South-Africa focused diversified real estate investment trust (Reit) Dipula Income Fund has concluded formal agreements with Resilient Reit, which is intended to help Dipula optimise its capital structure and unlock shareholder value.

In terms of the transaction, Dipula will acquire 50% of the Circus Triangle shopping centre from Resilient for R404.5-million in exchange for B shares.

Circus Triangle is a small regional shopping centre located in central Mthatha, in the Eastern Cape.

Dipula will also embark on a R595.5-million equity raise underwritten by Resilient.

This new equity will be available to fund an offer to buy back A shares on a voluntary basis. A shares not repurchased for cash may be swapped at a ratio of 2.2 B shares per A share.

“There is a disconnect between Dipula’s underlying historic performance and its share price performance. Dipula’s assets sustained their value throughout Covid-19 and the recent civil unrest, but this is not reflected in its share price.

“In these circumstances, Dipula must depart from a business-as-usual mindset and seek to address the structural contribution to its high cost of equity or revisit its business model as a Reit that pays out 100% of its distributable earnings,” Dipula CEO Izak Petersen says.

He notes that the transaction offers Dipula shareholders a path to eliminate misalignment between A and B shareholders.

“This may lead to a re-rating of our shares and close the discount in the existing share price that stems from the dual share capital structure. This has the potential to place Dipula back on a growth path by correcting its cost of equity.

“In our view, our capital structure and historic dividend policy are not suited for the trading environment we expect to remain in for at least the medium term.

“In this environment, capital requirements to sustain and enhance performance must be funded out of operational cash flows as they cannot be funded out of new debt or equity. We are not averse to recycling capital through sales of noncore properties, but we do not believe that the current climate is conducive to realising fair value for sale assets,” Petersen adds.

The board believes it is no longer appropriate to maintain a 100% payout ratio and will evaluate all available alternatives in the interest of a sustainable Dipula, he adds.

It is also of the opinion that it would be in the company’s best interest not to pay any dividends rather than to pay out only a portion of its distributable earnings while it has a dual share capital structure.

If the company no longer meets the distribution requirements of a Reit, it will become a property entity that ceases to hold Reit status under the JSE Listings Requirements. In these circumstances, Dipula will retain its distributable earnings and, after meeting its capital requirements, will reduce its gearing over time.

“We expect that, once this transaction has been approved and implemented, Dipula will be positioned to unlock value for shareholders with greater investor demand for our shares and a better rated, more liquid share. This will further support attractive consolidation and strategic opportunities within the property sector,” Peterson says.

Dipula has convened an independent board to consider the transaction.

The independent board will appoint an independent expert to prepare a fair and reasonable opinion in respect of the scheme of arrangement.