Fortress Real Estate Investments Limited (FFB) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to all the participants. Thanks for joining the Fortress Real Estate Investments Pre-Close Update. We are joined by Steven Brown, CEO; Ian Vorster, CFO; Vuso Majija, Executive Director as well as other members of ExCo. The format of this morning's proceedings will be an overview provided by Steven Brown. And thereafter, we will head into Q&A facilitated by myself. [Operator Instructions] I'd now like to hand over to Steven Brown. Steven, good morning, and thank you.

Thanks for hosting us. Yes, I'll just give you a little bit of an update on the market. We released our pre-close update yesterday with a focus on just some of the key operational metrics. I think what's been pleasing in the market for the last 6 months is the continued low vacancy rate in our portfolio, and in particular, in the logistics portfolio, which has 2 impacts, number one, it gives us good NOI from our standing portfolio, but it also gives us quite a lot of confidence in the developments. Probably 5, 6 years ago, the asking rental on these new boxes, and I'll just take [indiscernible] as a proxy for the country. [indiscernible] usually a little bit more expensive. But they were expecting roughly ZAR 60, ZAR 65 per square meter on the Eastern Euro boxes. But that's now risen to mid-70s, 80s, sometimes even a little bit more. I think Clairwood, we are asking ZAR 85. So we're definitely seeing a nice step-up in terms of the asking rental that we're asking, that our competitors are asking. So that is positive. Unfortunately, it doesn't reflect directly in a better yield because it's driven by higher construction costs. But that does protect our existing portfolio. So I think Bruce and the asset management team have been trying to get tenants to recognize this and ask for a bit more rental. Will that come up during the course of the next year or 2 in terms of higher vacancies? Maybe it will. Hopefully, it won't. But I do think that it's time to just sort of harden the line with tenants because as they go and look around, if the tenant is, for example, looking at renewing a 20,000 square meter box, which maybe they have been in for 5 to 10 years, and they go and look around for new premises, they're going to be probably at ZAR 80, ZAR 85 a square meter. So I think that does -- our existing portfolio is going to benefit from that. I think just in terms of what we're seeing and a few of the questions that we've had so far, the new developments definitely do have the step change. And I think that's what we're seeing a little bit this year and into next year in terms of everything that we've completed, the reason being in our distributable earnings because we don't capitalize interest in the expense. As we build a new building, let's just say, it costs, for example, ZAR 1 billion, we're going to be paying that out to the contractor and to the subcontractors. That's going to then be incurring an interest cost. But when it's completed and let that then brings us all in a line. And I think we are starting to see that step change coming through this year and next year, which is very positive. Next year, we don't expect on the development side that much to be spent. It is going to be significantly less, certainly than FY '23, a little bit less than FY '24 as we chew through that pipeline. But there will still be some. We still have projects as you'll see in the updates, some in Poland, some in Eastport, one in Clairwood, a relatively small one. And then hopefully, at the end of the year, we may be in a position to push the button on the last building in Clairwood. We're close to agreeing something with the tenant there, but nothing to report as yet. In terms of the disposals, what we've sold year-to-date, that yield, which we are actually getting in reality, if you exclude the Pick n Pay, that yield is 7.6% on our disposals. We then do price certain value as though it's fully let. If you take the fully let yield, it's 10% from what we sold, excluding Longmeadow, but these assets have been vacant for a while. So as we're selling the older industrial and certainly the offices and developing out the pipeline, it's actually marginally yield accretive because we are selling quite a lot of vacancy. And when we look at the held for sale assets, there is some land in that table. Obviously, that is costing us. That's the expansion of Teraco. Oak Avenue is let. That's probably about a 9.5% yield. Fourways is almost completely vacant. That's for a residential conversion. So I think we'll land up probably at about 8% to 8.5% on the held-for-sale assets, but we will report that at year-end. But I think that's part of the recycling process as we're trying to get a better quality portfolio that's going to give us more certainty of income as well as more growth. Just a couple of other questions that we've had, just we did get a liquidity facility a while ago with Standard Bank utilizing some of our NEPI shares. We still have all the rights and rewards of ownership. So we still have exposure to those shares. We haven't done yet. It was just as a bit of a backstop, but just to optimize our treasury and interest cost, and we'll put more of the detail in our year-end update, which will be for the year, 30th June, which will come out, I think, towards the end of August. Vuso, do you want to touch on a bit of the retail?

