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Condensed unaudited consolidated interim financial statements for the six months ended 31 December 2014
FORTRESS INCOME FUND LIMITED
Incorporated in the Republic of South Africa
Reg no 2009/016487/06
JSE share codes
“FFA” ISIN ZAE000141313 and “FFB” ISIN ZAE000141321 respectively
(“Fortress” or “the group”)
(Approved as a REIT by the JSE)
CONDENSED UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS for the six
months ended 31 December 2014
DIRECTORS’ COMMENTARY
1. CAPITAL STRUCTURE
Fortress is an internally asset managed Real Estate Investment Trust
(“REIT”) with a capital structure consisting of separately listed A and B
linked units. The A linked units have a preferential entitlement to
distributable income and to capital participation in the event of
liquidation, while the B linked units qualify for the remainder of the
distributable income and the residual capital upon winding up.
The unitholder meetings to approve the conversion of the linked unit
structure to an all-share structure and the adoption of a new Memorandum
of Incorporation are scheduled to take place on 5 March 2015. The circular
pertaining thereto was posted to unitholders on 3 February 2015.
2. NATURE OF BUSINESS AND STRATEGY
Fortress, being a hybrid fund, invests in both direct property and other
local and offshore listed real estate companies. The direct property
portfolio comprises 90,1% retail centres, 8,2% industrial properties and
1,7% offices and residential.
Fortress continues to invest in well-located retail assets with strong
footfall and the potential for growth in trading densities. These centres
are traditionally built on transport nodes catering for the commuter
market. Fortress will dispose of its remaining non-retail assets as
opportunities arise.
The board is concerned about both electricity and water supply. Various
initiatives are being implemented to minimise the impact on Fortress’
properties.
3. DISTRIBUTABLE EARNINGS AND REVIEW OF RESULTS
Total distributable income per combined linked unit for the six months
ended December 2014 increased by 19,64% from the prior comparable period
to 92,96 cents. The distribution attributable to the A linked units was
61,75 cents, a 5% increase, being the lower of 5% and CPI. The CPI was
5,95% as calculated in terms of the existing debenture trust deed. The B
linked units’ distribution was 31,21 cents, representing an increase of
65,22% over the prior comparable six month period.
The property portfolio performed well and ahead of budget. Retail sales
for the December period showed a year-on-year increase of approximately
11%. Fortress benefited from the exposure to its offshore equity holdings
where the Rand on average was weaker than forecast. The results from the
local equity holdings were also ahead of forecast.
4. PROPERTY DISPOSALS
The following non-core properties were disposed of during the interim
reporting period:
Property Name Sector Book Net Exit Transfer
value proceeds yield date
R’000 R’000
Cato Street Industrial 7 600 6 800 10,0% Sep 2014
Bryanston Ridge
Office Park –
portion 6 Office 4 770 6 300 Vacant Nov 2014
12 370 13 100
5. PROPERTY ACQUISITIONS
Weskus Mall, a 33 525m2 regional mall located in Vredenburg on the Cape
west coast, was acquired for R485,5 million at a yield of 7,75%. Transfer
was effected on 5 December 2014. The mall is anchored by Checkers, Edgars,
Game and Woolworths and other tenants include national clothing retailers.
In order to settle the purchase price, Fortress placed 16 112 957 Fortress
A and Fortress B linked units at R16,10 and R14,00 per linked unit
respectively.
Year-on-year December retail sales at this mall increased by 10% and this,
in conjunction with the announced major infrastructure expenditure by
Transnet at nearby Saldanha Bay, bodes well for future growth. Management
is investigating various expansion and redevelopment options and plans to
increase the entertainment offering.
In order to expand Biyela Shopping Centre in Empangeni, Fortress acquired
the adjacent retail centre for R10,3 million.
An 8,6 hectare vacant portion of land neighbouring Evaton Mall was
acquired for R8 million. The rezoning process to expand the mall to cater
for tenant demand has commenced.
