Europe assets boost Fortress gains

• Dividend set to grow 25% as Polish and Romanian investments benefit from weaker rand and make up for poor performance of local office portfolio

Fortress Income Fund, the largest industrial property owner on the JSE, is on track to achieve 25% dividend growth in its 2017 financial year, easily beating the expected market average of 7% to 8%.

“We have a carefully balanced portfolio of our own properties and listed securities. Our listed securities have performed exceptionally well of late, largely thanks to our exposure to excellent assets in Romania and Poland,” said CEO Mark Stevens, who was speaking after the release of financial statements for the six months to December.

Fortress, a hybrid real estate investment trust which invests in physical property and listed property securities, offers different risks and rewards with its “A” and “B” share structure. Investors in the “A” shares are paid the lower of the consumer price index (CPI), or 5%, but have a preferential claim to earnings.

The group grew its “B” shares dividend 25.12% in the six months to December, from 62.81c to 78.59c per share compared with the previous period.

On the assumption the “A” share dividend grew at 5%, the board expected the “B” share dividend would rise about 25% for the full 2017 financial year.

Stevens said Fortress should be able to replicate a similar performance in the second half of the June 2017 financial year.

“We have seen very strong returns from our offshore investments. I don’t see rand strength coming in the next few months so the euro currency boost we get from our European assets should continue,” he said.

The weakest performance in the group’s local portfolio was from its office assets.

“In a difficult market characterised by continued new supply and slowing demand, the office portfolio performed in line with budget. Partly due to the sale of two let office blocks, the vacancies in the office portfolio increased from 13.5% to 15.7%. It is anticipated that new lettings and renewals will remain a challenge going forward,” the group said.

Stevens said Fortress may sell some of its office assets, which make up 15.9% of its property portfolio by book value. Logistics and industrial properties account for 48.4% of Fortress’s property portfolio by book value and retail accounts make up 34.1%.

Meago Asset Managers executive director Jay Padayatchi said Fortress had impressed the market.

“These results and outlook have exceeded our expectations, especially given the difficult operating environment…. The logistics portion of the direct portfolio has performed admirably…,” said Padayatchi.

Fortress’s retail assets are rural shopping centres close to commuter transport nodes.

“The retail properties performance stands out, with 8.6% trading density growth over the year to December 31 2016, which places it above the recent sector average. This is especially surprising given the level of duress we know the retailers and consumers alike are under,” said Padayatchi.

Evan Robins, of Old Mutual Investment Group, said Fortress had released solid results.

“There was good trading growth in their retail centres but offices, not a major part of Fortress, remain challenged. Industrial properties, which are their focus, performed satisfactorily,” he said.