Yes. I think on the retail side, I think what we've seen is, yes, things are tough, but it's not all human terms. I think that that's a sole performing relatively well considering the macroeconomic system -- situation out in the country. Similar to what I said at half year, the grocers sold the outperformance, the value fashion, more men's apparel, home with liquor stores are still doing well. I think the guys that are struggling a bit are your hardwares and your gambling guys, and those type of tenants. But generally, I think it's better than what we expected. Hopefully, things will get better as the issues improve in the ports. And hopefully, later on in the year, we could get a reprieve in terms of interest rates, and that will improve customer confidence, but it's generally while okay.

Yes, I suppose we could -- what we've included is the '25 forecast and guidance for the remainder of this year, which we've indicated that we'll be sort of in the midpoint of our previously reported guidance, and then, we've included a normalized position for 2025 on the basis that in prepared in this year, we obviously did a scheme of arrangements in February, and that resulted in a net 53 million NEPIs being released to repurchase for the Bs. So for clarity purposes, we've included a sort of an adjustment to show what the normalized base would be when looking at next year's forecast. Yes, from a funding and liquidity perspective, we're in a pretty good space. We had some questions on specifically interest cover ratios and where they go to as a result of the scheme of arrangement. And obviously, with those NEPIs leaving Fortress in February, some of the income would have disappeared as well. So our historic interest cover ratio of around 2.3 -- I think it was 2.33 circa, comes off to about 2 in the current year, and then, it will bottom out and start to sort of move up, and that's mainly as a result of the new NOI that comes out of the developments during net of the sales. So we sort of forecast that it goes probably to 2.1, 2.15 from 2025. From the family perspective and in our lenders, we only have 2 lenders that are at that sort of 2 level and, of course, very comfortable given the state of the balance sheet and current distribution sort of methodology, and in that, it's cash back. So all in all, in a pretty stable position.

Thank you. Maybe I'll kick off with some questions. Ian, maybe we can stick with you. So in terms of the FY '24 forecast, I would say relative at least to our forecast in terms of what we've seen, tracking more or less in line with expectations. I think we're awaiting surprise -- positive surprise savings on the FY '25 outlook. Am I just unpacking the key drivers there? I know you sort of touched on the NOI impact. And because you're not capitalizing any costs as these developments commence, then you get the key driver, but maybe some -- I mean just to your sort of building blocks for that income in '25, we can start there.

So simplistically, that's what it is. You've got the developments coming on stream. Historic funding costs that were in the distribution and now you've got the development sort of yield in NOI that comes online, of course, that's negated somewhat by the sales because there's -- if you're selling a building that's fully let to, let's say, north of 9.5%, then it's -- then that works against you. But as Steve pointed out, at circa 7.5% and what we actually saw, there's sort of yield enhancement in that sort of washing machine of sales to developments to new NOI. So that's one of the drivers. Obviously, the standing portfolio, the lower vacancies, the standing portfolio, I mean the growth in the underlying base, that's secondary -- well, not secondary, that's one of the other drivers. NAV's forecast is out for the coming year. Of course, we don't accrue the income. We know what our earnings will be because we recognize the earnings on a cashback, so we match the cash in our distribution. So there's 2 drivers to that, the actual forecast plus whatever our swapped out rates like those forward points, so we can predict what those are. We haven't really forecast any benefit in the interest rate -- sorry, in the interest charge as a result of reduction in rates. We've sort of assumed that -- bear in mind that we hedge up -- we've got a hedge book of circa 80%, probably 77% as we stand at the moment. But a big portion of that is by way of caps, and those caps are so in the moment that even if there is some interest rate reduction, we don't yet hit the strike on those caps in order for us to be sort of better off. So we do see some benefit if there is an interest rate reduction in the floating component of the book. But for the time being, we haven't really included that in the forecast. Of course, we now -- we do have a tax charge that comes through in the normalized tax position, which is -- and forgive me if I'm vague on this, it's quite a difficult one to forecast because we've got a number of moving parts in the business, specifically things like unrealized gains and losses on our [ FECs ] and so on. But if we park those, the normalized position is going to be somewhere between ZAR 60 million and ZAR 80 million on a normalized run rate sort of basis. There's still some scheme -- sorry, still some of the REIT to non-REIT effect still washing through on the tax line that work in both directions from what we had previously provided. But that should hopefully normalize once we get to 2025 and then we get to like a sort of -- that sort of run rate, and we carry on. Those are largely the drivers in the forecast. I don't know if you want to elaborate even below that level of detail, I suppose, in the portfolios, Steve, in this regard.

