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FORTRESS REIT LIMITED - Summarised audited consolidated financial statements for the year ended 30 June 2021

Release Date: 02/09/2021 14:25
Wrap Text
Summarised audited consolidated financial statements for the year ended 30 June 2021

Fortress REIT Limited
Incorporated in the Republic of South Africa
(Approved as a REIT by the JSE) 
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 2021

"The COVID-19 pandemic continues to be front of mind across the world. While 
we are seeing a gradual and hopeful reopening in many developed markets with 
a higher rate of vaccination, the impact on our business has been prevalent 
for the entire reporting period and the second consecutive set of annual 
results.

The third waves of COVID-19, both in South Africa as well as across Central 
and Eastern Europe, had an impact on many economies and in particular 
our exposure to retail real estate, which bore the brunt of many of the 
COVID-19-related restrictions. Pleasingly, we are seeing governments across 
the world becoming more logical and sensible in their approach to 
restrictions related to the spread of the virus. Combined with a strong 
global vaccination drive, we remain of the view that a return to a more 
normalised operating environment is foreseeable, with the timing of such 
return difficult to predict. However, there are also some beneficial changes 
to our business, such as the drive to a more robust and localised supply 
chain by many users of the space we offer, as well as retailers investing 
in e-commerce. This has some direct benefits on our logistics portfolio 
and our pipeline of logistics developments in South Africa and Central 
and Eastern Europe.

Post our year-end we encountered a challenging period stemming from the 
civil unrest in Gauteng and KwaZulu-Natal, which had a direct impact on 
seven of our properties. While the initial cost estimates for repairs of 
between R450 million to R550 million is only approximately 1% of our total 
asset base and covered under our SASRIA insurance policy, the loss of 
momentum due to the negative sentiment is harder to quantify and 
potentially more damaging to our fragile economy. However, we remain 
committed to the roll-out of our development pipeline and will continue 
to invest in our assets through the short-term volatility we have become 
used to managing. The significant progress we have made in the recent past 
from a focused strategy and prudent balance sheet management has resulted in
a more robust business with a better ability to withstand unforeseen events.

Looking back at the 2021 financial year, we had some significantly better 
enquiries into our logistics developments and managed to let all of our 
newly constructed assets prior to year-end. We also saw a resurgence in 
trading in our commuter and convenience retail portfolio which had better 
trading than the comparatives for 2019, a pre-pandemic period. The positive 
change in sentiment which prevailed for most of the year, along with 
historically low interest rates, allowed us to sell R1,65 billion of direct 
assets and recycle that capital into new, better quality logistics assets 
in our secure parks." Steven Brown, CEO 

Nature of the business
Fortress REIT Limited ("Fortress") is a Real Estate Investment Trust ("REIT")
specialising in the logistics and retail property sectors with an established 
in-house development track record.

We focus on developing, owning 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 retail portfolio which currently comprises 
53 shopping centres, including properties co-owned with partners. Our strategic 
shareholding in NEPI Rockcastle plc ("NEPI Rockcastle") gives us exposure to 
the high-growth economies of the CEE region and provides us with diversification.

NEPI Rockcastle recently released solid results for their interim period ended 
30 June 2021. Notably, their low loan-to-value ("LTV") ratio of 31,8% and 
strong liquidity position have enabled them to pay out 100% of their 
distributable earnings as a dividend. The portfolio has been strengthened 
with the sale of several non-core assets and valuations on their existing 
portfolio were marginally positive compared to 31 December 2020. The CEO and 
CFO, along with the rest of the management team, have done a commendable task 
in ensuring the business remains in a market-leading position.

Capital structure
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 Fortress A ordinary share 
("FFA"; share code: FFA) 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 Limited ("JSE") subject to a floor of R8,11 
if redeemed. The Fortress B ordinary share ("FFB"; share code: FFB) has 
entitlement to the residual distribution of capital upon winding up.

The Memorandum of Incorporation ("MOI") governs the distribution in any 
six-month income period. The MOI 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 the company earn distributable 
income 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 the company 
earn distributable income 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, unless a specific amendment 
to the MOI has been approved by both classes of shareholders.

The board approached shareholders for an amendment to the MOI, allowing a 
dividend to be declared below the FFA dividend benchmark for the six-month 
period ended 30 June 2021 ("second income period"), which was similar to the 
amendment sought for the prior year's second income period ended 30 June 2020. 
This amendment was approved by the requisite majority of our shareholders and 
allows us to retain REIT status by declaring a dividend below the FFA dividend 
benchmark that meets the JSE Listings Requirements for REITs.

