COMPANY PROFILE
2014
Arrowhead Properties
27 10 100 0076 | www.arrowheadproperties.co.za
company profile
Acquiring valuable assets… Editorial: Harriet Pattison Production: Hal Hutchison
Since its inception in 2011, Arrowhead Properties has shown exponential growth. CFO, Imraan Suleman, tells IndustrySA that the company plans to venture more into the residential market with hopes to create a standalone listing and grow its commercial assets to the value of R15 billion within the next five years.
When IndustrySA last spoke to Arrowhead Properties in March last year, the growth and potential of this company was already shining through, considering it was only started in 2011. This month we speak to Imraan Suleman, Chief Finance Officer who explains why, just 18 months on, Arrowhead Properties has come on leaps and bounds, with further exciting growth plans for the future. “Since March last year there has been huge movement forward within the company, it is largely a very different company to what it was last year. In terms of property value and number of properties, our total portfolio value in March last year would have been about R2.8 billion, we now have an asset base of R7.2 billion, so we have grown significantly
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in that time.” Within the last year Arrowhead has been a prominent player in the industry consolidation that has been taking place. Suleman explains that this consolidation had been called for by industry watchers for a couple of years and as a result, Arrowhead has acquired a competing fund: “We have acquired Vividend Income Fund Limited, which was unconditional two weeks ago and paid for two weeks ago. It was a share for share transaction and we acquired a portfolio of R2 billion. In addition we acquired a further R2 billion from various other parties.”
INVESTING IN RESIDENTIAL PROPERTY Arrowhead’s main focus tends to be more on the commercial side, across retail, industrial and office
Arrowhead Properties
space but in the future there will be equal focus on residential and commercial. Suleman explains that within the South African property sector, there are multiple commercial players but fewer in the residential market. “There hasn’t been a focus on residential fund, Mark Kaplan (COO) and I attended the NAREIT (North American Real Estate Investment Trust) conference in the US last year, we had a look at the properties within the United States and saw that around 11% of the total market capital was sitting in residential properties, so we came back with the vision to start up our own residential arm. “What we found was there was significant appetite from both institutional funders and equity capital to fund these types of acquisitions so we went about looking for residential property. To date
we’ve acquired R600 million worth of residential property. We’re now looking to aggressively grow that portfolio in the next 12 months to R2 billion. I think that’s quite a significant move on our side, we would hope that in time to come we could build a portfolio that would be large enough to be a standalone residential fund.”
STRONG STRATEGIES What continues to set this company apart from industry competition is its unfailing strategy to only look at a potential acquisition if it offers a yield in excess of the company’s costs of funding and is enhancing to the company’s existing distribution. This remains true whether the company is dealing with commercial or residential property.
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company profile Johannesburg Housing Company, he’d been there for seven years and was second in charge to the CEO. He was responsible for managing 4,000 residential units that the Johannesburg Housing Company own, he’s very experienced in his field.”
VIVIDEND INCOME FUND In December last year‚ Arrowhead bought 31.7% of Vividend Income Fund’s linked units from Coronation Asset Managers in a deal valued at about R430 million. The transaction added R2.3 billion worth of commercial, industrial and retail properties to Arrowhead’s current portfolio. “In terms of the Vividend fund, we looked across the sector and we looked at yields that were trading above Arrowhead, it was in keeping with our strategy to acquire at yields in excess of our cost of funding,” Suleman explains. “We approached one of the larger shareholders, Coronation Asset Management, who held a 31.7% stake in Vividend.
“In the last 18 months, we’ve bought between R3.5-4.5 billion worth of property, R600 million of that was on the residential side, so the way we look at residential at present is an extension of Arrowhead’s strategy,” explains Suleman. “Our strategy is to buy yield enhancing assets and we would assess those in whatever sector the opportunity would present at that point in time and we see residential as an extension of that. This gives us more opportunity to buy property and grow the fund.”
CONTINUED EXPANSION Starting out with just 84 properties, Suleman explains that Arrowhead’s portfolio has continued to grow in the three years since it began: “We’re now approaching the end of our third financial year, obviously our property portfolio has grown significantly, up to R7.2 billion and 185 properties in total and the average property size has grown to R40 million. “As the property portfolio has grown, we’ve added asset managers and legal resources. We’ve also brought on one specialised person for the residential side of things, he was from the
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“In terms of property value and number of properties, our total portfolio value in March last year would have been about R2.5 billion, we now have an asset base of R7.2 billion, so we have grown significantly in that time” “Over the course of a year, we’ve engaged in discussions with them where we have proposed a swap ratio, so for all of the Vividend unit they held, we proposed issuing them with new Arrowhead A and B link units at a ratio that was accretive to Arrowhead from an income perspective. Over the period of a year those negotiations have taken place and initially we proposed a ratio that would give us the accretion that we were looking for and that didn’t suit Correlation so it was turned down. After a year or so we agreed a swap ratio that was satisfactory to both parties. “What attracted us to Vividend was the quality
Arrowhead Properties
of the portfolio, it had strong retail bias and its biggest asset was in access of R500 million, Access Parking in Cape Town. We really thought it was the type of asset from which Arrowhead could attract serious value. It was a perfect fit for us and it offered us yield accretion whilst improving the quality of our overall portfolio,” explains Suleman.
PROMISING PROPERTY PRICES Last month, real estate counters reported listed property prices had rallied at about 5%. Keillen Ndlovu, Stanlib’s head of listed property funds, said in a statement that the recent rally in property share prices meant the sector’s total return of 11.8% for the year to date had exceeded predictions. Property analysts expected a total return of no more than 8%-10% for the year. The Stanlib figures place Arrowhead in the top five for year to date figures among the 38 counters within the R300 billon listed property sector with a total return of 21% for B units. Of the results, Suleman says: “It’s very positive – we are trading at a forward yield of around 9.5%, the sector range is about 8% so we are
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Arrowhead Properties trading at a discount to the average sector. We believe Arrowhead should be rerated to at least the sector average. We’ve consistently paid growth distributions in excess of the sector averages and we’ve grown significantly. “In March this year we released interim results, we performed a calculation on the properties we owned over 2012 that we still owned in October 2013 and we mapped out the performance for the six months from end of March 2013 versus the six months end of March 2014 and we showed that the core properties had grown at a property level at 7% net growth, before gearing. Including the effects of gearing, the performance of that portfolio would grow in excess of 9% which again, was above the market average of 8%. We believe there is a case for the average share price to be at least that of the market average.”
A SUCCESSFUL FUTURE With such an impressive portfolio to date, Suleman explains Arrowhead has no intention to move out of South Africa at present: “We’re
finding enough opportunities in South Africa to achieve our objectives. We may look to expand our horizon if we find that the pipeline we’re currently enjoying has started to dry up.” Speaking to Mark Kaplan last year, he explained that looking to the future the company was hoping to achieve a R10 billion asset base by 2016. 18 months on, Suleman explains: “We’re well on track to achieving that. We’re three years into that five year plan and we’re 70% there already. We’ve got an asset base already at R7.2 billion and we’ve got pipeline that could potentially take us up to R8.5 billion.” In addition to the company’s five year plan, Suleman explains Arrowhead is looking to increase its residential assets within the next few years too: “In a period of 12-18 months we’d like to see the residential side increase to R2 billion at least. Once it reaches a critical mass we’d like to spin that off as a standalone listing. On the Arrowhead commercial side, our new five year plan from here would be to take asset value in excess of R15 billion.”
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Imraan Suleman
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