SIMON BROWN: I’m chatting now with Garreth Elston. He is the chief investment officer at Reitway Global. Gareth, good morning. I appreciate the time. I was largely offline last week, but I did see one tweet which I think you posted out, which contained a fair question. You’re asking yet again when the JSE is going to respond on Reits not paying dividends.
A bit of backstory, Reits – real estate investment trusts – part of their rationale for existing is, if I remember correctly, 75% of distributable earnings must be paid to investors. And a large part of the attraction of investing in Reits has been that income flow to investors, which has now suddenly become ‘vague’, if I’m understanding what the JSE hasn’t said.
GARRETH ELSTON: Good morning, Simon. It’s good to be on again. Yes, it’s been quite a few tumultuous years for the Reit industry, and it doesn’t help when investors are a little in the dark. Professional investors will have a different level of understanding of these things, but the average investor who’s been attracted to the sector is a little unsure of what’s going on.
According to the Reit regulations, companies have to pay 75% of the net income for the year within four months. That has to happen. And if they don’t, they can lose their Reit status. This is now covered by the JSE’s listing requirements, and also by the Income Tax Act and the Companies Act.
There are quite a few things that happened last year, which really did put a lot of pressure on the companies. And there were some communications last year from the JSE and from the SA Reit Association which was helpful. I’ll quickly run through those.
At the start of the year, approaches were made to Treasury and the regulators as to pushing out payments because of uncertainty on this. There was a certain amount of consultation that also was done between the Reit Association and the general public and investors. What came out of that was that Treasury agreed that it would allow Reits to pay out within six months instead of four. That came out, and then they said no, they would not be giving any other further relief from that.
You then had the Reit Association going back saying, no, we’d like a little bit more to be given out. You then had the regulators going back saying, okay, we’ll consider it. But what we want from you is we want a waiver on your bonuses over the same period of time that you’re looking for relief on. The industry couldn’t agree on this. So Treasury and the regulators said, well, that’s it, there will be no extensions on it.
So the Reits do have to make the payments. According to the act, it should be if they miss two required years, they then lose their status. So for me now we have a couple of Reits that are very close to their year-ends; they will be needing to make a payment, and what’s going to happen?
That last comment came out in September, and since then there’s been nothing from the JSE. We then had the official announcements from these Reits saying we’re passing solvency and liquidity. We’re not going to pay, we’ll look at it in the future. And then there’s just been kind of radio silence.
For investors – well, what happens? If they lose their status, it will be two years before they can get it back, but how quickly are they going to lose it? What is the process going to be? I think this is the type of communication that the JSE really should have made public pretty much as soon as we started having Reits, saying we’re passing solvency and liquidity but we are not paying.
SIMON BROWN: I had assumed if you pass solvency and liquidity, send me the cash. But to your point, this just leaves humongous uncertainty in the Reit industry. As an investor, I sit there and look at the Reits I hold in my portfolio – whether they be direct or via ETFs – and suddenly I don’t actually know what they are at the end of the day.
GARRETH ELSTON: Yes. I also find it a bit irritating if you have investors who are now having to take a little bit of pain. A lot of these are put into pension funds, pensioners who are really reliant on these funds, and they have been taking the pain for a year, and you have a regulator saying to the Reits, “If you take some pain as well, we’ll look at this”, and they’re saying, “We can’t agree on that”. You are left as an investor holding the bag. I don’t find that fair to investors.
For me, being a Reit specialist, this reflects on the whole industry and all the investors in it – how do we get people attracted to this if they just don’t know what’s going to happen? If the message they’re getting is, well, you’re on your own, it’s not great.
SIMON BROWN: That’s it. And where’s the [stock] exchange in this? That’s the key point, and that was the point of your tweet as you said, your monthly spiel, which will probably keep on going.
That’s it for today. That’s Garreth Elston, CIO of Reitway Global. I appreciate the early morning.
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