Arrowhead to expand its exposure to government

Arrowhead Properties says it plans on growing its portfolio and extending its leases with regards to government tenants. Currently the majority of its office space is tenanted by government and makes up around 25% of the loan stock company’s income.

On Monday, Arrowhead Managing Director Mark Kaplan said business’ nervousness about government and walking away from government had created opportunities for his company: “…it makes out about 25% of our income at the moment. We are looking at maintaining that level of exposure to government, it is an A grade tenant.”

In contrast, earlier in November, the CEO of Redefine Properties, Marc Wainer, announced his company wanted to reduce its government portfolio substantially with a view to completely exiting the sector: “It’s a large portion of our office portfolio at 18% and I would like to see it at most down to 5%, but ideally right out.”

He cited some of the frustrations of doing business with government in that it doesn’t pay increases in rates, administrative bungles and the amount of time it takes to get leases signed. The company is in talks with “one or two parties who have substantial capital” in trying to sell off some of its government-tenanted buildings.

Arrowhead’s financial director, Imraan Suleman, conceded government could be a difficult customer: “As a tenant government is more management intensive. We dedicate a lot of time to developing relationships and setting guidelines, but we have made headway in dealing with them, certainly over the last year.”

Kaplan agreed saying Arrowhead had worked hard in building good relations with government but that there were challenges in collecting rentals and renewing leases: “It’s tough but we’ll be looking at acquiring more buildings in that space.”

Speaking after the release of its maiden results since listing on the JSE, CEO Gerald Leissner (pictured) declined to elaborate on the company’s pipeline, saying some transactions still needed to be concluded.

Suleman told Moneyweb: “We hope to conclude a number of deals and hope to come to market early next year to announce these deals. Kaplan added: “We like to bring news to the market once we are confident we are able to follow through on it. We bought around R800m in announcements last year and we came through with R750m. We are probably going to release another R800m for the next (financial) year.”

In announcing the results, Arrowhead said it had achieved an annualised distribution of 100.58 cents per A and B unit paid. It had increased its asset base by 50% and had almost trebled its market cap from R800m upon listing to R2.2bn. The total return of its A and B units was 40.6%, outperforming the market average of around 33.23%.

Kaplan said going forward to the 2013 financial year, Arrowhead intended growing its asset base by at least 30% and increasing its market cap to R3bn. It planned another R800m worth of acquisitions and wanted to increase its gearing to between 30 and 40%. “That’s what we’ll be comfortable with in growing the business.”

Asked what he attributed Arrowhead’s success to, Leissner replied: “Arrowhead has a very clear strategy. It won’t buy properties that are not revenue-enhancing. The clear focus of the business is on revenue. As it happens, we’ve improved the portfolio. We bought a portfolio from Redefine which was assets that they wanted to sell and everything we’ve bought this year I think has improved the portfolio.”

Kaplan added the company had turned down some offers which could have grown the portfolio significantly. “[Income is] our first criteria. Is it going to be accretive to our shareholders? So we stuck to our strategy and we turned down those opportunities. It would have given us a lot more size but we didn’t want to grow at the expense of income.”

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