Fortress, the listed landlord which owns logistics properties as well as commuter retail centres in towns, looks set to become the first real estate investment trust (Reit) to lose its Reit status, hopefully temporarily, for not paying dividends.
Pension fund and other money managers initially invested in Reits because Reits were reliable dividend payers. The rule in SA is that Reits must pay at least 75% of their annual income as a dividend. This is attractive for pension funds who can then ensure that their clients who tend to be older people, get paid income regularly. If a Reit failed to pay dividends, it was failing the mandate it had agreed with its investors in the first place.
But Fortress has let down its investors by missing the boat. More specifically, Fortress won’t have enough cash to pay its B-share holders after it pays its preferential A-share holders first. The fund has an A-B share structure that serves investors of varying risk profiles. A-class shareholders are paid dividends from available profits first. B-class shareholders are entitled to residual distributable income after distributions to A shares with the idea being that the B shareholders’ return has no limit. But in lean times, B shareholders look set to miss out as is the case now. Fortress has also been proposing a simplified single share structure as it battles to make commitments.
“This is the case for the most recent financial year. If Fortress had a single-share structure, it would enable the payment of dividends to shareholders. It remains the view of Fortress that a single-share structure with Reit tax status is the best outcome for both the company and its shareholders,” the group said in a statement.
But one has to ask why Fortress is complaining? The A-B status suited it well pre the Resilient scandal when it rose billions of Rand in capital, and grew rapidly, constantly rewarding its management. In terms of the scandal, Fortress and Resilient had a cross-shareholding and benefited from related party deals, used to pump profits. Some investors felt their profits were fake as a result and dumped their shares.
Fortress has been through a pandemic and is battling through a poor economy and now its investors will lose out on a reason they invested in it in the first place. Hopefully, the company can improve in the coming months.
“As a result, Fortress currently does not have the ability to comply with the minimum distribution requirements as set out in the JSE Listings Requirements pertaining to Reits, which requires a dividend to be declared and paid 4 months after a Reit’s year end. In the case of Fortress this date would be 31 October 2022. Fortress, as a prudently managed business, cannot risk non-compliance with the JSE Listings Requirements, and is engaging with the JSE to ensure that the process is well managed,” it said.
Could we see other property funds losing their Reit status? Time will tell.
Picture: Steve Brown CEO of Fortress, supplied by Fortress