 and a voluntary update released on 5 June 2023. We hereby provide
an update on Fortress' operations for the period subsequent to 31 December 2022.
"Global and local trends continue to support our strategy of recycling capital out of our non-core investment properties
and into high-quality logistics assets, providing a stronger platform from which to grow earnings in the future. During
the current financial year ending 30 June 2023 ("FY2023"), we have disposed of non-core properties for proceeds of
R1,21 billion and recycled this capital into best-in-class logistics developments. Strong demand for secure, high-quality
logistics space, both local and offshore, coupled with higher borrowing costs and construction cost inflation, have
translated into higher asking rentals for our speculative developments and better rentals for our standing portfolio of
prime logistics assets.
While the logistics property sub-sector is not immune to the macroeconomic challenges the country faces, it remains
well-positioned to weather the storm, given that fundamentals are robust relative to other real estate sub-sectors. The
strong demand for quality, well-located and secure logistics facilities is evidenced by our performance over the past two
years, in which time we have successfully developed and let approximately 350 000m2 of state-of-the-art logistics space
across our various logistics parks in South Africa. The South African ("SA") direct logistics portfolio continues to
perform well, with the low vacancy of 1,2% being testament to the efforts of our in-house development and asset
management teams. The Central and Eastern European ("CEE") logistics strategy remains on track, with 18 060m2 of
developments completed during FY2023 and a further 73 150m2 currently under construction.
Our SA retail portfolio continues to perform well, despite a tough operating environment and deteriorating consumer
dynamics, achieving 7,0% like-for-like tenant turnover growth and recording a low vacancy of 2,0%. The strategic focus
on extending and refurbishing our existing retail centres is proving fruitful and we plan to continue to dispose of
underperforming assets and use this capital to enhance our portfolio of conveniently located and commuter-focused
shopping centres". Steven Brown, CEO.
SA logistics and logistics developments
Vacancies, based on rental, in our SA logistics portfolio reduced from 3,3% at 31 December 2022 to 1,2% at
31 May 2023. The low vacancy underscores the healthy tenant demand for our logistics developments and space in our
existing portfolio and the improved quality of the overall portfolio through effective asset recycling. We have finalised
lease terms with an existing tenant in our portfolio for the newly constructed warehouse at Longlake Logistics Park
("Longlake"), comprising 19 099m2 of GLA. Moreover, we have finalised a 10-year triple net lease, with Seabourne
Logistics for a 18 573m2 facility at Eastport Logistics Park ("Eastport"), with beneficial occupation planned for October
2023.
Construction of a new 15 664m2 warehouse at Clairwood Logistics Park ("Clairwood") for ZacPak was completed in
May 2023. The 15-year lease commences on 1 July 2023. Construction of a new 37 965m2 warehouse at Clairwood for
Sammar Logistics is progressing well. The 15-year lease, underpinned by Sasol South Africa, is expected to commence
in November 2023. Furthermore, we commenced with construction of a new 20 514m2 speculative warehouse at
Clairwood which is expected to be completed by February 2024.
Construction of the new Retailability warehouse of 13 026m2 at Cornubia Ridge Logistics Park ("Cornubia") is on
track, with expected completion in August 2023. We secured a 10-year lease with Dromex for a 24 537m2 facility at
Cornubia, with completion expected during December 2023.
We completed the 12 319m2 speculative development at Montague Business Park in December 2022. The property has
been let to Media24/On the Dot, commencing on 1 May 2023 on a five-year triple net lease, translating to a yield of
8,9% on cost.
Pick n Pay super distribution centre at Eastport
As announced on SENS on 5 June 2023, the 164 470m2 state-of-the-art Pick n Pay super distribution facility at Eastport
has been completed, with the lease commencing on 1 June 2023. Fortress and Pick n Pay have agreed to amend the
initial transaction, such that Fortress will retain 100% of the distribution centre and Pick n Pay will pay rental based on
an initial yield of 8,5% on total development cost. The initial term of the lease will remain at 15 years with a 6% per
annum escalation. Fortress has already funded 100% of the development and there will be no incremental capital
requirements to finance the amended transaction terms.