I think what we see when we do the budgets is Vuso has done a great job on getting rid of the underperforming retail. The offices will -- if we complete these held for sale, we will be circa 2% of our total asset base, so it's also quite low. And we've got the new developments, which have got the contractual escalations. So I think all in all, it's starting to look a lot more robust, and there's fewer holes. Obviously, if vacancy spikes for some reason, we'll fall behind, but it's not something that we're predicting. And I do think the fact that over the last 5 years, we've sold about ZAR 7 billion of assets, those have largely been lower quality. So that's starting to come through in more solid growth prospects.

Maybe, Ian, just going back to the point on that, sort of cushion for '24 in particular is when we see this sort of positive and negative impacts as you sort of transition [indiscernible] it can be more, so I would assume that the outcome would be higher, slightly higher than the normalized number that you...

No, I'm not expecting that it will be. When we speak about positive and negative, it's relative to the prior period. So if you isolate the tax for this period, I think it's almost exactly where we anticipated it will be caveated with we're not sure exactly what happens to the rand, euro at 30 June because that's one of the moving parts. If you back that out, it relates more to historic provisions that we would have taken during the time that we were transitioning. And those were items that we would have to see where ZARs had landed once we had sort of put the returns through the assessment process and so on. And to date, we've been pleasantly surprised. We've worked well with ZARs to get through most of that. So there might be some normalized or some of it is coming through on that front. But on that, even if we isolate per year, 2024 to 2025, the normalized position is probably between ZAR 60 million to ZAR 80 million. And the reason that I say, it doesn't really move period-to-period is that -- remember the -- relative to our distributable earnings, the net income component of our earnings is the exempt component. So it can move, but the tax charge relates to the DSV business. So it's -- that's pretty predictable outside of the FEC position.

And just a final question on that. So you're benefiting from sort of accumulated losses or...

No. So there would be some of that in the underlying business as a big driver in the reduction of our taxes, the developments in that and the -- and again, this isn't an accumulation of development allowances that we've taken. It's -- whilst you're a REIT, you are not allowed to take the development deductions or the development allowances. So once we flipped from being a non-REIT to a REIT, it says if you have those developments, but they are standing development. You don't take everything that you historically haven't taken. You just take the steady state and carry on. So that's largely the big driver of the reduction in the SA portfolio. It's actually because that's where the developments are historically set.

And then the specific question I have is just on that -- on those tax allowances. What is your run rate? For how long could you have those...

Yes, 15 to 20 years, specifically on the development items. We also have started making use of the sort of normal wear and tear allowances. Those vary, but in terms of quantum, they are not as material as the development business. We've developed circa ZAR 7 billion, of which ZAR 5 billion, probably ZAR 4 billion to ZAR 5 billion went off to ZAR 5 billion is the top structure components in which these allowances are being generated. And as we continue to develop that part of development -- sorry, part of allowances continues to get bigger. But obviously, that sort of shifts to the right because you're taking a piece as you go. So yes, we still got a fair amount of runway on the net trends. The other moving parts are not that material other than we enjoy an exempt income on the NEPI difference that we receive. Of course, NEPI has been returning capital. So it will be -- it wouldn't be a taxable return in any event. But setting that aside, it's still in the -- it's in our world, and from an SA perspective, looks like a nontaxable income amount.

And just from a leverage perspective, so you quote an unencumbered ratio, I think just slightly lower than 50% in the announcement, so arguably sort of just below 40%. In terms of levels of comfort and flexibility from a financing perspective what's your view on it?

We have a very different balance sheet makeup to a lot of the other listed property companies and the fact that we've got ZAR 14.5 billion of NEPI shares, which are very liquid. So could we, on a risk-adjusted basis, run more leverage because we have a very liquid asset up, I do think so. But that being said, I think we can't get it up. If we look forward to next year, I think that our sales compared to our development spend on the pipeline, hopefully, the sales will be a little bit ahead of the development spend. So I think that will probably reduce it. And let's see where we will end up with valuations, but we're expecting a little bit of a marginal uptick. We don't know yet, but -- at year-end, but I think NOI has grown quite nicely. And I think last year, at this time, the market was a little bit unsettled with global interest rates and where we're heading. Whereas now, I think it's a bit more -- it may not have moved that much, but it's a bit more predictable, so -- and I think the direct market -- the valuers have got evidence in the direct markets. I expect that to be a little bit up, which will obviously reduce the LTV. But I think at the moment, we're pretty comfortable with where we are from a funding and leverage perspective.