6. PROPERTY EXTENSIONS AND REDEVELOPMENTS
Flamwood Walk (50% interest) The centre opened as planned in October 2014
and trading has been strong despite a larger competing mall having opened
in Klerksdorp. Demand is strong for the remaining vacancies at this centre.
Secunda Square Residential Practical completion of the 87 residential
units was 1 February 2015. Letting of the units is progressing well.
Shoprite Kokstad The expansion and redevelopment was completed on time and
within the budget of R30,4 million. The expanded Shoprite and new retail
tenants traded well over the December period.
7. VACANCIES
Vacancies decreased to 4,1% at December 2014 from the 4,6% reported at
June 2014. This figure includes vacancies at buildings that are being
redeveloped or where construction is about to commence.
8. LISTED PORTFOLIO
Fortress acquired 2 250 000 shares in Hammerson plc (“Hammerson”), a REIT
listed on the London Stock Exchange at an average price of GBP6,13 per
share. The shares were acquired after management visited Hammerson’s
assets and assessed the quality of its management. Since acquisition, the
share price has performed strongly and is currently trading above the
acquisition price.
Fortress participated in the capital raisings undertaken by Nepi and
Rockcastle during the interim reporting period.
Following the strong performance in its share price, 1 800 000 Resilient
shares were sold at an average price of R86,23 per share.
The shareholding in Safari was sold after the reporting date.
Dec 2014 Jun 2014
Counter Number Fair value Number Fair value
of units/ R’000 of units/ R’000
shares shares
Capital (CPF) 49 730 000 660 413 48 400 000 517 880
Hammerson^ 2 250 000 245 369 - -
Nepi (NEP) 24 525 000 2 795 849 22 300 000 2 118 500
Resilient (RES) 16 640 000 1 397 593 18 440 000 1 107 322
Safari (SAR) 1 989 000 15 713 2 840 000 24 850
5 114 937 3 768 552
Rockcastle (ROC)* 163 000 000 3 944 600 154 745 000 2 622 928
9 059 537 6 391 480
^ Converted at the spot rate of GBP/ZAR:18,03.
* Rockcastle was treated as an associate (equity accounted) and was thus
not fair valued in the financial statements. The carrying value of
Rockcastle was R2 352,9 million at December 2014.
The board’s policy is to hedge up to a maximum of 50% of Fortress’ foreign
currency exposure to equity investments (Nepi, Rockcastle and Hammerson).
At December 2014, the following currency hedges were in place:
Foreign currency ZAR Average exchange
equivalent rate to ZAR
USD 181 167 2 027 913 11,19
GBP 15 779 284 250 18,01
EUR 10 000 140 900 14,09
2 453 063
9. FACILITIES AND INTEREST RATE DERIVATIVES
Fortress increased the size of its unsecured domestic medium term note
programme from R2 billion to R4 billion. A total of R1 607 million has
been issued under the programme. While it remains the board’s intention to
utilise 50% unsecured funding, the ratio between secured and unsecured
funding may fluctuate in the short to medium term. Unsecured funding was
47,2% of total debt at December 2014.
The interest-bearing debt to asset ratio decreased to 21,2% from 22,9% at
June 2014, and 124,3% of Fortress’ interest rate exposure (inclusive of
contracted capital commitments) was hedged.
