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FORTRESS REIT LIMITED - Trading and pre-close operational update

Release Date: 02/12/2020 09:25
Code(s): FFB FFA FIFB15 FIFB16 FIFB19 FIFB18 FIFB14 FIFC35 FIFB17     PDF:  
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Trading and pre-close operational update

(Incorporated in the Republic of South Africa)
(Registration number 2009/016487/06)
JSE share codes:  FFA ISIN: ZAE000248498
                  FFB ISIN: ZAE000248506
Bond company code: FORI
LEI: 378900FE98E30F24D975
(Approved as a REIT by the JSE)
(“Fortress” or “the Company”)


Shareholders are referred to the final results announcement for the year ended 30 June 2020, released on SENS on
3 September 2020 and the integrated report published on 26 October 2020. We hereby provide an update on Fortress’

Direct property portfolio

Logistics and logistics developments

Since our last operational update we have made pleasing progress in letting the developments we have completed or
commenced. At 30 June 2020 we had let 38 857m2 of the 172 201m2 gross lettable area (“GLA”) of new
developments and as at 2 December 2020, the let space has increased by 61 899m2 to 100 756m2 of the 172 201m2 of
new logistics facilities completed or commenced. In addition, we have pre-let 56 792m2 of yard area to be developed
into a container terminal for an operator at Clairwood Logistics Park for a period of 10 years at an estimated total cost
of R178 million. Discussions are ongoing with several large users for our various new logistics facilities.

A summary of the progress in letting the new developments is presented below:
                                                                   Total GLA    GLA of                Estimated       Estimated
                                                                          of       let     Lease      yield for      completion
                                                      Pro rata   development   portion      term    let portion    date (actual 
Development                                          share (%)          (m2)      (m2)    (years)           (%)   if completed)

Louwlardia Logistics Park – Building 4                    100         14 310    14 310        10            7,6        Oct 2020
Longlake Logistics Park – Extension 4 (Zest Weg)          100         24 458    24 458        10            8,5        Dec 2020
Longlake Logistics Park – Extension 4 (Spec)              100         12 458         -         -              -        Jan 2021
Clairwood Logistics Park – Pocket 4A                      100         25 124    25 124         5            7,8        Jun 2021
Clairwood Logistics Park – Pocket 4B                      100         24 094     8 463         5            7,8        Aug 2021
Cornubia Ridge Logistics Park – Building 2               50,1         23 727    14 002         5            7,6        Oct 2020
Eastport Logistics Park – Building 4 (Clippa)              65         14 399    14 399        10            9,4        Jan 2021
Eastport Logistics Park – Building 3                       65         13 756         -         -              -        Mar 2021
Eastport Logistics Park – Building 5                       65         19 875         -         -              -        May 2021
Sub-total per June 2020 results presentation                         172 201   100 756
Clairwood Logistics Park – container terminal yard        100         56 792    56 792        10            9,2        Sep 2021
Clairwood Logistics Park – Pocket 7                       100         13 283         -         -              -        Aug 2021
Total                                                                242 276   157 548

The pipeline of development opportunities continues to attract interest and negotiations with several large users on a
pre-let basis are ongoing. The standing logistics portfolio continues to perform well relative to our other portfolios
with a low vacancy of 3,6%. However, rental growth remains muted and negative reversions on expiry of leases are
expected to continue.


Over the past 12 months, tenant turnover figures (“turnovers”) in our retail portfolio have declined by 3,9% when
compared to the same period in 2019. This reduction is primarily due to the COVID-19-related lockdown.

However, turnovers have recovered gradually since the over 50% decline experienced during April 2020 compared to
April 2019. Turnovers for October 2020 increased by 5,1% compared to October 2019. October 2020 was the first
month since the level 5 lockdown that turnovers surpassed the comparable monthly levels of 2019.

The rural, township and suburban centres continue to show their resilience in these tough trading conditions,
supported by social grants and their convenience offering. Turnovers at the CBD centres have improved markedly
from their lows during the level 5 lockdown. As businesses are starting to return to work, turnovers at the CBD 
centres is starting to increase, recording growth of 6,3% in October 2020 when compared to October 2019.

The best performing tenant categories have been grocers, pharmacies, hardware stores, cosmetics and beauty and
menswear. The tenants that have been negatively impacted are unisex wear, fast food, liquor stores, restaurants and


This non-core portfolio has been negatively impacted by financial strain in the tenant base. The letting performance,
leading to a reduction in vacancies from 17,6% at 30 June 2020 to current vacancies of 8,8%, has been a notable
achievement, albeit on short-term leases. The performance of a number of re-purposed industrial properties is proving
positive, while the appetite from the investor market to purchase smaller industrial properties and parks is growing.


