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FFA FFB
FORT
FFA /FFB - Fortress Income Fund - Condensed audited consolidated
financial statements for the nine months ended 30 June 2010
FORTRESS INCOME FUND LIMITED
Incorporated in the Republic of South Africa
Registration no 2009/016487/06
JSE codes "FFA" ISIN ZAE000141313 and "FFB" ISIN ZAE000141321
respectively
("Fortress" or "the company" or "the group")
CONDENSED AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED 30 JUNE 2010
DIRECTORS` COMMENTARY
1. LISTING AND STRUCTURE
Fortress listed on the JSE Limited on 22 October 2009 following the
successful private placing of 13 000 000 Fortress A linked units ("A
units") and 13 000 000 Fortress B linked units ("B units") at R9,00 and
R1,00 per linked unit respectively. In total 176 592 192 A and B units
were issued on listing.
Fortress` A and B linked unit structure offers investors two different
risk and reward propositions. The A units offered a yield of 10,75% on
the listing price on a preferred basis, escalating at 5% per annum for
five years and at the lower of CPI and 5% thereafter. These units have
preferential entitlements to income distributions and to capital
participation on winding up. The remaining distributable income accrues
to the B units.
2. DISTRIBUTABLE EARNINGS
Fortress achieved total distributions for the nine months ended 30 June
2010 of 79,72 cents for the A and B units combined against 79,31 cents
forecast in the prospectus. The distributions for the A unit amount to
72,57 cents which is in line with the forecast made in the prospectus.
The distribution for the B unit amount to 7,15 cents which is 5,7%
(annualised) ahead of the forecast figure of 6,75 cents per B unit.
The distribution for the six months ended 30 June 2010 was 48,38 cents
and 4,79 cents for the A and B units respectively.
3. COMMENTARY ON RESULTS
The nine months since listing was an active period with all but two of
the properties being transferred. During this period, management`s focus
has been the settling down of the portfolio and ensuring that the income
projections were achieved.
In a difficult economic environment vacancies increased to 5,7% from
3,0% at the time of listing. Vacancies are expected to stabilise at
current levels in the next six months followed by reduced vacancies
towards the end of the financial year. Arrears are being firmly
controlled and are expected to decline as the quality of the portfolio
improves.
4. DISPOSALS
As part of the board`s portfolio management strategy, Fortress disposed
of the following properties:
Purchase Net sale
price price Exit
Property name R`000 R`000 yield
Shoprite Centre, Sophia Town 18 500 22 750 9,5%
Burry Koen, Jet Park 34 400 35 400 10,0%
Eden Park Drive, Shortts Retreat 16 150 16 200 12,8%
21 Mandy Road, Reuven* 3 300 4 300 9,2%
213 Monte Carlo Crescent, Kyalami* 5 600 6 700 **
619 Voortrekker Road, Gezina, 39 900 39 900 12,0%
Pretoria*
5 Handel Road, Ormonde* 31 250 38 500 9,0%
149 100 163 750
*Not yet transferred at 30 June 2010 and disclosed as available for
sale.
**Vacant.
5. PROPERTY ACQUISITIONS
The following acquisitions were made during the period, all of which
enhance the quality and growth prospects of the portfolio:
5.1. CHECKERS MAYVILLE
This retail centre was acquired with effect from 1 October 2009 at a
cost of R196 million.
5.2. MURRAY AND ROBERTS PORTFOLIO
The following portfolio of 16 properties were acquired from the Murray &
Roberts Group for R373 million. Competition Commission approval for the
acquisition was obtained subsequent to the financial year end. Transfer
has not yet been effected.
