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FFA/FFB - Fortress - Condensed audited consolidated financial statements for
the year ended 30 June 2011
FORTRESS INCOME FUND LIMITED
Incorporated in the Republic of South Africa
Registration no 2009/016487/06
Share codes "FFA" ISIN ZAE000141313 and "FFB" ISIN ZAE000141321 respectively
("Fortress" or "the group")
CONDENSED AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
30 JUNE 2011
DIRECTORS` COMMENTARY
The Fortress A and B linked unit structure offers investors two different
risk and reward propositions. The distribution of the A units escalates at
5% per annum until June 2014 and thereafter at the lower of CPI and 5%.
These units have preferential entitlements to income distributions and to
capital participation on winding up. The remaining distributable income
accrues to the B units.
DISTRIBUTABLE EARNINGS
Fortress achieved total distributions for the year ended 30 June 2011 of
114,27 cents against 79,72 cents for the previous financial period of nine
months, an increase of 7,53% on the annualised distribution for the previous
financial period. The distributions for the six months ended 30 June 2011
are 50,80 cents and 6,63 cents per A and B linked unit respectively,
representing growth of 5,0% and 38,4% over the comparative period.
COMMENTARY ON RESULTS
In a difficult economic environment, vacancies decreased to 5,6% from 5,7%
at 30 June 2010. Vacancies are expected to decrease further as the economy
improves and as Fortress increases its investment in rural and CBD retail
properties situated close to transport nodes. Fortress will continue to
reduce its exposure to small and specialised industrial properties over
time.
DISPOSALS
Fortress disposed of the following properties during the period under
review:
Book
value/
purchase Sales
price price Exit Date
Property name (R`000) (R`000) yield transferred
213 Monte Carlo Crescent
Kyalami 6 700 6 700 * Sep 2010
5 Handel Road Ormonde 38 500 38 500 9,0% Dec 2010
London Lane (Erf 65 only) 1 008 1 500 8,1% Dec 2010
York Road Mthatha (40% only) 17 320 18 880 11,7% Dec 2010
Fort Gale Mthatha (40% only) 23 879 24 246 11,4% Dec 2010
21 Mandy Road 4 300 4 300 9,2% Jan 2011
Sucosa House Kramerville 14 000 14 000 10,3% Feb 2011
30 Coronation Road Maitland 12 700 12 700 6,9% Mar 2011
619 Voortrekker Road Gezina 39 900 39 900 12,0% Mar 2011
223 Monte Carlo Crescent
Kyalami 6 700 6 700 9,6% Mar 2011
595 Sydney Road Congella Durban 85 000 69 000 10,0% Jun 2011
Taxi City East London 15 180 24 000 10,0% Pending
Bryanston Ridge Office Park
(portion only) 5 950 7 750 7,7% Pending
Silver Creek Centre Centurion 15 100 15 750 11,9% Pending
Bayside Centre Mossel Bay 30 844 26 800 10,2% Pending
Shorthorn Street City Deep 14 000 22 100 10,0% Pending
City Centre Carltonville 8 000 6 000 * Pending
*Vacant property.
PROPERTY ACQUISITIONS
The following acquisitions were made during the year:
Murray & Roberts portfolio
The 16 properties purchased from Murray & Roberts for R373,4 million were
transferred during the financial year. These properties were purchased at an
average yield of 11%.
Other acquisitions
Purchase
GLA price
Property name Sector (m2) (R`000) Yield
Fort Gale Mthatha (60%) Residential 10 728* 43 216 9,7%
Middelburg Plaza Retail 7 897 62 000 11,0%
Philippi Shopping Centre Retail 8 331 60 500 10,3%
Makhaza Shopping Centre Retail 8 681 51 500 11,5%
Game Makhado (50%) Retail 4 758* 13 250 11,0%
Shoprite Kokstad# Retail 7 917 38 000 12,0%
*Represents 100% of the GLA.
#Not transferred at 30 June 2011.
REFURBISHMENTS AND EXTENSIONS
The R16 million refurbishment of Sinoville Shopping Centre was completed in
June 2011. The 1 800m2 extension to Evaton Plaza to accommodate Pick `n Pay
was completed in November 2010 on schedule and within budget at a cost of
R8,4 million (Fortress` 50% interest).
Fortress is evaluating refurbishments and extensions to the following
properties:
- Pick `n Pay Secunda, Checkers Secunda and Secunda Village
- Monument Centre
- Biyela Shopping Centre
- Philippi Shopping Centre
- Game Makhado
LISTED EQUITIES
As a hybrid fund, Fortress invests both in direct property and listed
property securities.