And in -- I mean one of the questions that have also come through, and again, something that you have alluded to for some time is the sort of valuation and what you need to be obviously a discount. In terms of market prices, we have narrowed this business. Maybe if you can elaborate on your thoughts around how to unlock that discounts you may have.

Sure. Yes, I think the discount to NAV, and we've got this big NEPI shareholding, so in theory, it could be just give all the NEPIs to the shareholders and unbundle everything. Theoretically, we could, but then on hearing we got 57% to reach our bond covenants, to reach the bank covenants. And I think we'll then have a difficult company to manage where we beholden to the lenders, and the lenders start to then price the risk and that eats the equity. So I think -- I don't think that's a prudent way to go. And I think all in all, the shareholders will be worse off. I think what -- something that we have explored is potentially we could. Because we aren't a REIT, it would be quite easy for us to use some of the NEPI shares. Dividends, that's something that I think if the climate is right, if the share price is right, we could use some of those NEPI shares to dividend that out, keep the cash, maybe return some value to the shareholders. So that's one option, which we could look at. But I think, as we roll out the pipeline, hopefully, the yield will increase. And I think the market will hopefully normalize and reward us for that. But we definitely are longer term looking at what we said, which is our 3 components of the business: logistics, retail, NEPI. And I think we've been a big proponent on specialization over diversification. We presented at a conference a few weeks ago, and Nareit came out with quite an interesting graph, which was the returns, 2016 to 2022, of all of their subsectors in North America. I think -- I can't remember the exact order, but it's probably data centers, telcos, industrial, retail, somewhere in the middle. Office is a little bit negative. The one big negative one was diversified. You would think diversified would naturally be somewhere in the middle of the rest of the subsectors, but it's not. So I think, again, that just speaks to where you aren't focused, you aren't specialized, you're probably going to be average at everything. So we need to focus on retail, focus on logistics. And NEPI is obviously a big business and very focused on CEE retail. So I think in the fullness of time, we hope to get more specialized, but that needs to be done in a prudent way where we don't have too much leverage sitting in the various portfolio so that we do the best we can for shareholders.

Vuso, let's come through on the retail side. Could you please elaborate on the decision to sell some or all of the high street CBD assets?

Yes. Look, CBD retail generally performs well, and we've got some pretty good retail centers there. Basically, like Park Central, Central Park, which we will keep. I think there's a smaller portion of smaller assets that we want to sell, which is the high street. I think when I counted there's about 5 of those assets, 2 of them -- while 1 is already sold, the other one will transfer now in June. So we are left with 3, and all of them are small. I mean, they're all less than ZAR 100 million each. So it's a small component, but we just want to clean up that portfolio and focus on the -- call it, the improved and slightly bigger shopping centers and CBDs.

Okay. And then a follow-on question from a retail perspective. Do you mind just talking us through the Pick n Pay strategy within your portfolio, your exposure to corporate versus franchise stores as well as exposure to Boxer versus Pick n Pay and sort of the proposed conversions going forward?

Yes. So we are more exposed to Boxer. We've got about 9 boxes at the moment. And on the Pick n Pay side, we've got 6 Pick n Pays, and 2 of those are franchise stores, which are performing very well. One of those stores, 1 of the 5 stores -- 1 of the 6 stores will convert to a Boxer. So at the end, we will be left with 3 corporate stores, which I'm not -- which they haven't -- in our meetings with them, they haven't indicated that they want to give up space or they want to close any of those stores. So we'll probably remain with those 3. Pick n Pay, I mean it's about 2% of our rental. And I'm not too concerned about them because in our portfolio, they're not bad -- those stores are not actually bad performing. So even if things were to go bad, I'm sure we could find replacements of the stores.

And then I mean what we've seen in terms of Pick n Pay relative to other grocers, we have seen a stark underperformance. Do you mind -- or can you provide any color in terms of the performance within your portfolio and what that sort of difference is in terms of tenant gains, if you can?

I can't go into detail. But yes, it has -- well, the corporate stores have been underperforming relative to their competitors. I do think, though, with the new management and the way that they're approaching it, I do think that, that would improve. And they will probably have more focus in terms of operations. They have split it up back into what it used to be into regions. So I think there will be a lot more focus on the operational side. So I expect that to improve over time. So I'm confident in them. Having said that, as I said earlier on, our exposure really is to Boxer, which is performing very well compared to opportunities -- competitors, yes.

Okay. And then just touching on the KPIs in terms of [indiscernible] improvement. We see the contraction in the versions over time. I mean can you speak to your expectation of those sort of KPIs going forward just given sort of the press reports that we are seeing coming through from a consumer perspective?