The vacancy rate continued to increase from 23,6% at 30 June 2020 to 26,6% currently and this trend is likely to
continue. Rentals remain depressed due to increased competition from other landlords. An emerging positive
development from this portfolio is the possibility of converting certain appropriately located properties to residential
use, given that the residential market has seen a marked increase in demand due to the record low interest rates.

Direct property disposals

The following properties have transferred since 30 June 2020:
                                                                                        Book value
                                                                       Net proceeds       Jun 2020
Property name                                        Sector                  R’000           R’000        Transfer date

Louwlardia Logistics Park – Building 1 (WAG)         Logistics              154 500        154 500            Aug 2020*
  (50% undivided share) ^
Protea Centre ^                                      Retail                  83 000         83 000             Sep 2020
Eastport Logistics Park (65% interest) – land
  portion only                                       Logistics land          71 175         58 693           Nov 2020**
Shoprite Port Shepstone                              Retail                  67 320         68 000             Oct 2020
Elliot Avenue Epping                                 Industrial              45 000         45 000             Nov 2020
204 Rivonia Road Morningside (Block C and E) ^       Office                  30 830         30 830   Aug and Sep 2020**
189 Monte Carlo Crescent Kyalami ^                   Office                  26 235         26 235             Sep 2020
Louis Trichardt Street Nelspruit ^                   Industrial              22 500         22 500             Sep 2020
8 and 16 Harry Street                                Industrial              22 000         23 740             Nov 2020
Brunton Circle Founders View South                   Logistics               18 000         19 680             Dec 2020
Broad and Simmonds Streets ^                         Industrial              14 550         14 550             Jul 2020
Groblersdal Centre ^                                 Retail                   7 500          7 500             Nov 2020
Bart Street Wilbart                                  Industrial               5 940          5 940             Nov 2020
                                                                            568 550        560 168

^  Held for sale at 30 June 2020.
*  Effective date of sale transaction. Proceeds and transfer expected in January 2021.
** Effective date of sale transaction. Proceeds have been received.

The following properties are currently classified as held for sale:
                                                                                                                     Book value
                                                                                              Net proceeds             Jun 2020
Property name                                                   Sector                               R’000                R’000

Cornubia Ridge Logistics Park – Makro (49.9% interest)$         Logistics                          469 060             466 710$
30 Bell Street Hennopspark                                      Industrial                          52 000               52 000
2 Drakensberg Drive Longmeadow                                  Logistics                           39 500               41 210
Modderfontein Road Longmeadow                                   Other – Motor dealerships           32 500               31 400
122 Koornhof Road Meadowdale                                    Industrial                          24 000               23 197
                                                                                                   617 060              614 517

$   Fortress has an effective 50,1% interest in Cornubia Ridge Logistics Park through a subsidiary and only the effective interest is
    shown for management account purposes. However, for group purposes, the interest is consolidated and reflects 100% for
    purposes of International Financial Reporting Standards. Fortress is disposing of 49,9% of the property via the restructuring of
    the existing development and funding arrangement, with the result that funding provided by Fortress for the development of the
    property will be repaid. Fortress will hold its 50,1% interest in undivided shares post the closing of the transaction. The book
    value shown is the current carrying cost of the pro-rata share of the asset, post 30 June 2020.


Below we present a summary of the vacancy per sector as at 30 June 2020 and the current vacancy profile:
                             30 June 2020             Current
                               vacancy by          vacancy by
Sector                            GLA (%)             GLA (%)

Retail                                6,0                 4,9
Logistics                             3,0                 3,6
Industrial                           17,6                 8,8
Office                               23,6                26,6
Other                                 2,3                 1,7
Total portfolio                       8,9                 6,8

The overall vacancy reduction is primarily the result of letting and sales in the industrial portfolio. The retail portfolio
vacancy has decreased due to lettings at Fourways Value Mart, Monument Centre, Pineslopes Shopping Centre,
Jeffreys Bay Centre and 409 West Street.

The logistics portfolio vacancy remains low compared to historic levels.

Billings and collections

The table below reflects collections as a percentage of billings per month by sector. Over the five-month period to
30 November 2020, tenant arrears have reduced by approximately 27% from 30 June 2020.

