1. it’s not competing with larger rivals for
prime properties while its A- and
B-share structure provides a handy way
to hedge against potential risks.
Arrowhead’s A-units (share code
AWA) are for the more risk averse as
their holders get first dibs on the first
60 cents of any distributions the com-
pany makes, with payments made every
quarter in instalments of 15 cents a unit.
Any excess distributions will go to
holders of the B-units (AWB) with the
plan being that holders of the A- and
B-units will enjoy a 50/50 split once
distributions reach 120 cents or more.
Grindrod Asset Management is fore-
casting that this won’t happen until
2015 meaning that buyers of the
B-units at R6.30 at the time of writing
are likely to enjoy most of the upside in
distribution growth, which Anderson
forecasts will be 15% a year for the next
three years.
At R6.60 the A-units are more
expensive but the fact that their distri-
butions are protected means they’re
ideally suited to investors looking for a
stable income stream.
The upside potential in distributions
a 23% vacancy rate compared to around
8% each for the retail and industrial seg-
ments.
“The sort of tenants they target will
typically do worse in a significant eco-
nomic downturn, which on balance does
make their portfolio a bit more risky
than some of the larger players,” says Ian
Anderson, the Durban-based chief
investment officer of Grindrod Asset
Management, which oversees about
R10.5bn. “However, if they fill that
vacant space when the economy picks
up, they’ll enjoy significant upside.”
Still, around 43% of Arrowhead’s
portfolio comprises office space com-
pared with 38% for retail and 19% for
industrial, while a full 25% of revenue
comes from Government tenants, who
the company acknowledges can be
“management intensive”.
It’s average lease profile is also fairly
short at 2.5 years, and its lack of BEE
credentials means it’s likely to lose out
on longer-term Government leases to
the likes of Rebosis and the newly listed
Delta Property fund, both of which are
black-managed and substantially black-
owned.
What counts heavily in its favour
though is Leissner’s 47-year track record
in the listed property sector. It’s target-
ing of the secondary market also means
A
rrowhead Properties, which
has just released its maiden
full-year results, is planning
to spend R800m on acquisi-
tions in its next fiscal year as part of a
plan to grow the value of its asset base
almost fivefold over the next four years.
The Melrose Arch-based property
company will finance the first R400m
in purchases entirely through debt with
the remainder funded through a combi-
nation of borrowings and equity, accord-
ing to managing director Mark Kaplan
and financial director Imraan Suleman.
The equity part of the capital-raising
exercise will be done via a private place-
ment of Arrowhead units with share-
holders, Kaplan and Suleman told
Finweek in an interview.
“Our strategy is to buy higher-yield-
ing properties in secondary locations,”
said Kaplan. “We hope to conclude
R800m worth of acquisitions in the
next fiscal year.”
Arrowhead, which brought in just
shy of R260m in revenue in the 12
months to end-September, is aiming to
increase the value of its property port-
folio to R10bn by 2016, from R2.3bn
currently.
The company’s strategy is to invest
in properties in so-called secondary
locations (think Rustenburg or
Mthatha rather than Sandton) that
offer yields of around 10.7%.
Chief executive officer Ger-
ald Leissner, who headed up
ApexHi Properties for eight
years until it merged with
Redefine, told Finweek
that Arrowhead is tar-
geting properties val-
ued at more than
R20m but
would not pay
m o r e t h a n
R230m for a
single property, an amount that equates
to about 10% of the company’s asset
value.
Arrowhead doesn’t target any spe-
cific sector, though it prefers retail
opportunities over commercial or indus-
trial ones, Leissner added.
“We target yield,” said Leissner. “If
the yield is right, we’ll look at it.”
One symptom of Arrowhead’s target-
ing of non-prime real estate locations is
that its vacancy rate will typically be
higher than the likes of Hyprop or
Growthpoint.
Though it managed to reduce vacan-
cies from 18% at the start of the year to
13% currently, vacancies are still heav-
ily skewed to the commer-
cial sector, which has
FINWEEK 6 DECEMBER 2012 35
COMPANIES & INVESTMENTS COMPANIES & INVESTMENTS
Arrowhead targets R800m
in acquisitions
Doubletake
Mark
Kaplan
makes the B-units a great equity play to
enhance the steady income offering of
the A-units, especially since the former
are cheaper.
The only risk is that if distributions
fall from the 100.58 cents paid in the
maiden fiscal year to say 90 cents next
year, then the A-unit holders will still
get 60 cents while the B-unit holders’
payout will fall from 40.58 cents to 30
cents.
Fortunately, the company is forecast-
ing a distribution of 111 cents in the
next fiscal year and if it manages to beat
that forecast as it did in the past year
(when it forecast a payout of 98.4 cents)
B-unit holders might be pleasantly sur-
prised.
“We’re very happy to be invested in
Arrowhead in both the A- and B-units,”
says Anderson. “They may play in the
secondary property space, but that
means they also have less competition
– sometimes it’s better to be different.”
Garth Theunissen
gartht@finweek.co.za
SOURCE: Bloomberg
Arrowhead Properties
Jan 2012 Jun 2012 Nov 2012
0
25
50
AWA AWB
%
34 FINWEEK 6 DECEMBER 2012
Imraan
Suleman