Arrowhead numbers are good, what about BBBEE?

This JSE listed group, Arrowhead Properties, literally forced its way into these sacred pages. It would appear this property fund is not called Arrowhead for mahala.

We were minding issues of national importance when the MMS landed to tilt the news matrix of the day. The headline of the animation shouted “All eyes on Arrowhead in 2013.” The voice over the animated man said something to this effect. Last year, Arrowhead budgeted for combined distribution (dividend like payment) of 98.38c but actually surpassed that by distributing 100.58c. This year, the fund expected   10% distribution growth but achieved 12.36% growth.

And so, here we report Arrowhead results for the year ended September 2012. You will know by now dear reader that we don’t do cold numbers. That is because the number crunching media space is sufficiently loaded. Our brief is to seek out social meaning in them numbers.

What started like a distraction from Arrowhead served our agenda well in the end. We began our hunt for the Arrowhead BBBEE scorecard to no avail. That is not to say the numbers don’t matter. These numbers are particularly good. A double digit growth in distribution in this market is not to be sneezed at. Average distribution in the JSE listed property sector was quoted around 7%. Arrowhead’s revenue rose from R259.7m in 2012 to R423m. The property portfolio was valued at R3.1bn at the end of September 2013 up from R2.2bn.

What is the catch in these numbers? Get it from the horse’s mouth. Arrowhead CEO Gerald Leissner noted that “Secondary properties bring with them additional risk.” Arrowhead owns a diverse portfolio of retail, commercial and industrial properties in secondary locations throughout South Africa. In simple terms the company specialises in B and C grade buildings. It is a high risk high return type of a business. But then, you can be comforted by the feature of the name Gerald Leissner in this business. Leissner is a real veteran property man. He knows this staff and everybody who is anybody knows this. He has been at it for close to 50 years. Arrowhead also features social housing expert Taffy Adler as chairperson of the board.

“We manage this risk by growing the portfolio as diversely as possible in terms of the number of properties, spread of tenants and locations and a spread of retail, office, industrial and now residential,” said Leissner.

Arrowhead is newish though. It was bundled out of that listed property giant Redefine Properties in 2011.

In its website Arrowhead explains the formation in this manner. “Redefine Properties wanted to reduce the number of properties in its portfolio. Arrowhead was established to focus more closely on the portfolio to ensure the best possible returns for shareholders.” But there was the not so small matter of the public sector. The portfolio of 90 properties bundled out of Redefine did have a huge exposure to the public sector. Redefine had expressly stated its want to reduce exposure to the public sector. This came amid a tussle between the department of public works, master of government’s property dealings, and mainstream landlords. The clash was over BEE direction.

It is reasonable to conclude that Redefine decided that someone else was better placed to handle the cumbersome government tenant. In this case that was Arrowhead.

The Arrowhead portfolio still features a significant exposure to government tenants even though it is on the decline. The latest report put government occupied portion of the office portfolio at 56 426m2.

The company noted that “Rentals from government tenants have reduced marginally, as a percentage of total revenue from the prior year as the properties acquired in the financial year have been weighted towards private sector tenants. Significant progress has been made in converting monthly tenancies with government into leases of between 12 and 24 months. Arrowhead remains committed to increasing its exposure to government as a tenant.”

The sentence here caused our frantic search for Arrowhead BBBEE certificate. The BBBEE certificate is not on the company’s website which we regard as uncommon practice. The scorecard is not to be found in the last published annual report (2012).

Our determined search yielded this interesting extract from the 2012 annual report: “Arrowhead is cognizant of the Property Charter which was recently concluded between the South African property industry and Department of Trade and Industry.”

Arrowhead will comply with the (BBBEE) scorecard to the best of its ability and will apply for a rating in terms of the Charter as soon as practical.”

Perhaps the company has since done the rating but failed to publish it. Perhaps!

The reader will say, did you phone the company to check if they have done a scorecard in the past twelve months. No we did not. If there is a scorecard we expect to find it without making a phone call. We think of the certificate as a public document. We may as well declare here that our search for Arrowhead scorecard, while speaking to fundamentals, feeds our selfish reason. We are poised to become largest publisher of verified BBBEE credentials.

It is also worth declaring that Arrowhead is not alone in missing a BBBEE certificate within the JSE listed property sector. Our search so far has yielded a single BBBEE certificate published by Growthpoint Properties. We divert.

Arrowhead makes interesting noises about its BBBEE path in the statement released yesterday. A follow on to BBBEE link up with Indite Properties was made. Indite is led by Tshepo Matlala, the president of the South African Institute of Property Practitioners (SAIBPP).

The Arrowhead update said the company has incorporated Indite Properties as a wholly owned subsidiary. Indite’s focus will be to acquire properties that are tenanted by government and into which Arrowhead’s existing government tenanted properties will be transferred. “Indite will be externally managed by a 100% black-owned asset manager, Indite Asset Management Proprietary Limited, should enable Indite to enter into longer term leases with government.”

Another paragraph in the statement referred to an initiative called Arrowhead Charitable Trust which sounds like a BEE initiative. Arrowhead has a loan to the trust for the trust to subscribe for Arrowhead units, at market value. “The loan bears interest equal to the distributions paid on the units subscribed for. Units will be sold by the trust in due course, and the loan repaid, which will create a capital base to be used by the trust to make donations to beneficiaries, which would include underprivileged communities in areas where Arrowhead is invested.”

While sorting out the BBBEE angle Arrowhead has expanded its portfolio. The property fund said noted that it has recently signed an agreement to acquire an R406m portfolio of residential properties servicing the affordable housing market. Arrowhead added that “It is the intention to grow the residential portfolio during 2014 to between R600 million and R1 billion, and the commercial portfolio by a similar amount.” With Adler in the picture this will be interesting to watch.

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