JSE-listed real estate investment trust Fairvest on June 1 announced its first interim results as a merged entity, and declared dividends equal to 100% of distributable income at 61.52c per A share and 21.33c per B share for the six months ended March 31.

"Retail is the core of our business and contributes 65% of revenues. As we went into the merger [with Arrowhead Properties], we told the market we would recycle and dispose of assets and move to a retail only fund.

“We will stick to this strategy and will attempt to do this over a period to preserve value and distributions in the process," Fairvest CEO Darren Wilder said during a presentation of the company’s interim results.

Fairvest and Arrowhead Properties merged on January 26, creating a property company holding a diversified portfolio of retail, office and industrial properties valued at a R11.77-billion, across all nine provinces of South Africa.

For the six months under review, gross lettable area (GLA) of about 139 000 m² came up for renewal, of which more than 123 000 m² were renewed or re-let, representing an aggregate retention of 88.5% of GLA.

Vacancies at the end of the period were 4.9% for retail and only 1% for industrial. Office vacancies were 16.7%, as the sector remains under pressure.

While the reletting required a negative rental reversion of 7.8% overall, the weighted average lease length was sustained at 28 months, despite the tough environment. The weighted average lease escalation across the portfolio was 6.7%, Wilder highlighted.

"The main strategic objective of the merger is to transition to a convenience retail portfolio while creating long-term shareholder value. The first order of priority has been to invest sufficient time in aligning staff to a new culture and obtaining a detailed understanding of the Arrowhead portfolio.

"Based on this thorough assessment, the group believes the value Fairvest first recognised for shareholders is realisable. The transaction has been earnings and net asset value accretive from inception and there is opportunity to extract further value out of the acquired portfolio.

"The management team is now in the process of assessing value extraction opportunities for each individual property. In the interim, Fairvest will continue to do what it does best, namely focusing on leasing space and collecting rent," Wilder added.

As part of progress towards moving toward its medium-term goal of a retail only fund focused on the underserviced market, Fairvest successfully disposed of several properties over the past 18 months.

During the period under review, the company successfully contracted for four disposals to the value of R61.6-million at a 1.5% discount to book value, which is commendable in the current environment. The disposals comprised two retail and two industrial buildings, he highlighted.

Meanwhile, Fairvest had debt of R6.11-billion, which represents a loan to value (LTV) ratio of 39.2%, which is well within the group and portfolio LTV covenants, Wilder said.

"The weighted average cost of funding was 8.4% and 69% of total interest rate exposure was hedged. Loan facilities of R2.98-billion will expire within the next 12 months, and the refinancing of a significant portion of these loan facilities is well progressed and expected to be concluded by the end of the financial year."

Cash on hand and undrawn debt facilities were about R484.1-million at period-end, providing ample headroom to execute its strategic initiatives, added Wilder.

"The retail and industrial portfolios performed well in the tough economic cycle, while the majority of the office portfolio held its own in a sector under pressure. The team has identified only about 25% of the office portfolio where performance was regarded as problematic, and these properties are receiving intense focus.

"These are ten office properties (25% of the office portfolio) that require special attention, which they will receive over the next six to eight months," Wilder said during the presentation to investors.

Fairvest has 38 office assets, down from a peak of 72, and has reduced its exposure to the office market from 46% of revenue to 24% of group revenue derived from its office portfolio, said Fairvest office and industry portfolio COO Alon Kirkel.

"The value of these [office] properties is R2.8-billion, down from R4.4-billion at the peak, and we are continually reducing our exposure to the sector," he said.

Further, the company has taken a focused approach to the ten problematic office assets, and is managing them as special projects to extract value. The company has allocated R24-million in its budget for capital expenditure for the special projects.

However, to sell an office requires that the company first rebuild its income before looking for buyers.

"This is a fine balance and we need to fill the buildings and will then look to sell," said Kirkel.

For example, the company secured a five-year renewal for a 23 000 m² Durban-based office used by the South African Revenue Service. Fairvest prefers diverse tenants as opposed to single tenants, and will potentially look to sell the asset to interested parties.

It also has parties interested in its 28 000 m²  Isle of Houghton office asset, which will reduce Fairvest's office exposure to 21% if it sells the property, he said.

Office vacancies are 16.73%, down from a peak of 21%, and the team aims to get vacancies down to 13% by the end of the financial year, Kirkel said.

Further, Fairvest expects the current difficult operating environment to continue in the short- to medium term, said Wilder.

"However, despite the challenging environment and given the performance of the portfolio, the successful implementation of the merger and the synergies achieved through the merger mean that the distributable income per B share for the 12 months to September 30, 2022, has been revised upwards to between 0% and 5% higher than the previous forecast, with no change to the forecast distributable income per A share," he said.

Meanwhile, Fairvest operates 33 solar plants, with 14.2 MW installed capacity, and a further six solar plants are under construction, which will add 2.4 MW of capacity. The total value of the plants is R173-million.

The company's solar investments produced 9.79% of the company's portfolio electricity costs, particularly in retail and light-industrial assets, and the new plants will increase this to 11% of the portfolio electricity costs, said Wilder.

"Water management is also a key focus with several smart monitoring and eight underground water harvesting plants in operation, and more plants in the exploration phase," he added.

There were more solar power plants the company could roll out, and Fairvest would continue to drive its water and solar projects over the next six to twelve months, he said.

"Property is a simple game; we do it well and the business is operationally strong," Wilder said.