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- JSE-listed property group Fortress has reported a slip in distributable earnings, once again below a benchmark that would allow for a distribution.
- The company lost its status as a real estate investment trust in January, and now faces tax implications.
- After attempts to resolve limitations on its ability to pay a distribution failed, the company says near-term solutions aren't in the offing, and is focused on its business.
- For more financial news, go to the News24 Business front page.
JSE-listed property group Fortress Real Estate says it's pleased with record-low vacancies in its logistics portfolio, but it is still unable to pay a distribution, and is counting the tax costs of losing its status as a real estate investment trust (REIT) in January.
Profit for the period rose 85% to R2.79 billion, despite it reporting a R360 million hit from income tax, more than eightfold what it reported for its 2022 year. Amid a series of adjustments - including for fair values and impairments - distributable earnings fell 3.5% to about R800 million. During the period, the group had sold assets worth R590 million, while it is holding R1.7 billion for sale, putting it on track for a record year of disposals.
Fortress, valued at about R17.6 billion on the JSE, has a focus on developing and letting premium-grade logistics real estate in SA and central and eastern Europe, while also owning a convenience and commuter-orientated retail portfolio. The latter currently comprises 51 shopping centres, including co-owned properties.
The company had a direct property portfolio worth R32.1 billion at the end of December, more than half of which was logistics, while about a third was retail. Fortress also holds a 23.7% stake in Europe-focused real estate group NEPI Rockcastle.
Total vacancies, measured as a percentage of gross lettable area decreased to 4.9% from 5.4% six months before, and while they climbed in its SA logistics portfolio, logistics vacancies in Europe fell to 0%, from 8.3% at the end of June.
Capital structure woes
In January, the company had lost its status as a REIT, after shareholders had rejected a scheme late last year to collapse its dual-share structure. Fortress A shares get preference for dividends, using a benchmark that is adjusted for the prior distribution and inflation, while the B shares receive the remaining earnings.
Due to distributions falling below the required benchmark to pay its A shareholders, the company was unable to pay any in its 2022 year, which is at odds with the requirements for a REIT to distribute at least 75% of distributable earnings. This has tax effects, including liability for capital gains taxes, as well as being unable to deduct dividends when determining taxable income.
Distributable earnings in the first half of the group's 2023 again fell below the required benchmark, with the company retaining the funds for debt, or retaining it in liquid assets to, in time, resolve its capital structure. Net debt had climbed slightly to R17.9 billion.
"The company's equity capital structure and our dual-share classes of A and B shares have remained front of mind for us and our shareholders," CEO Steven Brown said in the results.
"The board remains open to workable solutions to solve the problem of Fortress' sub-optimal capital structure, but, at this time, is not intending on proposing another potential solution to shareholders in the near term," he said.
Brown added that the group was in a "solid and robust position to provide growth going forward," with the current focus of management being on disposing under-performing non-core assets, and using this capital to grow its core portfolios of logistics and retail real estate,
The company has also upped its guidance for distributable income for the full year to R1.66 billion from R1.6 billion, primarily due to increased expectations for NEPI Rockcastle, which is benefitting from a return of consumers to brick-and-mortar stores.
