Wrap Text
Short-form announcement for the year ended 30 June 2023 and prospects
Fortress Real Estate Investments Limited
(formerly Fortress REIT Limited)
Incorporated in the Republic of South Africa
Registration number: 2009/016487/06
JSE share code: FFA
ISIN: ZAE000248498
JSE share code: FFB
ISIN: ZAE000248506
LEI: 378900FE98E30F24D975
Bond company code: FORI
("Fortress" or "the group" or "the company")
Short-form announcement
for the year ended 30 June 2023 and prospects
"Our FY2023 results have highlighted a notable achievement in that we have the
largest direct portfolio of real estate assets in our history at R30 billion,
excluding developments in progress, coupled with the lowest portfolio vacancy,
dating back to listing in October 2009, at 3,7%. At the core of this result is
the continued capital recycling through the disposal of older, under-performing
properties to fund new developments which are in demand and have lower
structural vacancies. Our relentless focus on driving each asset's performance
by our dedicated asset management teams has contributed significantly to these
achievements.
During the year, we completed R3,5 billion of new, state-of-the-art logistics
developments, which include the 163 533m2 Pick n Pay distribution centre at
Eastport, valued at R2,24 billion. These new logistics facilities provide a
strong underpin to our future growth ambitions, as well as that of our tenants,
who benefit from greater efficiency in their operations from occupying
well-designed and more energy-efficient buildings.
We continued to enhance our retail portfolio with the acquisition, from our
co-owners, of the remaining 50% share in Flamwood Walk and Flamwood Value
Centre. We further approved a redevelopment of the old Thrupps Illovo Centre,
now renamed 204 Oxford, as well as the expansion of AbaQulusi Plaza (formerly
Vryheid Plaza). This aligns with our strategy of expanding and enhancing our
best-performing assets, where we have approved capital spend of approximately
R500 million for these and other retail investments. During FY2023, we sold
under-performing retail assets in Secunda, Middelburg, Bellville,
Philippi and Makhanda for combined net proceeds of R549,5 million.
Globally, the rapid rise in interest rates to counter inflation has impacted
commercial real estate, both from a valuation perspective and an increase in
the funding costs for real estate businesses who utilise debt as part of their
capital structures. South Africa has not been immune to this global rise in
interest rates, albeit less pronounced than in developed markets, given the
higher base interest rates at the start of the hiking cycle.
These higher interest rates have been the primary reason for the flat
investment property valuations across our portfolio compared to the prior year,
despite higher net operating income.
A further impact has been higher interest costs on our debt, however, this has
been mitigated to a large extent, although not fully, by our interest rate
hedges which now cover 85% of our interest rate risk for a period of
3,5 years. We are fortunate that the South African banking and debt capital
markets remain stable and we are able to access funding on good terms and
at fair prices. In contrast, many developed markets face challenges of much
higher interest rates, coupled with falling capital values.
While many developed markets may be facing headwinds, our exposure to Central
and Eastern Europe has provided us with a strategic diversification benefit
with a 26% rise in the valuation of our direct portfolio when converted to
South African Rand over the period and a 27% increase in the value of our NEPI
Rockcastle investment held throughout the year. Both our direct logistics
assets in the region and our associate, NEPI Rockcastle, have again performed
well and have been a highlight for FY2023.
During FY2023, we transitioned from being a Real Estate Investment Trust to a
Real Estate Investment Company. I want to compliment Ian Vorster, our
CFO, and his finance team who have collectively managed a tiresome
restructuring and have done so effectively and successfully. In light of our
particular focus on developments and our investment portfolio composition, the
REIC structure allows for tax benefits which could significantly reduce any tax
leakage as it pertains to the relationship between the company and our
shareholders. The waters remain as yet untested for this transition, however,
we are cautiously optimistic about the efficiency which can be gained as
it pertains to tax payable at company and shareholder level.
Our equity capital structure and our dual-share classes of A and B shares
remain a hindrance and the board remains open to workable solutions to solve
this sub-optimal structure. Market participants have the ability to neutralise
the nuances between the two share classes by acquiring both A and B shares in
roughly equal numbers, thereby accessing a share of the equity of the company.
The coming year will bring opportunities to well-capitalised real estate
investors who are well-placed to take advantage of opportunities in a market
where many sub-sector fundamentals remain strong, but where many businesses are
primarily focused on their balance sheet and liquidity positions.
At Fortress, our focus on total returns over the long term will continue to
drive our investment and capital allocation decisions. I would like to
thank our teams who have achieved such a strong operational result in an
environment that is both challenging and volatile."
