Late on Friday, Redefine Properties (RDF) published its long-awaited dividend announcement for the year-ended August 2020.
You can find the full announcement here: LINK.
A Real Estate Investment Trust (i.e. “REIT”) has some special privileges and they come with some onerous requirements. If you don’t satisfy the requirements of being a REIT, you lose the privileges of being a REIT.
Most notably and relevant in Redefine’s case, a REIT has to distribute at least 75% of its distributable earnings to shareholders.
It is also pertinent to note that a company with REIT status has this status tested once a year (by the JSE, I believe). If the REIT fails this test on any single criteria, it then loses its REIT status and all those attractive privileges disappear with some material consquences.
Let me summarize Redefine dividend announcement for you:
- Redefine currently passes its short-term liquidity requirements, particularly after its lenders have temporarily relaxed its covenants (loan-to-value or LTV ratio lifted from 50% to 55%),
- But, if something bad happens in the next twelve months, then Redefine may not pass these requirements, &
- Thus, the Board is not going to distribute any distributable earnings to shareholders, and
- The Board still believes that Redefine Properties complies with the REIT rules and should keep their REIT status.
By virtue of the fact that Redefine’s announcement does not specifically say otherwise, it is quite clear that this rather creative interpretation of the REIT rules has not been signed off by the JSE.
Hence–despite the argument by Redefine’s Board to the contrary–there is a very real risk that the JSE disagrees with this. And, if the JSE really does disagree with this, then Redefine has breached its distribution requirements and Redefine should be stripped of its REIT status.
Redefine’s argument revolves around an uncertain future that may (possibly) lead to a breach in covenants. While the world is certainly risky now with COVID, lockdowns & other known-unknowns, the world has never been risk-free.
The future has always been uncertain and, thus, it could always turn out to be bad!
Thus, Redefine’s argument that an uncertain future is sufficient justification to not declare a dividend is akin to making the distribution of a REIT basically discretionary.
I.e. Because the future is always uncertain, therefore REIT can always skip their distributions, irrespective of their factual circumstances right now.
And, thus, this leads me to one of two opposing conclusions:
- Redefine’s REIT status is at serious risk of being lost and, thus, material negative financial consequences could flow from here, or
- On the less likely chance that this creative rules interpretation is upheld by the JSE, Redefine has effectively made all South African REIT’s discretionary yielding investments and, thus, de-rated the investment appeal for these investment vehicles (i.e. as an asset class they no longer belong in income portfolios/mandates).
Either way, I can tell you that I would not want to be a Redefine Properties investor right now.
We will all be watching this saga unfold very, very carefully.