Property losing REIT status (#398)

This week's episode of JSE Direct is courtesy of OUTvest, our preferred supplier in retirement products.

Simon Shares

• April was the best month for equity markets since 1987!
• Local ten year bonds are on a tear, just a week after we exited the World Government Bond Index the yields are back at pre-junk levels and even better as they trade below 8%. This is the search for yield playing out. If their mandate allows investors want yield, the rest they don't care about.
• This has also seen the Government Retail Bonds locally drop their April rate of 11.5% to 10% for May and likely will fall further in June.
• PMI shocker. The headline number was fine but that was due to some oddities. The real kicker was the business activity index that collapsed to an all-time low of 5.1 index points in April. During the 2008/9 crisis the lowest levels were low 30s.
• Oil bouncing higher, albeit at US$30 Brent is still over 50% off the January levels.
• Comair (JSE code: COM) went into business rescue less than a week after an update detailed no flying until October / November. They hope to be able to restructure and come back by then, but the airline industry globally is in melt down and locally we have three airlines in some form of bankruptcy (SAA and SA Express the other two).
• Metrofile* (JSE code: MFL) updated the market on their proposed 330c delisting and the short answer is that it is still on but is delayed indefinitely. Pratically trying to raise capital and get all the Is doted and Ts crossed is largely not practical under lockdown. But the buyer also wants to get a better understanding of the business post lockdown. I hold the stock and am happy to continue holding as I'd rather it not be delisted. But price had dropped to 220c on the news, currently 250c. Lockdown does hurt the company a little, most work in contractual. But the issue is how many clients don't survive and of those who do will they require less boxes?
• In very tough times for REITs Equites (JSE code: EQU) results really shone. Debt is low, distributions solid and they have very few clients not able to pay rentals as they state "since 29 February 2020, we have collected 92.8% and 100% of the contractual rental due in terms of our lease agreements in SA and the UK, respectively". This is largely as they are in the business of fancy logistics. No retail, no offices and many online customers, especially in the UK which os some 25% of their business.

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Property losing REIT Status

A REIT ~ Real Estate Investment Trust is essentially a special purpose vehicle for listed property stocks. In South Africa the most notable requirement is that 75% of 'distributable income' is paid to shareholders as a taxable dividend. This absolves the REIT of tax liability but that dividend received by shareholders is taxed as income, not the 20% dividend withholding tax (DWT). So depending on your marginal tax rate, it cold be higher or lower than DWT.

With this in mind I asked Redefine CEO Andrew Konig about this on my show on Tuesday. The company had some 33c per unit of distributable income due to investors but did not declare it rather saying they'd decide at yearend in August 2020. This is perfectly legal as this was an interim distribution and they only need to be paid annually.

Now that 75% rule is a SARS issue as it regards taxation, it is not a IFRS concept and as such it is a murky issue. So the REIT industry is engaging SARS in case some REITs can't pay the distribution. There could be lots of options such as delaying the payment and maybe spreading it our over a number of years. But if they lose REIT status frankly the property companies would unravel as the tax advantage from that status is huge and how they operate. As such I expect industry and SARS to come to some sort of agreement.

But what Andrew Konig said was that liquidity issues were of more a concern for REITs. Frankly their ability to actually pay anything and liquidity is a part of the companies act so is more immovable than the SARS REIT definition and allowances. This is the bind property stocks find themselves in. Debt that needs to be paid, income (rentals under pressure) and legal requirements to pay distributable income. There is going to have to be lots of clever thinking to get through this crisis.

* I hold ungeared positions.

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