Number % of units/ Carrying
of units/ shares in value
Investment shares issue (R`000)
Capital Property Fund 37 000 000 2,30% 303 770
New Europe Property Investments plc 3 327 585 3,76% 106 482
Resilient Property Income Fund
Limited 2 000 000 0,77% 62 700
Subsequent to the financial year-end, Fortress acquired 25 500 000 linked
units in Vukile Property Fund Limited ("Vukile") at a price of R13,10 per
linked unit, representing 7,26% of Vukile`s units in issue.
FUNDING
Fortress accepted an additional R135 million facility from RMB. The gearing
of 24,8% at 30 June 2011 increased to 30,4% following the acquisition of the
interest in Vukile. The board`s target range for gearing is between 30% and
35%.
BLACK ECONOMIC EMPOWERMENT
During April 2011, Fortress concluded an empowerment transaction with Amber
Peek Investments (Proprietary) Limited ("Amber Peek") to the value of R428,3
million. Amber Peek acquired 37 million A linked units and 10,25 million B
linked units comprising 16,0% of Fortress A units and 4,4% of Fortress B
units in issue. Amber Peek is effectively 100% black-owned; 48% by The
Siyakha Education Trust (a trust established exclusively for the benefit of
black education); 26% by Aquarella Investments 553 (Proprietary) Limited
(owned by 50 black individuals from Thohoyandou); and 26% by Celtic Rose
Investments 10 (Proprietary) Limited (owned by nine black individuals from
Johannesburg).
PROSPECTS
Although Fortress is operating in a challenging property market,
considerable progress has been made in enhancing the quality of the
portfolio through acquisitions, disposals and redevelopments. Further value
will be extracted from the recent acquisitions.
The board is confident that Fortress will achieve growth in distributions of
approximately 10% for the 2012 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 audited or reviewed by Fortress` auditors.
By order of the board
Mark Stevens Wiko Serfontein
Managing director Financial director
Johannesburg
17 August 2011
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Audited/
Audited restated
Jun 2011 Jun 2010
R`000 R`000
ASSETS
Non-current assets 3 975 937 2 914 116
Investment property 3 130 131 2 435 926
Straight-lining of rental revenue adjustment 28 618 16 556
Investment property under development 3 999 40 013
Investments 472 952 299 608
Fortress Unit Purchase Trust loans 135 947 122 013
Loan to BEE vehicle 183 991 -
Loans to development partners 20 299 -
Current assets 145 219 128 731
Investment property held for sale 101 815 88 702
Straight-lining of rental revenue adjustment 585 698
Fortress Unit Purchase Trust loans 3 809 2 351
Loans to development partners 7 169 2 882
Trade and other receivables 27 934 29 118
Cash and cash equivalents 3 907 4 980
Total assets 4 121 156 3 042 847
EQUITY AND LIABILITIES
Total equity attributable to equity holders 761 897 367 890
Share capital 4 620 4 036
Share premium 325 464 214 924
Non-distributable reserves 431 813 148 930
Retained earnings - -
Total liabilities 3 359 259 2 674 957
Non-current liabilities 2 612 735 2 517 332
Linked debentures 2 079 000 1 816 046
Interest-bearing borrowings 474 565 685 018
Deferred tax 59 170 16 268
Current liabilities 746 524 157 625
Trade and other payables 66 431 50 337
Linked debenture interest payable 132 663 107 288
Income tax payable 31 -
Interest-bearing borrowings 547 399 -
Total equity and liabilities 4 121 156 3 042 847
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Audited/
Audited restated
for the for the
year nine
ended months
ended
Jun 2011 Jun 2010
R`000 R`000
Net rental and related revenue 317 996 209 349
Recoveries and contractual rental revenue 453 966 272 108
Straight-lining of rental revenue adjustment 11 949 17 254
Rental revenue 465 915 289 362
Property operating expenses (147 919) (80 013)
Distributable income from investments 23 935 15 831
Fair value gain on investment property and
investments 315 336 165 121
Fair value gain on investment property 278 698 162 120
Adjustment resulting from straight-lining
of rental revenue (11 949) (17 254)
Fair value gain on investments 48 587 20 255
Administrative expenses (15 783) (9 821)
Listing costs - (3 197)
Profit before net finance costs 641 484 377 283
Net finance costs (315 387) (211 761)
Finance income 34 193 12 222
Interest from loans 24 557 6 238
Interest on linked units issued cum
distribution 9 636 5 984
Finance costs (349 580) (223 983)
Interest on borrowings (91 327) (55 874)
Capitalised interest 1 073 2 322
Fair value adjustment on interest rate
derivatives (1 188) (13 656)
Interest to linked debenture holders
- A linked units (229 489) (142 711)
- B linked units (28 649) (14 064)
Profit before income tax expense 326 097 165 522
