Arrowhead Properties’ turnaround plan – launched three years ago – could not have been better timed.
Now, as the diversified real estate investment trust (Reit) and South Africa’s broader Reit sector faces arguably the worst market conditions due to the Covid-19 crunch, Arrowhead is delivering dividends and is well-placed to weather the storm.
The company’s annual results for the year ending September 30, 2020, released on Wednesday, reflect a better performance compared with several of its industry peers.
Arrowhead, which has a dual A-share and B-share structure, declared a dividend of 115.45 cents per A-share for the year (based on a 75% pay-out ratio). This was up 3.5% compared with last year.
For its B-share, the group declared a dividend of 32.99 cents, which was down 52%, but based on a 76.5% pay-out ratio.
Most property funds have opted for a reduced pay-out in order to retain some cash and boost balance sheets in the face of pandemic pressure. JSE-listed counters have to pay-out at least 75% of distributable income in order to retain Reit status.
What stood out in Arrowhead’s latest full-year results, however, was that it had managed to sell R1.7 billion in non-core property assets during a difficult year.
This has seen its loan-to-value (LTV) or consolidated gearing level drop below the psychological 40% mark, which is seen as a Reit sector benchmark.
“We are pleased with our results, which were better than expected considering the really tough year that South Africa and the world has had economically, due to Covid-19,” Arrowhead’s CEO Mark Kaplan tells Moneyweb.
“The group is navigating the storm relatively well, on the back of tough decisions we made a few years ago, including deciding to dispose of poorer-performing non-core assets. We were ahead of the market in terms of such asset disposals and made headway in the financial year to dispose of 75 properties to the tune of R1.7 billion,” he adds.
Kaplan says this has resulted in Arrowhead strengthening its balance sheet, with its consolidated gearing being reduced from 41.2% at half-year in March, to 39.3% at year-end in September. The group’s loans have been reduced by just over R900 million – from R6.5 billion in FY 2019 to R5.6 billion for the year ending September 2020.
“This is a great achievement for us, taking into account the difficult market and economic conditions…. While we sold the assets at a 7.2% discount to book value, it was at an average forward yield of 11%,” he notes.
“Around R840 million [of the R1.7 billion in disposals] was transferred before year-end. With the balance of the transfers set to take place in the current financial and a further R500 million of non-core assets up for sale, we expect to reduce the group’s LTV even more,” says Kaplan.
Rosebank-based Arrowhead is a mid-cap fund, holding a diversified portfolio of retail, office and industrial properties valued at R9.7 billion.
It also has stakes in fellow JSE-listed Reits, including a majority 60% holding in residential focused Indluplace Properties; a 15% interest in Rebosis Property Fund; and, a 8.6% interest in Dipula Income Fund.
“Despite the challenging environment, Arrowhead was able to report positive letting activity.”
“Tenant retention in the period was 84%, increasing to 89% once re-letting is taken into account. Vacancies have been well managed despite the impact of Covid-19 at 8.6%, marginally higher than the 7.5% at the start of the year,” notes Kaplan.
He says the group offered its tenants rental relief of around R77 million in the second half of the financial year, due to pandemic-related lockdowns.
While rental reversions have come under pressure, he believes it’s better to retain tenants at lower rentals than lose tenants in the current economic environment.
Craig Smith, head of research and property at Anchor Stockbrokers, says while the group does not formally cover the Reit, Arrowhead’s results “at face value” were “better than what the market would have expected”.
However, he warns: “The commercial property market is expected to come under further strain….
“The reality is that demand for B- and C-grade space is going to come under continued pressure as a lag effect of the lockdowns and weaker South African economy plays out.”
Kelly Ward, an investment analyst at Metope Investment Managers, says Arrowhead has performed admirably in a very tough environment.
“We are encouraged by their ability to pay out a dividend, especially given the reduction in distributions from their listed investments… Despite declining property valuations the company has managed to reduce its LTV which will provide some balance sheet support in the face of possible further valuation declines over the coming financial year,” she adds.
“However we are concerned about the company’s interest cover ratio [ICR] which has come under pressure due to Covid-19 relief offered to tenants, and highlight this as a risk going forward if rental collection rates cannot be improved,” Ward notes.