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Preliminary Summarised Audited Consolidated Financial Statements for the year ended 30 June 2013
FORTRESS INCOME FUND LIMITED
INCORPORATED IN THE REPUBLIC OF SOUTH AFRICA
REGISTRATION NUMBER 2009/016487/06
SHARE CODES: FFA ISIN ZAE000141313
FFB ISIN ZAE000141321
(APPROVED AS A REIT BY THE JSE)
(“FORTRESS” OR “THE GROUP”)
PRELIMINARY SUMMARISED AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 30 JUNE 2013
DIRECTORS’ COMMENTARY
Fortress is an internally managed property loan stock company and has,
with effect from 1 July 2013, converted to a Real Estate Investment Trust
(“REIT”). REIT legislation provides for certainty on taxation and brings
South African REITs in line with international best practice for listed
property companies.
1 NATURE OF BUSINESS
Fortress invests both in direct property and listed property securities.
The direct portfolio consists of 109 investment properties with a strong
weighting to commuter focused retail centres.
The sectoral breakdown by valuation of the properties is as follows:
Retail 74,5%
Industrial 16,4%
Office 7,3%
Residential 1,8%
2 CAPITAL STRUCTURE
The capital structure comprises separately listed A and B linked units
with different risk and reward propositions. The distribution of the A
linked units escalates at 5% per annum until June 2014 and thereafter at
the lower of CPI and 5%. The A linked units have preferential entitlements
to income distributions and to capital participation on winding up, while
the remaining distributable income and capital participation accrues to
the B linked units.
3 DISTRIBUTABLE EARNINGS
Total distributions for the year ended 30 June 2013 increased by 11,72% to
140,70 cents. The distribution attributable to the A linked units was
112,02 cents (a 5% increase) with 28,68 cents attributable to the B linked
units (a 48,91% increase).
The distributable income attributable to the A linked units for the six
months ended 30 June 2013 was 56,01 cents (a 5% increase) with 15,22 cents
(a 52,96% increase) attributable to the B linked units.
Whilst the direct portfolio performed to budget, the group’s investments
in listed property securities have exceeded forecasts. The investments in
both New Europe Property Investments plc (“Nepi”) and Rockcastle Global
Real Estate Company Limited (“Rockcastle”) experienced good growth in
their respective currencies and shareholders benefitted further from the
weaker Rand.
4 STRATEGIC DIRECTION
Fortress aims to increase its direct property investment in retail centres
close to transport nodes with high footfalls. The group will continue to
dispose of its remaining office and industrial properties to focus on
retail investments. In addition to acquiring new retail centres, Fortress
will expand and redevelop its existing retail centres to accommodate
demand, to maintain their relevance and to enhance their attractiveness to
customers and tenants. Fortress will continue to increase its investments
in listed property companies, particularly those with hard currency
exposure. Euro or US Dollar denominated investments now constitute 23,4%
of Fortress’ total assets.
5 DISPOSALS
In line with its strategy, Fortress disposed of 22 properties during the
2013 financial year.
Book
value Net
Jun 2012 proceeds Exit Effective
Property name Sector (R’000) (R’000) yield date
Bhunu Mall
(22,37% interest) Retail 30 423 26 000 12,0% Jul 2012
2 Skeen Boulevard Office 46 500 46 500 9,8% Aug 2012
Grand Central
Industrial Park Industrial 16 700 18 150 10,0% Oct 2012
396 Voortrekker Road
Parow Retail 33 300 35 250 9,9% Oct 2012
Fort Gale Estate commercial
(60% interest)* Office 27 780 32 212 10,3% Nov 2012
27 – 29 Maitland Street* Office 21 100 21 674 11,0% Nov 2012
2 Andrea Street Industrial 5 100 5 700 11,0% Dec 2012
Kindon Street
Robertsham Industrial 10 200 11 550 11,2% Jan 2013
85 North Coast Road Industrial 7 450 8 000 9,4% Mar 2013
Middle Road
Industrial Park Industrial 48 000 50 500 10,2% Apr 2013
Sebokeng Plaza Retail 78 000 67 200 11,1% Apr 2013
Zenith Drive Umhlanga Industrial 17 400 17 400 10,0% May 2013
Sasol Rosebank~ Office 128 000 130 000 10,1% Jul 2013
Hertzog Boulevard~ Office 66 800 88 978 8,8% Jul 2013
308 Kent Avenue~ Office 50 000 59 008 10,3% Jul 2013
Hanover Square~ Office 20 700 24 957 10,3% Jul 2013
Wedgefield Office Park~ Office 7 700 9 318 9,3% Jul 2013
30 Mahogany Road@ Industrial 6 950 8 400 8,7% Jul 2013
10 Hawthorne Place@ Industrial 7 700 10 614 10,4% Jul 2013
Brits Office Park@ Office 5 500 5 600 12,0% Jul 2013
563 Voortrekker Road@ Industrial 12 300 13 500 8,7% Jul 2013
7 – 9 Hawthorne Place@ Industrial 10 350 14 150 8,8% Jul 2013
Total 657 953 704 661
*Sold to Delta Property Fund Limited for R26,8 million in cash and 3 304
877 units in Delta Property Fund Limited.