Facility expiry Amount R'million Average margin over Jibar
Jun 2015 450 0,27%
Jun 2016 1 036 1,49%
Jun 2017 2 328 1,59%
Jun 2018 121 1,70%
Jun 2019 440 1,64%
4 375 1,44%
Interest rate swap expiry Amount R'million Average swap rate
Jun 2015 50 7,87%
Jun 2016 200 8,16%
Jun 2017 310 7,40%
Jun 2018 500 7,57%
Jun 2019 400 6,85%
Jun 2020 300 7,24%
Jun 2021 100 7,87%
Jun 2022 200 8,13%
Jun 2023 100 7,80%
2 160 7,50%
Interest rate cap expiry Amount R'million Average cap rate
Jun 2019 100 7,43%
Jun 2020 200 7,52%
Jun 2021 400 7,80%
Jun 2022 200 8,18%
Jun 2023 100 8,21%
1 000 7,82%
Variable rate instruments Amount R'000
Interest-bearing borrowings net of cash on hand* 3 432 485
Capital commitments contracted for 47 115
Loans to The Siyakha Education Trust (749 996)
Loans to development partners* (186 631)
2 542 973
Total interest rate derivatives 3 160 000
Percentage hedged 124,3%
The all-in weighted average cost of funding of Fortress was 8,38% at
December 2014 and the average hedge term was 4,5 years.
* The information contained in note 2, 9 and the “Property operations”
section of note 10 included in the directors’ commentary has been compiled
using proportionate consolidation. This results in Fortress accounting for
its share of the assets and liabilities of associates (Arbour Crossing,
The Galleria and Mthatha Residential).
10. SUMMARY OF FINANCIAL PERFORMANCE
Dec 2014 Jun 2014 Dec 2013 Jun 2013
Distribution per A
linked unit (cents) 61,75 58,81 58,81 56,01
Distribution per B
linked unit (cents) 31,21 24,39 18,89 15,22
A linked units
in issue 466 251 105 424 290 288 358 412 595 316 832 021
B linked units
in issue 466 251 105 424 290 288 358 412 595 316 832 021
Property operations
Net property expense
ratio 13,5% 14,1% 16,1% 15,1%
Gross property expense
ratio 33,7% 33,9% 35,1% 34,8%
Net total expense ratio 11,7% 13,4% 14,5% 16,3%
Gross total expense ratio 25,0% 28,2% 29,1% 32,7%
Consolidated
Net asset value per
combined linked
unit* R24,82 R22,66 R20,32 R19,22
Net asset value per A
linked unit# R16,19 R14,58 R14,45 R14,90
Net asset value per B
linked unit R8,63 R8,08 R5,87 R4,32
Interest-bearing debt to
asset ratio** 21,2% 22,9% 29,9% 24,2%
* 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
total interest-bearing borrowings adjusted for cash on hand by the total
of investments in property, listed securities and loans advanced.
11. BROAD BASED BLACK ECONOMIC EMPOWERMENT
Fortress issued 15 847 860 A linked units and 15 847 860 B linked units to
The Siyakha Education Trust (“Siyakha”) on 9 December 2014 in accordance
with the authority approved by unitholders at the annual general meeting
held on 13 November 2014. Siyakha is a combined initiative between
Fortress, Resilient and Capital. Siyakha focuses exclusively on the
promotion of black education.
12. RECONCILIATION BETWEEN STATEMENT OF COMPREHENSIVE INCOME AND
DISTRIBUTIONS DECLARED
Dec 2014 R’000
Recoveries and contractual rental revenue 386 032
Property operating expenses (134 013)
Income from investments 113 870
Dividends accrued 44 096
Administrative expenses (16 967)
Distributable income from associate and joint ventures 60 299
Interest from loans 91 367
Interest on linked units issued cum distribution 33 580
Interest on borrowings (153 144)
Capitalised interest 8 307
Distributions declared 433 427
13. PROSPECTS
The board is confident that Fortress will achieve overall growth in
distributions of approximately 20% for the 2015 financial year. The
forecast assumes exchange rates of R12,80 to the Euro, R11,20 to the US
Dollar and R17,00 to the Pound Sterling.