I think in terms of vacancies, I don't expect vacancies -- I don't expect any sudden or major changes in terms of ruling out vacancies. I think it's low. And most of the tenants are performing well. There are 1 or 2 tenants that are in business, basically, I mean, we are expecting businesses, but we've only really got one of those. So we don't expect to see major disruptions in terms of tenancy. So I think the vacancies will remain where they are, slightly up or down, around that range. In terms of value creations, I think even though the turnover seemed to be growing nicely, I think there's still a lot of nervousness within us in the economy. And so I expect reversions to remain in the low digits positive, somewhere around this. So I think what we've seen would probably remain for the next year or so.

Okay. There's a question that does come through, Ian. Ask Ian about any upcoming refinancing requirements, maybe if you can shed some color upcoming refinancing?

Yes, business as usual. We do have some maturities towards the end of the year. In August, we've got a note that expires. Maturities, we'll be repaying. We placed ZAR 900 million earlier in the year at much tighter margins than we've done in the last sort of 3 years. That's been a consistent theme. There seems to be a much better risk assessment of Fortress actually following the scheme of arrangement. And I'd argue it's not quite where it should be. I'd like to see tighter pricing in that market. We have indicated to that market that we will now become a consistent place at marketing. Historically, it was very difficult for us. We were a REIT paying a dividend, not paying a dividend. There was various sort of implications to manage the treasury that couldn't really foresee it very easily. That's changed. So yes, business as usual. We sort of engage with the banks 6 to 9 months in advance of the refinances, get credit approval along the way, but really only pull the trigger very close to when they would mature because we don't like to pick up sort of where a raising fee that we've already paid for, for say a 3-year period or 4-year tenant and pick it up 3 years into to really refinancing this. And this, of course, it makes absolute sense in the pricing. Yes, we expect to see tighter margins and continued appetite, which we experienced in both the DMTN and in the primary lending market.

Just 2 further questions on debtor. I mean, where is the debt mix sitting now in terms of SA versus those all versus your debt completely where it was at interim?

Well, it's marginally up on interims. I think we had indicated that we had -- that outside of the in-country ring-fenced specific debt to the Polish and Romanian assets that we acquired. We had overlaid a EUR 50 million facility where we've been drawing against it to develop there. We had drawn all but, I think, about EUR 25 million, so half of it second half year and that's about done by 30 June. So there's been an incremental EUR 25 million borrowing in this period. That's the extent of it. We haven't introduced any cross-currency interest rate swap, so there's no synthetic or other direct or indirect euro funding in that.

Is it euro [indiscernible]?

It's quite low. But including our new facility, probably 40, definitely the direct assets were very low, and we've continued to develop in those developments. So those were sort of sub-30 actually post-acquisition to now with that new overlays, it's probably around full.

Can you provide further detail on the funding structure or the facility that you have in play from the sort of NEPI perspective? I mean, are there any specific, let's say, margin benefits if you were to compare that structure relative to sort of conventional debt? Maybe just the strategy behind putting that sort of -- or having access to that liquidity going forward.

Yes, there would be some marginal benefit. But we -- firstly, we haven't drawn on that facility as yet. And I think we'll provide a fair amount of detail on it in the future. It is not dissimilar to what we've done previously.

There's another question that has come through. You mentioned that Fortress intends to be a more frequent issuer in the bond markets. How frequent are bond issuances are likely to be?

So our plan is to place twice a year, and that would coincide, again, as we've mentioned to the market previously, that would coincide with interim and final results. So sort of post-March and post-September. Yes.

There's a question that has come through with respect to REIT status, views on reapplying for REIT status.

I think we've sort of said it in the past that it's something that we need to monitor and when our -- the income tax between us and the shareholders is getting something that we think there's a mutually beneficial reason for reapplying for REIT status, we'll certainly do that. But at the moment with circa Ian's forecast of ZAR 60 million to ZAR 80 million normalized tax, I don't think it makes much sense. Also then I think the problem is that the REIT status then restricts you in terms of -- for example, if we wanted to use some maybe shares to pay out the dividend, I think it might be difficult to do that. So there are certain restrictions that it would place on the business. And I think as long as we can be very efficient for tax, that's the reason you do it, right? So you do it [Audio Gap] certainly for -- if we carry on like this, I don't think there's a benefit in becoming a REIT.

Yes. All of this we might talk about in a bit. A few questions coming through here. There's one question that has come through, appetite for share buybacks.

