Wrap Text
Condensed unaudited consolidated interim financial statements for the six months ended 31 December 2019
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
Bond company code: FORI
("Fortress" or "the group" or "the company")
(Approved as a REIT by the JSE)
Fortress short-form announcement for the six months ended 31 December 2019
Highlights
The six-month interim period ended 31 December 2019 marked the first reporting
cycle under the new executive management team. Notable achievements for this
period and to the date of this report include:
- Commencement of 172 000m2 of logistics developments at an estimated
incremental capital cost of R963 million;
- Disposal of R420 million of properties;
- Placed R200 million (five years) in October 2019 and R300 million (one year)
post reporting period end in February 2020 in the debt capital markets;
- Secured refinancing of bank facilities of R4,5 billion; and
- Commenced five new solar installation projects.
Nature of business
Fortress is a Real Estate Investment Trust ("REIT") specialising in the
logistics and retail property sectors with significant in-house development
expertise.
We are focused on being the developer and landlord of choice for premium-grade
logistics real estate in South Africa. The core logistics portfolio is
complemented by a retail portfolio of 60 commuter-oriented shopping centres
(including co-owned properties). We remain committed to the strategy of
developing and selectively acquiring core logistics facilities in key
locations, whilst continuing to invest in commuter-oriented retail shopping
centres. We believe that these two asset classes, which form the base of our
direct property portfolio, will continue to outperform through the cycle.
In addition to our property portfolio, we have a 23,3% interest in NEPI
Rockcastle plc ("NEPI Rockcastle"), valued at R17,3 billion and an effective
11,1% interest (excluding treasury shares) in Resilient REIT Limited
("Resilient"), valued at R2,7 billion at 31 December 2019.
Capital structure
The current 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 (share code: FFA, "FFA") has a preferential right to distributions and to
capital participation upon winding up, which is calculated as the 60-day
volume-weighted average price on the JSE Limited. The Fortress B ordinary share
(share code: FFB, "FFB") has entitlement to the residual distributions, for
each six-month income period, and to the residual capital upon winding up.
The board is of the opinion that the current capital structure is not optimal
and, as such, a special subcommittee has been established to consider the
capital structure. This subcommittee will make recommendations to the board on
the optimisation of the capital structure which may result in a proposal to
shareholders. Shareholders will be advised of the progress made by the
subcommittee.
Summary of financial performance
Dec 2019 Dec 2018 % change
Dividend per share
– FFA (cents) 77,67 74,73 3,9
– FFB (cents) 74,84 77,49 (3,4)
International financial reporting standards ("IFRS") information
Dec 2019 Dec 2018 % change
Revenue from direct property
operations (R'000) 1 810 977 1 715 406 5,6
Total revenue (including revenue from
investments) (R'000) 1 919 091 1 821 743 5,3
Net asset value ("NAV") (R'000) 34 131 431 35 219 151 (3,1)
NAV per equity share
(going concern)^ (Rand) 15,81 16,18 (2,3)
NAV per FFA share* (Rand) 20,35 17,26 17,9
NAV per FFB share (Rand) 10,22 13,87 (26,3)
Basic earnings per share – FFA (cents) 35,97 13,27 171,1
Basic earnings per share – FFB (cents) 35,97 13,27 171,1
Headline earnings per share – FFA (cents) 68,68 36,37 88,8
Headline earnings per share – FFB (cents) 68,68 36,37 88,8
^ 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.
* 60-day volume-weighted average traded price at reporting date, limited to
combined NAV.
Management accounts information
Dec 2019 Dec 2018 % change
Loan-to-value ratio* (%) 33,3 32,3 #
NAV (R'000) 34 645 014 35 219 151 (1,6)
NAV per equity share
(going concern)^ (Rand) 15,59 16,18 (3,6)
NAV per FFA share** (Rand) 20,35 17,26 17,9
NAV per FFB share (Rand) 10,08 13,87 (27,3)
Direct property portfolio (completed
buildings) (R'million) 26 417 26 515 (0,4)
Investment property under development
(R'million) 3 602 4 496 (19,9)
Direct property disposals
(R'million) 420 493 (14,8)
Listed equity portfolio (R'million) 20 067 18 944 5,9
Vacancy based on GLA (%) 8,0 7,0 #
# % change not meaningful to disclose.
* The loan-to-value 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.