~Sold to Tower Property Fund Limited for R156,1 million in cash and 15 613
053 shares in Tower Property Fund Limited.
@Transferred after year-end.
6 ACQUISITIONS
The following properties were acquired during the financial year:
100% Purchase
GLA price Effective
Property name Sector (m2) (R’000) date
Flamwood Value Centre
(50% interest) Retail 8 183 33 515 Jul 2012
Flamwood Walk (50% interest) Retail 4 830 28 635 Jul 2012
Shell and McDonalds
Amanzimtoti Retail 954 31 267 Jul 2012
York Road Mthatha
(remaining 40% interest) Retail 5 264 26 000 Jan 2013
Tzaneen land Retail land n/a 29 640 May 2013
Nelspruit Plaza (leasehold)# Retail 18 525 312 500 Jul 2013
Rustenburg Plaza# Retail 12 188 260 000 Jul 2013
Central Park Bloemfontein# Retail 12 753 163 000 Jul 2013
New Redruth Village# Retail 12 028 151 000 Jul 2013
Tzaneen Lifestyle Centre#$ Retail 10 696 105 544 Jul 2013
Sterkspruit Plaza#$ Retail 9 380 49 946 Jul 2013
Total 94 801 1 191 047
#Fortress is acquiring the properties, together with a development partner
loan of R20,6 million, from Resilient Property Income Fund Limited for R1
063 million, payable 50% in cash and 50% in Fortress linked units
comprising 25 469 463 A linked units and 25 469 463 B linked units.
$Includes a portion of land held for development.
7 CURRENT EXTENSIONS
Evaton Mall
The enclosure of Evaton Plaza to create a mall and expansion of the centre
by 7 884m2 is well underway with several tenants having taken beneficial
occupation. Game and Edgars will join Pick n Pay and Shoprite as the four
anchors in this dominant retail centre. The development is projected to
yield 8% based on a cost of R130 million.
Game Makhado (50% interest)
Game will be taking occupation of the 945m2 extension at the end of August
2013. A yield of 9% will be achieved on Fortress’ cost of R5,5 million and
Game has agreed to a new 10-year lease commencing November 2013.
Mthatha Residential (60% interest)
An additional 54 residential flats measuring 2 356m2 were completed in
May 2013 ahead of schedule and below the budgeted cost. As there was no
additional land cost, a yield of 15% was achieved on the cost of R10,3
million for Fortress’ interest.
Philippi Shopping Centre
Construction for the expansion of the centre by 1 550m2 to a total of 9
881m2 commenced in May 2013. The additional area is let to Shoprite Liquor
and several fashion retailers. The approved budget of R18,5 million is
projected to achieve a yield of 10%.
8 VACANCIES
The board is pleased to report a reduction in vacancies from 5,1% at
30 June 2012 to 4,9% at 30 June 2013.
Of the current vacancies, 3 239m2 were the result of planned vacancies at
Evaton Mall, Biyela Shopping Centre and Game Makhado, all of which are
undergoing or are about to commence extensions and redevelopment.
9 LISTED PROPERTY SECURITIES
2013 2012
Number Carrying Number Carrying
of units/ value of units/ value
shares (R’000) shares (R’000)
Capital (CPL) 42 500 000 452 200 38 500 000 380 765
Nepi (NEP) 17 500 000 1 172 325 15 000 000 600 900
Resilient (RES) 12 400 000 666 375 5 678 053 243 872
Rockcastle (ROC) 65 769 000 884 593 – –
Total 3 175 493 1 225 537
Fortress agreed to underwrite R150 million of Tower Property Fund Limited
(“Tower”) shares on listing at a price of R8,70 per share. After the
financial year-end, Fortress acquired 13 420 398 Tower shares in terms of
the underwrite and subsequently placed all of these shares. The underwrite
fee of R7,5 million was earned in the 2014 financial year and was offset
against an interest rate cap premium of R8,5 million.
