Arrowhead Properties warned the market that its annual dividend would shrink in its September 2018 financial year, sending its share price down nearly 10% on Wednesday.
This is the first time in the diversified real estate company’s seven-year history that its dividend payout will not grow.
Most other listed property funds have managed to forecast positive dividend or distribution growth for the 2018 financial year. This is despite concerns that groups focused on SA are struggling to grow income pay-outs and that dividends could fall in 2019 or beyond.
Many of these companies have paid out part of their dividends from capital profits and other one-off items rather than from distributable earnings.
Arrowhead forecast that its dividend would shrink 6.5% for the year ended-September 2018. It made the forecast while releasing its financial statements for the year to September 2017.
Arrowhead declared a dividend of 87.52c per share for the period, resulting in growth of 6.02% from the previous reporting period.
The company earned revenue of R1.9bn for the year to September, a 27% rise on the R1.5bn achieved in 2016. However, the increase was attributed to income derived from subsidiaries Gemgrow Properties and Indluplace Properties. Both were highly acquisitive during the reporting period.
Arrowhead’s overall vacancies increased from 7.8% in 2016 to 12.1%. "The current uncertain political and economic circumstances have caused a rapid deterioration in our operating environment. These factors have greatly impacted our tenants. The combined effect of the challenging macroeconomic situation and political uncertainty have a negative impact on rentals, tenant installations and broker commissions and we are pleased to have delivered on our 2017 forecast," said Arrowhead CEO Mark Kaplan.
Nesi Chetty, head of property at MMI Investments & Savings, said Arrowhead’s results were weak overall. "Their core portfolio has slowed a lot. It’s a tough market out there."
The lower-than-expected reversions, longer vacancy times and general difficulty in letting space, particularly large single-tenanted spaces, are expected to have their full effect in the 2018 financial year.
These negative effects could be partially offset by the payment of one-off amounts, arising mainly from listed securities acquired cum dividend and capital profits that are collectively forecast to amount to about R65m in 2018.
But Arrowhead’s management has decided this would not be prudent. "We believe that in the current economic environment, the company needs to be conservative. As a result, we have taken the strategic decision that with effect from the 2018 financial year, we will no longer distribute any amounts that do not reflect a sustainable income base from which the company can deliver growth," said financial director Imraan Suleman.
The board is also considering the change from paying quarterly dividends to semi-annual dividends, in line with the rest of the South African listed sector. This proposed change to the policy of declaring quarterly dividends has not been taken into account in the 2018 forecast.