Fortress REIT Limited proposes new share structure

Fortress REIT Limited proposes new share structure

Firm intention to make an offer to exchange Fortress A shares for new Fortress B shares by means of a scheme of arrangement.


Johannesburg, 23 June 2022: As per the SENS announcement released by Fortress on 23 May 2022, the Fortress Board of Directors has commenced a process to potentially collapse the company’s dual share structure into a single class of ordinary shares (Share Exchange).


The Share Exchange proposal is premised on Fortress A shareholders receiving 80% of Fortress’ distributions going forward with the remaining 20% benefitting Fortress B shareholders. It is proposed that the Share Exchange be implemented through a scheme of arrangement between Fortress and Fortress A shareholders whereby Fortress will offer to repurchase all issued Fortress A shares (with the exception of 26 861 996 Fortress A shares held as treasury shares, which treasury shares shall be repurchased by the company subject to shareholder approval) in exchange for Fortress B shares at an Exchange Ratio that reflects the 80/20 sharing of distributions going forward. This is achieved at an Exchange Ratio of 3.01 Fortress B shares per Fortress A share, which represents a discount of 5.0% to the market price of the Fortress A share as at 20 May 2022. If approved, this will allow for a dividend payment equivalent to R1.17 per current Fortress A share (being R0.39 per Fortress B share multiplied by the Exchange Ratio) and R0.39 per Fortress B share in relation to the year ending 30 June 2022.


Steven Brown, CEO of Fortress, said: “Together with our advisors, the Board of Directors have engaged extensively with both Fortress A and Fortress B shareholders on the complexities of the current dual share structure. Although shareholders indicated an understanding of the need to collapse the dual share structure, in general there is a wide gap between Fortress A and Fortress B shareholders on what Exchange Ratio would be fair. The Board considers that 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 allowing Fortress to meet the payout obligations of a REIT. The Board is of the opinion that there is a lack of appetite and waning support for further MOI amendments which do not resolve the underlying structural issues. Having considered the feedback from shareholders and the alternatives available to Fortress, the Board believes a single-share structure to be a permanent solution to the potential risk of losing REIT status, which is currently the course the company finds itself on given the constraints imposed by the MOI.”


The Independent Board will only express an opinion on the Share Exchange following the receipt of the opinion of an independent expert that will be appointed in line with set conditions.


Robin Lockhart-Ross, Chairman of the Board of Fortress stated: “The Board is of the view that the Share Exchange is the best alternative available to the company that ensures long-term retention of Fortress’ REIT status and resolves the challenges of the current structure. The Board believes the Share Exchange to be in the best interests of the company, Fortress A shareholders and Fortress B shareholders, and accordingly is proposing this scheme of arrangement to Fortress A shareholders at the Exchange Ratio.”


Fortress acknowledges the divergent views expressed by shareholders on a fair swap ratio. However, it is incumbent on the Board to propose a transaction that puts the interests of the company and its long-term prospects before those of shareholders of any particular class.


The 80/20 sharing of distributions and resultant Exchange Ratio of 3,01 Fortress B shares for one Fortress A share was informed by detailed analysis and assessment of information and valuation metrics including:
• Discounted cash flow analysis using management distribution guidance for FY 2022 and the year ending 30 June 2023 and consensus and advisor forecast estimates of the business up to 30 June 2031, including consensus foreign exchange rates;
• Discounted cash flow analysis of Fortress A and Fortress B shares under multiple scenarios;
• Sensitivity analysis of key valuation assumptions, including consensus and advisor forecasts, discount rates and payout ratios; and
• The impact on distributions per share and capital value for both Fortress A and Fortress B shareholders.


The proposed Share Exchange will see Fortress offer to repurchase all Fortress A shares in exchange for a share consideration of 3.01 Fortress B shares per Fortress A share. The key outcome - if successful - would be a collapse of Fortress’ dual share structure with the Fortress A Dividend Benchmark no longer being applicable.


In recent years, Fortress has made significant progress towards creating a simpler and more robust business model. “We undertook proactive measures aimed at protecting and strengthening Fortress’ balance sheet and liquidity position, enabling us to continue developing our logistics property pipeline and grow our offshore presence, while retaining a comfortable level of gearing. The Board is optimistic regarding the prospects for the business and the property sectors in which we operate, and we are well-positioned to continue to produce high quality and growing distributable earnings, which, could be distributed to shareholders on a six-monthly basis without the constraints of the current dual share structure,” explained Brown.


A single share structure would have the following benefits:
• allows for distribution of income at the discretion of the Board without the restrictions of the company’s MOI;
• dividend reinvestment programmes could be implemented;
• a single share structure offers greater flexibility with regard to corporate actions;
• greater liquidity in a single share rather than having share liquidity spread across the two different classes;
• a simpler share structure is likely to appeal to a broader range of potential investors;
• aligns the interest of shareholders of the two different classes; and
• allows management to focus more on the business rather than on the issues resulting from the dual share structure.


As a REIT, Fortress offers its shareholders direct exposure to high quality real estate income. However, the uncertainty regarding the company’s ability to pay regular distributions and its ongoing REIT status is a key factor in the valuation of the company (implied by the aggregate of the market capitalisation of the Fortress A shares and Fortress B shares, adjusted for treasury and Fortress Empowerment Shares) being approximately 31% less than the Company’s NAV, adjusted for fair value movements of listed investments held.


Without a shareholder-approved solution before 31 October 2022, Fortress will be unable to meet the JSE requirements for retaining its REIT status.


Going forward, Fortress intends, at the discretion of the Board, to maintain a six-monthly distribution cycle, paying out 100% of distributable earnings. In addition to participation in distributions of income post implementation of the Share Exchange, Fortress A and Fortress B shareholders are positioned to benefit from a resultant re-rating of the Fortress B share (being the only share class in issue post implementation).


Watch this interview, moderated by Bruce Whitfield, with the Fortress Board and advisors as they discuss this proposal.


Read the full SENS announcement released on 20 June 2022: