Fortress Real Estate Limited has published its interim results for the period ending December 2022, reporting distributable earnings of R800.9 million, compared to R830.5 million for the prior comparable six-month period.
The company’s LTV ratio decreased from 38.7% at 30 June 2022 to 36.9% at 31 December 2022, primarily as a result of retention of cash from the non-declaration and non-payment of dividends, an increase in the share price of NEPI Rockcastle as noted previously and disposal of non-core assets to the value of R590 million. This was offset by development spend and capital expenditure of R1.4 billion, mainly at the new Pick n Pay site at Eastport, and ongoing developments at Longlake, Clairwood and Cornubia.
“Despite a challenging trading environment due to the impact of load shedding, higher inflation and the resultant low-growth operating environment in South Africa, we adapted to the market conditions and focused on our business strategy, which includes diversification into high-growth economies in Europe, to deliver strong growth in our logistics and retail portfolios, yielding net asset value (NAV) growth of 12% over the past six months,” said Steven Brown, CEO of Fortress.
“Last year did pose some challenges at a shareholder level too, with the issue around our dual A and B shareholding structure remaining unresolved. Consequently, the inability to pay a dividend resulted in Fortress losing its REIT status earlier this year. However, the core business remains operationally strong with a conservatively managed balance sheet. We are now looking to the future with a renewed focus on the operational performance of the business and ensuring our tenants are able to operate efficiently and profitably in our real estate assets as that will drive our growth.”
Fortress continues to focus on growing its R10.9 billion SA logistics portfolio with a measured approach by converting logistics land into income-producing assets and a joint ownership strategy with tenants to lower capital requirements for the development pipeline, enhance profitability and to reduce risk.
Its logistics portfolio reported a low vacancy rate by the rental of 3.3% (30 June 2022: 0.9%) with good leasing activity, especially in new logistics developments.
The emphasis within the SA Logistics portfolio will focus on rolling out existing logistics parks, with R3.8 billion in asset value currently under development. This includes the R2.1 billion Eastport logistics park development, with a 164 470m² state-of-the-art Pick n Pay super distribution centre on track for completion in May 2023. Additional key logistics park developments include Cornubia, Longlake and Clairwood, which has secured two 15-year lease agreements.
Central and Eastern Europe (CEE) Logistics Portfolio
The 133 000m² of GLA in the R1.7 billion Fortress CEE Logistics portfolio is presently fully leased, with additional development underway in Fortress Logistics Park Bydgoszcz (10 289 m²). Fortress expects to start construction on two new developments in Zabrze and Łódź in 2023 and potentially commence a third building in Stargard.
SA Retail portfolio
Despite the challenging trading environment, the R10.1 billion Fortress Retail portfolio achieved good trading growth.
Retail tenant turnover increased 7.64% compared to the 12 months to December 2021 (14.02% versus 2019), which represents a notable performance considering the increasing challenges faced by the retail sector, including the increased prevalence and intensity of load shedding, rising interest rates, higher inflation, poor service delivery from local authorities, and subdued discretionary consumer spending.
Asset recycling strategy
Fortress continues to deliver on its asset recycling performance despite the challenging environment posed by the prevailing economic climate, a tough property market, and numerous industry issues, including regular deeds office closures due to continuous load shedding and delays in obtaining rates clearance certificates.
During 1H2023, Fortress sold a total of 15 properties, including 14 income-producing properties at a 1.4% premium to book value. Fortress maintained its strategy with respect to non-core asset disposals in H12023, with 12 properties held for sale, yielding net proceeds of R1.7 billion from a book value of R1.65 billion at a time when attractive portfolio disposal opportunities are limited.
Single-asset transactions continue to meet quantum and price-to-book value targets, with FY2023 disposals expected to be higher than FY2022.
Fortress will continue to leverage its proven development business and use the proceeds from the disposal of non-core assets to fund its development pipeline and the extensions or enhancements of existing assets.
These projects include current developments in the SA and CEE logistics sector, retail, and other on-going CAPEX projects. The focus will remain on both speculative – mainly high-spec logistics within existing parks – and tenant-driven developments.
Fortress also announced its secondary listing on A2X with effect from the 16th of March 2023. The company will retain its primary listing on the JSE and its issued share capital will be unaffected.