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FFA/FFB - Fortress Income Fund Limited - Condensed unaudited consolidated
interim financial statements for the six months ended 31 December 2011
FORTRESS INCOME FUND LIMITED
Incorporated in the Republic of South Africa
Reg no 2009/016487/06
Share codes FFA ISIN ZAE000141313 and FFB ISIN ZAE000141321 respectively
("Fortress" or "the group")
CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE SIX
MONTHS ENDED 31 DECEMBER 2011
DIRECTORS` COMMENTARY
1 UNIT STRUCTURE
Fortress has separately listed A and B linked units offering investors a
different risk and reward profile. The A linked units have a preferential
entitlement to distributions, with annual distribution growth capped at 5%
until June 2014 and the lower of 5% and CPI thereafter. The remaining
distributable income accrues to the B linked units. The unit structure must
comprise an equal number of A and B linked units.
2 DISTRIBUTABLE EARNINGS
Fortress increased combined distributions by 10,22% to 62,65 cents for the
six months ended 31 December 2011 compared with the 56,84 cents for the
comparable prior period.
Of the total distribution for this period, 53,34 cents accrues to an A linked
unit and 9,31 cents to a B linked unit, equating to growth of 5% and 54,14%
respectively.
3 COMMENTARY ON RESULTS
Fortress has achieved robust growth in distributions in a difficult economic
climate. This performance is largely attributable to the strategy of
investing in retail properties, focused on the lower LSM market. These retail
assets are commuter-orientated and are located in rural nodes. Fortress`
direct property portfolio comprises 66% retail, 22% industrial, 10% office
and 2% residential based on property value.
Overall vacancies increased marginally to 5,7% at 31 December 2011 from 5,6%
at 30 June 2011. The vacancies should however decline for the remainder of
the financial year as City Centre Carltonville, Bayside Centre Mossel Bay and
a portion of Top Road Industrial Park Anderbolt, which had relatively high
vacancies, were sold. Considerable success has been achieved with letting of
retail space, particularly at the Nongoma and Sinoville Shopping Centres.
4 DISPOSALS
The following non-core properties were sold during the previous financial
year, but had not transferred:
Book value Sale
Jun 2011 price Exit Transfer
Property name R`000 R`000 yield date
Taxi City East London 24 000 24 000 10,0% 17 Aug 2011
Silver Creek Centre
Centurion 15 750 15 750 11,9% 9 Sep 2011
Bryanston Ridge Office
Park (portion only) 7 750 7 750 7,7% 9 Sep 2011
Shorthorn Street
City Deep 22 100 22 100 10,0% 14 Oct 2011
Bayside Centre
Mossel Bay 26 800 26 800 10,2% 20 Jan 2012
City Centre
Carltonville 6 000 6 250 Vacant Pending
The following non-core properties were sold during the period under review:
Book value Sale
Jun 2011 price Exit Transfer
Property name R`000 R`000 yield date
Elston Street Benoni 8 000 6 250 Vacant 28 Oct 2011
People`s Place
Queenstown 15 700 22 000 10,5% 3 Nov 2011
Grader Road Spartan 8 500 12 250 Vacant 25 Nov 2011
Meadowdale Centre
Edenvale 58 000 64 500 9,5% 1 Dec 2011
Queenstown Mall 28 700 32 750 11,0% Pending
Top Road Industrial
Park Anderbolt
(portion only) 9 500 10 250 Vacant Pending
Grand Central Shopping
Centre 121 700 122 500 9,5% Pending
Nquthu Plaza
(50% interest)* 61 140 66 856 9,5% Pending
Total 311 240 337 356
*This disposal is subject to Competition Commission approval.