Steven Brown, CEO
Nature of the business
Fortress is a real estate investment company with a focus on developing and
letting premium-grade logistics real estate in South Africa ("SA") and
Central and Eastern Europe ("CEE"), as well as growing our convenience and
commuter-oriented retail portfolio which currently comprises 46 shopping
centres, inclusive of centres co-owned with partners. Fortress also holds a
strategic 23,9% interest in NEPI Rockcastle, the largest listed property
company on the JSE Limited ("JSE"), with a EUR7 billion portfolio across nine
CEE countries.
Capital structure and REIT status
The capital structure comprises two classes of ordinary shares, each with equal
voting rights, but different entitlements to distributions and capital
participation on redemption or winding up. The FFA share has a preferential
right to capital participation upon winding up or redemption, which is
calculated as the 60-day volume-weighted average price ("VWAP") on the JSE,
subject to a floor of R8,11 if redeemed. The FFB share has entitlement to the
residual distribution of capital upon winding up.
FFB shares can be issued without issuing FFA shares, however, FFA shares must
be issued contemporaneously with an equal number of FFB shares. Investors are
able to capture the full equity value of Fortress, at a significant discount to
NAV, by buying FFA and FFB shares in roughly equal numbers. This allows
investors to take a neutral stance as it pertains to differences between the
share classes.
The Memorandum of Incorporation ("MOI") governs the distribution in any
six-month income period and defines a first and a second income period. The
FFA share has a dividend benchmark which is the prior comparative period's
dividend benchmark, escalated by the lower of the Consumer Price Index ("CPI")
or 5% ("the FFA dividend benchmark"). Should distributable earnings be in
excess of the FFA dividend benchmark in any income period, the board may
declare a dividend equal to the FFA dividend benchmark to the holders
of FFA shares and any residual to the holders of FFB shares. Should
distributable earnings be below the FFA dividend benchmark, the board is
not authorised to declare any distribution from income earned in that
specific income period to either FFA or FFB shareholders.
Other than the differences mentioned above, all shares rank pari passu in all
respects in accordance with clause 34.7 of the MOI.
Fortress was required to meet the minimum distribution requirement for a REIT,
per the JSE Listings Requirements, being an annual distribution of at least 75%
of distributable profit ("Minimum Distribution Requirement"), in respect of the
financial year ended 30 June 2022 ("FY2022"). Fortress' MOI prevents the
payment of a distribution where distributable earnings are less than the FFA
dividend benchmark in respect of that period, which was the case for both the
interim reporting period for the six months ended 31 December 2021 ("1H2022")
and the final reporting period for the six months ended 30 June 2022
("2H2022"). In these circumstances, Fortress could not comply with the
Minimum Distribution Requirement and, as a consequence, the JSE removed
Fortress' REIT status with effect from 1 February 2023.
The removal of our REIT status has tax consequences, impacting both the
company and its shareholders, which were outlined in a SENS announcement
released on 20 January 2023.
Summary of financial performance
Jun 2023 Jun 2022 % change
Distributable earnings (R'000) 1 797 267 1 707 455 5,3
Dividend declared per share
- FFA (cents) - - -
- FFB (cents) - - -
International financial reporting standards ("IFRS") information
Jun 2023 Jun 2022 % change
Revenue from direct property
operations (R'000) 3 787 954 3 446 471 9,9
Total revenue (including revenue
from investments) (R'000) 3 787 954 3 446 471 9,9
Net asset value ("NAV") (R'000) 33 330 390 26 740 401 24,6
NAV per equity share (going
concern)^ (Rand) 15,82 12,70 24,6
Basic earnings per share
- FFA (cents) 281,92 70,33* 300,9
Basic earnings/(loss) per share
- FFB (cents) 281,92 (4,38)* 6 536,5
Headline earnings per share
- FFA (cents) 90,99 153,24* (40,6)
Headline earnings per share
- FFB (cents) 90,99 78,52* 15,9
^ The NAV per equity share is calculated as the total NAV divided by the
aggregate number of FFA and FFB shares in issue, less shares held in treasury.
* Restated.
SA REIT best practice disclosure
Jun 2023 Jun 2022 % change
NAV per share 14,85 12,22 21,5
Loan-to-value ("LTV") ratio (%) 35,9 38,7 #
Funds from operations 2 188 936 1 911 378 14,5
# Percentage change not meaningful to disclose or not applicable.
Distributable earnings and dividend benchmark
Distributable earnings amounted to R1 797,2 million for the financial year
ended 30 June 2023 ("FY2023"), comprising R800,9 million for the interim
reporting period for the six months ended 31 December 2022 ("1H2023") and
R996,3 million for the final reporting period for the six months ended
30 June 2023 ("2H2023"). Distributable earnings for FY2023 is an after-tax
amount, as Fortress pays the tax as a normal taxpayer, whereas for FY2022
the distributable earnings would have been fully taxable in the hands of
shareholders, at their marginal tax rates, had the earnings been distributed
under the previous REIT structure. This is not applicable for FY2023. This
represents an increase of 5,3% in distributable earnings for FY2023 compared to
the R1 707,5 million reported for FY2022. The distributable earnings for both
1H2023 and 2H2023 were below the FFA dividend benchmark of R1 028,7 million and
R1 016,3 million, respectively. Accordingly, no dividends may be declared by
the board.
