January 24 2022
The listed property group is no longer a Reit and investors are in the dark about what the company wants to do strategically as a result.
Fortress, the listed owner of logistics parks and commuter retail centres is no longer a real estate investment trust (Reit) but it isn’t falling out of favour with the commercial property sector’s investor base just yet as there hasn’t been a sudden mass sale of its shares.
The group lost its Reit status earlier in January after it lost an appeal against the JSE’s decision to strip it of it, as it battled for months to win the approval of shareholders to collapse its dual-share structure.
The change will take effect in February, but Fortress will remain a listed company with its existing share structure.
The A-B share structure has been a feature of the company for years, with Fortress having been listed in 2009, and was designed to give investors with different risk appetites options. Fortress used to declare A and B share dividends. The A shareholders would be paid first but the growth in their dividend would be capped at a set percentage or the prevailing consumer price inflation rate, whichever was lower. Then if there was distributable income left over, Fortress would be able to pay its B shareholders a dividend and the growth of this had no limit. Its A ordinary shares and B ordinary shares have equal voting rights.
The dual structure suited investors when Fortress was enjoying a strong performance. In fact from around 2012 to 2018, listed property funds had a very good time. Capital was relatively easy to come by and he cost of debt was fairly low. But things have soured. Fortress lost much of its value in 2018 amid the Resilient group scandal. Fortress and Resilient were intertwined through cross shareholdings and related party deals. Shareholders shorted Resilient’s, Fortress’ and other companies in the group’s shares and pensioners lost billions of Rand. The Financial Sector Conduct Authority (FSCA) investigated and no directors within the groups were found guilty of any fraud or other criminality. The cross share structures were collapsed.
Now in 2023 we find that Fortress has been unable to guarantee its investors dividends. This is concerning as pensioners are the people who find their money invested in Reits as they live on regular income payouts like dividends. Reits are supposed to pay a minimum of 75% of its taxable earnings available for distribution as a dividend annually within four months after its year-end. This stipulation is in the listing requirements of the JSE for property companies to remain Reits. Reits do not incur tax when paying a dividend as the dividends are taxed at a shareholder level.
Fortress specialises in the logistics and retail property sectors in SA and owns premium logistics assets in Central and Eastern Europe. Now it looks like it is becoming a growth focused stock.
Fortress had said on December 7 it had lodged an objection to the JSE’s decision. The JSE said it would await the outcome of the company’s general meeting with shareholders last week. At the meeting, shareholders again voted against getting rid of the share structure, and informed Fortress about its decision on Thursday January 19.
A large portion of investors also voted against Fortress retaining its CEO, Steve Brown. As long as Fortress remains listed, shareholders which stick with the company will want to see improvements and a clearly defined and communicated structure.
alistair@propertyflash.co.za