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FFA/FFB - Fortress Income Fund Limited - Condensed Unaudited Consolidated
Interim Financial Statements for the six months ended 31 December 2010
FORTRESS INCOME FUND LIMITED
Incorporated in the Republic of South Africa
Registration no 2009/016487/06
JSE codes "FFA"
ISIN ZAE000141313 and "FFB"
ISIN ZAE000141321 respectively
("Fortress" or "the company" or "the group")
Condensed Unaudited Consolidated Interim Financial Statements For the six months
ended 31 December 2010
DIRECTORS` COMMENTARY
1 LISTING AND STRUCTURE
Fortress listed on the JSE Limited on 22 October 2009 with an A/B linked unit
structure. The Fortress A and B units offer investors a unique risk and reward
opportunity. Fortress A units yielded 10,75% on the listing price of R9,00 with
an escalation of 5% per annum for five years and at the lower of CPI and 5%
thereafter. Income is firstly distributed to the Fortress A units with the
balance of the distributable income attributed to the Fortress B units.
The property portfolio has been actively asset managed with acquisitions, sales
and refurbishments undertaken to upgrade the quality of the portfolio. Since the
financial year end 11 817 123 A units and 11 817 123 B units were placed at
R10,40 and R2,30 respectively to raise additional finance for the acquisition of
properties. A total of R150 million was raised in the placing.
2 DISTRIBUTABLE EARNINGS
Fortress achieved total distributions for the six months ended 31 December 2010
of 56,84 cents for the A and B units combined. Of this amount,
50,80 cents is payable to A unitholders and 6,04 cents to B unitholders.
3 COMMENTARY ON RESULTS
Vacancies increased marginally to 5,9% at 31 December 2010 from 5,7% at
30 June 2010. A tenant liquidation at 595 Sydney Road, Congella (Durban)
resulted in a vacancy of 10 032 mSquared.
Despite firm credit control arrears increased. Management expects the arrears to
decline during the remaining six months of the financial year as the economy
stabilises.
Increases in operating costs remain an area of concern, particularly sharp
increases in municipal rates which are not always recoverable from tenants.
4 DISPOSALS
Fortress sold Fort Gale Estate Mthatha and York Road Mthatha into a joint
venture with Copper Lake Investments. Fortress holds a 60% interest in the joint
venture and provided mezzanine finance of R52 million at an interest rate of
prime plus 2%. The rationale for the joint venture was that the Mthatha
properties included residential units and multi-tenanted offices which require
intensive management which is provided by the joint venture partner.
Fortress disposed of the following properties:
Book
value
30 June Sale Transfer/
2010 price Exit effective
Property name R`000 R`000 yield date
Fort Gale Estate Mthatha* 68 055 68 156 11,7% 1 Jul 10
York Road Mthatha* 43 300 47 200 11,4% 1 Jul 10
619 Voortrekker Road Gezina 39 900 39 900 11,2% @
5 Handel Road Ormonde 38 500 38 500 9,0% 2 Dec 10
Sucosa House Kramerville 12 200 14 000 10,3% @
30 Coronation Road Maitland ** 12 700 6,9% @
213 Monte Carlo Crescent Kyalami 6 700 6 700 $ 7 Sep 10
223 Monte Carlo Crescent Kyalami 6 400 6 700 9,6% @
21 Mandy Road 4 300 4 300 9,2% @
