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Condensed audited consolidated financial statements for the year ended 30 June 2012
Fortress Income Fund Limited
Incorporated in the Republic of South Africa
Registration number 2009/016487/06
Share codes: FFA ISIN ZAE000141313
FFB ISIN ZAE000141321 respectively
(“Fortress” or “the group”)
Condensed audited consolidated financial statements for the year ended
30 June 2012
DIRECTORS COMMENTARY
1 NATURE OF BUSINESS
Fortress, a listed property loan stock company invests in both direct
and indirect property. Its earnings are derived from collecting rentals
as well as distributions from a portfolio of listed property securities.
The direct property portfolio is weighted towards retail centres
focusing on the commuter market.
2 COMPANY STRUCTURE
Fortress is structured with separately listed A and B linked units
offering unitholders an opportunity to have investments in 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.
3 DISTRIBUTABLE EARNINGS
Fortress increased total distributions for the year ended 30 June 2012
by 10,2% to 125,94 cents against 114,27 cents for the previous financial
year. The distributions for the six months ended 30 June 2012 are 53,34
cents and 9,95 cents per A and B linked unit respectively, representing
growth of 5,0% and 50,1% over the comparative prior period.
4 STRATEGIC DIRECTION
The strategy of Fortress is to increase its investment in rural and CBD
retail properties situated close to transport nodes. This will result in
the reduction in the group?s exposure to small industrial properties
over time. In addition to acquiring new retail centres, Fortress will
continue to expand and redevelop its existing retail portfolio to
improve the tenant profile and to accommodate tenant demand.
5 ASSET MANAGEMENT
The 2012 financial year was again characterised by aggressive asset
management with the disposal of 16 properties (R465 million) and the
acquisition of 12 properties (R942 million). As a result, the portfolio
is well positioned to provide superior growth in the future.
5.1 DISPOSALS
The following properties that were sold, transferred during the
financial year:
Book Sale
value price Exit Transfer
Property name R 000 R 000 yield date
Taxi City East London 24 000 24 000 10,0% Aug 2011
Silver Creek Centre
Centurion 15 750 15 750 11,9% Sep 2011
Bryanston Ridge Office
Park (portion only) 7 750 7 750 7,7% Sep 2011
Shorthorn Street City
Deep 22 100 22 100 10,0% Oct 2011
Elston Street Benoni 8 000 6 250 7,1% Oct 2011
Grader Road Spartan 8 500 12 250 * Nov 2011
Peoples Place Queenstown 15 700 22 000 10,5% Nov 2011
Meadowdale Centre 58 000 64 500 9,5% Dec 2011
Bayside Centre Mossel Bay 26 800 26 800 10,2% Jan 2012
Top Road Industrial Park
Anderbolt
(portion only) 9 500 10 250 10,4% Feb 2012
10 Skeen Boulevard 18 000 19 000 * May 2012
Grand Central Shopping
Centre 121 700 125 693 10,0% May 2012
21 Ashfield Avenue
Springfield 11 000 12 500 * Jun 2012
Nquthu Plaza
(50% interest) 61 140 68 351 9,4% Jun 2012
The Avenues Industrial
Park Anderbolt 21 600 21 600 10,5% Jun 2012
City Centre Carltonville 6 000 6 250 11,9% Jun 2012
Total 435 540 465 044
*Vacant
5.2 ACQUISITIONS
The following retail properties were acquired and transferred during the
financial year:
Purchase
GLA price Effective
Property name m2 R?000 Yield from
Park Central Shopping
Centre 8 613 154 000 10,2% Dec 2011
Mutsindo Mall and
Capricorn
Plaza 12 330 145 000 8,4% Dec 2011
Morone Shopping Centre 13 487 120 500 9,6% Dec 2011
Crossroads KwaMhlanga 10 708 90 000 11,6% Dec 2011
West Street Durban 6 202 83 500 8,5% Dec 2011
Venda Plaza 10 284 81 000 10,8% Dec 2011
Shoprite Port Shepstone 8 792 30 000 10,8% Dec 2011
Shoprite Kokstad 7 917 38 000 12,0% Sep 2011
Metropolitan Centre
Lebowakgomo 5 514 28 000 10,7% Dec 2011
Evaton Plaza (remaining
50% interest) 28 720 120 341 9,4% May 2012
Game Paarl 4 010 29 610 11,1% Jun 2012
Paradise and Corner House 3 932 22 000 9,0% Jun 2012
Total 941 951
5.3 INVESTMENT PROPERTIES HELD FOR SALE
Fortress has agreed to sell 2 Skeen Boulevard for R46,5 million and
Sebokeng Plaza for R78,0 million.