Summary of financial performance

                                         Jun 2021     Jun 2020     % change
Dividend per FFA share (cents)              74,70        23,00        224,8
Dividend per FFB share (cents)                               -            -

International financial reporting standards ("IFRS") information

                                         Jun 2021     Jun 2020     % change
Revenue from direct property 
operations (R'000)                      3 231 356    3 401 534         (5,0)
Total revenue (including revenue 
from investments) (R'000)               3 233 454    3 617 183        (10,6)
Net asset value ("NAV") (R'000)        27 257 162   24 116 771         13,0
NAV per equity share 
(going concern)^ (Rand)                     12,63        11,17         13,1
NAV per FFA share* (Rand)                   14,22        11,08         28,3
NAV per FFB share (Rand)                    10,67        11,29         (5,5) 
Basic earnings/(loss) per share 
- FFA (cents)                              156,17      (390,15)           #
Basic earnings/(loss) per share 
- FFB (cents)                              156,17      (390,15)           #
Headline earnings/(loss) per share 
- FFA (cents)                               89,50       (64,07)           #
Headline earnings/(loss) per share 
- FFB (cents)                               89,50       (64,07)           #

Management accounts information

                                         Jun 2021     Jun 2020     % change
LTV ratio** (%)                              36,7         38,5            # 
NAV (R'000)                            27 436 274   24 306 154         12,9
NAV per equity share 
(going concern)^ (Rand)                     12,34        10,94         12,8
NAV per FFA share* (Rand)                   14,22        11,08         28,3
NAV per FFB share (Rand)                    10,18        10,77         (5,5) 
Direct property portfolio (completed 
buildings, including held for sale) 
(R'million)                                25 601       25 018          2,3
Investment property under development
(R'million)                                 3 074        3 422        (10,2)
Direct property disposals (R'million)       1 650          877         88,1
Listed equity portfolio (R'million)        14 401       12 426         15,9
Vacancy based on GLA (%)                      7,4          8,9            #

^ 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.
* 60-day VWAP at the reporting date, limited to combined NAV.
# Percentage change not meaningful to disclose or not applicable.
** The LTV ratio is calculated by dividing the total interest-bearing 
borrowings adjusted for cash on hand by the total of investments in property, 
listed securities and loans advanced, and is based on management accounts 
information.

Distributable earnings
First income period (1 July 2020 to 31 December 2020; "1H2021")
Distributable income, based on our communicated Fortress distribution 
methodology, was less than the FFA dividend benchmark and accordingly no 
dividends were declared for the first income period to either FFA or FFB 
shareholders. The total FFA dividend benchmark per share, multiplied by the 
number of shares in issue (excluding treasury shares at the time of the dividend 
declaration) for the first income period was R954,5 million, with actual 
distributable income achieved of R820,5 million.

Second income period (1 January 2021 to 30 June 2021; "2H2021")
For the second consecutive year, distributable income was less than the FFA 
dividend benchmark for the second income period. The total FFA dividend 
benchmark per share, multiplied by the number of shares in issue (excluding 
treasury shares at the time of the dividend declaration) for the second income 
period was R921,8 million with actual distributable income achieved of 
R892,2 million.

Dividends and dividend policy
For the third consecutive reporting period, distributable income was below the 
FFA dividend benchmark. As noted under the capital structure section, the board 
has the requisite authority from shareholders for this income period to declare 
a dividend below the FFA benchmark and accordingly declared a dividend of 74,70 
cents per FFA share for the second income period and did not declare a dividend 
to FFB shareholders. The total distribution for FY2021 meets the minimum 
distribution requirement for a REIT per the JSE Listings Requirements.

For the second income period, CPI, as supplied by Statistics SA, increased by 
3,95% over the comparable period in the prior year and, accordingly, the FFA 
dividend benchmark is 79,14 cents per share for the second income period. This 
FFA dividend benchmark of 79,14 cents per share will then increase at the lower 
of CPI or 5% for future second income periods from 1 January to 30 June of the 
respective years. The FFA dividend benchmark for the first income period is 
80,10 cents and this will increase by the lower of CPI or 5% for future first 
income periods from 1 July to 31 December of the respective years.