The growth is further 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 and municipal rates. 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
10 February 2015
Directors Jeff Zidel (chairman); Mark Stevens (managing director)*; Kura
Chihota; Craig Hallowes*; Chris Lister-James; Nontando Mahlati; Wiko
Serfontein*; Djurk Venter
*Executive director
Company secretary Bernita Schaper
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
Changes to the board of directors
There were no changes to the board of directors since 12 August 2014, the
date of the previous results announcement.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Unaudited Audited Restated
Dec 2014 Jun 2014 Dec 2013
R’000 R’000 R’000
ASSETS
Non-current assets 16 044 872 13 190 804 11 116 538
Investment property 6 249 973 5 577 773 5 610 590
Straight-lining of rental
revenue adjustment 146 585 119 262 117 875
Investment property
under development 134 280 194 382 318 952
Investment in and loans to
associate and joint ventures 3 044 409 2 875 804 1 544 927
Investments 5 114 937 3 768 552 2 827 893
Fortress Unit Purchase
Trust loans 583 470 384 041 418 559
Loans to BEE vehicle 749 996 250 000 221 471
Loans to development partners 21 222 20 990 56 271
Current assets 241 002 274 365 223 253
Investment property held for sale - 24 436 45 655
Straight-lining of rental
revenue adjustment - 234 395
Fortress Unit Purchase Trust loans 11 243 8 884 9 655
Loans to development partners 118 841 69 278 -
Trade and other receivables 105 337 167 837 160 101
Cash and cash equivalents 5 581 3 696 7 447
Total assets 16 285 874 13 465 169 11 339 791
EQUITY AND LIABILITIES
Total equity attributable to
equity holders 7 374 349 5 794 397 4 058 759
Share capital 9 326 8 486 7 168
Share premium 3 235 984 2 330 270 1 453 970
Non-distributable reserves 4 129 039 3 455 641 2 597 621
Total liabilities 8 911 525 7 670 772 7 281 032
Non-current liabilities 7 568 939 6 415 304 6 038 666
Linked debentures 4 196 260 3 818 612 3 225 713
Interest-bearing borrowings 2 981 040 2 280 783 2 579 766
Deferred tax 391 639 315 909 233 187
Current liabilities 1 342 586 1 255 468 1 242 366
Trade and other payables 450 715 142 048 198 696
Linked debenture interest payable 433 427 353 010 278 486
Income tax payable - - 714
Interest-bearing borrowings 458 444 760 410 764 470
Total equity and liabilities 16 285 874 13 465 169 11 339 791
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Unaudited Audited Restated
for the six the year for the six
months ended ended months ended
Dec 2014 Jun 2014 Dec 2013
R’000 R’000 R’000
Net rental and related revenue 279 108 516 189 274 837
Recoveries and contractual
rental revenue 386 032 727 545 371 380
Straight-lining of rental revenue
adjustment 27 089 35 884 34 658
Rental revenue 413 121 763 429 406 038
Property operating expenses (134 013) (247 240) (131 201)
Income from investments 113 870 190 922 104 162
Fair value gain on investment
property, investments and
currency derivatives 840 936 1 020 873 252 553
Fair value gain on
investment property 691 393 014 18 413
Adjustment resulting from
straight-lining of rental
revenue (27 089) (35 884) (34 658)
Fair value gain on investments 1 025 161 673 686 268 798
Fair value loss on
currency derivatives (157 827) (9 943) -
Termination fee received
from Amber Peek - 61 025 -
Tower underwriting fee - 7 500 7 500
Administrative expenses (16 967) (32 660) (12 735)
Goodwill on acquisition of
interest in joint venture - 57 -
Income from associate and
joint ventures 44 939 229 754 21 800
- distributable 60 299 109 963 21 800
- non-distributable (15 360) 119 791 -
Profit before net finance costs 1 261 886 1 993 660 648 117
Net finance costs (512 758) (746 584) (341 965)
Finance income 91 367 181 934 57 430
Interest from loans 91 367 63 532 31 289
Fair value adjustment on
interest rate derivatives - 70 471 18 941
Interest on linked units issued
cum distribution - 47 931 7 200
Finance costs (604 125) (928 518) (399 395)
Interest on borrowings (153 144) (310 221) (128 222)
Capitalised interest 8 307 13 200 7 313
Fair value adjustment on
interest rate derivatives (25 861) - -
Interest to linked debenture
holders
- A linked units (287 910) (460 308) (210 782)
- B linked units (145 517) (171 189) (67 704)
Profit before income tax 749 128 1 247 076 306 152
Income tax (75 730) (82 222) 682
Profit for the period
attributable to equity holders 673 398 1 164 854 306 834
Total comprehensive income for
the period 673 398 1 164 854 306 834
Basic earnings per
A share (cents) 78,16 148,82 42,80
Basic earnings per
B share (cents) 78,16 148,82 42,80
Basic earnings per
A linked unit (cents) 144,99 266,44 101,61
Basic earnings per
B linked unit (cents) 111,93 192,57 61,69
Fortress has no dilutionary instruments in issue.
