Fortress Real Estate Investments Limited has published its pre-close operational update for the period post-31st December 2023.
“The buoyant demand for high-quality, well-located logistics space is evidenced by the development of 268 982 m² of lettable area that we commenced or completed during the current financial year, of which over 90% is let with a weighted average lease expiry of approximately 10 years. The successful roll-out of the development pipeline is underpinned by strong fundamentals, healthy demand and our strategy to dispose of non-core assets and recycle this capital accordingly,” says Steven Brown, CEO of Fortress.
The South African logistics portfolio vacancies, based on rental, increased from 1.1% at December 2023 to 2% at 31 May 2024. Its Central and Eastern European (CEE) logistics vacancies, by rental, reduced from 6.5% at 31 December 2023 to 5.2% at 31 May 2024, representing two buildings, being 3 849m2 in Hall A in Stargard, Poland, and 5 450m2 in Hall E in Bydgoszcz (Poland).
Fortress’ local retail portfolio achieved like-for-like tenant turnover growth of 7.1%, maintaining a low vacancy rate, by rental, of 1.3%. The retail portfolio collection rate between January and May 2024 was 99% with vacancies, by rental, decreasing from 1.6% as at 31 December 2023 to 1.3% at 31 May 2024.
The Group continues to sell non-core assets with total disposals for the financial year-to-date amounting to R1.51 billion with a book value of R1.25 billion. For the full financial year ending 30 June 2024, Fortress expects to generate approximately R1.8 billion in cash proceeds from non-core asset sales, with the remainder of the held-for-sale assets expected to be transferred shortly after FY2024 yearend.
Fortress has a total of R3.9 billion in cash and available facilities at group level and remains comfortably within all debt covenants. Its unencumbered asset ratio is 30.6% with its loan-to-value (LTV) ratio approximately 39.4%
The proceeds from the non-core asset disposals have been recycled into the logistics development pipeline and retail refurbishments, extensions, and redevelopments. Despite the continued challenges faced by the real estate market, disposals were concluded at a premium to their book values, which highlights the stark contrast between the direct market and the Fortress share price, which trades at a material discount to net asset value per share.
“The new developments will contribute to significant growth in net operating income from our direct standing portfolio for the FY2025 financial year, for which we forecast growth of 20% off the FY2024 base, after adjusting for the impact of the Scheme of Arrangement implemented in February 2024. We forecast total distributable earnings for FY2025 to be marginally ahead of FY2024. This is noteworthy given that we used one-third of our c.R21 billion investment in NEPI Rockcastle shares at the time to facilitate the simplification of our capital structure to a single class of share by buying out one class entirely for c.R7 billion,” comments Brown.
South African logistics and developments portfolio
Fortress has received an offer from Crusader Logistics, an existing tenant, for a five-year lease on a new 19 970m² warehouse at Eastport Logistics Park, with development commencing in July 2025. Additionally, Liquor Runners has signed a five-year lease for a new 31 481m² warehouse at Eastport, with beneficial occupation scheduled for October 2025.
Fortress has received numerous enquiries for space at the Longlake Logistics Park and expect to commence a pre-let development shortly.
The construction of a 24 537m² warehouse for Dromex at Cornubia Ridge Logistics Park was completed on schedule in February 2024, with a 10-year lease commencing on the 1st of March 2024.
The new 38 169m² warehouse at Clairwood Logistics Park for Sammar Logistics was completed and the 15-year lease, which is underpinned by Sasol South Africa, commenced on the 1st of April 2024. Construction of the 14 071m² warehouse at Clairwood on Pocket 5B, for CHC, is progressing well and is on schedule for completion in September 2024. The 10-year lease with CHC is expected to commence on the 1st of November 2024. Additionally, the 20 682m² warehouse on Pocket 3C for ASL achieved practical completion on 24 April 2024, with ASL, an existing tenant, signing a five-year lease.
Demand for Pocket 6 – the last available pocket at Clairwood – is strong and it is expected that the final portion (approximately 30 000m² of GLA) will be let during the remainder of 2024. Once Pocket 6 is constructed and let, Clairwood will comprise approximately 300 000m² of fully let, high-quality, and well-located secure logistics space.
CEE logistics and developments portfolio
Fortress has signed a 12-year lease with MediVet for 6 425m² of Hall C ain Bydgoszcz, with construction starting in April 2024 and the lease commencement expected in December 2024.
Construction of a 50 200m² warehouse at the site in Łódź (Poland) commenced in July 2023, of which 28 509m² has been pre-let to Notino, who has already taken occupation, on a 10-year lease. The balance of the space currently under construction remains unlet at present, which will cause a temporary increase in the vacancy. The project provides further development potential of approximately 30 000m² of GLA in the second building. Development will commence once the available space in the first building has been fully let and based on adequate pre-lease commitments.
Construction of the 23 015m² warehouse at the site in Zabrze (Poland) has been pre-let to Lit Logistyka Polska (11 675m²) and INNPRO (11 340m²), both on five-year leases. The 11 675m² warehouse for Lit Logistyka was completed during May 2024 and the 11 340m² facility for INNPRO is expected to be completed by September 2024. The demand for new space in this location is encouraging and bodes well for the remainder of this c.77 500m² development.
Retail portfolio
Fortress has seen growth in its CBD portfolio turnover due to improved lettings at Park Central in Johannesburg CBD and Central Park in Bloemfontein. However, high street CBD centres face challenges from crime and surrounding area degradation, leading Fortress to plan a reduction in exposure to these retail assets. In the township category, improved leasing at Evaton Mall was the main driver of turnover growth.
The rural portfolio has benefited from reduced vacancies and improved trading at Mussina Shopping Centre, Lebowakgomo Centre, Sterkspruit Plaza, and Venda Plaza. The recently redeveloped AbaQulusi Plaza is performing well and exceeding expectations. The newly opened Shoprite at Morone Shopping Centre is trading well, resulting in increased foot traffic and reduced vacancies.
The suburban category continues to report steady growth, led by Shoprite Mayville, which now features a newly revamped Checkers Hyper, and Weskus Mall, which has seen an increase in foot traffic and consumer spending. Additionally, the redevelopment at 204 Oxford is progressing well, with the parking reconfiguration completed. The remaining construction, including a 1 061m² Woolworths Food, is expected to be finalised in the second half of the year.
“Our continued focus on improving the performance of our core portfolio, while disposing of the underperforming assets, has delivered positive results and we will continue to drive this strategy while remaining prudent in the allocation of capital across the various opportunities,” concludes Brown.