5.4 ACQUISITIONS TRANSFERRED AFTER YEAR-END
The following retail properties were transferred after 30 June 2012:
Purchase
GLA price
Property name m2 R?000 Yield
Shell and McDonalds 954 31 267 9,0%
Boxer Centre Lephalale* 4 655 13 000 10,8%
Fashion Corner Lephalale* 5 017 19 000 10,1%
Relebogile Centre Lephalale* 3 395 12 000 11,2%
Standard Bank Building Lephalale* 2 594 7 200 11,2%
Shoprite Centre Lephalale* 6 908 22 000 10,9%
Total 104 467
*51% undivided share
5.5 REDEVELOPMENTS
Monument Centre Standerton The redevelopment and expansion of the
centre to accommodate Legit, Totalsports, Exact, Studio 88, Sportscene
and additional space for Edgars will be completed in November 2012.
The project is anticipated to yield 9,5% on the budgeted cost of
R41,2 million.
Secunda centres Pick „n Pay Secunda was refurbished and extended. The
Pick „n Pay lease was renewed for a period of five years and the tenant
profile was further improved. The Checkers lease at Checkers Secunda was
renewed for five years and the mall was refurbished. New leases were
entered into with Truworths and The Scene (Foschini Group). The offices
on the first floor of Secunda Village were refurbished.
Evaton Plaza Fortress is planning to expand the centre by 7 884m2, to
enclose the mall and to introduce Game and Edgars. Negotiations are at
an advanced stage to introduce all the major national clothing retailers
which are currently not represented in the centre. As a result of the
extension, the centre will have four anchors and become the dominant
retail centre in the area. The extension is anticipated to yield 8% on
the budgeted cost of R130 million.
6 VACANCIES
The board is pleased to report a reduction in vacancies from 5,6% at 30
June 2011 to 5,1% at 30 June 2012. Positive rental reversions of 7,6%
were achieved on leases renewed during the year.
Of the current vacancies, 1,1% were the result of planned vacancies at
the Secunda centres, Monument Centre and Evaton Plaza which are
undergoing refurbishment and redevelopment.
7 LISTED EQUITIES
As a hybrid fund Fortress also invests in listed property securities.
Number % of units/ Carrying
of units/ shares in value
Investments shares issue R?000
Capital Property Fund 38 500 000 2,40% 380 765
New Europe Property
Investments plc
(“Nepi”) 15 000 000 11,96% 600 900
Resilient Property
Income Fund Limited 5 678 053 2,02% 243 872
Total 1 225 537
8 FUNDING
Fortress has established a R1 billion unsecured Domestic Medium Term
Note (“DMTN”) programme and has obtained a rating of A- (long term) and
A1- (short term) from Global Credit Rating Co. Fortress intends to raise
50% of its funding from the capital markets.
R250 million of commercial paper was issued in June 2012, the proceeds
of which were used to repay an expiring facility in July 2012.
Fortress has reduced its average cost of funding from 10,20% at 30 June
2011 to 9,43% at 30 June 2012 by accessing cheaper funding from the
capital markets and negotiating lower margins on the renewal of existing
facilities.
Gearing reduced to 19,4% from 24,8% at 30 June 2011, which is below the
board?s target range of 30% to 35%.
9 PROSPECTS
The board is confident that Fortress will achieve growth in
distributions of approximately 10% for the 2013 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
15 August 2012
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Audited Audited
Jun 2012 Jun 2011
R'000 R'000
ASSETS
Non-current assets 5 755 600 3 975 937
Investment property 4 035 002 3 130 131
Straight-lining of rental revenue adjustment 37 539 28 618
Investment property under development 48 222 3 999
Investments 1 225 537 472 952
Fortress Unit Purchase Trust loans 202 644 135 947
Loan to BEE vehicle 175 711 183 991
Loans to development partners 30 945 20 299
Current assets 169 683 145 219
Investment property held for sale 123 595 101 815
Straight-lining of rental revenue adjustment 905 585
Fortress Unit Purchase Trust loans 5 499 3 809
Loans to development partners – 7 169
Trade and other receivables 31 333 27 934
Cash and cash equivalents 8 351 3 907
Total assets 5 925 283 4 121 156
EQUITY AND LIABILITIES
Total equity attributable to equity holders 1 658 860 761 897
Share capital 5 862 4 620
Share premium 633 974 325 464
Non-distributable reserves 1 019 024 431 813
Retained earnings – –
Total liabilities 4 266 423 3 359 259
Non-current liabilities 3 411 099 2 612 735
Linked debentures 2 637 760 2 079 000
Interest-bearing borrowings 650 862 474 565
Deferred tax 122 477 59 170
Current liabilities 855 324 746 524
Trade and other payables 171 377 66 431
Linked debenture interest payable 185 493 132 663
Income tax payable 1 088 31
Interest-bearing borrowings 497 366 547 399
Total equity and liabilities 5 925 283 4 121 156
