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Shareholder Cilliers says Fortress board has no other option, but to collapse share structure

East Port Logistics Park developed by the JSE-listed Fortress REIT. Picture, Supplied.

East Port Logistics Park developed by the JSE-listed Fortress REIT. Picture, Supplied.

Published Jun 27, 2022


Some shareholders are unhappy that Fortress Reit, the commercial property group that includes a large logistics portfolio, is planning to collapse its A and B share structure into one class of shares, saying that it is the only way to preserve its Reit status.

Business Report on Friday asked Albie Cilliers, an activist investment manager at Cilandia Capital, what he thought of the move after commentary on social media, which showed discontent about he planned move.

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On Twitter, social media users raised the issue that management was overweight on the A shares in value and questioned the board’s decision in light of incentives they get.

CEO Steven Brown holds 2 865 750 B-shares, but only 809 700 A-shares. The previous CEO, Mark Stevens, holds 28 593 185 B-shares, but only 13 501 115 A-shares.

The Passive Income Guy @hazelwood_dave, said, “For me ‘incentivised’ is quite simple – will you gain more if B-shares score. Therefore the actual shareholding is NB. Talking about incentive schemes is irrelevant and just a way to dodge the question.”

Upon the incorporation of Fortress and subsequent listing of the company in October 2009, the rights of the A class shareholders and B class shareholders were established and have been entrenched ever since.

An extract of the Fortress Prospectus October 2009 reads: “The ‘A’ linked units offer an attractive yield on a preferred basis, escalating at 5 percent per annum for five years and at the lower of CPI (consumer price index) and 5 percent thereafter.

“The ‘A’ linked units have preferential entitlements to income distributions and to capital participation on winding up. On listing, the annualised forward yield to June 2010 of the ‘A’ linked units is forecast at 10.75 percent and that of the ‘B’ linked units at 9%. Thereafter growth in distributions is restricted for the ‘A’ linked units and weighted towards the ‘B’ linked units, reflecting their different risk and reward propositions.”

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Cilliers on Friday said the Fortress board was trying its best.

“Fortress A shareholders are in a difficult position, but they need to think of their cash flow in possible distributions outlook, stay calm and consider the alternatives, of which there aren't many,” he said.

He said the firm had no other real options, but to collapse the share structure.

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The board had looked at other options, but these were seemingly rejected.

“ The time for shareholders to make their voice heard was back around 2015. This was the time shareholders should have applied their minds more carefully, not now” he said, referring to the Capital Conversion Circular of Fortress, where the new Memorandum of Incorporation was adopted.

Cilliers, said that the company would lose its Reit’s status and be liable to pay tax, while it would also need to keep capital to grow, which would lead to lower dividends for shareholders. Even if they became able to pay dividends to A-shareholders again, it would only possibly be able to become a Reit again in three years thereafter.

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This as the board last week said the complexity of the dual-share structure and uncertainty about the ability to pay regular distributions and maintain Reit status were hurting the market valuation of the company, by about 31 percent of its net asset value.

The board said the collapse of the dual-share structure and elimination of restrictions on paying distributions would allow them to pay a distribution and meet Reit obligations for the 2022 year, and would allow a six-monthly distribution cycle, paying out 100 percent of distributable earnings.

Post implementation, Fortress A and Fortress B shareholders may also benefit from a rerating of the Fortress B share, the firm said.

The board also acknowledged the divergent views of shareholders, but “the board considers it is incumbent on Fortress to make a proposal to shareholders that is an alternative to the risk of loss of Reit status that will be the result of shareholders failing to approve any solution at all”.