Diversified South African real estate investment trust Arrowhead Properties says it performed ahead of expectations in a tough economic environment during the financial year ended September 30.
At period end, Arrowhead directly owned 143 commercial properties in South Africa (split 50% retail, 33% office and 17% industrial by revenue) and indirectly owned 147 residential properties through its 60% stake in Indluplace Properties.
Arrowhead says its recent focus on strengthening its balance sheet has positioned it to navigate the challenges in South Africa during the Covid-19 pandemic and thereafter.
During the period under review, the company disposed of 75 assets for R1.7-billion at an 11% forward yield and a 7% discount to book value. R840-million has already transferred in the 2020 financial year, with the balance expected to transfer in the 2021 financial year.
The company’s consolidated gearing reduced from 41.2% as at March 31 (pre-Covid-19) to 39.3% at year-end.
Its strategic sales programme complemented the strengthening of its balance sheet, reducing the company’s loan-to-value ratio.
Despite declining valuations, Arrowhead notes that its loan-to-value ratio reduced to 39.3% from 40.5% in the prior financial year.
It had a tenant retention of 84%, increasing to 89% once reletting is taken into account.
Arrowhead successfully renewed bank debt of just under R700-million.
The company had R786-million of free cash available at the end of the year after R175-million of defensive capital expenditure on the property portfolio.
The average collection rate from April to September was 86% before rental relief and 96% post rental relief. The total amount of Covid-19 rental relief granted to tenants amounted to R77-million.
Arrowhead says its vacancies were well managed, ending the financial year at 8.6%.
In April, the board resolved to defer the decision on the payment on an interim dividend for the six months ended March 31 until the end of the financial year and that it would revise its dividend policy of paying out 100% of distributable income to a more sustainable payout ratio.
Under the current uncertain circumstances, Arrowhead has revised its dividend payout ratio to 76.5% and has resolved to declare an interim dividend of 56.77c per A share and 17.54c per B share and a final dividend for period end of 58.67c per A share and 15.45c per B share.
Accordingly, a combined gross interim and final dividend of 115.46c per A share and 32.99c per B share will be paid to shareholders.
The distribution represents a 75% payout ratio, enabling the company to retain funds to invest in capital expenditure to maintain its properties.
Given the uncertainty surrounding the current unpredictable environment in which the company will be operating for the foreseeable future, Arrowhead says it is not in a position to provide the market with guidance as to its distributable income per share for the year ending September 30, 2021.
However, it mentions that i iis pleased with the progress made in the year under review in strengthening its balance sheet and the earnings generated, albeit at a lower level than originally budgeted.
Anticipating that the operating environment in South Africa will remain difficult, management has taken several defensive measures. Apart from the disposals and debt reductions, letting strategies pursued include an investment in tenant-centric initiatives and R140-million of capital invested into the portfolio.
“The current unpredictable environment has led us to become closer to our tenants with converging objectives between tenant and landlord becoming a common goal towards the sustainability of our respective businesses.
"I am thankful to our team and commend them for their adaptation to a fast-changing and unknown environment, working closely together to implement innovative solutions to the challenges we faced with our tenants during this time. We are confident that our current portfolio is well positioned to continue to offer value to tenants once the pandemic is over,” CEO Mark Kaplan says.