10 FUNDING
Fortress has a R2 billion unsecured domestic medium term note programme
and has a rating of A- (long term) and A1- (short term). A total of R1 170
million has been issued under the programme at 30 June 2013.
Fortress accepted a three year facility of R300 million from RMB and a
further R200 million facility was approved by RMB after year-end. The
Standard Bank facility was increased by R153,8 million and the total
facility of R1 billion was renewed for three years.
At 30 June 2013, 100,7% of Fortress’ interest rate exposure (inclusive of
contracted capital commitments) was hedged.
Gearing increased to 24,0% from 19,4% at 30 June 2012, which is below the
board’s target range of 30% to 35%.
11 PROSPECTS
The board is confident that Fortress will achieve growth in distributions
of approximately 10% for the 2014 financial year. The forecast assumes
exchange rates of R12,00 and R9,00 to the Euro and US Dollar respectively.
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
14 August 2013
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Audited Audited
2013 2012
(R'000) (R'000)
ASSETS
Non-current assets 8 393 133 5 755 600
Investment property 4 351 125 4 035 002
Straight-lining of rental revenue adjustment 79 128 37 539
Investment property under development 148 797 48 222
Investments 3 175 493 1 225 537
Fortress Unit Purchase Trust loans 374 370 202 644
Loan to BEE vehicle 193 104 175 711
Loans to development partners 71 116 30 945
Current assets 409 464 169 683
Investment property held for sale 329 553 123 595
Straight-lining of rental revenue adjustment 7 322 905
Fortress Unit Purchase Trust loans 7 860 5 499
Trade and other receivables 61 083 31 333
Cash and cash equivalents 3 646 8 351
Total assets 8 802 597 5 925 283
EQUITY AND LIABILITIES
Total equity attributable to equity holders 3 237 962 1 658 860
Share capital 6 336 5 862
Share premium 940 839 633 974
Non-distributable reserves 2 290 787 1 019 024
Retained earnings – –
Total liabilities 5 564 635 4 266 423
Non-current liabilities 4 693 004 3 411 099
Linked debentures 2 851 488 2 637 760
Interest-bearing borrowings 1 607 285 650 862
Deferred tax 234 231 122 477
Current liabilities 871 631 855 324
Trade and other payables 141 428 171 377
Linked debenture interest payable 225 679 185 493
Income tax payable 421 1 088
Interest-bearing borrowings 504 103 497 366
Total equity and liabilities 8 802 597 5 925 283
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Audited Audited
2013 2012
(R'000) (R'000)
Net rental and related revenue 465 300 379 719
Recoveries and contractual rental revenue 640 002 560 630
Straight-lining of rental revenue adjustment 48 006 9 241
Rental revenue 688 008 569 871
Property operating expenses (222 708) (190 152)
Distributable income from investments 119 056 62 057
Fair value gain on investment property
and investments 1 294 355 699 732
Fair value gain on investment property 688 228 447 370
Adjustment resulting from straight-lining
of rental revenue (48 006) (9 241)
Fair value gain on investments 654 133 261 603
Nepi underwriting fee – 2 143
Administrative expenses (25 506) (23 669)
Profit on sale of subsidiary 115 –
Profit before net finance costs 1 853 320 1 119 982
Net finance costs (456 987) (460 068)
Finance income 112 539 65 347
Interest from loans 46 337 33 036
Fair value adjustment on derivatives 53 857 2 031
Interest on linked units issued cum
distribution 12 345 30 280
Finance costs (569 526) (525 415)
Interest on borrowings (142 738) (112 079)
Capitalised interest 7 019 2 297
Fair value adjustment on derivatives – (51 090)
Interest to linked debenture holders
– A linked units (345 260) (308 774)
– B linked units (88 547) (55 769)
Profit before income tax expense 1 396 333 659 914
Income tax expense (124 570) (72 703)
Profit for the year attributable to
equity holders 1 271 763 587 211
Total comprehensive income for the year 1 271 763 587 211
Cents Cents
Basic earnings per A share 206,31 101,44
Basic earnings per B share 206,31 101,44
Basic earnings per A linked unit 318,33 208,12
Basic earnings per B linked unit 235,04 120,71
Fortress has no dilutionary instruments in issue.
