Arrowhead Properties has declared a dividend of 115.46 cents per ‘A’ share and 32.99 cents per ‘B’ share for the year to the 30th of September 2020.
With a portfolio of commercial properties valued at approximately R9.7 billion, these results reflect a solid performance delivered by its well-located properties despite the tough operating conditions. The distribution represents a 75% payout ratio enabling the company to retain funds to invest in capital expenditure to maintain its properties.
Mark Kaplan, CEO of Arrowhead says the company is well placed to face the challenges of these uncertain times: “We made great progress during the year in selling our non-core properties and at the same time, strengthening our balance sheet.”
Kaplan says environmental, social and governance (ESG) factors have become an integral part of any business and Arrowhead has taken steps to enhance its ESG performance.
“Our social initiative, Arrow for Change, was successfully launched during the year and we were able to positively impact communities in close proximity to our assets that are less fortunate and that have been severely impacted by Covid-19“.
At the end of September, Arrowhead directly owned 143 commercial properties in South Africa (split 50% retail, 33% office and 17% industrial by revenue) and indirectly owned 147 residential properties through its 60% stake in Indluplace Properties.
The company’s strategy is to invest in properties for which there is a strong tenant demand and that can deliver long-term growth. In line with this goal, 75 assets were successfully sold for R1.7 billion during the year at an average 11.0% forward yield and 7.2% discount to book value of which R840 million was transferred before year-end. Arrowhead has taken major steps towards achieving its goal of reaching its target portfolio.
These disposals also served to strengthen the balance sheet by reducing group loans by just over R900 million to R5.6 billion (2019: R6.5 billion), reducing the company’s loan to value (LTV) ratio to 39.3% from the 40.5% at the start of the year. The value realized for these disposals also reinforced the group’s confidence that the valuation of the properties on its balance sheet is realistic.; All expiring loan facilities were renewed and after spending R140 million of capital expenditure, the company still held R581 million of free cash at the end of the financial group (group cash was R786 million, including Indluplace).
Despite the challenging environment, Arrowhead was able to report positive letting activity. Tenant retention in this period was 84%, increasing to 89% once re-letting is considered. Vacancies have been professionally managed despite the impact of Covid-19 at 8.6% marginally higher than the 7.5% at the start of the year.
The retail asset class of the portfolio was particularly resilient, because the group’s assets are well-located, with linkages to transport hubs or dominant within their respective nodes. The industrial portion has held up well, although the office sector has shown some signs of strain as some corporates have closed and others have scaled down their space requirements with more staff working from home. The average collection rate during April to September was a pleasing 86% before relief and 96% if relief is considered. Arrowhead granted R77 million of rental relief to its tenants during the lockdown.
Anticipating that the operating environment in South Africa will remain difficult, management has taken several defensive measures. Apart from the disposals and debt reductions previously mentioned, innovative letting strategies were pursued, there was an investment in tenant-centric initiatives, and R140 million of capital was invested into the portfolio.
“The current unpredictable environment has led us to become closer to our tenants with divergent objectives between tenant and landlord becoming a common goal towards the sustainability of our respective businesses,” Kaplan says.
“I am thankful to our team and commend them for their adaptation to a fast-changing and unknown environment, working closely together to implement innovative solutions to the challenges we faced with our tenants during this time. We are confident that our current portfolio is well positioned to continue to offer value to tenants once the pandemic is over.”