The changing shape of Arrowhead
The unbundling of its non-core properties and a focus on quality will transform Arrowhead Properties into the new year. ARROWHEAD RESULTS FOR FINANCIAL YEAR TO 30 SEP. 2016
Arrowhead’s prime office property located in Rosebank, expected to be vacated by current tenant Sasol in the not-too-distant future, has a value of R265.7m.
sA-focused JSE-listed real estate investment trust (REIT) Arrowhead Properties has grown exponentially since listing in 2011. Back then its market cap was around R800m. Five years later, at 30 September 2016, the needle was poised around R9bn.
The company has in the past made headlines for its somewhat controversial takeover approach in its bid to enhance its portfolio. It’s an opportunistic approach that chief operating officer Mark Kaplan won’t apologise for. “What moves the needle is when you take over another fund,” he says.
But 2016 has proved a difficult year in which to move that needle, its Emira Property Fund takeover bid coming to naught.
Nor has there been much direct property acquisition activity, the company only acquiring two retail properties over the past 18 months.
“There has not been a meeting of minds between buyers and sellers on pricing levels,” says chief financial officer Imraan Suleman. It’s a consequence of the difficult macroeconomic environment and it is not the only difficulty facing property funds.
“The average cost of funding has increased tremendously. We have stuck diligently to our strategy of acquiring properties that also offer us a yield in excess of our cost of funding,” explains Suleman.
At 30 September 2016, Arrowhead’s portfolio comprised 154 properties, 47% of this by value retail, 41% office and 12% industrial.
Arrowhead may not have ramped up its property asset base of late but that did not prevent the fund from posting exceptional full-year dividend growth of 9.85% and sectorleading growth on its core portfolio of 6.1%.
Notwithstanding solid results, there has been much shuffling behind the scenes.
Investment into listed securities has spiked. The company invested R1.1bn into Rebosis Property Fund – representing a 19% share – has an 11% interest in Dipula Income Fund and 60.1% in residential-focused fund Indluplace. These investments have accounted for the significant increase in listed securities income.
Arrowhead’s existence – in large part – came about through the unbundling of Redefine Properties’ smaller assets. Arrowhead is now going about refining its portfolio in much the same way, unbundling its smaller non-core assets like C-grade offices with their average building value of R26m, via the Gemgrow transaction (see box).
The unbundling of 100 properties will see the shape of Arrowhead significantly transformed.
The “new” property portfolio of R5.679bn will comprise 54 properties split over retail (53%), office (39%) and industrial 8%. Significantly, once the Gemgrow transaction is approved by the Competition Commission (expected end November), Arrowhead’s average asset size will increase from under R50m to R107m.
Unbundling aside, Kaplan says Arrowhead is not looking to sell its stake in Gemgrow, aiming to benefit from growth in the fund. ASSETS: R11.5bn (Direct property: R10bn; Investments: R1.5bn) NO. OF PROPERTIES: 154 DIVIDEND GROWTH: 9.85% GEARING: R3.1bn (84.1% debt fixed) LOAN-TO-VALUE (LTV): 27.5% VACANCIES: 7.8% REVENUE GROWTH: 7.77% ACQUISITIONS: R1.67bn DISPOSALS: R126.4m FORECAST DIVIDEND GROWTH: 6%-8% “Distribution growth from Indluplace and Gemgrow can help us outperform the SAPY [SA Listed Property] Index.” Another goal is that of positioning itself at the forefront of consolidation of smaller funds. It’s an area where Arrowhead has proven its success as it did with the purchase of Vividend Income Fund two years back. Arrowhead’s opportunistic approach will persist but at present, Kaplan says, there is no intention to make another play for Emira. Defensiveness of the diversified fund is enhanced by the residential component via Arrowhead’s significant interest in Indluplace. Then there is Arrowhead’s investment in the listed sector, also expected to provide yield uptick for the company. COO of Arrowhead Properties CFO of Arrowhead Properties