Dipula Income Fund one step closer to eliminating dual share structure

Circus Triangle Mall in the Eastern Cape (Image source: Circus Triangle website).

Dipula Income Fund has concluded agreements with Resilient REIT with the intention of optimising its capital structure and unlocking value for its shareholders.

The transaction will see Dipula Income Fund acquire 50% of the Circus Triangle shopping centre from Resilient REIT for R404.5 million in exchange for B shares. Dipula will also embark on a R595.5 million equity raise underwritten by Resilient REIT.

This new equity raise will be available to fund an offer to buy back A shares on a voluntary basis and A shares not repurchased for cash, may be swopped 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” commented Izak Petersen, CEO of Dipula Income Fund.

This transaction offers Dipula shareholders a path to eliminate misalignment between A and B shareholders. This may lead to a rerating of our share 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” he noted.

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 to 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 non-core properties, but we do not believe that the current climate is conducive to realising fair value for sale assets”.

Our board believes that it is no longer appropriate to maintain a 100% payout ratio and will evaluate all available alternatives in the interest of a sustainable Dipula”.

Our board is further 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 would retain its distributable earnings and, after meeting its capital requirements, would 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”.

Des de Beer, CEO of Resilient REIT commented: “We have high regard for the Dipula management team who we have known for a long time and have evaluated Dipula’s business. In our view, Dipula’s prospects are good, if it can eliminate its outdated and unworkable dual share structure. We would like to contribute to the success of this black-managed SA REIT, which we believe should be widely supported in the South African property sector.”

Circus Triangle is a small regional shopping centre located in central Mthatha, in the Eastern Cape with a gross lettable area (GLA) of 33 820 m2. The tenant base comprises of 96% national tenants with anchor tenants Shoprite and Game and a weighted average lease expiry of 2.9 years. Resilient recently extended and refurbished the shopping centre.

Circus Triangle is the dominant shopping centre in the area located close to the R61 and N2 roads, with a large rural catchment area. It serves as a commuter hub for short- and long-distance taxis and busses with ample car parking. In addition, the topography of the area provides a natural barrier to competition.

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.