Arrowhead Properties, the Real Estate Investment Trust (REIT) with a diversified portfolio of retail, office and industrial properties across all nine provinces of South Africa, has reduced its vacancy rate in the past financial year despite a persistently challenging economic environment.
On distributable earnings of R769.3 million for the year to September 2019, Arrowhead has declared a total dividend of 111.51 cents per “A” share and 68.74 cents per “B” share. This is slightly ahead of the dividend target communicated at the time of the conclusion of the merger.
In August 2019 Arrowhead merged with Gemgrow to create a larger and more simplified business taking into account the current operating environment. Leading up to the transaction, Gemgrow started to sell non-core assets as part of the repositioning of its portfolio. To date the merged group has concluded sales of 57 non-core assets in excess of R1 billion of assets at a net discount of 2% to book value and a weighted average yield of 9.1% (excluding income assumptions on vacancies). R670 million has been transferred with the balance expected to transfer before the next interim reporting period. The average asset size of the disposals are under R18 million, with 60% of the sales value derived from its office portfolio.
Comfortable with the positioning of the portfolio, CEO Mark Kaplan said, “The restructuring of our portfolio positions the group to take advantage of any future turnaround in market conditions. We remain positive about the future of South Africa and will continue to focus on matters we are able to influence, including the letting of vacant space, tenant retention and collection of rentals.”
At 30 September 2019, the vacancy rate across the portfolio was 7.51% (on a total GLA of 1,252,133 m²), down from 7.72% (on a total GLA of 1,277,699 m²) at 30 September 2018. Vacancies in retail are 6.2%, 11.6% in office and 5.6% in industrial property, in line with expectations.
The group has strengthened its property management team, with headcount rising to 32 from 20, as its operating strategy has changed from one where its property management was wholly outsourced to a hybrid model. “Our team now works alongside the property managers and has direct day-to-day involvement to enhance efficiencies and the management of our properties. There is a specific focus on building strong relationships with tenants and understanding their needs to retain good tenants,” commented Kaplan.
Despite the increase in costs, the change in philosophy has already yielded benefits with more than 129 000m² of new deals in GLA being let, alleviating pressure on the lease expiry profile. Arrowhead expects the beneficial impact of this philosophy to continue to be successful in the future.
Operating costs have increased over the reporting period, mainly due to the acquisition of the additional 36 properties early in the financial year. The Group’s LTV of 40.5% was lower at 39% at the time of the release of its annual results, due to some proceeds from disposals allocated to reduce debt. At 30 September 2019, Arrowhead loans totaled R5 billion at a weighted average interest rate of 9.59%, while the group reported debt of R6,5 billion at a weighted average interest rate of 9.48%.
“We are well underway in strengthening our balance sheet, which has reduced from 41.4% at interims to 40.5% at year-end and below 39% at the time of reporting. We expect LTV to be less than 38% once our remaining sales transfer.“
“We have all but removed the effects of our non-core listed investments, with it only representing just over one percent of the gross assets and only 5% of the forecast income of the fund in 2020. We remain prudent with our capital allocation and expect that proceeds from the additional disposals will be used to strengthen our balance sheet, further augmenting the sustainable positioning of the fund,” said Junaid Limalia, CFO of the fund.
With the South African economy experiencing an unpredictable and difficult environment, the company expects that tenants will continue to feel the effects.
“Despite the challenging environment and the pressure that certain of our listed holdings have experienced, Arrowhead is pleased with the performance of its direct property portfolio which has been in line with expectations”.
“In anticipation of a further weakening economy, we have implemented various defensive measures. We have substantially increased the number of in-house property resources to support our external property managers. We are also implementing innovative letting strategies; disposing of non-core assets with non-sustainable income streams; and strengthening the company’s balance sheet.“
“We are well under way in implementing our strategy to reposition our portfolio defensively to yield sustainable income over the long term,” concluded Kaplan.