Arrowhead forecasts R1bn in disposals for 2021 financial yearend

CEO of Arrowhead Properties, Mark Kaplan.
CEO of Arrowhead Properties, Mark Kaplan.

Arrowhead Properties has projected a healthy cash balance of approximately R150 million for its financial yearend on 30 September 2021 with just over R600 million cash on hand (excluding Indluplace Properties Limited) and on the assumption that a full divided will be paid.

While the company’s board has not made a decision yet as to whether an interim and/or final divided will be declared, Arrowhead’s distributable income per A share is expected to grow by the lower of 5% and CPI inflation whilst its distributable income per B share for the 2021 financial year is expected to between 0 – 6% higher(45.5 cents – 48 cents) than the distributable income per B share reported for the 2020 financial year (45.39 cents) – subject to the level of dividends received from Indluplace Properties and Dipula Income Fund Limited.

Balance sheet management

Since the inception of its disposal strategy in 2018, approximately R2.5 billion in assets have been disposed of, significantly strengthening its balance sheet, and improving the quality of its portfolio.

In its results for the six months ended 31 March 2021, Arrowhead reported that it had disposed of R1.145 billion in assets at a 4.2% discount to book value, of which 20 properties valued at R498 million had transferred and 20 properties of R647 million were held for sale.

Given market conditions, certain sales fell through which were subsequently replaced by new sales, increasing total disposals marginally to R1.17 billion, concluded at a 3% average discount to book value.

Arrowhead has now transferred 32 assets with a sales value of R978 million since the start of the year and it has lodged a further 4 assets with a sales value of R62 million in the Deeds Office awaiting registration. It is expected that the value of transfers will exceed R1 billion by the end of September 2021.

Vacancies, letting activity and rental relief

While pressure on the rental market continues, Arrowhead anticipates vacancies at yearend to be below 10%, and improvement on the 11% vacancy levels reported in May. Year-to-date tenant retention and reletting has increased from 85% as at 31 March 2021 to approximately 87% as at 30 June 2021 and rental reversions on lease renewals improved to better than -10% (31st March 2021: -11%) with contractual escalations across the portfolio of more than 7%.

Positive letting activity during the second six months of the year is likely to see the value of the company’s core portfolio reduce by 7% for the twelve-month period, compared to the 11% reduction reported for the six-month interim reporting period.

In its financial year to date, Arrowhead has provided Covid-19 relief of R6.6 million (R5.6 million in discounts and R1 million in deferrals) compared to R77 million (R67 million in discounts and R10 million in deferrals) for the comparable period in 2020. Collections (measured as a percentage of contractual rental) are currently sitting at 96% compared to 86% during the same period in 2020.

Core portfolio

Capital expenditure (capex) year-to-date is approximately R150 million, considering the total capex spend across the Arrowhead portfolio over the past four years to roughly R530 million. Of this, just over R430 million (80%) was incurred in respect of the 104 assets that are expected to remain in the portfolio as at 30 September 2021.

Loan facilities

Arrowhead has four loan facilities of R800 million in aggregate that are due for renewal in 2022. Of these, agreements have been reached on the renewal of two facilities valued at R250 million. Discussions are being held on the renewal of the remaining R630 million. Following the settlement of its outstanding capital obligations, the company believes it will achieve and exceed all funding covenants for 2021. The board expects the group’s loan-to-value (LTV) to be around 39% (including derivatives) and approximately 38% (excluding derivatives) as at 30 September 2021, subject to certain sold assets being transferred and property valuations that form part of the group’s yearend process.

Post the cancellation of certain swaps as reported and subject to its sales pipeline transferring, Arrowhead expects its hedging position to be 75%, in line with the targeted range between 70% to 80% with the expected weighted average effective interest rate to reduce to 8.5% at yearend, lower than the 9% reported in its interim results.

The company’s results for the year ending 30th September 2021 is scheduled for release in late November 2021.