Arrowhead Properties is simplifying its strategy to focus on owning South African real estate directly instead of investing in other property groups, CEO Mark Kaplan said on Tuesday.

The group, which owns a portfolio of offices, retail centres and industrial sites worth about R10.5bn, has spent the past two years or so restructuring its asset base as it looks to retain tenants in a weak economy. It was considering selling noncore assets.

Its investments in other listed property groups including Rebosis Property Fund and Dipula Income Fund have disappointed recently and haven't returned substantial income to Arrowhead.

“We are refocusing to be an SA-invested property group which owns properties directly. Our investments in other listed securities are now worth about R100m, which is not very material compared with property assets worth more than R10bn,” he said.

Arrowhead on Wednesday said it would defer its interim dividend decision due to Covid-19, and was also considering disposing of even more noncore properties to bolster its balance sheet.

CFO Junaid Limalia said the company was selling many of the higher yielding, smaller assets it took on when it merged with Gemgrow Properties. Limalia was formerly CFO of Gemgrow.

Gemgrow had listed out of Arrowhead in 2016 with the aim of holding Arrowhead's smaller properties, most of them valued under R100m. But the fund struggled to perform in the past two years off the back of a weak South African economy.

There was limited demand from smaller tenants for space and Gemgrow battled to grow its rental rates to levels which existing tenants were prepared to pay.

This prompted Arrowhead and Gemgrow to merge in 2019.

Kaplan said about 20% of its tenants asked for rental relief during the Covid-19 lockdown. As such Arrowhead had collected between 55% and 60% of its rental due each month since its 2021 March financial year began in April.

Arrowhead reported that distributable income fell 10.5% to R340m in its half-year to end-March 2020, though the group said it was “pleased” with the performance of its direct property portfolio for the period under review

During its half-year, the group concluded 41 sales valued at R840m at a 1.5% discount to book value. At the end of March 2020, assets valued at R395m had been transferred with the remaining 21 assets, valued at R445m, scheduled for transfer.

Arrowhead has a 16.4% interest in Rebosis Property Fund as well as an 8.6% interest in Dipula Income Fund, with both also opting not to declare dividends.

But Ninety One investment portfolio manager Peter Clark said Arrowhead's latest financial results were strong given its challenges.

“These are decent results but all that matters now is what is to come. Management have an uphill battle ahead with a large proportion of C-grade tenants who will take strain either due to Covid-19 or the impending recession. Though the balance sheet is far from the worst in the sector, covenants are tight and headroom for negative performance is limited,” he said.

Arrowhead's share price closed unchanged at 93c. The stock has fallen by 75% so far in 2020.


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