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Audited Audited
for the for the
year ended year ended
Jun 2012 Jun 2011
R'000 R'000
Net rental and related revenue 379 719 317 996
Recoveries and contractual rental revenue 560 630 453 966
Straight-lining of rental revenue adjustment 9 241 11 949
Rental revenue 569 871 465 915
Property operating expenses (190 152) (147 919)
Distributable income from investments 62 057 23 935
Fair value gain on investment property and
investments 699 732 315 336
Fair value gain on investment property 447 370 278 698
Adjustment resulting from straight-lining of
rental revenue (9 241) (11 949)
Fair value gain on investments 261 603 48 587
Nepi underwriting fee 2 143 –
Administrative expenses (23 669) (15 783)
Profit before net finance costs 1 119 982 641 484
Net finance costs (460 068) (315 387)
Finance income 65 347 34 193
Interest from loans 33 036 24 557
Fair value adjustment on derivatives 2 031 -
Interest on linked units issued cum
distribution 30 280 9 636
Finance costs (525 415) (349 580)
Interest on borrowings (112 079) (91 327)
Capitalised interest 2 297 1 073
Fair value adjustment on derivatives (51 090) (1 188)
Interest to linked debenture holders
– A linked units (308 774) (229 489)
– B linked units (55 769) (28 649)
Profit before income tax expense 659 914 326 097
Income tax expense (72 703) (43 214)
Profit for the year attributable to equity
holders 587 211 282 883
Total comprehensive income for the year 587 211 282 883
Basic earnings per A share (cents) 101,44 62,62
Basic earnings per B share (cents) 101,44 62,62
Basic earnings per A linked unit (cents) 208,12 164,22
Basic earnings per B linked unit (cents) 120,71 75,30
Fortress has no dilutionary instruments in issue.
RECONCILIATION OF PROFIT FOR THE YEAR TO HEADLINE EARNINGS AND
DISTRIBUTABLE INCOME
Audited Audited
for the for the
year ended year ended
Jun 2012 Jun 2011
R'000 R'000
Basic earnings (shares) – profit for the year
attributable to equity holders 587 211 282 883
– interest to A linked debenture holders 308 774 229 489
– interest to B linked debenture holders 55 769 28 649
Basic earnings (linked units) 951 754 541 021
Adjusted for: (383 777) (229 523)
– fair value gain on investment property (438 129) (266 749)
– income tax effect 54 352 37 226
Headline earnings (linked units) 567 977 311 498
Straight-lining of rental revenue adjustment (9 241) (11 949)
Fair value gain on investments (261 603) (48 587)
Fair value adjustment on derivatives 49 059 1 188
Income tax effect 18 351 5 988
Distributable income 364 543 258 138
Less: distributions declared (364 543) (258 138)
Income not distributed – –
Headline earnings per A share (cents) 35,14 11,81
Headline earnings per B share (cents) 35,14 11,81
Headline earnings per A linked unit (cents) 141,82 113,41
Headline earnings per B linked unit (cents) 54,41 24,50
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 289 439 493 (2011: 225 875 000) shares/linked
units in issue during the year for both A and B shares/linked units.
ABRIDGED CONSOLIDATED STATEMENT OF CASH FLOWS
Audited Audited
for the for the
year ended year ended
Jun 2012 Jun 2011
R'000 R'000
Cash inflow from operating activities 36 176 31 329
Cash outflow from investing activities (352 788) (753 062)
Cash inflow from financing activities 321 056 720 660
Increase/(decrease) in cash and cash equivalents 4 444 (1 073)
Cash and cash equivalents at the beginning
of the year 3 907 4 980
Cash and cash equivalents at the end of the year 8 351 3 907
Cash and cash equivalents consist of current accounts.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Non-
distri-
Share Share butable Retained
capital premium reserves earnings Total
Audited 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) 584 110 540 111 124
Total comprehensive
income for the year 282 883 282 883
Transfer to non-
distributable
reserves 282 883 (282 883) –
Balance at
30 June 2011 4 620 325 464 431 813 – 761 897
Issue of linked units
(equal number of
A and B units) 1 242 308 510 309 752
– Issue of 3 780 000
units effective
6 September 2011 76 23 020 23 096
– Issue of 51 014 493
units effective
1 December 2011 1 020 216 557 217 577
– Issue of 7 290 000
units effective
29 March 2012 146 68 933 69 079
Total comprehensive
income for the year 587 211 587 211
Transfer to
non-distributable
reserves 587 211 (587 211) -
Balance at
30 June 2012 5 862 633 974 1 019 024 – 1 658 860
NOTES
1 PREPARATION, ACCOUNTING POLICIES AND AUDIT OPINION
The condensed audited consolidated 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 2008 (“the 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 30 June 2012 that require any
additional disclosure or adjustment to the financial statements.