RECONCILIATION OF PROFIT FOR THE PERIOD TO HEADLINE EARNINGS
Unaudited Audited Restated
for the six the year for the six
months ended ended months ended
Dec 2014 Jun 2014 Dec 2013
R’000 R’000 R’000
Basic earnings (shares) –
profit for the period
attributable to equity holders 673 398 1 164 854 306 834
- interest to A linked
debenture holders 287 910 460 308 210 782
- interest to B linked
debenture holders 145 517 171 189 67 704
Basic earnings (linked units) 1 106 825 1 796 351 585 320
Adjusted for: 4 025 (383 141) 16 285
- fair value loss/(gain) on
investment property 26 398 (357 130) 16 245
- fair value gain on investment
property of joint ventures - (10 688) -
- income tax effect (22 373) (15 323) 40
Headline earnings
(linked units) 1 110 850 1 413 210 601 605
Headline earnings per
A share (cents) 78,62 99,87 45,08
Headline earnings per
B share (cents) 78,62 99,87 45,08
Headline earnings per
A linked unit (cents) 145,46 217,49 103,89
Headline earnings per
B linked unit (cents) 112,40 143,62 63,97
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 430 800 557 (Jun 2014: 391 351 442; Dec 2013: 358 412
595) shares/linked units in issue during the period for both A and B
shares/linked units.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Share Share Non-distribu- Retained Total
capital premium table earnings
reserves
R'000 R'000 R'000 R'000 R'000
Balance at
Jun 2013 6 336 940 839 2 290 787 - 3 237 962
Issue of linked
units (equal
number of
A and B units) 832 513 131 513 963
Total comprehensive
income for the
period 306 834 306 834
Transfer to non-
distributable
reserves 306 834 (306 834) -
Balance at
Dec 2013 7 168 1 453 970 2 597 621 - 4 058 759
Issue of linked
units (equal
number of
A and B units) 1 318 876 300 877 618
Total
comprehensive
income for the
period 858 020 858 020
Transfer to non-
distributable
reserves 858 020 (858 020) -
Balance at
Jun 2014 8 486 2 330 270 3 455 641 - 5 794 397
Issue of linked
units (equal
number of
A and B units) 840 905 714 906 554
- 10 000 000 units
on 27 Nov 2014 200 213 712 213 912
- 16 112 957 units
on 2 Dec 2014 322 335 129 335 451
- 15 847 860 units
on 9 Dec 2014 318 356 873 357 191
Total
comprehensive
income for the
period 673 398 673 398
Transfer to non-
distributable
reserves 673 398 (673 398) -
Balance at
Dec 2014 9 326 3 235 984 4 129 039 - 7 374 349
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Unaudited Audited Restated
Dec 2014 Jun 2014 Dec 2013
R’000 R’000 R’000
Cash inflow/(outflow) from
operating activities 183 891 22 668 (5 058)
Cash outflow from investing
activities (1 864 499) (2 848 307) (2 119 322)
Cash inflow from financing
activities 1 682 493 2 825 744 2 128 236
Increase in cash and cash
equivalents 1 885 105 3 856
Cash and cash equivalents at the
beginning of the period 3 696 3 591 3 591
Cash and cash equivalents at the
end of the period 5 581 3 696 7 447
Cash and cash equivalents
consist of:
Current accounts 5 581 3 696 7 447
NOTES
1. PREPARATION AND ACCOUNTING POLICIES
The condensed unaudited consolidated interim financial statements have
been prepared in accordance with 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 Companies Act of South
Africa. This report was compiled under the supervision of Wiko Serfontein
CA(SA), the financial director.
