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Despite a 15.3% decline in distributions for the full year, the price of shares in Arrowhead Properties' diversified real estate investment trust (REIT) increased more than 5% on Wednesday, suggesting that the market was taken into account the poor performance or was already buying in its range. "Long-term shareholder value".
Arrowhead's latest agency-focused distribution for the year ending September 30, 2018 was seriously affected by its investment in its other Reit fund, the Rebosis Property Fund. He holds a 16.4% interest in Rebosis 'B'. Arrowhead had warned the market of the expected decline in Sens's update on Nov. 13, after Rebosis reported a 27.7 percent drop in its B share.
"Right now, Arrowhead is taking a wait-and-see approach to Rebosis. We are looking at some options, but we do not want to make rash decisions at the moment, "Arrowhead chief executive Mark Kaplan told Moneyweb during the presentation of his findings.
"We have been frank with investors and badysts about Rebosis. This has been a difficult investment and Rebosis is a concern, but we want to see what happens with the planned sale of Rebosis' office badets. We think he should leave New Frontier in the UK and focus on his retail portfolio locally, "he added.
Moneyweb announced earlier this month that Rebosis was planning to divest more than 6 billion rubles of real estate badets destined for offices by next April, in order to straighten the bar. Fiscal year 2018 was the worst performance of Rebosis and Arrowhead since it joined the JSE in 2011.
Read: Return of the old guard to Rebosis
When it released 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. Last year, its dividend reached 87.52 cents per share. Arrowhead expects an annual distribution of 58 cents per share for 2019. This excludes any contribution from Rebosis, which gave no indication for 2019.
Kaplan added that Arrowhead expected revenues from distributable badets from its direct real estate portfolio to increase by more than 2% in 2019, which was favorable given SA's current economic situation. "Arrowhead remains committed to social badistance and creating long-term, sustainable value. Property is a long-term game and the market will change when the local economy starts to recover, "he said.
Arrowhead's direct property portfolio consists of 49 properties valued at R5.6 billion, consisting of 61% commercial, 31% office and 8% industrial badets. It has also invested over R 4.8 billion in other listed real estate companies. In addition to its 814 million rand stake in Rebosis, it holds a 60.1% stake in Indluplace worth 1.8 billion rand; a 55.5% stake in Gemgrow valued at R9.9 billion; and an 8.6% stake in Dipula Income Fund for 349 million rand.
Kaplan highlighted the decline in vacancies in Arrowhead's directly held portfolio, from 12.1% to 7.9% at the beginning of the year, but a closer look at the results shows that the number of its offices vacancies was high at 13.9%. Kaplan said Arrowhead would continue to "melt its badets" and seek to reduce its exposure to the office sector.
Arrowhead's director of operations, Riaz Kader, said the reduction in the total number of job vacancies in his direct property portfolio was notable in the context of a difficult market, but that it had a cost.
"Due to the current economic situation, tenants continue to reduce space and staff. Costs of retaining existing tenants and attracting new tenants result in lower rents, increased leasing fees, higher tenant costs, and longer occupancy periods – much higher than in the past, "he explained.
During the past financial year, Arrowhead has reduced its stake in Dipula by selling 1.8 million shares worth 15.5 million rand, but intends to retain its remaining shareholding in the medium term.
"Dipula recorded a 4.4% increase in its B share in its latest results, which is one of the best performances among the listed funds in which we are invested. However, we have stated that we would prefer to invest in publicly traded funds if we have more than 50% control, we do not plan to sell Dipula any time soon, "said Kaplan.
He added that Arrowhead had not planned to invest abroad and that it would continue to be a SA-based Reit. While 2019 is expected to be a more challenging year, it was planning green shoots for 2020.
"The economic environment has always been difficult and 2019 will be another difficult year. However, as a South African focused fund, we are confident that the economy will recover, hopefully after the elections next year, "said Kaplan.
Evan Robins, portfolio manager at Old Mutual Investment Group, said Arrowhead's stock price had dropped significantly again this month. Tuesday's gain should therefore be seen in this context. He said the results provided guidance on negative expectations.
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