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

Finweek English Edition - - THE WEEK IN THE NEWS - Ed­i­to­rial@fin­

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

Im­raan Sule­man

Mark Ka­plan

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