Rentable Purchase
area price
Property name Sector m2 R`000
Att Yard Gunners Circle, Industrial 5 478 10 818
Epping
Epp Yard Gunners Circle, Industrial 38 225 36 664
Epping
73 Hertzog Boulevard, Cape Commercial/Retail 7 819 47 909
Town
Biyela Shopping Centre, Retail 6 957 20 000
Empangeni
10 Skeen Boulevard, Commercial 2 908 16 364
Bedfordview
2 Skeen Boulevard, Commercial 5 117 32 636
Bedfordview
312 Kent Avenue, Randburg Commercial 4 329 7 308
Monument Centre, Standerton Retail 6 170 26 957
Bayside Centre, Mossel Bay Retail 7 237 30 769
People`s Place, Queenstown Retail 5 018 13 077
Queenstown Mall Retail 7 588 21 481
Taxi City, East London Retail 5 127 15 000
42 Coronation Road, Maitland Industrial 4 074 8 000
Bellstar, Bellville Retail 5 211 66 400
34 Kindon Road, Robertsham Industrial 6 788 6 154
23 Shorthorn Street, City Industrial 6 790 13 846
Deep
Total 373 383
5.3. SECUNDA RETAIL PROPERTIES
Fortress acquired the remaining 50% in each of the following retail
centres from Sasol Pension Fund at a total cost of R74,5 million.
Transfer has been effected:
Rentable Purchase
area price
Property name m2 R`000
Pick `n Pay Secunda 5 064 24 500
Checkers Secunda 7 006 32 500
Secunda Village 3 100 17 500
Total 74 500
6. REDEVELOPMENTS
Redevelopment and extensions to the following properties have commenced:
6.1. SINOVILLE SHOPPING CENTRE
A R16 million redevelopment of this retail centre commenced in May 2010
and is scheduled for completion in December 2010. This has already
positively impacted on the tenant profile of the property as well as
securing the extension of the Pick `n Pay lease for a further period of
five years.
6.2. EVATON PLAZA
A 1 800 mSquared extension to the centre commenced in May 2010 to
accommodate a Pick `n Pay store. Fortress` 50% share of the cost amounts
to R8,4 million. The extension is scheduled for completion in December
2010.
7. LISTED EQUITIES
Fortress` strategy as set out in the prospectus is to increase its
exposure to listed property securities and to diversify the income base
by including hard currency exposure by investing in listed property
securities offshore. Pursuant to this strategy, Fortress invested R45
million in the Fortress REIT Fund, acquired 2 010 000 shares in New
Europe Property Investments plc and an additional 12 185 186 units in
Capital Property Fund ("Capital"). Fortress now owns 27 000 000 Capital
units.
8. FUNDING
Subsequent to the listing, Fortress accepted additional loans totaling
R296 million from Standard Bank. These facilities were utilised to repay
the loans from Investec and to finance the Murray & Roberts acquisition.
Current gearing of 22,5% will increase to 31,0% once the Murray &
Roberts transfers have been effected. The board`s strategy is to
maintain gearing at between 30% and 35%.
9. PROSPECTS
Although Fortress is operating in a challenging property market,
considerable progress has been made in enhancing the quality of the
portfolio through acquisitions, disposals and redevelopments. Management
is confident that considerable value will be extracted from the recent
acquisitions. A number of further opportunities are being explored.
The board is of the opinion that the Fund will achieve annualised growth
in distributable income of approximately 7%. This forecast has not been
reviewed or reported on by the Fund`s auditors.
By order of the board
Mark Stevens
Managing director
Nick Hanekom
Financial director
25 August 2010
Johannesburg
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Audited
Jun 2010
R`000
ASSETS
Non-current assets 2 914 116
Investment property 2 435 926
Straight-lining of rental revenue adjustment 16 556
Investment property under development 40 013
Investments 299 608
Loans 122 013
Current assets 128 731
Investment property held for sale 88 702
Straight-lining of rental revenue adjustment 698
Loans 2 351
Loan to development partner 2 882
Trade and other receivables 29 118
Cash and cash equivalents 4 980
Total assets 3 042 847
EQUITY AND LIABILITIES
Total equity attributable to equity holders 351 798
Share capital 4 036
Share premium 214 924
Non-distributable reserves 132 838
Retained earnings -
Total liabilities 2 691 049
Non-current liabilities 2 533 424
Linked debentures 1 816 046
Interest-bearing borrowings 685 018
Deferred tax 32 360
Current liabilities 157 625
Trade and other payables 50 337
Linked debenture interest payable 107 288
Total equity and liabilities 3 042 847
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Audited
for the
nine
months
ended
Jun 2010
R`000
Net rental and related revenue 209 349
Recoveries and contractual rental revenue 272 108
Straight-lining of rental revenue adjustment 17 254
Rental revenue 289 362
Property operating expenses (80 013)
Distributable income from investments 15 831
Fair value gain on investment property and investments 165 121
Fair value gain on investment property 162 120
Adjustment resulting from straight-lining of rental revenue (17 254)
Fair value gain on investments 20 255
Administrative expenses (9 821)
Listing costs (3 197)
Profit before net finance costs 377 283
Net finance costs (211 761)
Finance income 12 222
Interest from loans 6 238
Interest on linked units issued cum distribution 5 984
Finance costs (223 983)
Interest on borrowings (55 874)
Capitalised interest 2 322
Fair value adjustment on interest rate swaps (13 656)
Interest to linked debenture holders
- A linked units (142 711)
- B linked units (14 064)
Profit before income tax expense 165 522
Income tax expense (32 684)
Profit for the period attributable to equity holders 132 838
Total comprehensive income for the period 132 838
Basic earnings per A share (cents) 32,92
Basic earnings per B share (cents) 32,92
Basic earnings per A linked unit (cents) 103,64
Basic earnings per B linked unit (cents) 39,89
Fortress has no dilutionary instruments in issue.
