Head­ing for its mark, with plenty in the quiver

Financial Mail - Investors Monthly - - Analysis - Alis­tair An­der­son

Ar­row­head Prop­er­ties is a very well-run real es­tate in­vest­ment trust (Reit). Since list­ing in late 2011, the fund has been a strong per­former which has regularly ex­ceeded mar­ket ex­pec­ta­tions.

Ar­row­head was cre­ated by prop­erty doyen Gerald Leiss­ner, who has worked in the prop­erty in­dus­try since he was in his 20s. He is now 73 and, as CEO, is man­ag­ing to find good deals which are bring­ing dou­ble-digit re­turns to Ar­row­head’s share­hold­ers.

Since list­ing Ar­row­head with a port­fo­lio of as­sets worth R1,72bn, Leiss­ner has aimed to reach a port­fo­lio worth R10bn by 2016. This would make it a mid­sized in­vest­ment propo­si­tion.

His mis­sion is on track as the group’s prop­erty port­fo­lio is cur­rently worth about R6,5bn. This is af­ter Ar­row­head sep­a­rately listed its R1,6bn residential port­fo­lio as Ind­lu­place Prop­er­ties last month.

The head of listed prop­erty funds at Stan­lib, Keillen Ndlovu, says Ar­row­head has sur­prised him on the up­side and that the fund has timed its strat­egy well.

Leiss­ner’s right-hand man is Mark Ka­plan, the fund’s chief op­er­at­ing of­fi­cer. He had some ex­pe­ri­ence in af­ford­able hous­ing and Leiss­ner took a shine to him. His ap­point­ment was how­ever un­pop­u­lar be­cause he was in his early 30s when he joined Ar­row­head. But the fund’s over­all per­for­mance sug­gests the team is man­ag­ing well.

Im­raan Sule­man is the CFO and is man­ag­ing the fund’s debt and ex­penses very care­fully.

Ar­row­head grew its dis­tri­bu­tions by 19,03% in the half year to March this year com­pared with the same pe­riod last year, fol­low­ing ag­gres­sive ac­quis­i­tive growth. This means Ar­row­head is on track to achieve to­tal dis­tri­bu­tion growth of nearly 12% for the year to Septem­ber 2015, out­per­form­ing the listed prop­erty sec­tor, which has de­liv­ered av­er­age dis­tri­bu­tion growth of only 8%-9%.

Ka­plan is right to praise the per­for­mance of Ar­row­head’s core port­fo­lio over the six-month pe­riod. “Core port­fo­lio growth of 9% for the pe­riod, to­gether with in­come from rev­enue en­hanc­ing ac­qui­si­tions, has once again en­abled Ar­row­head to pay grow­ing dis­tri­bu­tions above those paid by many of our peers,” he says.

Ndlovu says the dis­tri­bu­tion growth has been es­pe­cially im­pres­sive be­cause it was achieved while ex­penses were kept at no­table lows.

Ar­row­head’s share price is likely to climb through­out the rest of this year, on the back of fi­nan­cial re­sults for the year to Septem­ber.

The group will also ac­quire more build­ings to add to its di­verse port­fo­lio, which has ex­po­sure to of­fice, in­dus­trial and re­tail as­sets. Over the first six months of this year, Ar­row­head’s A units achieved a to­tal re­turn (which in­cludes cap­i­tal and in­come growth) of 5,59%. Ar­row­head’s B units grew 2,88% over the same pe­riod.

The fund is still in­ter­ested in tak­ing over Dip­ula In­come Fund, which is a re­tail fo­cused Reit. Cur­rently Ar­row­head owns about 11,5% of Dip­ula’s B units. Ka­plan has said he is at­tracted to its port­fo­lio and that it is co­in­ci­den­tal that Dip­ula is a broad-based black eco­nomic em­pow­er­ment com­pany.

Mar­ket speak is that Dip­ula CEO Izak Petersen is re­luc­tant to re­lin­quish his shares in the com­pany, which he started.

Leiss­ner is a shrewd deal maker and the fund is ac­tive in all of SA’s nine prov­inces.

There are mur­murs in the mar­ket that he may re­tire from the prop­erty game soon to join some of his fam­ily abroad, but Leiss­ner has said he en­joys prop­erty man­age­ment too much to exit the in­dus­try just yet. Per­haps he is groom­ing Ka­plan to be a fu­ture star.

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