5 PROPERTY ACQUISITIONS
During the interim period Fortress issued an additional 51 014 493 A and B
linked units for the acquisition of a portfolio of retail properties from
Capital Property Fund ("Capital"). This R704 million acquisition was
effective 1 December 2011:
Purchase
price Initial
Property name R`000 yield
Park Central Shopping Centre Johannesburg 154 000 10,2%
Mutsindo Mall & Capricorn Plaza Thohoyandou 145 000 8,4%
Morone Shopping Centre Burgersfort 120 500 9,6%
Crossroads KwaMahlanga 90 000 11,6%
West Street Durban 83 500 8,5%
Venda Plaza Thohoyandou 81 000 10,8%
Shoprite Port Shepstone 30 000 10,8%
Total 704 000 9,8%
The following properties were acquired for cash:
Purchase
price Initial Effective
Property name R`000 yield date
Shoprite Kokstad 38 000 12,0% 5 Sep 2011
Metropolitan Centre Lebowakgomo 28 000 10,7% 11 Dec 2011
Evaton Plaza
(remaining 50% interest)* 116 800 9,4% 1 Jan 2012
Total 182 800
*This acquisition is subject to Competition Commission approval.
6 REDEVELOPMENTS
The Monument Centre in Standerton is being upgraded and extended by 1 600m2
to accommodate Legit, Totalsports, Exact, Studio 88, Sportscene and
additional space for Edgars and Mr Price at a projected total cost of R30,2
million, of which R10,2 million was incurred at 31 December 2011. The project
is scheduled to be completed in November 2012.
The redevelopment and refurbishment of the three properties in Secunda
(Checkers Secunda, Pick `n Pay Secunda and Secunda Village) commenced during
the interim period.
The conversion of an unutilised auditorium at Fort Gale Estate to 650m2 of
office space is in progress. Negotiations to let the space are well advanced.
7 LISTED EQUITIES
In July 2011 Fortress acquired 25,5 million linked units in Vukile Property
Fund Limited at a price of R13,10 per unit. These units were disposed of
during the interim period.
The investment in New Europe Property Investments plc ("Nepi") was increased
from 3 327 585 shares at 30 June 2011 to 9 700 000 shares at 31 December
2011, representing 9,44% of Nepi`s shares in issue. Fortress earned a fee of
R2,1 million as underwriter of a rights issue undertaken by Nepi during the
period.
Fortress acquired an additional 3 000 000 Resilient Property Income Fund
Limited linked units at an average price of R32,74, resulting in a total
holding of 5 000 000 linked units. A further 1 000 000 units in Capital were
acquired at an average price of R8,71. Fortress now owns 38 000 000 Capital
units.
8 FUNDING
During September 2011 Fortress increased its borrowing facilities with
Standard Bank by R220 million to R1,115 billion. A facility of R846,2 million
was renewed for a further period of two years.
Fortress` gearing as at 31 December 2011 was 21,5% against the board`s target
range of between 30% and 35%.
The board has approved the establishment of a domestic medium term note
programme to enable it to access the capital markets.
9 PROSPECTS
The board anticipates growth in total distributions of approximately 10% for
the full financial year to 30 June 2012.
