Ann Crotty Writer-at-large
Resilient Property Income Fund
Resilient Property Income Fund

The Resilient share price hit a three-and-a-half-year low on Thursday afternoon after an announcement that management was looking closely at the valuations underpinning the company’s controversial relationship with its broad-based black economic empowerment (B-BBEE) partner Siyakha Education Trust.

The share hit a low of R67.70 before recovering marginally to close 10.32% down at R69.95.

Within minutes of the Resilient announcement its stablemate, Fortress Reit, issued a similar statement and its share price slumped to a low of R14.99 before recovering to close 10.83% weaker on the day at R16.05.

The announcements sent jitters through the market as it placed the spotlight firmly on one of the key issues behind a number of reports that have slammed the Resilient group’s accounting policies and the use of related parties to trade in the group’s shares.

36ONE Asset Management said the manner in which the BEE entity was structured created another set of related parties through which group share prices and volumes could be manipulated. The asset managers said in a recent report the Siyakha Education Trust should be consolidated as it was controlled by Resilient and Fortress.

Resilient owns about 16% of Fortress and some analysts have not been pleased with this cross-holding. In addition all five of the Siyakha trustees are either current or previous employees of Resilient or Fortress.

The asset manager contends they are not consolidated because Resilient and Fortress rely for a large portion of their income on the interest paid by Siyakha on loans they have granted to them.

“Fortress and Resilient are highly dependent on related party investments continuing to perform to support their own distributable income.” 36ONE said the two companies earned a substantial amount of interest on loans to the BEE trust, “where their own shares serve as security for these loans”.

In 2017, Resilient earned interest income of R317m from the trusts and Fortress R269m.

In the report released two weeks ago, 36ONE raised the possibility that if the share prices of Resilient and Fortress declined then the loans and interest income may need to be impaired.

The Fortress share price has plummeted 48.86% in the past 30 days and Resilient is down 40% over the same period.

In the announcement issued on Thursday afternoon, Resilient said that in light of its share price performance it “considers it prudent to commence negotiations with the trustees of and other lenders to the Siyakha Education Trust regarding all loans to the trusts and underlying collateral”.

It said the outcome of the negotiations may affect the distributable earnings of Resilient and it advised shareholders to exercise caution in dealing in its shares.

Fortress also announced it was negotiating with the trustees and other lenders to the Siyakha Education Trust.

It said the outcome of the negotiations may affect its distributable earnings and advised shareholders to exercise caution.

A related concern is the loans to employees, which were used to purchase shares.

Depending on when the shares were purchased, the share valuation may not be sufficient to cover the loan. This not only raises issues around the recoverability of the loans but also employee motivation.

crottya@businesslive.co.za

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