RECONCILIATION OF PROFIT FOR THE YEAR TO HEADLINE EARNINGS AND
DISTRIBUTABLE INCOME
Audited Audited
2013 2012
(R'000) (R'000)
Basic earnings (shares) - profit for the
year attributable to equity holders 1 271 763 587 211
– interest to A linked debenture holders 345 260 308 774
– interest to B linked debenture holders 88 547 55 769
Basic earnings (linked units) 1 705 570 951 754
Adjusted for: (719 365) (383 777)
– fair value gain on investment property (640 222) (438 129)
– income tax effect (79 143) 54 352
Headline earnings (linked units) 986 205 567 977
Straight-lining of rental revenue adjustment (48 006) (9 241)
Fair value gain on investments (654 133) (261 603)
Fair value adjustment on derivatives (53 857) 49 059
Profit on sale of subsidiary (115) –
Income tax effect 203 713 18 351
Distributable income 433 807 364 543
Less: distributions declared (433 807) (364 543)
Income not distributed – –
Cents Cents
Headline earnings per A share 89,61 35,14
Headline earnings per B share 89,61 35,14
Headline earnings per A linked unit 201,63 141,82
Headline earnings per B linked unit 118,34 54,41
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 308 213 257 (2012: 289 439 493) shares/linked units in
issue during the year for both A and B shares/linked units.
SUMMARISED CONSOLIDATED STATEMENT OF CASH FLOWS
Audited Audited
2013 2012
(R'000) (R'000)
Cash inflow from operating activities 30 075 36 176
Cash outflow from investing activities (1 531 352) (352 788)
Cash inflow from financing activities 1 496 572 321 056
(Decrease)/increase in cash and cash equivalents (4 705) 4 444
Cash and cash equivalents at the beginning
of the year 8 351 3 907
Cash and cash equivalents at the end of
the year 3 646 8 351
Cash and cash equivalents consist of:
Current accounts 3 646 8 351
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Non-
Share Share distributable
capital premium reserves
Audited (R’000) (R’000) (R’000)
Balance at 30 June 2011 4 620 325 464 431 813
Issue of linked units (equal number
of A and B linked units) 1 242 308 510
Total comprehensive income for the year
Transfer to non-distributable reserves 587 211
Balance at 30 June 2012 5 862 633 974 1 019 024
Issue of linked units (equal number
of A and B linked units) 474 306 865
– Issue of 6 510 000 linked units
effective 3 December 2012 130 75 282
– Issue of 11 037 528 linked units
effective 22 April 2013 220 143 914
– Issue of 6 200 000 linked units
effective 20 May 2013 124 87 669
Total comprehensive income for the year
Transfer to non-distributable reserves 1 271 763
Balance at 30 June 2013 6 336 940 839 2 290 787
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (CONTINUED)
Retained
earnings Total
(R’000) (R’000)
Balance at 30 June 2011 – 761 897
Issue of linked units (equal number
of A and B linked units) 309 752
Total comprehensive income for the year 587 211 587 211
Transfer to non-distributable reserves (587 211) –
Balance at 30 June 2012 – 1 658 860
Issue of linked units (equal number
of A and B linked units) 307 339
– Issue of 6 510 000 linked units
effective 3 December 2012 75 412
– Issue of 11 037 528 linked units
effective 22 April 2013 144 134
– Issue of 6 200 000 linked units
effective 20 May 2013 87 793
Total comprehensive income for the year 1 271 763 1 271 763
Transfer to non-distributable reserves (1 271 763) –
Balance at 30 June 2013 – 3 237 962
Non-distributable reserves comprise those profits and losses that are not
distributable to unitholders and are made up of revaluation adjustments on
investment property, investment property held for sale and investments,
straight-lining adjustments and other non-distributable balances.
NOTES
1 PREPARATION, ACCOUNTING POLICIES AND AUDIT OPINION
The summarised audited consolidated financial statements have been
prepared in accordance with the measurement and recognition requirements
of IFRS and its interpretations adopted by the Independent Accounting
Standards Board, the SAICA Financial Reporting Guides as issued by the
Accounting Practices Committee and Financial Reporting Pronouncements as
issued by the Financial Reporting Standards Council, 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 year with the exception of the adoption of a revised standard which
became effective during the year (IAS 1: Presentation of Financial
Statements). The adoption of this standard did not have a material effect
on the financial statements.
Fortress provided deferred tax at the income tax rate on the recoupment of
capital allowances claimed on investment property as well as the fair
value adjustments on the investments in Capital, Nepi and Rockcastle. The
enacted legislation does not exempt profits on these investments from
capital gains tax. It is anticipated that the remaining deferred tax
provision will be reversed when the proposed Taxation Laws Amendment Bill
is finalised and enacted.