Longmeadow distribution centre, previously occupied by Pick n Pay ("Inland 1")
Fortress has agreed to acquire 100% of the warehouse previously occupied and owned by Pick n Pay ("Inland 1"),
consisting of two large warehouses, for R500 million as part of the abovementioned transaction. Inland 1 is situated in
Longmeadow in Gauteng, an established warehousing and industrial area with a number of high-profile tenants in the
immediate vicinity. The property has exceptional highway frontage and is approximately 20 kilometres from OR Tambo
International Airport, with easy access to the N3 highway. Warehouse 1 consists of 62 303m2 of GLA with a clear eaves
height of 11,5 metres and Warehouse 2, a cold storage facility, consists of 44 746m2 of GLA with a clear eaves height
of 9,5 metres. We estimate a required spend of approximately R65 million to repair the yard and other parts of Inland 1,
which repairs have commenced and are expected to be completed within the next two months.
We have entered into a sale agreement with the Dis-Chem group for the purchase of Warehouse 1. Proceeds from the
sale to the Dis-Chem group, net of fees and commissions, are R492 million and a binding sale agreement has been
entered into.
These transactions, being the purchase of Inland 1 from Pick n Pay and the sale of Warehouse 1 (being a portion of
Inland 1) to the Dis-Chem group, are subject to certain conditions precedent including Competition Commission
approvals for each transaction.
Indicative rentals for Warehouse 2 (44 746m2 of GLA) are between R60/m2 and R65/m2.
CEE logistics and logistics developments
The CEE portfolio was fully let at 31 May 2023. We completed phase 1 (7 560m2) of Hall E in Bydgoszcz during the
period and phase 2 (10 500m2) is expected to be completed during June 2023. Phase 1 of Hall E is fully let, and part of
phase 2 is pre-let to retail provider Stokrotka and MEGIMA for 6 480m2 and 1 620m2 respectively, both for a term of
five years. In Stargard, TR-AK Logistics initially signed a five-year lease for 3 240m2 in Hall D, but has subsequently
requested the remaining 3 240m2 in Hall D, as well as 3 600m2 in Hall A. Consequently, all 27 207m2 of Stargard
Logistics Park is fully let.
Construction of a 50 200m2 warehouse at our site in Lodz (Poland) will commence in July 2023, of which 29 000m2 has
been pre-let to Notino on a 10-year lease, with occupation scheduled during the third quarter of 2023. Discussions are
ongoing with interested tenants for the remainder of the space. The project provides further development potential of
approximately 30 000m2 of GLA in the second building, which is to be developed after the first building is fully let.
Furthermore, we will start construction of phase 1, a 22 950m2 warehouse at our site in Zabrze (Poland) in July 2023.
Approximately 50% of phase 1 has been pre-let to Lit Logistyka Polska on a five-year lease. This development is
expected to be completed during the second quarter of 2024.
Present market conditions allow these new developments to provide yields on cost in the range of 6,8% to 7,4% once
completed and fully let.
The table below provides a summary of our logistics park developments in SA and CEE:
% GLA m2 Let GLA Lease Estimated Completion
Logistics park Detail owned (100%) term yield date
(years) (%)
Developments completed during FY2023
Eastport Building 7 – Pick n Pay 100 164 470 164 470 15 8,5 May 2023
Eastport Building 8 – Seabourne Logistics 65 18 573 18 573 10 8,0 Oct 2022
Longlake Extension 2 – Liquor Runners* 100 19 099 19 099 1< 6,3 Oct 2022
Clairwood Pocket 3A – Imperial Logistics 100 17 905 17 905 5 7,0 Nov 2022
Clairwood Pocket 3B – RB Logistics 100 11 178 11 178 5 7,0 Nov 2022
Clairwood Pocket 5A – ZacPak 100 15 664 15 664 15 7,3 May 2023
Montague Business Park Block D 25 12 319 12 319 5 8,9 Dec 2022
Bydgoszcz Poland $ Hall E – phase 1 100 7 560 7 560 5 7,0 Jul 2022
Bydgoszcz Poland $ Hall E – phase 2 100 10 500 5 100 5 7,0 Jun 2023
Total 277 268 271 868
Currently under development
Eastport Crusader Logistics^ 65 19 787 19 787 10 8,3 Jul 2023
Clairwood Pocket 2A – Sammar Logistics 100 37 965 37 965 15 7,0 Nov 2023
Clairwood Pocket 3C 100 20 514 - - ** Feb 2024
Cornubia Retailability redevelopment 50,1 13 026 13 026 10 7,0 Aug 2023
Cornubia Dromex 50,1 24 537 24 537 10 8,0 Dec 2023
Lodz Poland $ Hall A – Notino 100 29 000 29 000 10 7,4 Jun 2024
Lodz Poland $ Hall A 100 21 200 - - ** Jun 2024
Zabrze Poland $ Phase 1 – Lit Logistyka 100 22 950 11 610 5 6,8 Jun 2024
Total 188 979 135 925
Total: 100% of developments 466 247 407 793
$ Yield shown in Euro.
