The Board explained that it had considered the needs of all stakeholders in the context of a rapidly changing trading environment. The decision is consistent with Redefine’s focus on preserving liquidity, protecting its loan to value (LTV) ratio and maintaining its REIT status, whilst complying with the solvency and liquidity test contained in the Companies Act.
The Board considers this to be the most pragmatic course of action until the impact of Covid-19 becomes clearer. This is the first time in Redefine’s 22 year listed history that it has not declared a dividend, but the decision follows that of many other companies globally and locally in the face of ongoing uncertainty. The decision whether or not to pay a dividend was also necessitated, after the JSE disallowed an alternative distribution mechanism, which Redefine had proposed last year.
In order to retain its REIT status, Redefine is required to distribute at least 75% of its total distributable profits as a cash distribution to its shareholders by no later than six months after its financial year end, which is subject to meeting the solvency and liquidity requirements of the Companies Act.
Redefine CEO, Andrew Konig, explains that Redefine will not lose its REIT status following this decision. “The Board concluded that, while Redefine clearly satisfies the solvency leg of the solvency and liquidity test, there may be insufficient headroom to absorb any further material negative LTV triggers if a cash dividend was paid, which could potentially lead to a breach of the LTV debt covenant ratio with one or more funders after the 28 February 2021 measurement period and result in adverse liquidity consequences.”
A REIT's obligation to make the minimum 75% distribution is contingent upon its Board reasonably concluding that the REIT will satisfy the solvency and liquidity test after having paid such minimum distribution.
“Facing unprecedented operating conditions in the real estate sector and little visibility into the future as a consequence of the outbreak of the second and possibly more waves of the pandemic, we believe we have no choice but not to declare a dividend as a means of preserving shareholder value and protecting our balance sheet,” adds Konig.
“We are working hard to streamline our asset platform and strengthen the balance sheet to withstand the ongoing volatility and uncertainty, at the same time ensuring we are poised to benefit when conditions improve. We will return to a consistent cycle of dividend payouts as soon as we have greater visibility of the impact of this pandemic on trading conditions.”
The board’s assessment was that the company’s LTV debt covenants on the assumption of no further adverse market circumstances would not likely be breached. However, given the ongoing and potential adverse impact of the Covid-19 pandemic, it needed to take into account the possible impact of factors outside of Redefine’s control and which may materialise within the 12-month period after payment of the dividend.
The factors at play include the impact of foreign exchange fluctuations, property valuations, valuations of investments, timing of LTV reduction interventions including disposals, the outbreak of subsequent waves and any associated increased and extended lockdown regulations locally and internationally.
“Capital and liquidity are the order of the day. The near-term outlook is clearly challenging and without precedent; however, we are confident that over time the strength of our portfolio both here in South Africa and Poland, rigorous balance sheet management, rationalisation of our asset base and in particular, our cash-flow generation capabilities will shine through,” adds Konig in conclusion.
“We are hopeful that the global roll out of vaccines and our government’s own efforts to acquire some 20 million doses during early 2021 will return confidence to the markets. Redefine remains a financially sound business with a capital structure that is well placed to absorb a prolonged period of uncertainty.”
