Arrowhead

COMPANY PROFILE

2013

Arrowhead

“Growing our portfolio to grow your revenue”

COMPANY REPORT

“Growing our portfolio to grow your revenue” Editorial – Roland Douglas Production – Hal Hutchison

Arrowhead Properties has seen immense growth since its inception in 2011. COO, Mark Kaplan tells IndustrySA that the company has managed to be successful because of a great team and a robust strategy.

In August, IndustrySA spoke to JHI, one of South Africa’s leading property management organisations. We found that although property is one of the most valuable investment areas in these difficult times, everyday management of a large scale portfolio is no easy task.

This month IndustrySA speaks to Arrowhead Properties, a JSE listed property loan stock company who take advantage of the fantastic service offered by JHI. Mark Kaplan is the Chief Operating Officer for Arrowhead and he spoke to IndustrySA allowing for a perfect follow-on, focussing on the property industry.

He began by telling us a little bit about the history of Arrowhead. “It started when Gerald Leissner (CEO) and I were looking to list a residential fund towards the end of 2010. We couldn’t get enough residential properties together so we started looking at commercial properties

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to bulk up the fund.

“We found that there were billions and billions of Rand in available stock at high yield that one could purchase. We thought that it was an opportune time to set up a high-yielding property fund, similar to ApexHi. “In April 2011, I resigned from my job, Gerald was retired at the time, and we spent 2011 putting the listing together. We only found out in October that the listing would actually happen and in that time we had identified a whole list of properties that Redefine Properties were looking to sell.

“Redefine made a statement saying they were looking to sell and we ended up buying around 98 properties for R1.5 billion to start off the business.

“Along the way, we met Imraan Suleman (CFO) from Java Capital and he joined us so it was really the three of us who put Arrowhead together.”

ARROWHEAD PROPERTIES

THE TEAM AND THE STRATEGY As mentioned above, the property business is not an easy one to navigate. Take into account financial, economic, political, legal and logistical considerations and the result is a complex web of issues to iron out.

Fortunately, the team at Arrowhead has decades of experience behind them, in both the property and investment markets.

CEO, Gerald Liessner has nearly 50 years’ experience in real estate. He is a Chartered Accountant and has worked in senior positions for some of the country’s major property organisations.

COO, Mark Kaplan has worked on various entrepreneurial ventures and managed portfolios with assets worth in excess of R300 million for major property companies.

CFO, Imraan Suleman, also a Chartered Accountant, worked for one of the big four audit firms and has advised clients on important transactions including listings, mergers and acquisitions, capital raisings and empowerment transactions.

The experienced, knowledgeable and talented team, make Arrowhead local experts and you feel that a learned, trustworthy approach to business is adopted.

“We’ve been very fortunate but we’ve stuck to our strategy and the market likes our business case,” says Mr Kaplan.

“We’ve got a different model. We have six people that manage and grow the portfolio and we outsource property management to JHI. We have a great partnership with them and they have a great footprint across the country.”

He makes it clear that a simple but effective strategy has been in place since the beginnings of the business: Invest in high yield properties and provide superior income returns to investors.

“Arrowhead differentiates itself as it only buys yield enhancing properties,” Mr Kaplan says. “When we look at a property, if it is not yield enhancing we will not consider it. I don’t think one other listed property company can say that.

“We are generally buying properties with a yield of around 10.5% - 11%.”

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COMPANY REPORT

Mark Kaplan GLOBAL RECESSION? Starting a business in 2011, in the heart of what has been a terrible few years for businesses all over the world, may seem like an unusual thing to do, especially in the property market, one that is known for having cyclical shifts in demand.

Mr Kaplan tells us that although the global economic downturn has caused some difficulties, overall the business has been successful because of the solid strategy.

“We don’t want to get ahead of ourselves, we are aware of how quickly things can turn around but it has really been a great start. We’ve exceeded expectations on every level since listing. Our ‘B’ Share price listed at R3.38, today it is trading at R7.30 so excluding income it has gone up by 120% in a very short amount of time.

“Our ‘A’ share price listed at R6 and is now trading at R7.50, so that has gone up by around 25% excluding income growth. As a business case, everything has been fantastic.

“In terms of income targets and distribution targets, we’ve exceeded expectations in our first year, as well as

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put out targets to grow distributions in the second year by 10% which is well ahead of the sector average.”

It is not just going well for the share price and investment potential; the company also managed to bolster its portfolio and is continuing to increase its assets.

“We’ve grown in terms of assets. We started with R1.4 billion of assets under management and when we complete the transactions that we are busy with, we’ll probably be sitting on assets closer to R3.5 billion.