* Temporary lease until we secure a longer-term tenant. Let to an existing tenant for the warehouse portion only.
** Estimated net initial yields on unlet developments are forecast at approximately 7%.
^ Initial lease period is five years with option in favour of landlord to extend for five years, which we intend to exercise.
Retail
Our portfolio of retail properties, which is focused on essential goods and services in convenient locations and commuter
nodes, is well-positioned given current macroeconomic conditions and a tough consumer environment. Turnover for the
12 months ended 31 May 2023 increased by 7,0% compared to the corresponding period of the previous year. The
portfolio collection rate for this period was 97%. Retail vacancies, based on rental, decreased from 2,8% at 31 December
2022 to 2,0% at 31 May 2023. We expect retail vacancies to decrease further due to ongoing negotiations with various
new tenants for vacant space at Thrupps Illovo Centre, Central Park Bloemfontein and Kimberley Junction.
During March 2023, the redevelopment of Morone Shopping Centre commenced, which includes the construction of a
new 2 500m2 Shoprite store and façade upgrades. This redevelopment is expected to be completed by September 2023.
The redevelopment at Thrupps Illovo Centre is underway and will include façade upgrades and a parking reconfiguration
to improve traffic flow.
The Vryheid Plaza extension is progressing well and is expected to be completed in the last quarter of 2023. The project
is well-supported from a leasing perspective. New tenants to the centre include Shoprite, Clicks, Jet, Woolworths Edit,
Totalsports, Sportscene and Markham.
Renewable energy
We remain committed to establishing a significant solar photovoltaic ("solar PV") footprint across our property
portfolio. We now have 26 operational plants totalling 10.153 MWac, compared to 23 plants totalling 8.988 MWac at
31 December 2022. We are on site with a further seven plants totalling 3.16 MWac and have approved a next phase of
four plants totalling 1.64 MWac. A further 14 plants are in various stages of planning and procurement, totalling an
estimated 5.3 MWac. We have also completed our first solar PV installation of 150 KWac at Bydgoszcz in Poland.
Backup generators are currently being installed at five retail centres, with expected completion in June 2023. The
generators will be integrated with the solar PV to minimise diesel usage, where practical and feasible. Site surveys are
underway for the remaining retail centres, with completion expected by December 2023.
Vacancies
Total vacancies, based on rental, decreased from 4,8% at 31 December 2022 to 3,6% at 31 May 2023.
Based on rental Based on GLA
May 2023 Dec 2022 May 2023 Dec 2022
Sectoral vacancy % % % %
Total 3,6 4,8 4,1 4,9
Logistics – SA* 1,2 3,3 1,2 2,9
Retail 2,0 2,8 3,1 3,6
Industrial 7,2 4,5 7,7 5,9
Office 20,7 26,3 23,6 25,7
Other^ 1,1 6,2 1,3 5,2
Logistics – CEE 0,0 0,0 0,0 0,0
Information based on Fortress’ economic interest in wholly-owned and co-owned properties.
* Eastport building 8 was let to Seabourne Logistics during June 2023. As a result, the SA logistics vacancy has reduced to 0,3% subsequent to
31 May 2023.
^ Includes a hotel, residential units and serviced apartment properties.
Vacancies in the industrial portfolio increased from 4,5% at 31 December 2022 to 7,2% at 31 May 2023, attributable
mainly to two new vacancies, being Torre City Deep (15 444m2) and 368 Sifon Street Robertville (4 550m2).
The office portfolio comprises less than 4% of our total assets by value and remains part of the non-core direct property
portfolio. This portfolio has recorded a decrease in vacancies to 20,7% from 26,3% at 31 December 2022. We have
noted a gradual return to offices in our portfolio, partly due to the prevalence of load shedding. The asset management
initiatives which are underway to refurbish four of the buildings with the highest vacancies are focusing on improved
security, back-up electricity and water, and high-speed connectivity. Energy efficiency is also a major area of focus,
including LED lighting and, where feasible, solar installations and battery storage. These initiatives have proven
successful, with half of the vacant space at Parc Nicol being let and an offer to purchase being received for the entire
Fourways Office Park.