The accounting policies applied in the preparation of the consolidated
interim financial statements are in terms of International Financial
Reporting Standards and are consistent with the accounting policies
applied in the preparation of the previous consolidated financial
statements, with the exception of the adoption of new and revised
standards which became effective during the period. The restatement of the
comparative information for December 2013 is the result of the adoption of
IFRS 11: Joint Arrangements which resulted in Fortress accounting for its
investments in Arbour Crossing, The Galleria and Mthatha Residential on an
equity accounted method as opposed to proportionately consolidating it.
The directors are not aware of any matters or circumstances arising
subsequent to 31 December 2014 that require any additional disclosure or
adjustment to the financial statements.
This report was not audited or reviewed by the group’s auditors.
2. LEASE EXPIRY PROFILE
Lease expiry Based on Based on contractual
rentable area rental revenue
Vacant 4,1%
Jun 2015 11,5% 10,8%
Jun 2016 21,8% 17,0%
Jun 2017 13,1% 14,6%
Jun 2018 13,4% 16,7%
Jun 2019 15,2% 18,7%
> Jun 2019 20,9% 22,2%
100,0% 100,0%
3. SEGMENTAL ANALYSIS
Unaudited Audited Restated
for the six the year for the six
months ended ended months ended
Recoveries and contractual Dec 2014 Jun 2014 Dec 2013
rental revenue R’000 R’000 R’000
Retail 335 763 612 976 302 850
Industrial 48 106 107 237 64 541
Office 2 163 7 332 3 989
386 032 727 545 371 380
Rental revenue
Retail 361 358 651 462 340 971
Industrial 49 620 108 384 64 086
Office 2 143 3 583 981
413 121 763 429 406 038
Property operating expenses
Retail (116 105) (207 013) (107 431)
Industrial (17 160) (37 686) (22 404)
Office (748) (2 541) (1 366)
(134 013) (247 240) (131 201)
Profit before net finance costs
Retail 239 277 788 082 195 476
Industrial 30 140 98 621 48 196
Office 2 964 18 828 14 920
Residential 7 124 18 337 4 756
Corporate 982 381 1 069 792 384 769
261 886 1 993 660 648 117
4. PAYMENT OF INTERIM DISTRIBUTIONS
The board has approved and notice is hereby given of interim distributions
(distributions no 11) of 61,75 cents per A linked unit and 31,21 cents per
B linked unit for the six months ended December 2014.
The distributions are payable to Fortress unitholders in accordance with
the timetable set out below:
Last date to trade cum distribution Friday, 6 March 2015
Linked units trade ex distribution Monday, 9 March 2015
Record date Friday, 13 March 2015
Payment date Monday, 16 March 2015
Linked unit certificates may not be dematerialised or rematerialised
between Monday, 9 March 2015 and Friday, 13 March 2015, both days
inclusive.
In respect of dematerialised linked unitholders, the distributions will be
transferred to the CSDP accounts/broker accounts on Monday, 16 March 2015.
Certificated linked unitholders’ distribution payments will be posted on
or about Monday, 16 March 2015.
An announcement informing linked unitholders of the tax treatment of the
distributions will be released separately on SENS.
Date: 10/02/2015 01:49:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
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