Fortress, South Africa’s third largest real estate investment trust (Reit), announced its first direct property foray in Poland on Thursday – a R700 million investment into two logistics assets in the country.
The announcement, which follows the release of the group’s interim results on Wednesday, comes as Fortress forges ahead with its expansion drive into the better-performing logistics property market.
Fortress CEO Steven Brown tells Moneyweb the group remains committed to the expansion strategy, despite Covid-19 uncertainty.
He says the Polish acquisitions represent “opportunistic investments” in the Central Eastern Europe (CEE) region; however, the group’s ambitious one million square metre gross lettable area (GLA) logistics property development pipeline in South Africa continues to be a priority.
“We’ve spent around R700 million to buy the two assets in Poland as it fits in with our logistics property expansion strategy,” says Brown.
Investment in SA
“In South Africa, we will be spending around R1 billion this financial year in rolling out various logistics developments, many of these currently underway,” he adds.
Fortress’s multi-billion-rand developments on the go locally include the likes of Eastport Logistics Park in Gauteng and Clairwood Logistics Park on the site of the old Clairwood Racecourse near the port in south Durban.
The group aims to have two thirds of its property portfolio in logistics assets and one third in convenience- and commuter-focused retail. It is trying to exit its poor-performing office assets, which make up around 5% of its portfolio, and some of its older industrial properties.
Over 65% of its property assets are in SA, while the rest are offshore investments in the CEE region, largely through its 23.6% interest in Nepi Rockcastle plc.
Asked why Fortress decided to make a direct property investment into Poland instead of via Nepi, Brown says Nepi focuses largely on the retail property market in the CEE region.
“Our first two logistics assets in Poland are prime properties and we will be looking for more opportunities there. We are also finalising a €30 million deal on a property in Romania. Our strategy around logistics property encapsulates both SA and the CEE region,” he notes.
“Fortress is the largest shareholder in retail shopping centre investor Nepi and we are now increasing our presence in CEE through our direct investments in logistics properties. We entered the Polish market just this year after concluding the acquisition of Waimea Group’s two logistics parks in Bydgoszcz and Stargard,” says Brown.
He points out that both properties are in regional industrial zones, thus benefitting from strong infrastructure.
“Major roads nearby allow for fast transportation of goods to businesses in Poland. Both developments are close to Germany presenting a powerful supply proposition for clients targeting Europe’s largest economy,” he adds.
On the local logistics front, Brown says Fortress has done letting or has received offers on some 340 000m2 of the group’s one million square metre GLA development pipeline in SA.
“A strong and growing balance sheet enabled Fortress to continue to realise its commitment to delivering on this … It is an achievement that we are proud of in these especially challenging times,” he says.
In its latest results, the group opted not to pay out an interim dividend.
However, executives stressed during a results presentation on Thursday that the fund aims to retain its Reit status and pay the requisite level of dividends for its June 2021 year-end.
Fortress was in a good loan-to-value (LTV) ratio position at its half-year, at 38.1%. Reit sector fund managers prefer LTVs below 40%, especially in the current Covid-19 environment.
While the group has managed to reduce its LTV marginally from its last financial year-end (June 2020) to its latest half-year in December 2020, the 38.1% gearing level is still almost five percentage points higher than its comparative half year (December 2019).
Brown nevertheless maintains that Fortress is still in a strong balance sheet position.
The group has a better LTV ratio than many of its peers.
Senior listed property fund manager at Stanlib, Nesi Chetty, says despite the pressure on certain parts of Fortress’s portfolio in terms of rentals and impairments, the group has “done well to keep their LTV at 38%” and maintain sufficient liquidity.
“The fund’s retail portfolio has been fairly defensive through the pandemic with trading density levels very similar to the prior year. However, consumers in those markets [rural and township areas] will likely be challenged this year with rising fuel and food costs,” he notes.
“The growth in logistics continues with NOI [net operating income] on a like-for-like basis around 2.3% in the fund’s South African portfolio.
“Logistics vacancies seem to have been contained at the 4% level,” says Chetty.
“There is currently around 152 000m2 of space that will be completed in Clairwood and Eastport logistics parks for the reminder of the year for Fortress. The estimated yields on completion range between 7.8% and 9.2%, which is still compelling in a tough market. Fortress has made good progress with almost 90 000m2 of this total let already.”
He points out that the group’s direct logistics foray into Poland is a new strategy.
“There are certainly some opportunities in the Polish market to grow logistics assets … Certain nodes in Poland on the logistics side are more competitive and Fortress will need to secure properties with strong yielding tenants.”