Direct property disposals
We continue to dispose of non-core properties. Total disposals during FY2023 amount to R1,21 billion in net proceeds
against a combined book value of R1,23 billion. The following properties have transferred since 30 June 2022:
Book value
Net proceeds Jun 2022
Property name Sector (R'000) (R'000) Transfer date
Tillbury Business Park Midrand Industrial 171 000 163 160 May 2023
*
Bellstar Bellville (leasehold) Retail 123 000 140 000 Apr 2023
Market Square Grahamstown ^ Retail 117 700 117 700 Sep 2022
^
Midrand Protea Hotel Other - hotel 117 500 117 500 Jan 2023
Philippi Shopping Centre ^ Retail 91 071 91 080 Aug 2022
Sandton Land - Rivonia Road & Land - office 86 460 99 944 Nov 2022
2 Joyner Road Prospecton ^ Industrial 79 000 79 000 Sep 2022
Secunda Central Retail 61 000 66 000 May 2023
Eastport Logistics Park - Building 4 (Clippa)^# Logistics 55 644 55 380 Aug 2022
Cunningham Street Uitenhage Logistics 45 000 40 400 May 2023
Rigger Road Spartan Industrial 41 213 34 590 Sep 2022
^
38 Milkyway Avenue Linbro Park Industrial 33 500 33 500 Nov 2022
Secunda Square Retail 32 500 35 500 May 2023
Leslie Office Park Office 28 000 28 000 Dec 2022
Secunda Town Centre Retail 24 000 26 500 May 2023
Chelsea Office Park Rivonia ^ Office 17 890 17 890 Jul 2022
^
Megawatt Road Spartan Logistics 15 050 15 050 Jul 2022
2 and 4 Spanner Road Industrial 14 300 14 720 Jan 2023
Secunda Residential Other - residential 11 500 12 500 May 2023
15 Progress Road New Germany @ Industrial 11 400 10 815 Jan 2023
^
Le Roux Avenue Midrand Industrial 7 970 7 970 Apr 2023
7 and 9 Watkins Street Denver Industrial 6 600 6 520 Nov 2022
Derrick Coetzee Road Jet Park Industrial 6 000 5 900 Oct 2022
6 Ivanseth Road ^ Industrial 4 000 4 000 Aug 2022
39 Loper Street Spartan ^ Industrial 3 900 3 900 Aug 2022
13 Wessels Road Rivonia ^@ Office 3 500 3 500 Oct 2022
1 208 698 1 231 019
* Effective date 1 April 2023.
^ Held for sale at 30 June 2022.
@ 50% undivided share.
& 80% undivided share.
# Clippa exercised its option to purchase a 50% undivided share in this property in which Fortress group owned a 65% undivided share.
The following properties are classified as held for sale at 31 May 2023:
Book value
Net proceeds Jun 2022
Property name Sector (R'000) (R'000)
Middelburg Plaza Retail 103 000 92 000
Lakeview Business Park 14 Industrial 12 550 10 890
Lakeview Business Park 6 Industrial 4 850 3 960
15 Wessels Road Rivonia @ Office 4 635 5 000
15 Kouga Street Stikland @ Industrial 3 800 2 723
128 835 114 573
@ 50% undivided share
NEPI Rockcastle
By electing the scrip dividend option in March 2023, we increased our shareholding in NEPI Rockcastle N.V. ("NEPI
Rockcastle") to 23,9% from 23,7% at 31 December 2022. NEPI Rockcastle released its final results for the year ended
31 December 2022 on 21 February 2023 and subsequently released a comprehensive trading update on
17 May 2023. These results and announcements are available on its website at www.nepirockcastle.com.
Funding, liquidity and treasury
During June 2023, we completed the refinancing of the Nedbank facilities totalling R4,4 billion, as noted in the 1H2023
interim results announcement.. The facility is split into four equal tranches of R1,1 billion each with expiries in May of
2026, 2027, 2028 and 2029. Furthermore, we issued two new notes, totalling R800 million, under our domestic medium
term note programme during June 2023, being a three-year note for R380 million and a five-year note for R420 million.
We currently have a total of R2,9 billion in cash and available facilities and remain comfortably within all debt
covenants.
Our loan-to-value ("LTV") ratio is approximately 37,3% at the date of this announcement.
Outlook
Consistent with our distribution methodology, as previously communicated, we update our previous distributable
earnings guidance as published on 8 March 2023, from R1,66 billion to at least R1,74 billion for the year ending
30 June 2023.
This forecast is based on the following assumptions:
Fortress-specific assumptions
- 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.
The information in this announcement has not been audited, reviewed or reported on by Fortress' auditor.
26 June 2023
Lead sponsor Joint sponsor Debt Sponsor
Java Capital Nedbank Corporate and Investment Banking, Rand Merchant Bank
(a division of Nedbank Limited) (a division of First Rand Bank Limited)
Date: 26-06-2023 04:45:00
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