Ar­row­head tar­gets R800m in ac­qui­si­tions

Finweek English Edition - - INSIDE -

Ar­row­head Prop­er­ties, which has just re­leased its maiden full-year re­sults, is plan­ning to spend R800m on ac­qui­si­tions in its next f is­cal year as part of a plan to grow the value of its as­set base al­most f ive­fold over the next four years.

The Mel­rose Arch-based prop­erty com­pany will f inance the f irst R400m in pur­chases en­tirely through debt with the re­main­der funded through a com­bi­na­tion of bor­row­ings and eq­uity, ac­cord­ing to man­ag­ing di­rec­tor Mark Ka­plan and f inan­cial di­rec­tor Im­raan Sule­man.

The eq­uity part of the cap­i­tal-rais­ing ex­er­cise will be done via a pri­vate place­ment of Ar­row­head units with share­hold­ers, Ka­plan and Sule­man told

Fin­week in an in­ter­view. “Our strat­egy is to buy higher-yield­ing prop­er­ties in sec­ondary lo­ca­tions,” said Ka­plan. “We hope to con­clude R800m worth of ac­qui­si­tions in the next f is­cal year.”

Ar­row­head, which brought in just shy of R260m in rev­enue in the 12 months to end-Septem­ber, is aim­ing to in­crease the value of its prop­erty port­fo­lio to R10bn by 2016, from R2.3bn cur­rently.

The com­pany’s strat­egy is to in­vest in prop­er­ties in so-called sec­ondary l oca­tions (t hink Rusten­burg or Mthatha rather than Sand­ton) that of­fer yields of around 10.7%.

Chief ex­ec­u­tive off icer Ger­ald Leiss­ner, who headed up ApexHi Prop­er­ties for eight years un­til it merged with Re­de­fine, told Fin­week that Ar­row­head is tar­get­ing prop­er­ties val­ued at more than R20m but would not pay more than R 230m f or a sin­gle prop­erty, an amount that equates to about 10% of the com­pany’s as­set value.

Ar­row­head doesn’t tar­get any specif ic sec­tor, t hough it prefers re­tail op­por­tu­ni­ties over com­mer­cial or in­dus­trial ones, Leiss­ner added.

“We tar­get yield,” said Leiss­ner. “If the yield is right, we’ll look at it.”

One symp­tom of Ar­row­head’s tar­get­ing of non-prime real es­tate lo­ca­tions is that its va­cancy rate will t yp­i­cally be higher t han t he l i kes of Hyprop or Growth­point.

Though it man­aged to re­duce va­can­cies from 18% at the start of the year to 13% cur­rently, va­can­cies are still heav­ily skewed to the com­mer

cial sec­tor, which has a 23% va­cancy rate com­pared to around 8% each for the re­tail and in­dus­trial seg­ments.

“The sort of ten­ants they tar­get will typ­i­cally do worse in a sig­nif­i­cant eco­nomic down­turn, which on bal­ance does make their port­fo­lio a bit more risky than some of the larger play­ers,” says Ian An­der­son, t he Dur­ban- based chief in­vest­ment off icer of Grindrod As­set Man­age­ment, which over­sees about R10.5bn. “How­ever, if they fill that va­cant space when the econ­omy picks up, they’ll en­joy sig­nif­i­cant up­side.”

Still, around 43% of Ar­row­head’s port­fo­lio com­prises off ice space com­pared with 38% for re­tail and 19% for in­dus­trial, while a full 25% of rev­enue comes from Government ten­ants, who t he com­pany ac­knowl­edges can be “man­age­ment in­ten­sive”.

It’s av­er­age lease pro­file is also fairly short at 2.5 years, and its lack of BEE cre­den­tials means it’s likely to lose out on longer-term Government leases to the likes of Rebosis and the newly listed Delta Prop­erty fund, both of which are black-man­aged and sub­stan­tially black­owned.

What counts heav­ily in its favour though is Leiss­ner’s 47-year track record in the listed prop­erty sec­tor. It’s tar­get­ing of the sec­ondary mar­ket also means

Im­raan Sule­man

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