Deloitte & Touche have issued their unmodified opinion on the group
financial statements for the year ended 30 June 2012. These condensed
financial statements have been derived from the group financial
statements and are, in all material respects, consistent with the group
financial statements. These financial statements have been audited in
compliance with all applicable requirements of the Act. A copy of the
audit report is available for inspection at Fortress? registered office.
2 Summary of financial performance
Jun 2012 Dec 2011 Jun 2011 Dec 2010
Distribution per A
linked unit (cents) 53,34 53,34 50,80 50,80
Distribution per B
linked unit (cents) 9,95 9,31 6,63 6,04
A linked units in
issue 293 084 493 285 794 493 231 000 000 220 750 000
B linked units in
issue 293 084 493 285 794 493 231 000 000 220 750 000
Net asset value per
combined linked unit* R14,66 R12,69 R12,30 R11,08
Net asset value per
A unit# R13,20 R12,22 R10,88 R11,08
Net asset value per
B unit R1,46 R0,47 R1,42 –
Gearing ratio** 19,4% 21,5% 24,8% 22,6%
*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
Average
Amount margin
Facility expiry R?million over Jibar
2013 585 1,37%
2014 896 1,78%
2015 – –
2016 – –
2017 397 1,96%
1 878 1,69%
Amount Average % of
Interest rate swaps expiry R?million swap rate borrowings
2014 150,0 8,04% 13,06%
2015 300,0 7,53% 26,13%
2016 200,0 8,16% 17,42%
2017 166,0 7,35% 14,46%
2018 300,0 7,57% 26,13%
2019 100,0 7,65% 8,71%
Hedged borrowings 1 216,0 7,69% 105,91%
Variable rate borrowings (67,8) (5,91%)
Total borrowings 1 148,2 9,43%* 100,00%
*Represents the all-in average rate for Fortress at 30 June 2012.
4 LEASE EXPIRY PROFILE (UNAUDITED)
Based on
Based on contractual
rentable rental
Lease expiry area revenue
Vacant 5,1%
June 2013 28,5% 25,7%
June 2014 20,7% 21,8%
June 2015 13,2% 15,9%
June 2016 12,7% 14,1%
June 2017 10,0% 12,4%
>June 2017 9,8% 10,1%
Total 100,0% 100,0%
5 SEGMENTAL ANALYSIS
Jun 2012 Jun 2011
Recoveries and contractual rental revenue R?000 R?000
Retail 347 834 241 929
Industrial 145 735 151 534
Office 57 584 56 082
Residential 9 477 4 421
Total 560 630 453 966
Property operating expenses
Retail (118 987) (82 322)
Industrial (49 361) (46 669)
Office (19 755) (18 066)
Residential (2 049) (862)
Total (190 152) (147 919)
Rental revenue
Retail 357 442 250 515
Industrial 145 573 152 014
Office 57 379 58 965
Residential 9 477 4 421
Total 569 871 465 915
Profit before net finance costs
Retail 571 622 336 568
Industrial 164 200 162 385
Office 73 641 79 039
Residential 8 385 6 753
Corporate 302 134 56 739
Total 1 119 982 641 484
6 Payment of final distributions
The board has approved and notice is hereby given of the final cash
interest distributions (distributions no 6) of 53,34 cents per A linked
unit and 9,95 cents per B linked unit for the six months ended 30 June
2012. These interest distributions are not subject to dividend with-
holding tax.
The last date to trade linked units cum distribution will be Friday,
31 August 2012 and trading will commence ex distribution on Monday,
3 September 2012. The record date to participate in the distribution
will be Friday, 7 September 2012.
Linked unit certificates may not be dematerialised or rematerialised
between Monday, 3 September 2012 and Friday, 7 September 2012, both days
inclusive. Payment of the distribution will be made to linked
unitholders on Monday, 10 September 2012.
In respect of dematerialised linked unitholders, the distribution will
be transferred to the Central Securities Depository Participant
accounts/broker accounts on Monday, 10 September 2012. Certificated
linked unitholders? distribution payments will be posted on or about
Monday, 10 September 2012.
Registered office
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 Chris Lister-James Djurk Venter Wiko Serfontein*
(*executive director)
www.fortressfund.co.za
Date: 15/08/2012 04:07:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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