                     Jul 2020           Aug 2020            Sep 2020            Oct 2020           Nov 2020         Total
Retail                 100,0%             100,0%              100,0%               99,9%             100,0%        100,0%
Logistics              100,0%             100,0%               98,4%               99,1%             100,0%         99,5%
Industrial              94,0%              95,2%              100,0%              100,0%             100,0%         97,8%
Office                 100,0%              98,4%               97,7%               98,7%             100,0%         98,9%
Total                   99,0%              99,0%               98,7%               99,5%             100,0%

Deferrals of rental granted during the lockdown of R35,6 million have been included in billings in the table above and

NEPI Rockcastle plc (“NEPI Rockcastle”)

Shareholders are referred to the latest available operational and business updates provided by NEPI Rockcastle which
are available on their website at

Funding, liquidity and treasury

As at Friday, 27 November 2020 Fortress had a total of R2,7 billion available in cash and undrawn secured banking
facilities. The current facility expiry profile is as follows:

 Facility expiry          R’million
 Jun 2021                       910
 Jun 2022                     4 856
 Jun 2023                     5 274
 Jun 2024                     4 034
 Jun 2025                     4 395
 Jun 2026                       250
 Jun 2027                       206
                             19 925

The only note repayable under our domestic medium-term note (“DMTN”) programme in the next 12 months is a note
of R300 million maturing in February 2021.

Fortress’ loan-to-value ratio has increased to a current level of approximately 39,7% from 38,5% at
30 June 2020 primarily as a result of a decrease in the traded price of NEPI Rockcastle.

Outlook and trading update

Forecasting in the current market conditions remains challenging due to the uncertainty over lockdown restrictions and
changing financial positions of tenants both in South Africa and in Central and Eastern Europe. While the collections
against billings are pleasing, like-for-like net operating income remains under pressure due to higher administered
costs and persistently negative reversions on lease renewals.

Maintaining a strong balance sheet, retaining REIT status and ensuring sufficient available liquidity need to be
balanced against the payment of dividends.

Our distributable income and hence our dividends for the interim six-month period from 1 July 2020 to
31 December 2020 (“H1 2021” or “the first income period”) are materially dependent on the final dividend declared
by NEPI Rockcastle for its year ending 31 December 2020. Should NEPI Rockcastle pay a dividend per share (on a
like-for-like basis with a consistent methodology to prior periods and in line with recent distributable earnings
guidance provided), we currently forecast that our total distributable earnings will be lower than the Fortress A share
minimum entitlement for H1 2021, being the first income period.

The result of the total distributable earnings being below the Fortress A share minimum dividend entitlement is that
the Fortress A share H1 2021 distribution per share will be NIL and concomitantly the Fortress B share interim
H1 2021 distribution per share will also be NIL. This is a 100% reduction in distribution per share for both Fortress A
shares and Fortress B shares from the prior comparable period (being the six-month period from 1 July 2019 to
31 December 2019).

For the following six-month period from 1 January 2021 to 30 June 2021 (“H2 2021” or “the second income
period”) we forecast that the Fortress A share minimum dividend entitlement will be met and utilising an estimated
Consumer Price Index inflation rate of 3,5% for the H2 2021, we expect the distribution per Fortress A share to be
78,79 cents per share. Further to this, we expect the distribution per Fortress B share for H2 2021 to be between
10,0 cents and 15,0 cents per share for the second income period. This is an increase of between 10,0 cents and
15,0  cents per share compared to the NIL cents per share for the comparable six-month period ended
30 June 2020.
This forecast is based on the following assumptions:

Fortress-specific assumptions

–      NEPI Rockcastle pays a dividend per share for the six months ending 30 June 2021 that is similar to the
       distributable earnings per share for the six-month period ended 30 June 2020, adjusted for the capitalisation
       issue. Note that this assumption has not been supplied nor discussed with NEPI Rockcastle and remains an
       assumption by Fortress utilising historic figures;
–      No material sales nor acquisitions occur which necessitate a revision to this forecast;
–      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; and
–      Tenants will be able to absorb the recovery of rising utility costs and municipal rates.

Macro-economic and regulatory assumptions

–      There is no change in the existing lockdown restrictions placed on any of our tenants in our direct portfolio;
–      There is no unforeseen material macroeconomic deterioration in the markets in which Fortress has exposure; and
–      The South African Reserve Bank maintains the repurchase rate at 3,5%.

This forecast has not been audited, reviewed or reported on by Fortress’ auditor.

2 December 2020

Lead sponsor
Java Capital

Joint sponsor
Nedbank Corporate and Investment Banking

Date: 02-12-2020 09:25:00
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