RECONCILIATION OF PROFIT FOR THE PERIOD TO HEADLINE EARNINGS AND
DISTRIBUTABLE INCOME
Audited
for the
nine
months
ended
Jun 2010
R`000
Basic earnings (shares) - profit for the period 132 838
attributable to equity holders
- interest to A linked debenture holders 142 711
- interest to B linked debenture holders 14 064
Basic earnings (linked units) 289 613
Adjusted for: (111 194)
- fair value gain on investment property (144 866)
- income tax effect 33 672
Headline earnings (linked units) 178 419
Adjustment resulting from straight-lining of rental (17 254)
revenue
Fair value gain on investments (20 255)
Fair value adjustment on interest rate swaps 13 656
Listing costs 3 197
Income tax effect (988)
Distributable income 156 775
Less: distribution declared (156 775)
Income not distributed -
Headline earnings per A linked unit (cents) 76,09
Headline earnings per B linked unit (cents) 12,33
Basic earnings per share, basic earnings per linked unit and headline
earnings per linked unit are based on the weighted average of 201 782
877 shares/linked units in issue during the period for both A and B
shares/linked units.
ABRIDGED CONSOLIDATED STATEMENT OF CASH FLOWS
Audited
for the
nine
months
ended
Jun 2010
R`000
Cash inflow from operating activities 102 786
Cash outflow from investing activities (2 817 830)
Cash inflow from financing activities 2 720 024
Increase in cash and cash equivalents 4 980
Cash and cash equivalents at beginning of period -
Cash and cash equivalents at end of period 4 980
Cash and cash equivalents consists of:
Current accounts 4 980
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Non-
distri-
Share Share butable Retained
capital premium reserves earnings Total
Audited R`000 R`000 R`000 R`000 R`000
Balance at
30 September 2009 - - - - -
Issue of linked units
(equal amount of
A and B units) 4 036 214 924 218 960
- Issue of 176 592 192
units effective
1 October 2009 3 532 173 000 176 532
- Issue of 9 800 000
units effective
1 October 2009 196 9 544 9 740
- Issue of 8 620 685
units on 5 May 2010 172 18 903 19 075
- Issue of 6 770 000
units on 14 May 2010 136 13 477 13 613
Total comprehensive
income for the period 132 838 132 838
Transfer to non-
distributable reserves 132 838 (132 838) -
Balance at 30 June 2010 4 036 214 924 132 838 - 351 798
Non-distributable reserves comprise those profits and losses that are
not distributable to unitholders and are made up of revaluation
adjustments on investment property, investment property held for sale
and investments, straight-lining adjustments and other non-distributable
balances.
NOTES
1. PREPARATION AND AUDIT OPINION
The condensed audited consolidated financial statements have been
prepared in accordance with the framework concepts and the measurement
and recognition requirements of IFRS, the AC500 standards as issued by
the Accounting Practices Board, the information as required by IAS34:
Interim Financial Reporting, the JSE Listings Requirements and the South
African Companies Act. The condensed audited financial statements have
been prepared using accounting policies that comply with IFRS.
