Long-suffering shareholders of Fortress Real Estate Investments, who have been deprived of dividends for several years, can finally look forward to some joy in their trading accounts.
Management confirmed last week that income payouts are likely to resume in March, when results for the six months to December are announced. Even better for dividend-hungry punters, management has kept its policy of paying out 100% of distributable earnings to shareholders, one of only a handful of property counters to do so.
It comes after more than 90% of Fortress shareholders approved the latest proposal to collapse the company’s divisive A and B share structure.
The two sets of investors failed to agree on several previous attempts to do away with the unpopular dual capital structure. Former proposals didn’t garner the needed minimum of 75% votes because each set of shareholders believed the share-swap ratio on offer unduly favoured the other.
The stand-off between A and B shareholders forced Fortress to withhold dividends, which ultimately prompted the JSE to strip the company of its real estate investment trust status.
The latest scheme, which will be implemented in late February, entails a buyback of all B shares in exchange for shares in East European mall giant Nepi Rockcastle, in which Fortress owns a 24% stake. Fortress B shares will be cancelled, while Fortress’s stake in Nepi Rockcastle will decrease to about 16%, equating to about 30% of its R43.9bn assets. That leaves Fortress with only one set of (former A) shareholders.
Analysts say most investors probably viewed it as a last-ditch chance to end the untenable impasse, which wasn’t in anyone’s interest
Some believed the deal was skewed in favour of B shareholders, but the deal nevertheless got the green light. Analysts say most investors probably viewed it as a last-ditch chance to end the untenable impasse, which wasn’t in anyone’s interest.
As independent property analyst Keillen Ndlovu points out: “There was fatigue in the market. There have been discussions, debates, arguments and failed attempts to collapse the A and B structure for almost five years.’’
So, now that the collapse of Fortress’s dual structure is a done deal, what are the key implications for existing and future shareholders?
Importantly, dividends can be paid without the previous impediment imposed by the company’s restrictive memorandum of incorporation.
“This is a big step forward in enhancing the attractiveness of our single share as an investment for investors seeking regular distributions, supported by solid cash-backed earnings, with a significant portion of those earnings in euros,’’ says Ryan Eichstadt, head of investor relations and corporate finance at Fortress.
Eichstadt adds that a single share structure allows the board to implement dividend reinvestment programmes and greater flexibility with regard to corporate action.
Ultimately, a single share provides better liquidity and a simpler structure, which Eichstadt says is likely to appeal to a broader range of potential investors. “All these benefits will have a positive effect on the company’s cost of capital, allocation of resources, earnings and operating performance,’’ he says.
The question is whether the stock in its new guise offers further share price upside, especially as both A and B shares are already more than 50% higher in the past 12 months. Nepi Rockcastle’s shares have rallied 24% over the last three months.
The market has mixed views. Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, isn’t convinced there’s much upside left, given how hard the shares have already run.
He says there’s still value in the remaining Fortress entity but adds that the share-swap deal means B shareholders have “extracted more than their fair share of the value”.
Tilly adds: “The higher debt levels after the unbundling of Nepi Rockcastle shares and low interest coverage are of concern and would necessitate more disposals, in our view.’’
Others are more bullish. Anchor Stockbrokers last week upgraded its recommendation on Fortress A from a hold to a buy. There’s a view that the A shares are still undervalued, given their 35% discount to NAV.
Ndlovu points out that Fortress’s NAV is in fact more conservative than most peers with offshore exposure. He says the company has made good progress in restructuring its underlying portfolio by significantly reducing exposure to the underperforming office sector in favour of logistics and retail.
He adds: “Fortress has developed most of its vacant land. It costs money to hold land, which they have turned into rental income.’’
But there’s one last catch: the fear that the market could be flooded with Nepi Rockcastle shares if former Fortress B investors decide to sell their newly acquired holdings in the rand hedge stock. That could send Nepi Rockcastle’s share price down, albeit perhaps only temporarily.
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