London Lane (Erf 65 only) 1 008 1 443 8,1% 14 Dec 10
*Sold into a joint venture (60% owned)
**Acquired during the financial period
$Vacant
@Not yet transferred
5 PROPERTY ACQUISITIONS
The following properties were acquired during the period:
Purchase
price Initial Effective
Property name R`000 yield date
Bellstar, Bellville*# 66 400 11,0% 1 Nov 10
Middelburg Plaza 62 000 11,0% 14 Oct 10
Philippi Shopping Centre* 60 500 10,5% Transfer date
Makhaza Shopping Centre 51 500 11,5% 28 Oct 10
73 Hertzog Boulevard, Cape Town 47 909 11,0% 1 Nov 10
Epp Yard Gunners Circle, Epping 36 664 11,0% 1 Nov 10
2 Skeen Boulevard, Bedfordview 32 636 11,0% 1 Nov 10
Bayside Centre, Mossel Bay* 30 769 11,0% 1 Nov 10
Monument Centre, Standerton 26 957 11,0% 1 Nov 10
Queenstown Mall* 21 481 11,0% 1 Nov 10
Biyela Shopping Centre, Empangeni* 20 000 11,0% 1 Nov 10
10 Skeen Boulevard, Bedfordview 16 364 11,0% 1 Nov 10
Taxi City, East London 15 000 11,0% 1 Nov 10
Shorthorn Street, City Deep 13 846 11,0% 1 Nov 10
Game Makhado (50% undivided share) 13 250 11,8% 14 Dec 10
People`s Place, Queenstown* 13 077 11,0% 1 Nov 10
Att Yard Gunners Circle, Epping 10 818 11,0% 1 Nov 10
30 Coronation Road, Maitland 8 000 11,0% 1 Nov 10
312 Kent Avenue, Randburg 7 308 11,0% 1 Nov 10
34 Kindon Road, Robertsham* 6 154 11,0% 1 Nov 10
Total 560 633
*Not yet transferred
#Consent to transfer has been obtained from the South African Rail
Commuter Corporation Limited.
6 REDEVELOPMENTS
6.1 Sinoville Shopping Centre
The scope of the redevelopment of this retail centre has been increased and is
now scheduled for completion in March 2011. Although not complete, the
redevelopment has positively impacted on the tenant profile of the property and
the Pick `n Pay lease has been renewed for a further period of five years.
6.2 Evaton Plaza
The 1 800 mSquared extension to the centre to accommodate Pick `n Pay, was
completed ahead of schedule in October and within the budget of R16,8 million.
Fortress has a 50% interest in this property.
7 LISTED EQUITIES
Fortress disposed of its investment in the REIT Fund and increased its
investment in New Europe Property Investments plc from 2 010 000 shares at 30
June 2010 to 3 327 585 shares at
31 December 2010. Fortress also holds 27 000 000 Capital Property Fund units.
8 FUNDING
Fortress` gearing increased from 22,5% at year end to 22,6% at 31 December 2010,
however, the figure will increase once all the property acquisitions have
transferred.
9 BLACK ECONOMIC EMPOWERMENT
Fortress is at an advanced stage with negotiations to implement a BEE scheme as
authorised by unitholders at the last annual general meeting. Management is
confident that the scheme will be in place by the end of the financial year.
10 PROSPECTS
The board remains confident that Fortress will achieve growth in distributions
of approximately 7% for the full financial year.
The growth is based on the assumptions that a stable macro-economic environment
will prevail, no major corporate failures will occur and that tenants will be
able to absorb the recovery of rising utility costs. Budgeted rental income was
based on contractual escalations and market related renewals. This forecast has
not been reviewed or reported on by Fortress` auditors.