Income tax expense (43 214) (16 592)
Profit for the period attributable to equity
holders 282 883 148 930
Total comprehensive income for the period 282 883 148 930
Basic earnings per A share (cents) 62,62 36,90
Basic earnings per B share (cents) 62,62 36,90
Basic earnings per A linked unit (cents) 164,22 107,63
Basic earnings per B linked unit (cents) 75,30 43,87
Fortress has no dilutionary instruments in issue.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Non-dis-
Share Share tributable
capital premium reserves
Audited/restated R`000 R`000 R`000
Balance at 30 September 2009 - - -
Issue of linked units
(equal number of A and B units) 4 036 214 924
Total comprehensive income for the period
Transfer to non-distributable reserves 132 838
Balance at 30 June 2010 previously reported 4 036 214 924 132 838
Change in accounting policy 16 092
- Total comprehensive income for the period
- Transfer to non-distributable reserves 16 092
Balance at 30 June 2010 restated 4 036 214 924 148 930
Issue of linked units
(equal number of A and B units) 584 110 540
- Issue of 11 817 123 units effective
23 September 2010 236 40 171
- Issue of 7 150 000 units effective
7 December 2010 143 26 392
- Issue of 10 250 000 units effective
30 March 2011 205 43 977
Total comprehensive income for the period
Transfer to non-distributable reserves 282 883
Balance at 30 June 2011 4 620 325 464 431 813
Retained
earnings Total
Audited/restated R`000 R`000
Balance at 30 September 2009 - -
Issue of linked units
(equal number of A and B units) 218 960
Total comprehensive income for the period 132 838 132 838
Transfer to non-distributable reserves (132 838) -
Balance at 30 June 2010 previously reported - 351 798
Change in accounting policy - 16 092
- Total comprehensive income for the period 16 092 16 092
- Transfer to non-distributable reserves (16 092) -
Balance at 30 June 2010 restated - 367 890
Issue of linked units
(equal number of A and B units) 111 124
- Issue of 11 817 123 units effective
23 September 2010 40 407
- Issue of 7 150 000 units effective
7 December 2010 26 535
- Issue of 10 250 000 units effective
30 March 2011 44 182
Total comprehensive income for the period 282 883 282 883
Transfer to non-distributable reserves (282 883) -
Balance at 30 June 2011 - 761 897
RECONCILIATION OF PROFIT FOR THE PERIOD TO HEADLINE EARNINGS AND
DISTRIBUTABLE INCOME
Audited/
Audited restated
for the for the
year nine
ended months
ended
Jun 2011 Jun 2010
R`000 R`000
Basic earnings (shares) - profit for the
period attributable to equity holders 282 883 148 930
- interest to A linked debenture holders 229 489 142 711
- interest to B linked debenture holders 28 649 14 064
Basic earnings (linked units) 541 021 305 705
Adjusted for: (229 523) (127 286)
- fair value gain on investment property (266 749) (144 866)
- income tax effect 37 226 17 580
Headline earnings (linked units) 311 498 178 419
Adjustment resulting from straight-lining of
rental revenue (11 949) (17 254)
Fair value gain on investments (48 587) (20 255)
Fair value adjustment on interest rate
derivatives 1 188 13 656
Listing costs - 3 197
Income tax effect 5 988 (988)
Distributable income 258 138 156 775
Less: distributions declared (258 138) (156 775)
Income not distributed - -
Headline earnings per A share (cents) 11,81 5,36
Headline earnings per B share (cents) 11,81 5,36
Headline earnings per A linked unit (cents) 113,41 76,09
Headline earnings per B linked unit (cents) 24,50 12,33
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 225 875 000 (2010: 201 782 877) shares/linked units
in issue during the period for both A and B shares/linked units.
ABRIDGED CONSOLIDATED STATEMENT OF CASH FLOWS
Audited Audited
for the for the
year nine
ended months
ended
Jun 2011 Jun 2010
R`000 R`000
Cash inflow from operating activities 40 965 102 786
Cash outflow from investing activities (753 062) (2 817 830)
Cash inflow from financing activities 711 024 2 720 024
(Decrease)/increase in cash and cash
equivalents (1 073) 4 980
Cash and cash equivalents at the beginning of
the period 4 980 -
Cash and cash equivalents at the end of
the period 3 907 4 980
Cash and cash equivalents consist of:
Current accounts 3 907 4 980
NOTES
1 PREPARATION
The condensed audited consolidated financial statements have been prepared
in accordance with the measurement and recognition requirements of IFRS, the
AC500 standards, the principles of IAS 34: Interim Financial Reporting, the
JSE Listings Requirements and the requirements of the South African
Companies Act. This report was compiled under the supervision of Wiko
Serfontein, the financial director.
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 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.
