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Arrowhead boosts FY distributions 13%, plans listed offshoot in 2016

Arrowhead boosts FY distributions 13%, plans listed offshoot in 2016

Photo by Duane Daws

18th November 2015

By: Natalie Greve

Creamer Media Contributing Editor Online

  

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Real estate investment trust (Reit) Arrowhead Properties has grown its yearly distribution by 13%, declaring 150.30c per combined A and B share for the year ended September 30, it said on Wednesday.

The Reit, which held a nationwide portfolio of 159 commercial and 30 residential properties valued at R8.6-billion, realised core property portfolio growth of 6.2% and a 26.7% uptick in net asset value per combined share to R17.40 for the 12 months.

The full effect of acquisitions concluded during the prior financial year was fully felt in the company’s full-year earnings for the period under review, lifting revenue from R712.23-million in 2014 to R1.21-billion.

“Revenue was further boosted by the partial impact of acquisitions – particularly that of the Vividend Income Fund – concluded during the current financial year and yearly escalations to existing leases.

“The increase is also the result of our gearing ratio of about 90% at fixed interest rates, ” CEO Imraan Suleman told Engineering News Online.

RENTAL PORTFOLIO
Arrowhead’s portfolio realised monthly rentals of R90/m2 for retail, R98/m2 for offices and R41/m2 for industrial, while vacancies in the commercial portfolio increased to 7.3% from 6.3% in 2014.

Overall vacancies decreased from 8.2% in March to 7.3% at year-end, with retail vacancies at 5.19%, office vacancies at 10.38%, industrial vacancies at 5.66% and residential vacancies at 3%.

Around 24% of Arrowhead’s office portfolio was let to government and parastatal tenants.

Arrowhead COO Mark Kaplan told Engineering News Online that, while the delayed payment of rental fees and lease renewals by government tenants was a challenge, the State remained a “good payer”.

“They often pay late . . . but this [rental segment] has become a minor part of our business – far less so than when we first listed.

“It’s not an intention of us to reduce this segment, we’re just not finding the appropriately priced government properties at the right yield,” he noted.

During the year, 149 662 m2 of gross lettable area in the commercial portfolio expired, of which 64% was renewed. Rental escalations of 8.4% were achieved on lease renewals across the commercial portfolio, with the average lease profile across the portfolio having increased to 3.73 years, the Reit reported.

OPERATING EXPENSES
Looking to the group’s property expenses, Arrowhead’s municipal expenses increased in line with the higher revenue, with the gross cost-to-income ratio improving marginally from 35% to 34% year-on-year and the bulk of the recoverable expenditure being recovered.

Finance charges increased from R115-million in the 2014 fiscal period to R219.7-million as the full effects of the secured financial liabilities of Vividend's interest-bearing borrowings came into effect in the current financial year.

INVESTMENT PROPERTIES
Arrowhead boosted its number of commercial properties from 89 at listing in 2011 to 157 at present, with the average value per property increasing from R17-million to R44.5-million.

Investment property increased from R7-billion in 2014 to R8.6-billion, attributable largely to fair value adjustments of R498.2-million, acquisitions and additions of R1.2-billion and disposals of R61.2-million.

The company also owned an effective 11% interest in the Dipula Income Fund, as well as 70% of newly-listed Reit Indluplace, which owned a substantial residential property portfolio.

PROSPECTS
Arrowhead further outlined in a results statement that it intended to transfer 101 properties valued at R1.9-billion to a separate subsidiary in the upcoming
financial year, after which this 70%-owned subsidiary would be listed on the JSE in March 2016.

“Following this transaction, Arrowhead – excluding its subsidiaries – will own 56 properties valued at R5.5-billion with a vacancy of 5% at an average property value of R97-million,” said the group.

The average length of leases would be just under four years and 9% would be let to government.

The new company, dubbed Cumulative Properties, would have its own dedicated and incentivised management team that would focus on growing the portfolio with properties valued at under R50-million apiece, which Arrowhead was no longer acquiring.

“Arrowhead won’t get smaller, as it will retain shares in this new vehicle, but it will move properties valued at under R50-million off its balance sheet onto that of the new company, which will provide the opportunity to continue to buy smaller properties with higher yields at lower risk.

“There is a huge opportunity to buy these smaller, unsexy, unloved properties, but Arrowhead will be focusing on bigger, better properties on a yield-enhancing basis,” Kaplan explained.

He, meanwhile, ruled out possible property acquisitions north of the border.

“We’re not looking at anything outside South Africa. Africa scares us. I’m sure there are opportunities there, but we hear lots of stories that things change quite often from a regulatory perspective, so that’s a definite no,” he held.

Kaplan added that the company was also not actively investigating acquisitive opportunities offshore, holding that escalations in international markets would dilute the Reit’s core portfolio growth.

“We’d only be relying on rand depreciation to make up that gap and that’s not the business we’re in,” he commented.

Arrowhead forecast distribution growth of between 8% and 10% per combined A and B shares for the 2016 financial year.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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