On 1 February 2023, the Johannesburg Stock Exchange (JSE) withdrew Fortress's Real Estate Investment Trust (REIT) status, stating that the company no longer met the minimum requirements to maintain its REIT status. To remain a REIT, property businesses must pay a dividend of at least 75% of their taxable earnings available for distribution each year within four months of the end of their financial year, according to listing requirements.
This was due to an impasse between A and B shareholders. The two groups of investors rejected several proposals to amend the company's memorandum of incorporation. If changed, the memorandum of incorporation would have allowed Fortress to resume paying dividends and maintain its REIT status.
So what does the loss of the REIT status mean for investors?
- Loss of Tax Benefits:
The loss of REIT status means that Fortress won't be getting any tax breaks on their dividends anymore, which also means that they'll be liable for taxes on their income and capital gains taxes on immovable property and certain shares. And as you can imagine, this loss of tax benefits could have a significant impact on your investment returns.
- Changes in Distributions:
Since Fortress is no longer required by REIT rules to pay out income to shareholders, the amount and frequency of distributions may change. This means that the company may need to retain more of its income in order to pay taxes, which could mean less money to give to shareholders. Fortress might need at least three years to reach the required level before it can start paying dividends again.
- Change in Investment Strategy:
Fortress losing its REIT status also means that they are no longer bound by the 75% income requirement from property or property-related assets. This could potentially allow Fortress to invest in a wider range of assets but could also result in a shift in their overall investment strategy.
- Market Reaction:
Losing their REIT status may be perceived as less attractive to investors, which could impact Fortress’s share price. Fortress may also need to revalue its assets and liabilities to account for the loss of tax benefits and changes in investment strategy. As one of the largest shareholders in Fortress A, Coronation has already sold a chunk of shares shortly after the JSE issued its de-Reit decision.
Although Fortress remains a listed company with its existing share structure, the loss of a REIT status can have significant implications for your investment structure, tax treatment, and overall strategy. Don't let this news catch you off guard, keep a close eye on your investments and make informed decisions.
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