At a time when South Africa wrestles with the impact of the double downgrades to junk and an operating environment fraught with political and economic uncertainty, Arrowhead Properties is betting on its diversification strategy to ride out local pressures.
Arrowhead, which owns a property portfolio worth R5.6 billion, managed to grow its dividend by 6% to 43.24 cents per share and revenue by R216 million to R959 million for the six months to March 31.
At work for the company’s resilence during increasingly uncertain times in South African is a diversified property portfolio spanning across the retail, office, industrial and residential industry, said Arrowhead’s CEO Mark Kaplan. “The company is well diversified with properties across the country. Although our peers have been investing offshore markets we are sticking by South Africa,” Kaplan told Moneyweb.
The company achieved average rental escalations of 3% on lease renewals and vacancies increased from 7.8% to 10,8% largely due to Sasol vacating its building in Rosebank, Johannesburg.
Arrowhead, along with its peers on the JSE’s more than R850 billion real estate sector, has acquired stakes in listed property funds over the last four years. Arrowhead has acquired a 61.7% stake in residential-focused Indluplace Properties, 55% of Gemgrow Properties, 19.4% of retail-focused Rebosis Property Fund and 11.3% of Dipula Income Fund.
This has continued to bear fruit for the company as it secures it an additional income stream. The company’s substantial increase in revenue (by R216 million) was boosted by the conclusion of its acquisition (during the period under review) of a 55% stake in Gemgrow Properties, which owns a property portfolio of 129 retail, industrial and office properties valued at R4.3 billion.
Stalling Arrowhead’s ability to grow the size of its direct property portfolio is the lack of quality deal flow in the market. Much of its acquisitions recently have been stakes in companies and few direct properties.
Arrowhead’s CFO Imraan Suleman attributes the limited acquisition opportunities to the high pricing of assets by sellers. The volatility in financial markets seen after President Jacob Zuma abruptly fired former finance minister Nhlanhla Nene in 2015, known as Nenegate, resulted in the increase in borrowing costs and subsequently valuation on properties.
“However, the misalignment of pricing expectations between sellers and acquirers has recently narrowed, resulting in funding costs moving in a favourable direction,” said Suleman.
The company now sees a potential acquisition pipeline for Arrowhead, Indluplace and Gemgrow. With a conservative gearing of 25%, this gives Arrowhead more runway to fund new deals, as its gearing was once 47% in 2011.