By order of the board
Mark Stevens
Managing director
Nick Hanekom
Financial director
Johannesburg
23 February 2011
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited Restated Restated
Dec 2010 Jun 2010 Dec 2009
R`000 R`000 R`000
ASSETS
Non-current assets 3 514 398 2 914 116 2 721 608
Investment property 2 955 725 2 435 926 2 365 861
Straight-lining of rental revenue
adjustment 19 564 16 556 6 306
Investment property under development 15 579 40 013 27 981
Investments 320 665 299 608 275 585
Loans 194 638 122 013 45 875
Loans to development partners 8 227 - -
Current assets 128 549 128 731 43 502
Investment property held for sale 77 408 88 702 -
Straight-lining of rental revenue
adjustment 192 698 -
Loans 4 090 2 351 -
Loans to development partners 6 624 2 882 -
Trade and other receivables 24 266 29 118 36 328
Cash and cash equivalents 15 969 4 980 7 174
Total assets 3 642 947 3 042 847 2 765 110
EQUITY AND LIABILITIES
Total equity attributable to equity
holders 458 489 367 890 223 628
Share capital 4 416 4 036 3 728
Share premium 281 487 214 924 182 544
Non-distributable reserves 172 586 148 930 37 356
Retained earnings - - -
Total liabilities 3 184 458 2 674 957 2 541 482
Non-current liabilities 2 323 471 2 517 332 2 404 234
Linked debentures 1 986 750 1 816 046 1 677 530
Interest-bearing borrowings 321 121 685 018 723 790
Deferred tax 15 600 16 268 2 914
Current liabilities 860 987 157 625 137 248
Trade and other payables 234 059 50 337 23 332
Linked debenture interest payable 125 474 107 288 49 487
Income tax payable 463 - 134
Interest-bearing borrowings 500 991 - 64 295
Total equity and liabilities 3 642 947 3 042 847 2 765 110
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited Restated Restated
for the for the for the
six nine three
months months months
ended ended ended
Dec 2010 Jun 2010 Dec 2009
R`000 R`000 R`000
Net rental and related revenue 148 569 209 349 71 524
Recoveries and contractual rental
revenue 210 446 272 108 89 699
Straight-lining of rental revenue
adjustment 2 502 17 254 6 306
Rental revenue 212 948 289 362 96 005
Property operating expenses (64 379) (80 013) (24 481)
Distributable income from investments 10 444 15 831 4 054
Fair value gain on investment
property and investments 38 989 165 121 34 075
Fair value gain on investment
property 5 628 162 120 26 007
Adjustment resulting from straight-
lining of rental revenue (2 502) (17 254) (6 306)
Fair value gain on investments 35 863 20 255 14 374
Administrative expenses (5 996) (9 821) (2 429)
Listing costs - (3 197) (3 197)
Profit before net finance costs 192 006 377 283 104 027
Net finance costs (167 947) (211 761) (63 623)
Finance income 14 917 12 222 4 963
Interest from loans 8 151 6 238 1 743
Fair value adjustment on interest
rate swaps - - 3 220
Interest on linked units issued
cum distribution 6 766 5 984 -
Finance costs (182 864) (223 983) (68 586)
Interest on borrowings (40 411) (55 874) (19 680)
Capitalised interest 453 2 322 581
Fair value adjustment on interest
rate swaps (17 432) (13 656) -
Interest to linked debenture
holders
- A linked units (112 141) (142 711) (45 088)
- B linked units (13 333) (14 064) (4 399)
Profit before income tax expense 24 059 165 522 40 404
Income tax expense (403) (16 592) (3 048)
Profit for the period attributable
to equity holders 23 656 148 930 37 356
Total comprehensive income for the
period 23 656 148 930 37 356
Basic earnings per A share (cents) 5,36 36,90 10,02
Basic earnings per B share (cents) 5,36 36,90 10,02
Basic earnings per A linked unit
(cents) 56,16 107,63 34,21
Basic earnings per B linked unit
(cents) 11,40 43,87 12,38
Fortress has no dilutionary instruments in issue.
RECONCILIATION OF PROFIT FOR THE PERIOD TO HEADLINE EARNINGS AND DISTRIBUTABLE
INCOME
Unaudited Restated Restated
for the for the for the
six nine three
months months months
ended ended ended
Dec 2010 Jun 2010 Dec 2009
R`000 R`000 R`000
Basic earnings (shares) - profit for
the period attributable to equity
holders 23 656 148 930 37 356
- interest to A linked debenture
holders 112 141 142 711 45 088
- interest to B linked debenture
holders 13 333 14 064 4 399
Basic earnings (linked units) 149 130 305 705 86 843
Adjusted for: (2 381) (127 286) (19 567)
- fair value gain on investment
property (3 126) (144 866) (19 701)
- income tax effect 745 17 580 134
Headline earnings (linked units) 146 749 178 419 67 276
Adjustment resulting from straight-
lining of rental revenue (2 502) (17 254) (6 306)
Fair value gain on investments (35 863) (20 255) (14 374)
Fair value adjustment on interest
rate swaps 17 432 13 656 (3 220)
Listing costs - 3 197 3 197
Income tax effect (342) (988) 2 914
Distributable income 125 474 156 775 49 487
Less: distribution declared (125 474) (156 775) (49 487)
Income not distributed - - -
Headline earnings per A share (cents) 4,82 5,36 4,77
Headline earnings per B share (cents) 4,82 5,36 4,77
Headline earnings per A linked unit
(cents) 55,62 76,09 28,96
Headline earnings per B linked unit
(cents) 10,86 12,33 7,13
Basic earnings per share, basic earnings per linked unit, headline
earnings per share and headline earnings per linked unit are based on the
weighted average of 220 750 000 (Jun 2010: 201 782 877, Dec 2009: 186 392
192) shares/linked units in issue during the period.