The dividend benchmark for the FFA share is increased by the lower of the CPI
or 5,0% over the prior comparable income period, using the CPI figures supplied
by Statistics SA. CPI growth for the 2H2023 income period was 6,58% and
therefore the FFA benchmark has been escalated by 5,0%. On this basis, the
FFA benchmark base is 87,26 cents per share for future comparable
income periods.
Due to the restriction in the MOI, the board is limited in its authority to
declare dividends or distribute the retained distributable earnings. Retained
earnings will be used to reduce debt and invest in liquid assets for
deployment, in time, to resolve the capital structure. For 1H2023, an amount of
R800,9 million was retained in this manner and was utilised to take up the
scrip offer from NEPI Rockcastle, resulting in an additional holding of
8 077 478 NEPI Rockcastle shares with a current value of approximately
R930 million. This capital retained is viewed as distinct from the capital
generated from asset sales, which has been, and will continue to be, earmarked
for deployment into funding the pipeline of logistics developments,
enhancements to the retail portfolio and opportunistic acquisitions.
The company remains liquid and solvent.
Prospects
We forecast total distributable earnings for the financial year ending
30 June 2024 ("FY2024") of R1,93 billion, representing an increase of 7,3%
over FY2023.
This forecast is based on the following assumptions:
Fortress-specific assumptions
- There is no unforeseen failure of material tenants in our portfolio;
- Contractual escalations and market-related renewals will be achieved with
no major change in vacancy rates;
- Tenants will be able to absorb the recovery of rising utility costs,
municipal rates and electricity interruption costs; and
- There are no changes to current tax legislation in the jurisdictions in which
the company operates.
Macroeconomic and regulatory assumptions
- There is no unforeseen material macroeconomic deterioration in the markets in
which Fortress has exposure; and
- The South African Reserve Bank repurchase rate remains unchanged during the
forecast period.
This forecast has not been audited, reviewed or reported on by Fortress'
auditor.
Short-form announcement
This short-form announcement of the audited consolidated financial
statements ("full announcement") for the year ended 30 June 2023 is a
summary of the information in the full announcement and does not contain full
or complete details of the financial results that were published on SENS on
31 August 2023 and is the responsibility of Fortress' board of directors. The
information in this short-form announcement has been extracted from the full
announcement for the year ended 30 June 2023. Any investment decisions should
be based on consideration of the full announcement published on SENS and
Fortress' website as a whole. In accordance with section 3.46A(g) of the JSE
Listings Requirements, the full announcement (audited consolidated financial
statements) together with the company's auditor's KPMG Inc., audit report
thereon have been published on Fortress' website and are available at:
https://fortressfund.co.za/financials/view-pdf?id=
Annual%20financial%20statements%2030%20June%202023 and on the JSE's
website at: https://senspdf.jse.co.za/documents/2023/jse/isse/FFAE/FY2023.pdf.
Fortress' summary consolidated financial statements for the year ended
30 June 2023 which include directors' commentary have been published on
Fortress' website at: https://fortressfund.co.za/financials/view-
pdf?id=Summary%20consolidated%20financial%20statements%2030%20June%202023.
The audit report on the annual financial statements in respect of which an
unmodified opinion was expressed, notes the valuation of investment properties
as a key audit matter.
Copies of the full announcement (audited consolidated financial statements)
are available for inspection during business hours at the registered offices of
Fortress or its sponsors, Java Capital and Nedbank Limited, acting through its
Corporate and Investment Banking Division. Such inspection will be at no charge
and investors may request a copy of Fortress' audited consolidated financial
statements for the year ended 30 June 2023 from tamlyn@fortressfund.co.za.
The short-form announcement itself is not audited or reviewed by Fortress'
auditor, but extracted from audited results.
By order of the board
Steven Brown Ian Vorster
Chief executive officer Chief financial officer
Johannesburg
31 August 2023
Block C, Cullinan Place, Cullinan Close,
Morningside, 2196.
PO Box 138, Rivonia, 2128
Lead sponsor
Java Capital
Joint sponsor
Nedbank CIB
Debt sponsor
RMB
Date: 31-08-2023 04:00:00
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