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
15 February 2012
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited Audited Unaudited
Dec 2011 Jun 2011 Dec 2010
R`000 R`000 R`000
ASSETS
Non-current assets 4 737 178 3 975 937 3 514 398
Investment property 3 575 922 3 130 131 2 955 725
Straight-lining of rental revenue
adjustment 35 976 28 618 19 564
Investment property under
development 28 184 3 999 15 579
Investments 823 400 472 952 320 665
Fortress Unit Purchase Trust loans 151 469 135 947 194 638
Loan to BEE vehicle 102 859 183 991 -
Loans to development partners 19 368 20 299 8 227
Current assets 314 441 145 219 128 549
Investment property held for sale 261 934 101 815 77 408
Straight-lining of rental revenue
adjustment 3 472 585 192
Fortress Unit Purchase Trust loans 4 537 3 809 4 090
Loans to development partners 7 503 7 169 6 624
Trade and other receivables 28 150 27 934 24 266
Cash and cash equivalents 8 845 3 907 15 969
Total assets 5 051 619 4 121 156 3 642 947
EQUITY AND LIABILITIES
Total equity attributable to
equity holders 1 053 371 761 897 458 489
Share capital 5 716 4 620 4 416
Share premium 565 041 325 464 281 487
Non-distributable reserves 482 614 431 813 172 586
Retained earnings - - -
Total liabilities 3 998 248 3 359 259 3 184 458
Non-current liabilities 3 520 797 2 612 735 2 323 471
Linked debentures 2 572 150 2 079 000 1 986 750
Interest-bearing borrowings 894 799 474 565 321 121
Deferred tax 53 848 59 170 15 600
Current liabilities 477 451 746 524 860 987
Trade and other payables 106 401 66 431 234 059
Linked debenture interest payable 179 050 132 663 125 474
Income tax payable 1 282 31 463
Interest-bearing borrowings 190 718 547 399 500 991
Total equity and liabilities 5 051 619 4 121 156 3 642 947
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited Audited Unaudited
for the for the for the
six months year six months
ended ended ended
Dec 2011 Jun 2011 Dec 2010
R`000 R`000 R`000
Net rental and related revenue 178 738 317 996 148 569
Recoveries and contractual rental
revenue 264 223 453 966 210 446
Straight-lining of rental revenue
adjustment 10 245 11 949 2 502
Rental revenue 274 468 465 915 212 948
Property operating expenses (95 730) (147 919) (64 379)
Distributable income from
investments 32 390 23 935 10 444
Fair value gain on investment
property and investments 72 225 315 336 38 989
Fair value gain on investment
property 17 792 278 698 5 628
Adjustment resulting from
straight-lining of rental
revenue (10 245) (11 949) (2 502)
Fair value gain on investments 64 678 48 587 35 863
Nepi underwriting fee 2 143 - -
Administrative expenses (9 016) (15 783) (5 996)
Profit before net finance costs 276 480 641 484 192 006
Net finance costs (224 127) (315 387) (167 947)
Finance income 42 252 34 193 14 917
Interest from loans 14 232 24 557 8 151
Interest on linked units issued
cum distribution 28 020 9 636 6 766
Finance costs (266 379) (349 580) (182 864)
Interest on borrowings (57 745) (91 327) (40 411)
Capitalised interest 533 1 073 453
Fair value adjustment on
interest rate derivatives (30 117) (1 188) (17 432)
Interest to linked debenture
holders
- A linked units (152 443) (229 489) (112 141)
- B linked units (26 607) (28 649) (13 333)
Profit before income tax expense 52 353 326 097 24 059
Income tax expense (1 552) (43 214) (403)
Profit for the period attributable
to equity holders 50 801 282 883 23 656
Total comprehensive income
for the period 50 801 282 883 23 656
Basic earnings per A share (cents) 8,89 62,62 5,36
Basic earnings per B share (cents) 8,89 62,62 5,36
Basic earnings per A linked unit
(cents) 62,23 164,22 56,16
Basic earnings per B linked unit
(cents) 18,20 75,30 11,40
Fortress has no dilutionary instruments in issue.