“We listed with a market cap of just under R800 million and today it is R2.6 billion, so it’s more than trebled in 14 months.”

Not all businesses in South Africa have felt the pinch since the economic bubble burst in the USA and Europe, the country’s strong financial industry has managed to remain relatively positive but there are companies that are being tested.

“When you talk about demand for space, in terms of letting, it has had a dramatic effect. Anyone can see it’s not an easy environment to fill vacancies and get good rental renewal, especially in office space.

“We have managed to reduce our vacancies but if the economic climate had been better we would have been able to get higher rental renewals and fill vacancies quicker.

“Our bad debts are very low but it is clear that tenants are struggling in many cases,” says Mr Kaplan.

In times like this, investors look to secure markets to protect their capital and Mr Kaplan suggests that because of this, business has in fact been boosted.

“On the macro side, people have been searching for yield and listed property is one of the most secure places to get yield with capital values that grow.

Because of this, listed property has outperformed bonds, cash and equity.”

> Corporate and Investment Banking

Our mOst VALuABLE prOpErty is Our CONNECtiONs with Our CLiENts We know the importance of relationships.

Working together allows us to understand your needs so we can offer the best real estate solutions for you. This is how we’re moving real estate forward. www.standardbank.co.za/cib

Authorised financial services and registered credit provider (NCRCP15).

The Standard Bank of South Africa Limited (Reg. No. 1962/000738/06).

SBSA 139312-02/13 Moving Forward is a trademark of The Standard Bank of South Africa Limited

Standard Bank Real Estate Finance is proud of the strong relationship that has been established with Arrowhead Property Fund (Arrowhead).

The Standard Bank Real Estate Finance team worked closely with Arrowhead management team in facilitating the financing structure for the property acquisitions that led to the listing of the Fund in December 2011.

Standard Bank has enjoyed a long-standing relationship with Arrowhead’s CEO, Gerald Leissner, dating back to the listing of ApexHi Properties Ltd. Mr Leissner’s preeminent position in the real estate industry is underpinned by 48 years of accumulated property knowledge & experience. Arrowhead has enjoyed a successful first year since their listing on the JSE and management has proven their ability in meeting distribution targets and growing the asset base.Standard Bank is currently the sole debt provider to Arrowhead, having provided R800m of funding on lising against a portfolio of properties that were unbundled from Redefine Properties Ltd and more recently an additional R150m to finance new property acquisitions.

2013/02/28 12:28 PM

Standard Bank has also advised Arrowhead and successfully executed appropriate interest rate hedging strategies. “We are confident that our depth of property knowledge and experience, and the full range of products and services we can offer, will continue to enable us to partner with Arrowhead and help drive their business forward”, says Bevan Williams, Manager Real Estate Finance.

Standard Bank South Africa is the largest operating entity of Standard Bank Group, Africa’s largest bank by assets. Standard Bank Group had total assets of over R1 497-billion (about US$185 billion) at 31 December 2011. Standard Bank’s market capitalisation at 31 December 2011 was R157 billion (approximately $19 billion).

In South Africa, Standard Bank provides the full spectrum of financial services. It’s Corporate and Investment Banking division serves a wide range of requirements for banking, finance, trading, investment, risk management and advisory services. Corporate and Investment Banking division

THE FUTURE On the economic side of things, lower interest rates have helped the country and eased some financial pressures that may have been felt in the residential markets.

Residential property is slowly growing again and all property management companies will look for the markets to return to similar levels seen in 2005/06.

In September, the Property Sector Charter Company released a report which claimed the property market in South Africa is worth R4.9 trillion, with R780 billion of that being in commercial property.

This means there is obviously huge scope for a company like Arrowhead in the future.

“By 2016 we would like to have a R10 billion portfolio and I’m confident that we will be able to reach that,” says Mr Kaplan.

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“By 2016 we would like to have a R10 billion portfolio and I’m confident that we will be able to reach that” With that target in place, the company is already a few steps ahead, putting deals in the pipeline to increase its portfolio even further.

While they will not look to the continent or to other international markets at this stage, they are confident there are enough prospects in South Africa to continue to boost assets.

“The focus is on South Africa,” says Mr Kaplan.

“We’ve been popular since listing because we have a simple investment strategy that we’ve stuck to.

There are plenty of opportunities for Arrowhead in South Africa. Our deal flow is huge.”

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“When we look at a property, if it is not yield enhancing we will not consider it.

I don’t think one other listed property company can say that”

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+27 10 100 0076 www.arrowheadproperties.co.za

(0)1603 618 000 info@industrysa.com East Coast Promotions Ltd, Ferndale Business Centre, 1 Exeter Street.

Norwich, Norfolk NR2 4QB