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Ingham’s Incisive Insights: REITs (Fortress)

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REITs (Fortress)Fortress.jpg       

“Hybrid property”

 

What are REITs?

If you’re looking to get into the real estate market, but you don’t have masses of capital, you should consider buying shares in a real estate investment trust (REIT). These trusts/companies are set up purely to invest in real estate, typically with the intention of earning passive rental income from the underlying property investments...Check out the rest here

 

FFA units in issue: 1 091,7 million

FFA price: 1596 cents per unit

FFB price: 3707 cents per unit

FFB units in issue: 986,3 million

FFA market cap: R17,5 billion

FFB market cap:R36,5 billion

Total market cap: R54,0 billion  

Fair value up to 1600 cents for FFA and up to 3700 cents for FFB in current interest rate environment   

Trading Buy and Portfolio Buy

Fortress is hybrid fund, investing in physical property and listed property and it is a constituent of the

JSE Top 40 and the MSCI index.

Fortress A units earn dividends that grow at the lower of 5% or CPI. The dividend of the Fortress B units is a function of the residual distributable income after FFA units are paid.

The fund holds passive investments in listed NEPI, Resilient, Hammerson and Rockcastle. All have offshore exposure with NEPI predominantly central and eastern Europe and with Rockcastle increasingly so. Hammerson is largely UK focused with 20% of the portfolio in France. Resilient has similar characteristics to Fortress, including direct investments and a cross-holding in Fortress, NEPI, Rockcastle and Hammerson.    

The value of the offshore listed investments is currently R23,8 billion at the current rate of exchange with Resilient, with indirect offshore exposure, valued at R5,2 billion and having a quarter of distributable income associated with overseas assets.

Approximately 30% of Fortress distributable income will derive from listed investments in the year ended June 2016 based on my forecasts but I see this growing to 38% in 2017 and 2018. 

Fortress has directly owned properties valued at R24,6 billion and development properties valued at R1,6 billion.

Together with the listed investments, the total value of assets is R55,3 billion with 52% by value listed on the JSE and other stock exchanges. Over 80% of the listed assets by value are offshore.

A direct portfolio of 325 properties is composed of logistics, retail, office and industrial properties with logistics warehouses the largest at 46% and retail centres at 31%. Vacancies at 6.2% on average are relatively low. Lease expiries are well termed with 12% in 2016 fiscal year, 19% in 2017, 23% in 2018, 18% in 2019, 9% in 2020 and 18% thereafter.        

Fortress is currently developing Clairwood Logistics Park in Durban. An 8.5% weighted average yield in developments is expected.

Fortress hold Hammerson through equity derivatives. There is a policy to hedge up to 35% of foreign currency exposure in Hammerson, NEPI and Rockcastle. Current hedges are at R15,25/EUR, R20,12/GBP, and R14,83/USD.

Dividend income is hedged too with projected dividend income for the year ended June 2016 hedged at R20,80/GBP, R14,84/EUR and R13,34/USD.

Investors should note that as currency adds volatility to income the forex contracts create relative stability. As a result, recent ups and downs in the rand do not have a proportionate effect on capital value, income and dividends.

Despite the recent strengthening in the rand to R14,40/USD, R16,17/EUR and R20,75/GBP, Fortress has covered on currency for dividends at stronger levels of 7% on the USD and 8% on the EUR and at broadly the same exchange rate on GBP.  

Swaps and caps of R7,9bn are well spread with hedge term 4.2 years whilst there is no meaningful short to medium term risk from rising interest rates.

Total interest bearing borrowing of R14,8 billion is 35% of attributable equity of R41,8 billion and thus conservative in the current rising interest rate cycle. Of the debt, 15% is capital market based with a target of 25%. RMB has 36% with Standard 41%. Moodys has a A3.za, P-2.za rating with a stable outlook as at 30 November 2015. Average borrowing margin over JIBAR is 1.56% and the average cost of funding after the recent Reserve Bank rise in repo is +/- 8.6%.

The advantages of exposure to Fortress include:

  • large portfolio base with substantial offshore exposure
  • hedging policy
  • local development pipeline
  • appropriately geared balance sheet with good terming
  • market linked yield on A units with steady growth
  • FFA forward yield of 8.1% compares favourably to peers - Growthpoint is 7.4% and Hyprop is 5.0% on a forward basis for example

The disadvantages of exposure to Fortress include:

  • large deals for above average growth now needed
  • an indirect reliance on growth from passive exposure to NEPI, Rockcastle and Hammerson in particular                        
  • low yield of FFB units in relation to FFA units is a function of investment in foreign-focused REITS and thus cost of capital
  • a stronger rand over times will lead to price weakness for FFB in rand                            
  • pricing of FFB is full with a forward yield of 3.7%, which is in line with NEPI on 3.7%

In summation, Fortress has a place in a diversified portfolio for investors with a long view requiring relative stability, geographic and currency spread through proven vehicles, and an attractive income yield.

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