Yes. I mean, as the price keeps jumping 5% a day, as it has done earlier, yes, it's certainly on our capital allocation list, but the last 2 months have been interesting, just sort of got down to 14 and now it's close to 17 yesterday. It's definitely something that I think we have done in the past, even before the ZAR 7 billion buyback, I think we were probably one of the REITs that had bought the most shares back. And now out of the SA-listed property companies must be final way, but just 14 companies bought the most shares back by a mile, having bought back, I don't know, probably ZAR 8 billion or ZAR 8.5 billion over the last 5 years, and I don't know the exact number. So it's always there. But I think it needs to be opportunistic and need to sort of weigh it up. And then, it's the executability and the size. I think it's -- make these very liquid. Unfortunately, the Fortress' shares are not quite as liquid, so to do it in size and in scale and make it meaningful is more difficult on the execution side, whereas on a spreadsheet, it looks fantastic in the real world. I think it might be a bit more difficult, but it's definitely always on our wheel.

I have a follow-on question to that. I mean, if you were to think about capital allocation, few buybacks obviously been something or a consideration. I mean, maybe just rank the pecking order just given your opportunity set and your cost of capital, just put it in a cycle?

Look, we -- I think I have been consistent that we think that we will really lose value in the logistics parks if we don't complete the development that is in our land bank currently. In other words, completing Eastport, Clairwood, Longlake, maybe a little bit of [ Dromex ], I guess. And we have to do that. Otherwise, you're going to devalue those parts if you've got large vacant plots sitting there for years. So that's something that we need to do, and we need to defend. But then by defend, I mean protect, enhance, perhaps extend our core REIT. So those were the 2 authorities from a portfolio perspective. And I think post that, buybacks are there, but we would also likely get our debt down because that enables then a lot of the other value unlock opportunities that we see slightly further down the line. But I think we'll remain opportunistic within our specialist portfolio should an opportunity arise. But I think if we had a much stronger balance sheet, certainly the value and a lot opportunities become more real.

Can you elaborate a little more on the sort of debt reduction strategy or plan further down the line? Where do you think the optimal debt reduction is for your business? And how do you intend to achieve that?

I mean, if -- today, as we sat here, if our direct portfolio was geared at, let's say, 35% to 40%, which it isn't, it's closer to 60%, then we could certainly unbundle all of the NEPIs. It wouldn't be an issue. We just aren't there yet. So I think through the passage of time, that probably gets slightly better as we sell. As we bring the developments online in the portfolio, quality grows, whereas the overall size may actually shrink a little bit. I think that quality should hopefully then come through in value uplift over the next 3 to 5 years.

I mean you touched on the -- you made the point that you expect your disposals to exceed your development spend in FY '25. Can you maybe just quantify the sort of capital outlay from a development perspective and where you expect...

Yes, I think we're probably, I mean, estimating about ZAR 1 billion coming for this year to -- when we look at the forecast, and we're hopeful that we can sell ZAR 1.5 billion. But outside of the held for sale, that's a 0 base. So we have to see what the next 12 months holds. But as we've seen, our sales are very sentiment-driven, so with the positive sentiment circulating in the country at the moment, hopefully, that will get better. And if there's an interest rate cut, that certainly makes our life easier. That being said, South Africans have got an amazing affinity to property. We like to own it. We like to buy it. And fortunately, our strong banking sector still facilitates a lot of that. So even though it's been a pretty tough 12 months from an interest rate perspective, from a sentiment perspective, we still managed to sell a lot of properties. And I think you have -- why is that? It's because the properties we're selling are right size, ZAR 50 million, ZAR 100 million, so you can sell them. They're fairly valued, and they're good quality. So I think that does make our sales process a lot easier than, for example, selling these very big assets where there's only 1 or 2 players with that quantum of equity.

In terms of your growth outlook, given your accounting treatment for capitalized interest, the fact that you have experienced it, then it's sort of a lag impact, obviously, when the income comes out to sort of fill that out. I mean, if you were -- and something we discussed before -- if you were or if there was a big development, in fact, on Super Group, certainly negatively impact the sort of growth outlook. I mean what's your view -- how aggressive are you in terms of looking for opportunities out there in the market in the form of RFPs? What do you think the impact of the reduction in interest rate is going to be in terms of potential opportunities coming to the market? And how do you sort of take off, one, the opportunity or the ability to continue to roll out these developments versus just looking at the earnings profile? Or is it not clearly, I would say, a decision that you take sort of yet in together? I mean, just...

