Fortress Reit, the JSE-listed logistics and commuter retail landlord could lose its real estate investment trust (Reit) status by December, making it the first major property fund to do so.
The JSE on Wednesday announced it had extended the deadline of Fortress Reit to submit a compliant Reit declaration until the end of November. Pensioners have relied on Fortress to pay them regular dividends as is typical of property Reits.
The JSE’s listing requirements prescribe that a Reit must pay out at least 75% of its distributable profits as a dividend within four months after the end of its financial year to keep its status. Since the Reit dispensation was adopted in South Africa in late 2013, most Reits have paid out at least 90%.
Fortress has not submitted a complaint Reit declaration. It argues that it remains constrained by its dual AB share structure, which was designed to appeal to investors with varying risk appetites.
A shareholders are paid first, of the lower of 5%, or consumer price inflation, while B shares receive the remaining distributable income. When times are tough, B shareholders receive relatively little in dividends.
In June, Fortress proposed a share exchange to shareholders. Fortress offered to exchange each A-ordinary share for 3.01 B-shares, but the required 75% majority vote was not met at the August meeting, leaving the company no choice but to withhold dividends.
If Fortress loses its Reit status, it will become liable for tax. One reason it became a Reit was to avoid paying taxes on it profits. As so a large proportion of these profits was paid out as dividends and taxes lay in shareholders’ hands. Shareholders were happy to invest capital into Reits like Fortress in the mid 2010s in search of dividends.
Fortress said that if it did obtain the requisite shareholder approvals, it would only be in a position to meet the required minimum distribution payout in January 2023.
The threat of losing Reit status is placing pressure on Fortress’ executive management who could lose their jobs over the debacle.
Fortress, however, may not be the only Reit to lose its status in 2022 or 2023.