JSE-listed real estate investment company Fortress has increased its portfolio of direct real estate assets to R30-billion and achieved the lowest vacancy rate of 3.7% since its listing in October 2009.

“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 continued strategic focus on developing and letting premium-grade logistics real estate in South Africa and Central and Eastern Europe, as well as growing our convenience and commuter-oriented retail portfolio, has proven to be successful,” Fortress CEO Steven Brown said on September 1 in a report on the company's performance for the financial year ended June 30.

The loan-to-value ratio decreased to 35.9% as at June 30, from 38.7% as at June 30, 2022. Fortress also realised growth in net asset value to R6.6-billion.

Growth in distributable earnings was 5.3% for the year and amounted to R1.79-billion, comprising R800.9-million for the first half of the financial year and R996.3-million for the second half.

Distributable earnings are forecast to grow to R1.93-billion for the 2024 financial year, the company said.

Further, like-for-like retail turnover growth was 7%. The retail portfolio vacancy, based on gross lettable area, decreased to 2.3%, from 3.6% as at December 31, 2022.

Additionally, Fortress' income-producing logistics assets now total R15.6-billion, across South Africa and Central and Eastern Europe, compared with R8.8-billion as at June 30, 2018. The company also completed R3.5-billion worth of new logistics developments.

“The gross asset value of the Central and Eastern Europe logistics portfolio is €140-million, with debt of €28.7-million and it has a current pipeline of 246 000 m² of GLA. The loan-to-value is low at 20.5%, with the majority of debt expiring in the 2026 financial year,” Fortress said in its results statement.

Meanwhile, the group also completed investment property disposals of R1.3-billion, in which a total of 29 properties were sold, including 28 income-producing properties and one vacant land site in the office portfolio. Apart from the vacant site, the 28 income-producing properties were sold at book value.

Fortress also added nine additional solar photovoltaic installations across its property portfolio, bringing the total number of installations to 25. Installed capacity was 9.633 MW as at June 30, compared with 7.248 MW as at June 30, 2022.

The current installed portfolio capacity is 10.58 MW. Fortress generated 11 970 MWh of renewable energy during the 2023 financial year, compared with 10 733 MWh in the 2022 financial year, the company stated.

“Rising interest rates have impacted on commercial real estate globally, both from a valuation perspective and an increase in funding costs. South Africa has not been immune to this global trend, but the impact has been less pronounced than in developed markets,” said Brown.

“Higher interest rates have led to flat investment property valuations across our portfolio, despite higher net operating income. Fortress has hedged 85% of its interest rate risk for a period of 3.5 years, which has mitigated the impact of higher interest costs on our debt.

“The South African banking and debt capital markets remain stable, which means that we can access debt on good terms and at fair prices. In contrast, many developed markets face challenges of much higher interest rates, coupled with falling capital values,” he highlighted.

LOGISTICS PORTFOLIO
Fortress continues to see strong demand for new logistics space in South Africa, particularly in well-located and secure logistics parks. This has translated to a record-low vacancy in its South African logistics portfolio of 0.5%, compared with 2.9% in the first half of the financial year.

The logistics portfolio weighted average lease expiry has improved to 4.7 years, up from four years in the prior financial year, as a result of longer-term leases having been concluded on new developments.

“These new logistics facilities provided a strong underpin for our future growth ambitions, as well as that of our tenants who benefited from greater efficiency in their operations from occupying well-designed and more energy-efficient buildings,” Brown said.

Further, during the year under review, Fortress completed R3.5-billion of new, state-of-the-art logistics developments, including the 163 533 m² Pick n Pay distribution centre, at Eastport Logistics Park, which is valued at R2.24-billion.

“We have strategically slowed the pace of the speculative warehouse developments, as we have successfully developed more than three-quarters of the one-million-square-metre pipeline we controlled around five years ago.

“Owing to the buoyant market for new logistics facilities, we remain positive about adding speculative supply, but need to balance this against keeping key sites available for attractive pre-let transactions. Pre-let developments carry less risk, although take longer to secure, increasing the holding cost on the undeveloped land,” said Brown.

Further, Fortress’ exposure to the Central and Eastern Europe region has provided a strategic diversification benefit with a 26% increase in the valuation of the direct portfolio when converted to South African rand over the period and a 27% increase in the value of the NEPI Rockcastle investment held throughout the period.

Both the direct logistics assets in the region and NEPI Rockcastle have again performed well.

“The fundamentals of the logistics real estate market in Central and Eastern Europe continue to strengthen. There is evidence of rental growth, strong occupier demand and a normalisation of construction costs. This renders us even more optimistic on this strategy for our future growth and diversification,” Brown noted.

ENERGY STRATEGY
Fortress continued to execute on its energy plan that focuses on embedded generation and power risk mitigation at an asset level. Its goal is to have 75% by GLA of the retail portfolio supported by backup power by December this year and 88% by June 2024, Brown said.

During the 2023 financial year, Fortress spent R167.9-million on solar projects, with another R121.3-million approved for 16 additional installations.

Further, the company estimates that the rollout of solar projects beyond the current approved projects will cost R316.2-million, which will allow for another 63 projects to be completed before June 2025.

Fortress has 15 operational solar photovoltaic (PV) plants in its retail portfolio, with the goal of increasing this to 25 plants by June 2024 and 33 plants by June 2025.

Further, its logistics portfolio has 10 operational plants, with a total of 22 plants planned by June 2024 and 50 plants planned by June 2025.

“The internal rates of return on the solar PV investments average 20%, on a pre-tax basis, over a useful life estimate of 20 years. While Fortress is in the process of installing additional diesel generators, the overall strategy is to use these in a backup capacity.

“However, in the short term, Fortress will consume more diesel directly, which will negatively impact direct carbon dioxide emissions. In the retail portfolio, Fortress spent R10.7-million on diesel during the financial year, of which 77% of the cost was recovered from tenants,” Brown added.

“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.

“Our focus on total returns over the long term will continue to drive our investment and capital allocation decisions,” he added.