Real estate investment trust (Reit) Fortress is effectively executing its development strategy and has managed to secure tenants for about 340 000 m² of gross lettable area (GLA) out of its one-million square metre GLA logistics development pipeline in South Africa.

Nearly 62 500 m² of GLA was completed and let in the six-month interim reporting period to the end of December 2020, while the remainder of about 278 000 m² is work-in-progress.

The company had also reduced its vacancy rate to 6.8% from 8.9% during the comparable six-month period to the end of 2019, and had maintained its trading density despite the impact of Covid-19 restrictions and changes in market conditions, Fortress CEO and MD Steven Brown said during a presentation of the company's interim results on March 11.

"We disposed of 16 properties, seven of which were held for sale at June 30, 2020, for net proceeds of R1.1-billion, which was above book value, with a further 11 properties held for sale with a value of R371-million."

The company also improved its balance sheet strength with access to cash and available facilities of R2.8-billion and it reduced its loan-to-value (LTV) ratio slightly to 38.1% at the end of December from 38.5% at the end of June 2020.

"Historically low interest rates have made our senior debt more affordable and the close-out of our synthetic euro-denominated loans through cross-currency interest rate swaps has materially reduced risks to both our LTV and our liquidity position. This lower risk position, combined with lower variable interest rates, has resulted in us being comfortable with the current LTV ratio," said Brown.

The tangible net asset value (TNAV) was R25.2-billion at the end of December, or R11.35  per equity share. The TNAV per equity share provides the fairest reflection of the per share TNAV for the Fortress A ordinary shares and Fortress B ordinary shares.

"We will continue to assess our gearing and serviceability of debt to ensure that we balance taking advantage of investment opportunities with the risk of high levels of debt. We are not in breach of any of our debt covenants and continue to enjoy good relationships with our funders," noted Brown.

Fortress also successfully concluded the acquisition of its first directly held logistics parks in Poland totalling about 60 000 m² of GLA, with available land for a further 110 000 m² of logistics developments.

"Over the past 18 months, various proactive steps were taken by management and the board of directors that were principally aimed at protecting the balance sheet, preserving liquidity and focusing on setting a solid base for the company for the future, which has allowed us to position the business for growth going forward," said Brown.

However, in terms of its memorandum of incorporation (MoI), it was not in a position to distribute income, but would declare a dividend after its financial year-end, or would seek to temporarily amend the MoI to distribute the income to ensure it meets its listing requirement as a Reit by paying 75% of distributable income, he explained.

The amount available for distribution at the end of December was R820.5-million, and its headline earnings were R766.9-million for the interim reporting period.

Additionally, the company still had about R6-billion of noncore assets in South Africa that it would dispose of, and it had achieved fair and market-aligned value for these noncore assets. It would use these funds to support its development pipeline.

"We have to give credit to the development team for their work. However, our sales team is performing well and is running slightly ahead of our development team, which means that we have a bit more cash on hand," said Brown.

Fortress was maintaining its focus on converting land to provide yields in its asset base. While this does mean shareholders do not receive returns outside of dividends, which Fortress did to preserve its balance sheet as it continued to developed assets, the total income of the yields contributes to the bottom line and, hence, to shareholders, he said.

There is also continued uncertainty in the overall business environment and future macroeconomic conditions.

"Despite these challenging times, we remain focused on continuing our journey of rolling out the largest development pipeline of logistics real estate in South Africa, and ensuring that our defensively positioned convenience and commuter-oriented retail real estate assets continue to perform,” Brown stated.

SOLAR SOLUTIONS
Further, he said the company would continue to roll out solar solutions, as these are not only economically lucrative for returns, but also a strategic imperative for sustainability and tenants also realise value from the solar solutions.

"We currently have ten operational solar photovoltaic (PV) plants, with five plants currently under construction. We are awaiting approval on a further eight sites and four sites are undergoing feasibility studies. Our installed capacity increased to over 3 MW and we are targeting 5 MW by June 30, 2021."

Fortress generated 2.405 MWh for the six months compared with 1.385 MWh for the corresponding period last year. Its target for the 2021 financial year is 5.5 MWh compared with 3.272 MWh last year.

"The total cost of installed solar PV plants is R46-million to date with a further estimated cost of R107-million committed at sites under our control. The estimated internal rate of return is in excess of 15%," added Brown.

Further, online water monitoring systems at selected properties allowed it to monitor water consumption more closely, and the conversion of an initial pilot phase at two retail properties to a complete water and electricity online smart metering platform is another initiative to improve sustainability.

"Meanwhile, the Meycol Nature Reserve at Clairwood, which was acquired as part of an environmental offset agreement and subsequently transformed into and proclaimed a nature reserve, is our biodiversity initiative that aims to protect the natural environment and the ecosystem within it. We continue to manage and maintain this biologically sensitive site," he said.

One such programme is its partnership with Food & Trees for Africa. In terms of overall  impact, Fortress has nine ecoclusters in seven provinces around South Africa, with 17 725 trees having been planted, 39  enterprise orchards initiated and 389 community members trained.

"In line with our internal framework, we have initiatives that align environmental, sustainability and social investment  goals," Brown concluded.