Yes, I mean -- the big RFPs, we'll always look at. Where it requires us to take on new land, I think we need to be strict with that capital allocation versus the land that we've already got. I think that's 2 different -- slightly nuanced different decisions. But we always look at that. I think we have a preference for the pre-let deals, I suspect. But if we needed to complete, let's say, a smaller box at Eastport or something like that, expect something that we've done where the market is right, and we can understand it. I don't think we've ever shied away from that. Otherwise, you end up waiting forever if you're just waiting for the right pre-let deal you may never develop it and then -- and the time, value of money, when you've got these assets that there's a significant holding cost doesn't help. So we've always looked at it like that. I think in terms of the capital market paying out the capitalized interest or -- we're paying the bank interest, not adding that back to the distribution is just -- it's just financial theory. We want to compound our assets. We don't want to compound our liabilities. Where you are borrowing to pay dividends and you're compounding your liabilities over time, it's going to end that. So we stopped doing that outside of a gangbusters market, which is growing where you can capitalize interest on the land and the land is still increasing in value in excess of that capitalization. Well, that's probably okay because you're not sort of misstating your assets. But in a market, which we've seen in South Africa, and we don't expect to change overnight, which is relatively flat land values, low growth, I don't think we want to be compounding our liabilities. And we certainly don't want to be compounding our liabilities when interest rates are at a 2-decade or a 4-decade high in the U.S., it just doesn't make financial sense. If we found something that made sense and it was going to hurt the distributable earnings number for a period, we just have to communicate that to our shareholders and to the market as to why we think that's a good idea. I'm not saying we have anything on the cards, but that's just been our sound principle. It may be more conservative than most, but I think it keeps the balance sheet in a steady state and -- borrowing to pay dividends just isn't something that we think is wise.

And what is the value of non-core assets still to be sold? Can you give...

About ZAR 1.5 billion. I think roughly there. Yes. Maybe a little less with these held for sales...

I mean, if I think about your strategy to deduce the image of new business, I mean, how do you view the potential to dispose of, let's say, your modern spec buildings in the portfolio to the likes of a pension fund, where you can still continue to manage the property, et cetera, but you do unlock capital in that way? I mean, these holdings, particularly the logistics assets that deemed to be in mid-sales quite well to sort of being that additional type of grade as something. Is that -- does that form part of your strategy to gain leverage?

Yes. I mean I don't think we have a specific like delevering strategy per se, but we would always sell assets if we got a good price. I think selling to a pension fund in a big headline deal seems to be what everybody is talking about, but we've been doing that for years with the tenants. And to be honest, that is much easier, much lower and actually gets us a much better return. So if I take, for example, the WAG deal that we did at Louwlardia, we developed it for them at a 9.5% deal, they bought half at 8.5% on completion. I think another 7% or 8% escalation -- I think, 7%. Yes, 7%, we then got to 8%. So that borders the 8.5%. We were then getting 10.7%, 7% escalation, and then bought the other half also at the pre-contracted or the contractual pre-agreed 8.5%. So that got us 22%, 23% return on that asset. That is great for us to recycle capital. And I think the owner-occupiers are always such a good partner to have as opposed to a co-investor because they're in the building, they look after it, they're there, and they look at probably more of a replacement value than a yield. So we have been doing that. I think that gets us -- that's a much better model for us than trying to sell to co-investors, which is slightly more complicated, and they often have different opinions to us because now you've got 2 investors and the tenant whereas when we do a JV with the tenant, it's sort of the tenant and us. So yes, it's certainly something that we can look at, that we have been looking at, but the tenant JVs are sort of -- I think, kind of happy hunting ground and a bit of capital recycling at a profit.

There is a follow-on question on NEPI. What's the minimum stake in NEPI that you would hold in lieu of possibly using NEPI as scrip for dividends?

So I mean, we don't have a set minimum. I think we really like the business. And as opposed to outright sales, we've said -- just given our outlook for the business, the fact that it's giving you an 8% to 8.5% euro yield on the dividends, which is only 90% of their total earnings, we would rather give that to our shareholders. Below 10% is if they pay a dividend, we then would suffer if someone's holding tax, possibly in the Netherlands. Above 10%, we can get a dividend without the holding tax. So for this period, we elected a dividend, not a capital return because it's better for us from a tax perspective. Yes, so there's some sort of set minimum, but we have ZAR 14.5 billion. So even if we didn't, say, for example, give some of it to dividend, that wouldn't really change our shareholding materially. Yes.