The directors are not aware of any matters or circumstances arising
subsequent to 30 June 2013 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 2013. These summarised
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
Fortress’ registered address. This preliminary report has been audited by
Deloitte & Touche and an unmodified audit opinion has been issued. The
auditor’s report does not necessarily report on all of the information
contained in this preliminary report. Unitholders are therefore advised
that in order to obtain a full understanding of the nature of the
auditor’s engagement they should obtain a copy of that report together
with the accompanying financial information from Fortress’ registered
address.
2 SUMMARY OF FINANCIAL PERFORMANCE
Jun 2013 Dec 2012 Jun 2012 Dec 2011
Distribution per
A linked unit (cents) 56,01 56,01 53,34 53,34
Distribution per
B linked unit (cents) 15,22 13,46 9,95 9,31
A linked units
in issue 316 832 021 299 594 493 293 083 493 285 794 493
B linked units
in issue 316 832 021 299 594 493 293 083 493 285 794 493
Net asset value per
combined linked unit* R19,22 R15,44 R14,66 R12,69
Net asset value per
A linked unit# R14,90 R13,51 R13,20 R12,22
Net asset value per
B linked unit R4,32 R1,93 R1,46 R0,47
Interest-bearing debt
to asset ratio** 24,0% 22,3% 19,4% 21,5%
*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 interest-bearing debt to asset ratio is calculated by dividing
interest-bearing borrowings by total assets.
3 FACILITIES AND INTEREST RATE DERIVATIVES
Average
Amount margin
Facility expiry (R’000) over Jibar
Jun 2014 500 000 0,54%
Jun 2015 – –
Jun 2016 670 000 1,54%
Jun 2017 1 732 567 1,61%
2 902 567 1,41%
Amount Average
Interest rate swaps expiry (R’million) swap rate
Jun 2014 150 8,04%
Jun 2015 300 7,53%
Jun 2016 200 8,16%
Jun 2017 310 7,40%
Jun 2018 400 7,61%
Jun 2019 400 6,85%
Jun 2020 100 6,12%
1 860 7,41%
Amount Average
Interest rate caps expiry (R’million) cap rate
Jun 2020 100 7,49%
The all-in weighted average cost of funding of Fortress was 8,48% at 30
June 2013.
4 LEASE EXPIRY PROFILE (unaudited)
Based on
Based on contractual
rentable rental
Lease expiry area revenue
Vacant 4,9%
Jun 2014 27,1% 23,4%
Jun 2015 15,7% 16,3%
Jun 2016 18,1% 17,4%
Jun 2017 8,2% 10,2%
Jun 2018 9,1% 11,6%
>Jun 2018 16,9% 21,1%
Total 100,0% 100,0%
5 SEGMENTAL ANALYSIS
Audited Audited
2013 2012
Recoveries and contractual rental revenue (R’000) (R’000)
Retail 456 668 347 834
Industrial 122 332 145 735
Office 50 683 57 584
Residential 10 319 9 477
Total 640 002 560 630
Property operating expenses
Retail (159 374) (118 987)
Industrial (43 078) (49 361)
Office (18 076) (19 755)
Residential (2 180) (2 049)
Total (222 708) (190 152)
Rental revenue
Retail 497 579 357 442
Industrial 124 824 145 573
Office 52 448 57 379
Residential 13 157 9 477
Total 688 008 569 871
Profit before net finance costs
Retail 852 975 571 622
Industrial 158 545 164 200
Office 79 459 73 641
Residential 14 543 8 385
Corporate 747 798 302 134
Total 1 853 320 1 119 982
6 PAYMENT OF FINAL DISTRIBUTIONS
The board has approved and notice is hereby given of final cash interest
distributions (distributions no 8) of 56,01 cents per A linked unit and
15,22 cents per B linked unit for the six months ended 30 June 2013.
The last date to trade linked units cum distribution will be Friday, 30
August 2013 and trading will commence ex distribution on Monday, 2
September 2013. The record date to participate in the distribution will be
Friday, 6 September 2013.
Linked unit certificates may not be dematerialised or rematerialised
between Monday, 2 September 2013 and Friday, 6 September 2013, both days
inclusive. Payment of the distribution will be made to linked unitholders
on Monday, 9 September 2013.
In respect of dematerialised linked unitholders, the distribution will be
transferred to the Central Securities Depository Participant
accounts/broker accounts on Monday, 9 September 2013. Certificated linked
unitholders’ distribution payments will be posted on or about Monday, 9
September 2013.
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 CA(SA)
Directors
Jeff Zidel (chairman), Mark Stevens (managing director)*, Kura Chihota,
Nontando Kunene, Chris Lister-James, Djurk Venter, Wiko Serfontein*
(*executive director)
There was no change to the board of directors during the year.
Date: 14/08/2013 03:07:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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