RECONCILIATION OF PROFIT FOR THE PERIOD TO HEADLINE EARNINGS AND
DISTRIBUTABLE INCOME
Unaudited Audited Unaudited
for the for the for the
six months year six months
ended ended ended
Dec 2011 Jun 2011 Dec 2010
R`000 R`000 R`000
Basic earnings (shares) - profit
for the period attributable to
equity holders 50 801 282 883 23 656
- interest to A linked debenture
holders 152 443 229 489 112 141
- interest to B linked debenture
holders 26 607 28 649 13 333
Basic earnings (linked units) 229 851 541 021 149 130
Adjusted for: (5 056) (229 523) (2 381)
- fair value gain on investment
property (7 547) (266 749) (3 126)
- income tax effect 2 491 37 226 745
Headline earnings (linked units) 224 795 311 498 146 749
Adjustment resulting from
straight-lining of rental
revenue (10 245) (11 949) (2 502)
Fair value gain on investments (64 678) (48 587) (35 863)
Fair value adjustment on interest
rate derivatives 30 117 1 188 17 432
Income tax effect (939) 5 988 (342)
Distributable income 179 050 258 138 125 474
Less: distribution declared (179 050) (258 138) (125 474)
Income not distributed - - -
Headline earnings per A share
(cents) 8,00 11,81 4,82
Headline earnings per B share
(cents) 8,00 11,81 4,82
Headline earnings per A linked
unit (cents) 61,34 113,41 55,62
Headline earnings per B linked
unit (cents) 17,31 24,50 10,86
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 285 794 493 (Jun 2011: 225 875 000;
Dec 2010: 220 750 000) shares/linked units in issue during the period
for both A and B shares/linked units.
ABRIDGED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited Audited Unaudited
for the for the for the
six months year six months
ended ended ended
Dec 2011 Jun 2011 Dec 2010
R`000 R`000 R`000
Cash inflow from operating
activities 50 474 40 965 30 456
Cash outflow from investing
activities (842 912) (753 062) (394 208)
Cash inflow from financing
activities 797 376 711 024 374 741
Increase/(decrease) in cash and
cash equivalents 4 938 (1 073) 10 989
Cash and cash equivalents at the
beginning of the period 3 907 4 980 4 980
Cash and cash equivalents at the
end of the period 8 845 3 907 15 969
Cash and cash equivalents consist
of:
Current accounts 8 845 3 907 15 969
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Non-
Share Share distributable Retained
capital premium reserves earnings Total
R`000 R`000 R`000 R`000 R`000
Balance at
30 June 2010 4 036 214 924 148 930 - 367 890
Issue of
linked units
(equal number
of A and B
units) 380 66 563 66 943
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
Issue of
linked units
(equal number
of A and B
units) 204 43 977 44 181
Total
comprehensive
income for
the period 259 227 259 227
Transfer to
non-
distributable
reserves 259 227 (259 227) -
Balance at
30 June 2011 4 620 325 464 431 813 - 761 897
Issue of
linked units
(equal number
of A and B
units) 1 096 239 577 240 673
- Issue of
3 780 000
units
effective
12 September
2011 76 23 020 23 096
- Issue of
51 014 493
units
effective
1 December
2011 1 020 216 557 217 577
Total
comprehensive
income for
the period 50 801 50 801
Transfer to
non-
distributable
reserves 50 801 (50 801) -
Balance at
31 December
2011 5 716 565 041 482 614 - 1 053 371
NOTES
1 PREPARATION
The condensed unaudited consolidated interim financial statements have been
prepared in accordance with the measurement and recognition requirements of
IFRS, the AC500 standards as issued by the Accounting Practices Board, the
information contained in 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
CA(SA), the financial director.
The accounting policies adopted are consistent with those applied in the
prior periods.
The directors are not aware of any matters or circumstances arising
subsequent to 31 December 2011 that require any additional disclosure or
adjustment to the financial statements.
This report was not audited or reviewed by the company`s auditors.
2 SUMMARY OF FINANCIAL PERFORMANCE
Unaudited Audited Unaudited Audited
six months six months six months six months
Dec 2011 Jun 2011 Dec 2010 Jun 2010
Distribution per
A linked unit (cents) 53,34 50,80 50,80 48,38
Distribution per
B linked unit (cents) 9,31 6,63 6,04 4,79
A linked units in
issue 285 794 493 231 000 000 220 750 000 201 782 877
B linked units in
issue 285 794 493 231 000 000 220 750 000 201 782 877
Net asset value per
combined linked unit* R12,69 R12,30 R11,08 R10,82
Net asset value per
A unit R12,22# R10,88# R11,08# R9,92#
Net asset value per
B unit R0,47 R1,42 - R0,90
Gearing ratio** 21,5% 24,8% 22,6% 22,5%
*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
combined net asset value.