Deloitte & Touche has audited the financial information set out in this
report. Their unmodified audit report is available for inspection at the
group`s registered address.
2. SUMMARY OF FINANCIAL PERFORMANCE - UNAUDITED
Jun 2010 Dec 2009
6 months 3 months
Distribution per A unit (cents) 48,38 24,19
Distribution per B unit (cents) 4,79 2,36
A linked units in issue 201 782 877 186 392 192
B linked units in issue 201 782 877 186 392 192
Net asset value per combined unit* R10,74 R10,20
Net asset value per A unit R9,92# R9,42$
Net asset value per B unit R0,82 R0,78
Gearing ratio** 22,5% 28,5%
*Net asset value includes total equity attributable to equity holders
and linked debentures.
#60-day volume weighted average trading price at 30 June 2010.
$Volume weighted average trading price since listing.
**The gearing ratio is calculated by dividing interest-bearing
borrowings by total assets.
3. GEARING
Amount Interest % of
Expiry R`million rate borrowings
Interest rate swaps*
March 2011 50,0 7,11% 7,3%
September 2011 100,0 7,37% 14,6%
March 2012 50,0 7,41% 7,3%
September 2012 100,0 7,77% 14,6%
March 2013 50,0 7,77% 7,3%
September 2013 100,0 8,04% 14,6%
March 2014 50,0 8,05% 7,3%
September 2014 100,0 8,24% 14,6%
May 2015 50,0 7,87% 7,3%
September 2015 100,0 8,36% 14,6%
June 2016 100,0 7,95% 14,6%
Hedged borrowings 850,0 124,1%
Variable rate borrowings (165,0) (24,1%)
Total gearing** 685,0 10,29% 100,0%
*Fortress pays the fixed rate and receives the 3-month Jibar floating
rate on the swaps.
**Total gearing comprises the level of external interest-bearing
borrowings.
4. LEASE EXPIRY PROFILE - UNAUDITED
Based on
Based on contractual
Lease expiry rentable area rental income
Vacant 5,7% -
June 2011 26,7% 25,9%
June 2012 24,3% 26,1%
June 2013 19,8% 22,1%
June 2014 8,1% 9,8%
June 2015 5,0% 5,8%
>June 2015 10,4% 10,3%
Total 100,0% 100,0%
5. SEGMENTAL ANALYSIS
Jun 2010
Rental revenue R`000
Retail 137 000
Industrial 109 512
Commercial 42 850
Total 289 362
Jun 2010
Profit before net finance costs R`000
Retail 109 288
Industrial 154 654
Commercial 90 273
Investments and other 23 068
Total 377 283
6. PAYMENT OF FINAL DISTRIBUTIONS
The board has approved and notice is hereby given of final interest
distributions (distribution no 2) of 48,38 cents per A linked unit and
4,79 cents per B linked unit for the six months ended 30 June 2010.
The last date to trade linked units cum distribution will be Friday, 10
September 2010 and trading will commence ex distribution on Monday, 13
September 2010. The record date to participate in the distribution will
be Friday, 17 September 2010.
Linked unit certificates may not be dematerialised or rematerialised
between Monday, 13 September 2010 and Friday, 17 September 2010, both
days inclusive. Payment of the distribution will be made to linked
unitholders on Monday, 20 September 2010.
In respect of dematerialised linked unitholders, the distribution will
be transferred to the Central Securities Depository Participant
accounts/broker accounts on Monday, 20 September 2010. Certificated
linked unitholders` distribution payments will be posted on or about
Monday, 20 September 2010.
Directors
Jeff Zidel (chairman), Mark Stevens* (managing director), Kura
Chihota,
Des de Beer*,Nick Hanekom*, Nontando Kunene, Jannie Moolman,
Djurk Venter
(*Executive)
Company secretary
Stephanie Botha
Registered address
3rd Floor Rivonia Village Rivonia Boulevard Rivonia 2191
(PO Box 2555 Rivonia 2128)
Transfer secretaries
Link Market Services South Africa (Proprietary) Limited
11 Diagonal Street Johannesburg 2001
Sponsor
Java Capital
Date: 25/08/2010 15:56:01 Produced by the JSE SENS Department.
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