JSE-listed real estate investment trust (Reit) Arrowhead Properties reduced it vacancy rate for the year ended September 30, despite a persistently challenging economic environment.

Speaking to Engineering News Online on Wednesday, Arrowhead CEO Mark Kaplan said the industry had been characterised by unpredictability, with tenants under a lot of pressure resulting in them either downgrading spaces or going out of business – engendering a risky operating environment. 

Despite this, he indicated that the group was pleased by the performance of its property portfolio amid the difficult trading conditions.

At period end, the vacancy rate across the portfolio was 7.51%, down from 7.72% in the prior financial year. Ninety per cent of lease expiries were successfully renewed or re-let.

On distributable earnings of R769.3-million, Arrowhead declared a total dividend of 111.41c per A share and 68.74c per B share, slightly ahead of the indicated target communicated at the time of the conclusions of the merger with Gemgrow.

To implement Arrowhead's strategy, there was a need to increase the size of the team. The group headcount increased from 20 to 32 in the current year to maintain strong market and operational focus.

There has been a change in philosophy within the organisation from wholly outsourcing the property management to a hybrid model, where each team works alongside its property manager and has direct involvement in the day-to-day property management.

The specific areas of focus have been tenant retention, new deals, debt collections, utility management and tenant-centric management. Arrowhead has employed an additional legal resource to manage risk and enhance compliance.

Despite the increase in costs, Arrowhead noted that the change in philosophy had already yielded benefits, with an additional 129 000 m² of gross letting area (GLA) having been let, alleviating pressure on the lease expiry profile.

Arrowhead expects these benefits to gain traction going forward. 

During the period, Arrowhead merged with Gemgrow to create a larger and more simplified business, in light of the current operating environment.

Leading up to the transaction, Gemgrow sold noncore assets as part of the repositioning of its portfolio.

To date, the merged group has concluded the sale of 57 noncore assets valued in excess of R1-billion at a net discount of 2% to book value and a weighted average yield of 9.1%.

Kaplan highlighted that despite the challenging conditions, Arrowhead was pleased with its portfolio positioning.

OUTLOOK

Arrowhead expects the challenging market conditions to persist, with continued risk of tenant failures and the non-renewal of leases by tenants.

To address this, it has strengthened its operational team, with a particular focus on tenant retention, rental collections, utility efficiencies and the generation of new deals in respect of vacant space.

The operational team was also successful in improving the group's lease expiry profile, thereby reducing the renewal risk for the 2020 financial year.

Despite the positive outlook under difficult conditions, Arrowhead’s 2020 forecast has been negatively impacted on by a reduction in its forecast income from its listed investments in Indluplace and Dipula, the sale of noncore properties and a major tenant failure at one of its Randburg properties.

Owing to these factors, the group’s  forecast for the 2020 financial year is for total dividend income to reduce by 3.5%, with the dividend on the A shares to increase by the lower of consumer price index or 5% to about 117c per A share; and the dividend on the B shares to reduce by 4% to 66c per B share compared with the 2019 year.