**The gearing ratio is calculated by dividing interest-bearing borrowings by
total assets.
3 FACILITIES AND INTEREST RATE DERIVATIVES
Amount Margin
Facility expiry R`million over Jibar
2012 256 2,22%
2013 975 1,74%
2014 - -
2015 - -
2016 348 1,75%
1 579 1,82%
Amount Swap % of
Interest rate swaps expiry R`million rate borrowings
2012 100 7,77% 9,21%
2013 100 8,04% 9,21%
2014 300 7,56% 27,62%
2015 150 8,20% 13,81%
2016 266 7,57% 24,49%
2017 200 7,45% 18,42%
2018 200 7,74% 18,42%
Hedged borrowings 1 316 7,70% 121,18%
Variable rate borrowings (230) (21,18%)
Total borrowings* 1 086 10,07%** 100,00%
*Total borrowings comprise the level of external interest-bearing borrowings.
**Represents the all-in average rate for Fortress at 31 December 2011.
4 LEASE EXPIRY PROFILE
Based on
Based on contractual
rentable rental
Lease expiry area revenue
Vacant 5,7%
June 2012 16,8% 18,9%
June 2013 26,3% 27,0%
June 2014 20,6% 21,4%
June 2015 10,9% 12,2%
June 2016 12,7% 13,1%
>June 2016 7,0% 7,4%
Total 100,0% 100,0%
5 SEGMENTAL ANALYSIS
Unaudited Audited Unaudited
Dec 2011 Jun 2011 Dec 2010
Recoveries and contractual rental
revenue R`000 R`000 R`000
Retail 150 185 241 929 109 002
Industrial 77 444 151 534 72 062
Office 30 904 56 082 25 265
Residential 5 690 4 421 4 117
Total 264 223 453 966 210 446
Property operating expenses
Retail (53 291) (82 322) (34 417)
Industrial (29 626) (46 669) (21 861)
Office (11 414) (18 066) (7 274)
Residential (1 399) (862) (827)
Total (95 730) (147 919) (64 379)
Rental revenue
Retail 154 116 250 515 111 267
Industrial 81 868 152 014 72 798
Office 32 794 58 965 24 766
Residential 5 690 4 421 4 117
Total 274 468 465 915 212 948
Profit before net finance costs
Retail 96 894 336 568 72 107
Industrial 47 818 162 385 57 314
Office 19 490 79 039 18 530
Residential 4 291 6 753 3 744
Corporate 107 987 56 739 40 311
Total 276 480 641 484 192 006
6 PAYMENT OF INTERIM DISTRIBUTIONS
The board has approved and notice is hereby given of interim cash interest
distributions (distributions no 5) of 53,34 cents per A linked unit and 9,31
cents per B linked unit for the six months ended
31 December 2011.
The last date to trade linked units cum distribution will be Friday,
2 March 2012 and trading will commence ex distribution on Monday,
5 March 2012. The record date to participate in the distributions will be
Friday, 9 March 2012.
Linked unit certificates may not be dematerialised or rematerialised between
Monday, 5 March 2012 and Friday, 9 March 2012, both days inclusive. Payment
of the distributions will be made to linked unitholders on Monday, 12 March
2012.
In respect of dematerialised linked unitholders, the distributions will be
transferred to the Central Securities Depository Participant accounts/broker
accounts on Monday, 12 March 2012. Certificated linked unitholders`
distributions payments will be posted on or about Monday, 12 March 2012.
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
Company secretary
Stephanie Botha
Directors
Jeff Zidel (chairman) Mark Stevens (managing director)* Kura Chihota
Nontando Kunene Jannie Moolman Djurk Venter Wiko Serfontein*
(*executive director)
Date: 15/02/2012 14:44:30 Supplied by www.sharenet.co.za
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