Arrowhead targets R800m in acquisitions
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