Deloitte & Touche have issued their unmodified opinion on the group
financial statements for the year ended 30 June 2011. These condensed
financial statements have been derived from the group financial statements
and are, in all material respects, consistent with the group financial
statements. A copy of their audit report is available for inspection at the
company`s registered office.
2 SUMMARY OF FINANCIAL PERFORMANCE
Audited Unaudited Restated Restated
Jun 2011 Dec 2010 Jun 2010 Dec 2009
six months six months six months three
months
Distribution per A
linked unit (cents) 50,80 50,80 48,38 24,19
Distribution per B
linked unit (cents) 6,63 6,04 4,79 2,36
A linked units in
issue 231 000 000 220 750 000 201 782 877 186 392 192
B linked units in
issue 231 000 000 220 750 000 201 782 877 186 392 192
Net asset value per
combined linked
unit* R12,30 R11,08 R10,82 R10,20
Net asset value per
A linked unit R10,88# R11,08# R9,92# R9,42$
Net asset value per
B linked unit R1,42 - R0,90 R0,78
Gearing ratio** 24,8% 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
Nominal
amount Interest % of
Expiry R`million rate borrowings
Interest rate swaps*
Mar 2012 50 7,41% 4,89%
Sep 2012 100 7,77% 9,78%
Mar 2013 50 7,77% 4,89%
Sep 2013 100 8,04% 9,78%
Mar 2014 50 8,05% 4,89%
Jul 2014 50 7,18% 4,89%
Aug 2014 100 6,83% 9,78%
Sep 2014 100 8,24% 9,78%
May 2015 50 7,87% 4,89%
Sep 2015 100 8,36% 9,78%
Jun 2016 100 7,95% 9,78%
Jul 2016 66 7,58% 6,46%
Aug 2016 100 7,19% 9,78%
Jul 2017 100 7,66% 9,78%
Jun 2018 100 7,82% 9,78%
Total hedged borrowings 1 216 118,93%
Variable rate borrowings (194) (18,93%)
Total gearing** 1 022 10,20% 100,00%
*Fortress pays the fixed rate and receives the three-month Jibar floating
rate on the swaps.
**Total borrowings comprise the level of external interest-bearing
borrowings.
4 LEASE EXPIRY PROFILE - UNAUDITED
Based on Contractual
rental
GLA revenue
Vacant 5,6% -
Jun 2012 28,4% 31,7%
Jun 2013 23,8% 24,9%
Jun 2014 16,3% 16,1%
Jun 2015 7,6% 7,9%
Jun 2016 12,1% 12,9%
>Jun 2016 6,2% 6,5%
100,0% 100,0%
5 SEGMENTAL ANALYSIS
Audited Audited
Jun 2011 Jun 2010
Recoveries and contractual rental revenue R`000 R`000
Retail 241 929 134 341
Industrial 151 534 103 534
Commercial 56 082 34 233
Residential 4 421 -
Total 453 966 272 108
Property operating expenses
Retail (82 322) (40 144)
Industrial (46 669) (28 984)
Commercial (18 066) (10 885)
Residential (862) -
Total (147 919) (80 013)
Rental revenue
Retail 250 515 137 000
Industrial 152 014 109 512
Commercial 58 965 42 850
Residential 4 421 -
Total 465 915 289 362
Profit for the period
Retail 336 568 109 288
Industrial 162 385 154 654
Commercial 79 039 90 273
Residential 6 753 -
Corporate 56 739 23 068
Total 641 484 377 283
6 PAYMENT OF FINAL DISTRIBUTIONS
The board has approved and notice is hereby given of final cash interest
distributions (distributions no 4) of 50,80 cents per A linked unit and
6,63 cents per B linked unit for the six months ended 30 June 2011.
The last date to trade linked units cum distribution will be Friday,
2 September 2011 and trading will commence ex distribution on Monday,
5 September 2011. The record date to participate in the distribution will be
Friday, 9 September 2011.
Linked unit certificates may not be dematerialised or rematerialised between
Monday, 5 September 2011 and Friday, 9 September 2011, both days inclusive.
Payment of the distribution will be made to linked unitholders on Monday, 12
September 2011. In respect of dematerialised linked unitholders, the
distribution will be transferred to the Central Securities Depository
Participant accounts/broker accounts on Monday, 12 September 2011.
Certificated linked unitholders` distribution payments will be posted on or
about Monday, 12 September 2011.
Directors
Jeff Zidel (chairman) Mark Stevens (managing director)* Kura Chihota
Nick Hanekom* Nontando Kunene Jannie Moolman Djurk Venter
Wiko Serfontein* (*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
13th Floor Rennie House 19 Ameshoff Street Braamfontein 2001
(PO Box 4844 Johannesburg 2000)
Sponsor
Java Capital
Date: 17/08/2011 17:33:59 Supplied by www.sharenet.co.za
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