Fortress more than doubles FY dividend to A-shares as Reit sector recovers

Fortress – the JSE-listed real estate investment trust (Reit) with a strong presence in the South African and Central and Eastern European (CEE) property markets – reported a recovery of several key financial and operating metrics in its full-year results to the end of June 2021 on Thursday.

Despite a 10.6% drop in overall group revenue to just over R3.2 billion for the year, Fortress declared a final dividend of 74.70 cents per share (cps) for its ‘A’ shareholders, which was more than double the payout it made for the prior financial year of 23 cps.

The group also saw a strong recovery of its share price, in line with most of the SA Reit sector this year following the economic fallout during 2020 due to the Covid-19 pandemic and initial ‘hard’ lockdowns.

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Fortress’s net asset value (NAV) increased 12.9% for the financial year ending June 2021, which saw its overall market capitalisation increase to R27.25 billion, compared to just over R24.1 billion in its 2020 financial year.

The group, which is focused on investing in convenience retail and logistics properties in South Africa and the CEE region, has an ‘A’ and ‘B’ share structure (referred to FFA and FFB respectively).

It did not declare a dividend for its ‘B’ shares, which is targeted at shareholders more interested in a capital return benefit.

Also worth noting is that Fortress sold R1.65 billion in directly held property during the year, despite the continued tough trading environment amid the ongoing impact of Covid-19, albeit to a lesser extent than in early 2020.

The property sales would have also contributed to the decline in revenue, but helped in reducing Fortress’s loan-to-value (LTV) ratio or debt levels. The group’s LTV was reduced from 38.5% at the end of its 2020 financial year to 36.7% by the end of June 2021.

“The long-term focus in the business, even when the effects of the pandemic hit, allowed us to continue to shore up our balance sheet and grow liquidity through the sales of non-core assets,” says Fortress CEO Steven Brown.

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“Recycled capital has been invested in acquiring and developing best-in-class, well-located premium logistics parks in South Africa and more recently, CEE,” he adds.

Brown reiterates that Fortress’s long-term strategy is “to pivot the business to a one-third convenience retail and two-thirds logistics real estate portfolio in South Africa and invest further into Europe”.

He says the strategy has helped the group show significant growth in its NAV during what continued to be a volatile Covid-19 trading period.

Analyst’s view

Commenting on Fortress’s full-year results, Stanlib listed property analyst Ahmed Motara tells Moneyweb: “Investors were focused on the FFA dividend quantum, with few, if any, investors expecting a dividend payable for FFB. As expected, the strong operational recovery of Nepi Rockcastle [invested in CEE], in which Fortress holds a 23.6% stake, was key in determining the ability of FFA shares to pay a reasonable distribution.”

On the group’s direct SA portfolio, he says Fortress’s disposals assisted in preventing vacancies from increasing materially, with a reasonable operational recovery evident in both the local logistics and retail portfolios.

Fortress’s overall vacancy rate of its directly-held local portfolio improved from 8.9% in FY2020 to 7.4% in the year to the end-June.

“The investment case for FFA shares is relatively easy to make, given the underpinning dividend and the ability to forecast it with increased certainty,” says Motara.

“On FFB, investors will likely continue to exercise caution, as they reassess when the FFB dividend will be reinstated, the quantum of such dividend and any corporate actions that may impact investors, if the dual-share structure is eventually collapsed.”