The company's policy relating to the determination of distributable income has 
remained consistent since 1 January 2020 and remains appropriate under current 
circumstances.

Payment of final dividend
The board has approved, and notice is hereby given of a final dividend of 
74,70000 cents per FFA share for the six months ended 30 June 2021. No 
dividend has been declared on the FFB share for this period. The dividend is 
payable to Fortress shareholders in accordance with the timetable set out below:

Last date to trade cum dividend                Monday, 20 September 2021
Shares trade ex dividend                      Tuesday, 21 September 2021
Record date                                  Thursday, 23 September 2021
Payment date                                   Monday, 27 September 2021

Share certificates may not be dematerialised or rematerialised between 
Tuesday, 21 September 2021 and Thursday, 23 September 2021, both days inclusive. 
In respect of dematerialised shareholders, the dividend will be transferred to 
the CSDP accounts/broker accounts on Monday, 27 September 2021. Certificated 
shareholders' dividend payments will be posted on or about Monday, 
27 September 2021. An announcement informing shareholders of the tax treatment 
of the dividends will be released separately on SENS.

Prospects
There is an evident stabilisation and in some cases noticeable recovery in many 
of the markets, sectors and countries to which we have economic exposure. We 
remain optimistic about the future of our core portfolio in the medium to long 
term. However, given the withdrawal of guidance from our associate NEPI 
Rockcastle, possible unforeseen COVID-19 restrictions being imposed, as well as 
our capital structure, we are unable to accurately forecast distributable 
earnings on a per share basis for each class. Given the assumptions below, on 
a total distributable earnings measure, we currently estimate that the total 
distributable earnings for FY2022 will be approximately R1,79 billion 
representing growth of approximately 5% on a like-for-like basis compared to 
FY2021, on a consistent distribution methodology and post adjusting for 
once-off items in FY2021. Assumptions made in this forecast are listed below.

Forecast distributable earnings, when split between the two income periods 
for FY2022, are expected to be below the FFA dividend benchmark for 1H2022 and 
above the FFA dividend benchmark for 2H2022.

Maintaining a strong balance sheet, retaining REIT status and ensuring 
sufficient available liquidity to continue our strategy of being a leading 
developer of logistics parks will continue to be balanced against the payment 
of dividends.

This forecast is based on the following assumptions: 
Fortress-specific assumptions
- In light of the withdrawal of guidance by NEPI Rockcastle, we have assumed 
in our forecasts above that NEPI Rockcastle's distributable earnings for the 
six-month periods ending 31 December 2021 and 30 June 2022 are the same as for 
the comparable periods ended 31 December 2020 and 30 June 2021 and that NEPI 
Rockcastle pays out 100% of distributable earnings as a dividend;
- 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 rising utility costs and municipal rates.

Macroeconomic 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;
- The South African Reserve Bank maintains the repurchase rate at 3,5%; and
- There is no resurgence in civil unrest in South Africa and we assume that 
timely payment of insurance claims related to previous civil unrest is made.

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

Changes to the board of directors 
The following changes to the board of directors were made since our previous 
report for the period ended 31 December 2020:
- Mr Djurk Venter retired from the board on 11 June 2021; and
- Mr Bram Goossens was appointed as an independent non-executive director 
on 11 June 2021. There have been no other changes to the board of directors.
 
Short-form announcement
This short-form announcement of the summarised audited consolidated financial 
statements ("full announcement") for the year ended 30 June 2021 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 
2 September 2021 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 2021. Any investment decisions 
should be based on consideration of the full announcement published on 
SENS and Fortress' website as a whole. The full announcement has been
published on Fortress' website at:
https://cmsignition.co.za/download/files_1184/FortressresultsannouncementJune2021.pdf
and available on the JSE's website at: 
https://senspdf.jse.co.za/documents/2021/jse/isse/FFAE/FY2021.pdf

In accordance with section 3.46A(g) of the JSE Listings Requirements, the 
audited consolidated annual financial statements together with the audit report 
thereon have been published on Fortress' website and are available at: 
https://cmsignition.co.za/download/files_1184/FortressannualfinancialstatementsJune2021.pdf

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 and the audited consolidated annual 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' condensed audited 
consolidated financial statements for the year ended 30 June 2021 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
CEO                          CFO

Johannesburg
2 September 2021

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: 02-09-2021 02:25:00
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