^ The NAV per equity share is calculated as the total net asset
value divided by the aggregate number of FFA and FFB shares in issue, less
shares held in treasury.
** 60-day volume-weighted average traded price at reporting date, limited to
combined net asset value.
Dividend policy
The macroeconomic conditions in South Africa continued to deteriorate on the
back of the latest round of load shedding, the lack of confidence in the South
African economy as well as fiscal risks to government finances evidenced by
National Treasury's prediction that debt to gross domestic product will reach
70% within three to four years. We note that business confidence, as measured
by the RMB/BER Business Confidence Index, is at 20-year lows. The nature of our
business has also changed to focus more on development activities, which
differentiates us, but also necessitates a strong and liquid balance sheet with
which to fund the development pipeline. Given the aforementioned factors, the
board deems it appropriate, at this time, to adopt a more conservative approach
to the dividend policy.
In future, the dividends will exclude capitalised interest on our strategic
land holdings, which has historically been included in determining the total
dividend payments, given that the growth in value of many of these land
holdings is likely to remain below the rate at which we capitalise interest.
We believe this limitation on the capitalised interest component of
distributions will add value over the longer term and is prudent in the current
environment. Should conditions change, this policy will be reassessed. Had this
policy been adopted in prior periods, the total dividend would have been
R390,6 million and R164,1 million less for the year ended 30 June 2019 and the
six months ended 31 December 2019, respectively.
Interim dividends and Settlement
The board has approved, and notice is hereby given of interim dividends of
77,67000 cents per FFA share and 74,84000 cents per FFB share for the six
months ended 31 December 2019.
For this interim reporting period, the board of directors resolved that the
dividends declared on both FFA and FFB shares will be settled by way of an in
specie distribution of Resilient shares at a price of R52,69 per share, being a
5% discount to the five-day volume-weighted average price ("VWAP"), to close of
business on 2 March 2020, less the Resilient dividend declared for the six
months ended 31 December 2019 of 267,96 cents per share.
This price represents a significant discount to Resilient's latest published
NAV per share of R68,78, which is underpinned by a high quality retail
portfolio. This in specie distribution returns value to our shareholders,
while allowing us to retain cash to fund the development pipeline and enhance
future growth.
This in specie distribution will reduce the effective shareholding in Resilient
to approximately 2,7%. Fortress' shareholders will be advised of the settlement
timetable via a separate SENS in due course.
Prospects
We will continue with our strategy of exiting non-core assets and reinvesting
the proceeds into our high-quality logistics parks. Given the current market,
and in order to ensure that adequate funding is available for the development
pipeline and to maintain balance sheet strength, we will be adopting a more
conservative approach to dividends in the future.
As a consequence of the change to the dividend policy, where capitalised
interest on our development pipeline is no longer distributed, together with
the effect of a reduction in the cross-currency interest rate swaps to
EUR302,7 million after 31 December 2019, we forecast a reduction in our
total dividends for the full 2020 financial year. However, on a
like-for-like basis, taking into account the aforementioned changes,
the dividends for the full 2020 financial year are forecast to be
3,4% higher than the 2019 financial year, but remain subject to
declaration at the discretion of the board.
Revised distribution methodology
The total dividend declared for H1FY20# is R1 697,2 million based on the
historic distribution methodology. Given that the new distribution methodology
is applicable from 1 January 2020, the forecast total dividend for H2FY20#
is R1 382,0 million.
The total dividend for the full 2020 financial year is forecast to be
R3 079,1 million. The table below includes a comparable analysis on a
like-for-like basis had the revised policy and reduction in cross-currency
swaps been in place for the historic periods presented.
