Business 24.5.2018 09:20 am

The great Resilient reversal

Property group begrudgingly concedes to views of its critics.

Resilient Reit, the listed property group facing damning allegations of shady dealings, has begun a process to restate its financial results going back to 2017.

This comes largely as a result of the company revising its views on the accounting treatment of its black economic empowerment (BEE) trusts, the Siyakha Education Trust 1 and Siyakha Education Trust 2.

For Resilient, it’s a significant reversal. It means Resilient will now have to consolidate the Siyakha trusts into its own financial results, following a revised opinion that the company exercised control over the BEE trusts.

The consolidation will have a negative impact on Resilient’s past stated distributable income and its dividend growth outlook (see table below).

But it’s also a massive concession by Resilient as it gives credence to allegations raised by a number of investment firms – initially by 36ONE Asset Management, then later followed by Mergence and Arqaam Capital.

The investment firms raised red flags about the Siyakha trusts, which hold 12% of Resilient and 11% of Fortress Income Fund, an associate company of Resilient. 36ONE has been the most vocal critic of Resilient, raising concerns about the degree of Resilient’s control of the trusts.

In a report, the asset manager said a majority of the Siyakha trustees were linked to Resilient, with some being former employees.

Another point of contention is that the Siyakha trusts and Resilient group employees borrow money from Resilient and Fortress to buy shares, which they have to repay at interest rates of prime plus 2% – equivalent to about 12% annually.

36ONE pointed out that R436.8 million of Resilient’s income during the year to June 2017 was from the interest paid to it from the Siyakha trusts and employees, while Fortress bagged R404 million over the same period. It accused Resilient of using this interest income to artificially boost income and dividend payments to investors.

Essentially, 36ONE called into question the independence of the trusts from Resilient and its ability to make decisions in the best interest of its empowerment beneficiaries.

The asset manager recommended Resilient consolidate the trusts into its group financial statements as it exercises substantial control over them according to its interpretation of International Financial Reporting Standards ten. However, Resilient rejected this, saying the Siyakha trusts have separate boards to Resilient and have unilateral discretion in making decisions.

In a u-turn on Tuesday, Resilient admitted that it does control the trusts, as it has exposure to its variable returns, has the ability to influence income earned from it and enjoys the power to remove any trustee.

This admission means that Resilient has to restate its financial results for the six months to December 2017, resulting in the group recording impairments, bloated liabilities, lower earnings and dividend growth.

Adjustments

The consolidation of the Siyakha trusts and the restatement of the company’s interim financial results might have a substantial impact on Resilient’s earnings per share and headline earnings per share once fair value adjustments are taken into account. But the investment community may not be too concerned about the effect of these fair value adjustments as most of them are non-cash in nature. Investors will pay closer attention to the change in distributable earnings.

Source: Resilient Sens and author’s calculations

Real Estate Investment Trusts (Reits) like Resilient have a code of best practice, which provides guidance on how listed property companies calculate the amount of income they can distribute to shareholders. This is to ensure comparability across the sector and to prevent earnings from being “tainted” by Reits using non-traditional sources of income (i.e. non-rental income) to adjust reportable distributable earnings.

In this regard, Resilient will see a substantial decline in its reported distributable income for the six months ending December 2017 after its accounts are restated. In aggregate, distributable income will decline by 32% to R891 million and the distributable earnings per share will decline by 22% to R2.40.

Further, Resilient declared and paid a cash dividend for the six months ending December of R3.06 per share. In hindsight, this means the company paid a dividend greater than distributable earnings per share for the period (R3.06 per share versus R2.40).

It also has implications for the dividend guidance provided in the update. To get to the full year distribution of R6.01 per share, distributable earnings will have to grow at an annualised rate of 11.5% if Resilient wants to stick to the code of best practice and pay dividends according to the definition in the code of best practice.

Enter Deloitte

The restatement will arguably give Des de Beer, the founder and CEO of Resilient, a headache as he has dismissed allegations facing the group as an effort by short-sellers to profit from the sustained selloff in the property group’s shares.

Resilient and Fortress shares

Market watchers said the restatement also calls into question the audit opinion of Resilient’s external auditor Deloitte Africa, which has signed off on the group’s financial results since 2009. This comes at a time when audit firms are being caught in accounting scandals, including Deloitte’s own audit of Steinhoff and African Bank.

“The exact same information that is available today was available when they [Deloitte] signed off on the results. It wouldn’t be a surprise if the company would have to relook at other prior financial statements. We cannot rely on the audit profession to give us what they are paid to do for investors and shareholders,” said Garreth Elston, an analyst at Golden Section Capital.

Deloitte Africa CEO Lwazi Bam, said the audit firm didn’t opine on Resilient’s restated interim results as they were issued unaudited.

Bam said in reevaluating the consolidation of the Siyakha trusts, Deloitte sought advice from its legal counsel on provisions in the trusts’ deed and documentation provided by Resilient and it sought an independent accounting opinion on the matter. “On the basis of this reevaluation, we concluded that, on balance, there was no longer sufficient persuasive evidence that Resilient was not required to consolidate the trusts based on the relevant accounting standards,” Bam told Moneyweb.

Cy Jacobs, the founder of 36ONE, said Resilient’s restatement validates its extensive work on the affairs of the property group. “The fact that the company’s own auditor, undoubtedly prompted by our analysis, sought legal counsel that agrees with our assertions, is the first and clearest indication of the strength of our analysis.”

Resilient still faces two investigations from the JSE and Financial Sector Conduct Authority (formerly the Financial Services Board) relating to share price manipulation.

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