ABRIDGED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited Restated Restated
for the for the for the
six nine three
months months months
ended ended ended
Dec 2010 Jun 2010 Dec 2009
R`000 R`000 R`000
Cash inflow from operating
activities 30 456 102 786 32 523
Cash outflow from investing
activities (394 208) (2 817 830) (2 677 236)
Cash inflow from financing
activities 374 741 2 720 024 2 651 887
Increase in cash and cash
equivalents 10 989 4 980 7 174
Cash and cash equivalents at
beginning of period 4 980 - -
Cash and cash equivalents at end
of period 15 969 4 980 7 174
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Non-
Share Share distributable Retained
capital premium reserves earnings Total
Restated R`000 R`000 R`000 R`000 R`000
Balance at
30 September 2009 - - - - -
Issue of linked units
(equal number of
A and B units) 3 728 182 544 186 272
Total comprehensive
income for the period 37 356 37 356
Transfer to non-
distributable
reserves 37 356 (37 356) -
Balance at
31 December 2009 3 728 182 544 37 356 - 223 628
Issue of linked units
(equal number of
A and B units) 308 32 380 32 688
Total comprehensive
income for the period 111 574 111 574
Transfer to non-
distributable
reserves 95 482 (95 482) -
Change in accounting
policy 16 092 (16 092) -
Balance at
30 June 2010 restated 4 036 214 924 148 930 - 367 890
Issue of linked units
(equal number of
A and B units) 380 66 563 66 943
- Issue of
11 817 123 units on
23 September 2010 236 40 171 40 407
- Issue of
7 150 000 units on
7 December 2010 144 26 392 26 536
Total comprehensive
income for the period 23 656 23 656
Transfer to non-
distributable
reserves 23 656 (23 656) -
Balance at
31 December 2010 4 416 281 487 172 586 - 458 489
NOTES
1 PREPARATION
The condensed consolidated interim financial statements have been prepared in
accordance with the measurement and recognition requirements of IFRS, the AC500
standards, IAS34: Interim Financial Reporting, the JSE Listings Requirements and
the requirements of the South African Companies Act.
The accounting policies adopted are consistent with those applied in the prior
periods except for the recognition of deferred tax. In December 2010 the IASB
released amendments to IAS 12 effective from 1 January 2012. These amendments
impact on the rate at which deferred tax is recognised specifically on the fair
value movement of the building component of investment property as it
establishes a presumption that it will be recovered through disposal and hence
will attract deferred tax at the capital gains tax rate. Fortress has elected
the early adoption of these amendments and applied them retrospectively as
required by IAS 8. It is the view of the board that the adoption of this policy
results in more accurate and meaningful information.
The early adoption had no effect on the December 2010 results.
The early adoption had the following effect on the June 2010 results: deferred
tax balance R16 092 000 decrease; income tax expense R16 092 000 decrease; basic
earnings per A and B share and basic earnings per A and B linked unit 3,99 cents
increase and no effect on headline earnings per share and per linked unit for
both A and B units.
This report was not audited or reviewed by the company`s auditors.
2 SUMMARY OF FINANCIAL PERFORMANCE
Unaudited Restated Restated
six six three months
months months
Dec 2010 Jun 2010 Dec 2009
Distribution per A linked unit
(cents) 50,80 48,38 24,19
Distribution per B linked unit
(cents) 6,04 4,79 2,36
A linked units in issue 220 750 000 201 782 877 186 392 192
B linked units in issue 220 750 000 201 782 877 186 392 192
Net asset value per combined
linked unit* R11,08 R10,82 R10,20
Net asset value per A linked unit R11,08# R9,92# R9,42$
Net asset value per B linked unit - R0,90 R0,78
Gearing ratio** 22,6% 22,5% 28,5%
*Net asset value includes total equity attributable to equity holders and
linked debentures.