Forecast % Six Six %
year Year change months months change
ending ended Jun 2019 ended ended Dec 2018
Jun 2020 Jun 2019 to Dec 2019 Dec 2018 to
R'000 R'000 Jun 2020 R'000 R'000 Dec 2019
Dividend declared
per historic
distribution
methodology (as
per published
results
announcements)* – 3 388 663 1 697 150 1 709 636
Forecast
distribution
(H1FY20 actual
based on historic
methodology,
H2FY20 forecast
post reduction
of cross-currency
swap position) 3 249 423
Distributable
income 3 249 423 3 388 663 (4,1) 1 697 150 1 709 636 (0,7)
Adjustment 1
Capitalised
interest (334 406) (390 636) (164 118) (210 498)
Adjustment 2
Effect of
reduced
cross-currency
swap position (111 629) (286 318) (111 629) (158 981)
Dividend assuming
adoption of
revised
distribution
methodology
and after
reduced
cross-currency
swap position^ 2 803 388 2 711 709 3,4 1 421 403 1 340 157 6,1
* The historic distribution methodology is similar to the SA REIT Association
Best Practice Recommendations' "Funds From Operations" or "FFO".
# H1FY20: Actual for the six months ended 31 December 2019; H2FY20: Forecast
for the six months ending 30 June 2020.
^ Dividend available for FFA and FFB shares net of 62 163 124 FFB treasury
shares.
Adjustment 1
This adjustment eliminates all capitalised interest as historically reported
and forecast for the full 2020 financial year, as applicable.
Adjustment 2
This adjustment represents the reduction in interest received on the
cross-currency swap position on the basis that the Euro exposure was
EUR302,7 million for all the periods presented above. Actual EUR:ZAR
exchange rates and interest rate differentials for historic periods have
been used.
Forecast – 30 June 2020
R'000
Total dividend forecast for the year ending 30 June 2020^ 3 079 135
H1FY20 dividend declared 1 697 150
H2FY20 forecast dividend applying revised distribution
methodology 1 381 985
^ The forecast dividend for the year ending 30 June 2020 comprises of the
aggregate of the H1FY20 dividend declared (based on historic distribution
methodology) and the H2FY20 forecast dividend (based on revised distribution
methodology, as adopted with effect from 1 January 2020).
As the optimisation of the capital structure may result in a proposal to
shareholders, guidance on a per share basis has been withdrawn. The
forecast for the year ending 30 June 2020 as presented is based
on the following assumptions:
Macroeconomic
- The macroeconomic environment will not deteriorate more than expected;
- The current political landscape will not change dramatically; and
- South Africa's sovereign rating will remain investment grade (as rated by
Moody's) for the remainder of the financial year.
Fortress–specific
The aforementioned macroeconomic factors will also have an impact on the
assumptions below, given the diversity of our portfolio:
- Contractual escalations and market-related renewals will be achieved with no
major change in vacancy rates;
- No major corporate failures will occur;
- Tenants will be able to absorb the recovery of rising utility costs and
municipal rates; and
- Distributions from NEPI Rockcastle and Resilient will be in line with their
guidance communicated to the market.
This forecast, as contained in the prospects section, has not been audited,
reviewed or reported on by Fortress' auditor.
This short-form announcement of the condensed unaudited consolidated financial
statements for the six months ended 31 December 2019 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 5 March 2020
and is the responsibility of Fortress' board of directors. The information
in this short-form announcement has been extracted from the condensed unaudited
consolidated financial statements for the six months ended 31 December 2019.
Any investment decisions should be based on consideration of the full
announcement published on Fortress’ website https://cmsignition.co.za/
download/files_1184/Interimresultsannouncement31December2019.pdf and
available on the JSE's website at:
https://senspdf.jse.co.za/documents/2020/jse/isse/FFAE/HY2019.pdf
A copy of the full announcement is 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 unaudited consolidated
financial statements for the six months ended 31 December 2019
from tamlyn@fortressfund.co.za.
By order of the board
Steven Brown Ian Vorster Johannesburg
Chief executive officer Chief financial officer 5 March 2020
Block C, Cullinan Place, Cullinan Close, Morningside, 2196
(PO Box 138, Rivonia, 2128)
Date: 05-03-2020 04:56:00
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