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Arrowhead takes ‘wait and see’ approach to Rebosis

As Rebosis looks to turn its fortunes around.

Despite reporting a 15.3% drop in full year distributions, the share price of diversified real estate investment trust (Reit) Arrowhead Properties was up more than 5% on Wednesday, suggesting the market had either priced in the poor performance or was buying into its line of ‘long-term shareholder value’.
 
SA-focused Arrowhead’s latest distribution for the year ending September 30, 2018 was badly affected by its investment in fellow Reit, Rebosis Property Fund. It has a 16.4% stake in Rebosis’s ‘B’ share. Arrowhead had warned the market of the expected decline in a Sens update on November 13, following Rebosis reporting a 27.7% decline in distribution for its B share.
 
“For now, Arrowhead is taking a wait-and-see approach to Rebosis. There are a few options that we are looking at, but we don’t want to make any rash decisions right now,” Arrowhead CEO Mark Kaplan told Moneyweb at its results presentation.
 
“We were upfront with investors and analysts regarding Rebosis. It has been a difficult investment and Rebosis is a concern, but we want to see what happens with Rebosis’s planned sale of office assets. We think it should exit New Frontier in the UK and focus on its retail portfolio locally,” he added.
 
Moneyweb reported earlier this month that Rebosis plans to dispose of more than R6 billion in office property assets by April next year, as it looks to turnaround it fortunes. The 2018 financial year has been both Rebosis’s and Arrowhead’s worst performance since listing on the JSE in 2011.

Read: Return of the old guard at Rebosis
 
In releasing its latest results, Arrowhead announced a dividend of 33.67 cents per share for the six months ended September 2018 and a full year dividend of 74.10 cents per share. Its full year dividend last year came in at 87.52 cents per share. Arrowhead has forecast a full-year distribution of 58 cents per share for 2019. This excludes any contribution from Rebosis, which has not given guidance for 2019.
 
Kaplan said Arrowhead anticipates distributable property income from its direct property portfolio will grow in excess of 2% for 2019, which he said was favourable given SA’s current economic environment. “Arrowhead remains committed to SA and creating long-term sustainable value. Property is a longer-term play and the market will turn when the local economy starts to pick up,” he said.
 
Arrowhead’s direct property portfolio is made up of 49 properties valued at R5.6 billion, which is comprised of 61% retail, 31% office and 8% industrial assets. It also has more than R4.8 billion invested in other listed property companies. Besides its R814 million stake in Rebosis, it has a 60.1% interest in Indluplace worth R1.8 billion; a 55.5% stake in Gemgrow valued at R1.9 billion; and, an 8.6% stake in Dipula Income Fund worth R349 million.
 
While Kaplan highlighted the drop in vacancies within Arrowhead’s overall directly held portfolio, from 12.1% at the start of the year to 7.9%, a closer look at the results show that its office vacancies were high at 13,9%. Kaplan said that Arrowhead would continue to “sweat its assets” and is looking to reduce its office sector exposure.
 
Arrowhead’s Chief Operating Officer, Riaz Kader said the reduction in overall vacancies in its direct property portfolio was notable in the context of the tough market, but this came at a cost.
 
“As a result of prevailing economic conditions, tenants continue to reduce space and work forces. Costs of retaining existing tenants and attracting new tenants take the form of reduced rentals, increased letting commissions, higher tenant installation costs and longer beneficial occupation periods – far higher than in the past,” he explained.
 
During the past financial year, Arrowhead reduced its holding in Dipula by disposing of 1.8 million shares to the value of R15.5 million, but it intends to retain its remaining investment stake in the medium term.
 
“Dipula reported 4.4% growth on its B share in its latest results, which was one of the better performances amongst the listed funds we are invested in. While we have stated that going forward we would prefer to only invest in listed funds if we have more than 50% control, we don’t plan to sell Dipula anytime soon,” said Kaplan.
 
He said Arrowhead had no plans to invest offshore and would continue as a SA focused Reit. While 2019 is forecast to be a tougher year, he anticipated green shoots going into 2020.
 
“It has been a persistently difficult economic environment and 2019 is going to be another tough year. However, as a South African focused fund, we are confident the economy will turnaround, hopefully after the elections next year,” said Kaplan.
 
Evan Robins, portfolio manager at Old Mutual Investment Group, said Arrowhead’s share price had been down even more significantly this month, so the gain on Tuesday needed to be seen in that context. He said the results provided some guidance signposts to negative expectations.

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