And just your view on NEPI sort of taking cash versus reinvesting and supporting the business from a capital retention perspective, thoughts on that?

Well, we have been taking quite a lot of script. I think the last year, we took -- a ton, yes. This period, they didn't offer a script, but if it's -- I think we look at that as a decision at that time, either we're getting cash or if there's a discount, then we can get the script. That's also fine. It is a fair way of them raising capital because all the shareholders can participate equally. It's not like they're going -- issuing at a discount to a third party. So I think it's a fair way of them raising capital. But at the moment, that business is on a -- I mean, the performance is really, really strong. I think you can see that in the operational update that they released, and -- yes, and we like it. We think there's a lot of runway there.

We saw it from the Pick n Pay exposure from a retail side. Maybe just touch on the sort of recently commissioned Pick n Pay assets. Do you have any concerns regarding sort of reutilization levels are? I mean, what is the potential to potentially sublet, to sublease that building should Pick n Pay need to reduce footprint?

That's something that I think they would do. And I don't think we would stand in their way. If they feel it's too big for them, they can sublet it. As we said, it's their core operational asset. I've referred to it as the heartbeat of their business. So we face Pick n Pay, I think for the sort of -- the planned rights offer and box unbundling, I think, will only help our creditors there, but it's -- I can't see a world in which they don't pay us the rental whether that's underutilized or not. If they wanted us to assist in finding potential subjects for them, we -- obviously, we did help, but that risk is there.

Are you considering any acquisitions in retail in SA?

I think we're always looking. We haven't really found sublet interest as yet. I think a lot of people are holding on to their good assets, and the prices, yes, it has gotten a little bit better, but I don't think, it's where we would like it to be. So yes, we would consider buying if it was attractive.

Where would you -- I mean, if you could allocate capital, I mean, what are the types of assets, either location or type that you would be looking to sort of increase the exposure to?

So we like the space that we play in, our stated space where it's convenience and also the commercial market, we keep that, probably go for not the bigger assets. We'll probably go for ZAR 20,000, ZAR 25,000, probably not much more than that. That sort of signs goes there. I think we're finding that, that model is quite stable from [indiscernible] point of view and performance point of view.

[Operator Instructions] Yes, from our side -- sorry, there's another question that has come through. Beyond Pick n Pay, are there any other retailers which you are concerned about?

I don't think we're concerned about Pick n Pay. Yes. No. I mean what they've done with the business with Boxer with the write-off, we've not still got ZAR 100 billion of turnover. So I just want to put in there...

So maybe asked differently, we have all the pressure points from a tailwind perspective.

To be honest, look, we don't see many of those pressure points. I mentioned earlier on, obviously, [ West Packers ] in business ratio, when you got [indiscernible]. We don't have any other tenants that are sort of in the business ratio. I mean, we all know what's happened to the post office, but I think that's in the base number that happened last year. So we've closed all the post offices in the portfolio, and that's been coming for us for some time. No real tenants quality on a watch list at the moment.

Yes. There are no further questions that have come through. I've dealt with all my questions. Maybe I'll hand it over to you, Steve, for any closing remarks or anyone else, obviously.

Yes, thanks. I mean, I think it's -- we came out with our guidance all year end, which is a first for us. Usually, we wait until August, September. I think we just wanted to point out, given all the changes and the huge buyback we did in February, the scheme of arrangement is what sort of what this year looked like because this wasn't a normalized base and off the normalized base. So I think you can see that the growth is coming through. And it's been interesting to see over the last few years that the NOI from our directly held property portfolio has gone from ZAR 2 billion to almost ZAR 3 billion forecast for next year. So I think we're getting a lot more stability of that income with focusing on retail, on the logistics and then keeping our NEPI shares on one side. So I think the business is in a much lower risk space than I think it was certainly 5 years ago when we held a lot more listed counters. Yes. And I think hopefully, the country does well and the interest rates come down globally, and I think it will be a good year for us next year and the year thereafter. And I think our yield post tax is still looking yield discount and now still looks quite attractive. I often said that the buyers of our assets maybe should look at buying our shares a lot cheaper than buying this building. But they have an affinity for over-leveraged, directly held assets. But no, that's all. Thanks, media. Thanks, everyone.

Thank you to the Fortress team, and thank you to the participants for dialing in. If there is anything that you missed, session has been recorded. So kindly reach out, and we can make the recording available. I think we will close the session. Thank you very much. Enjoy the rest of your day. Goodbye. Thanks, everyone.