#60-day volume weighted average trading price at reporting date limited
to net asset value per combined linked unit.
$Volume weighted average trading price since listing.
**The gearing ratio is calculated by dividing interest-bearing borrowings
by total assets.
3 HEDGED BORROWINGS
Amount Interest % of
Expiry R`million rate borrowings
Interest rate swaps*
March 2011 50,0 7,11% 6,1%
September 2011 100,0 7,37% 12,2%
March 2012 50,0 7,41% 6,1%
September 2012 100,0 7,77% 12,2%
March 2013 50,0 7,77% 6,1%
September 2013 100,0 8,04% 12,2%
March 2014 50,0 8,05% 6,1%
July 2014 50,0 7,18% 6,1%
August 2014 100,0 6,83% 12,2%
September 2014 100,0 8,24% 12,2%
May 2015 50,0 7,87% 6,1%
September 2015 100,0 8,36% 12,2%
June 2016 100,0 7,95% 12,2%
August 2016 100,0 7,19% 12,2%
Hedged borrowings 1 100,0 134,2%
Variable rate borrowings (277,9) (34,2)%
Total borrowings** 822,1 100,0%
*Fortress pays the fixed rate and receives the 3-month Jibar floating
rate on the swaps.
**Total borrowings comprise the level of external interest-bearing
borrowings.
4 LEASE EXPIRY PROFILE
Based on
Based on contractual
Lease expiry Rentable Rental
area income
Vacant 5,9% -
June 2011 16,3% 14,7%
June 2012 28,2% 28,6%
June 2013 19,8% 23,4%
June 2014 10,3% 12,9%
June 2015 6,2% 7,5%
>June 2015 13,3% 12,9%
Total 100,0% 100,0%
5 SEGMENTAL ANALYSIS
Dec 2010 Jun 2010 Dec 2009
Rental revenue R`000 R`000 R`000
Retail 111 267 137 000 45 493
Industrial 72 798 109 512 38 718
Commercial 24 766 42 850 11 794
Residential 4 117 - -
Total 212 948 289 362 96 005
Dec 2010 Jun 2010 Dec 2009
Profit before net finance costs R`000 R`000 R`000
Retail 72 107 109 288 42 055
Industrial 57 314 154 654 33 525
Commercial 18 530 90 273 15 645
Residential 3 744 - -
Investments and other 40 311 23 068 12 802
Total 192 006 377 283 104 027
6 PAYMENT OF INTERIM DISTRIBUTION
The board has approved and notice is hereby given of interim interest
distributions (distribution no 3) of 50,80 cents per A linked unit and 6,04
cents per B linked unit for the six months ended 31 December 2010. The last date
to trade linked units cum distribution will be Friday, 11 March 2011 and trading
will commence ex distribution on Monday, 14 March 2011. The record date to
participate in the distribution will be Friday, 18 March 2011.
Linked unit certificates may not be dematerialised or rematerialised between
Monday, 14 March 2011 and Friday, 18 March 2011, both days inclusive. Payment of
the distribution will be made to linked unitholders on Tuesday, 22 March 2011.
In respect of dematerialised linked unitholders, the distribution will be
transferred to the Central Securities Depository Participant accounts/broker
accounts on Tuesday, 22 March 2011. Certificated linked unitholders`
distribution payments will be posted on or about Tuesday,
22 March 2011.
Directors
Jeff Zidel (chairman) Mark Stevens* (managing director) Kura Chihota Des
de Beer* Nick Hanekom* Nontando Kunene Jannie Moolman
Djurk Venter
(*Executive)
Company secretary
Stephanie Botha
Registered address
3rd Floor Rivonia Village Rivonia Boulevard Rivonia 2191
(PO Box 2555 Rivonia 2128)
Transfer secretaries
Link Market Services South Africa (Proprietary) Limited
11 Diagonal Street Johannesburg 2001
Sponsor
Java Capital
Date: 23/02/2011 17:00:01 Supplied by www.sharenet.co.za
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