Fairvest, the specialist retail landlord, announced its first annual results after its merger with Arrowhead Properties, with the company managing to pay dividends equal to 100% of distributable income at 126.22 cents per A share and 43.29 cents per B share, exceeding its guidance for the latter by 4.4%.
Fairvest and Arrowhead merged on January 26 2022. The merged entity, named Fairvest Limited, currently holds a portfolio of 141 retail, office and industrial properties with a gross lettable area (GLA) of 1 150 862m2 and valued at R12.1bn. The properties are located across all nine provinces of South Africa with 50% of the GLA located in Gauteng. Retail properties represent 65% of the portfolio, office 24% and industrial 11% by revenue. The company also holds a 61% interest in residential property owner, Indluplace Properties, with 119 residential properties valued at R3.4bn, as well as a 5.1% interest in Dipula Income Fund.
Fairvest CEO, Darren Wilder said the weak South African economy, higher interest rates and severe loadshedding, as well as the remaining effects of the pandemic, civil unrest and floods, created a challenging operating environment, but Fairvest’s metrics were very impressive and indicative of a strong performance. Despite these impediments, Fairvest has successfully concluded the merger, and has turned its focus to implementing a suitable structure for the new entity, de-risking the balance sheet, reducing vacancies and commencing a disposal process for non-core assets.
He said Fairvest made excellent progress in achieving a stable performance in its directly portfolio, reducing vacancies, disposing of seven properties with a further seven transacted, pending transfer, and reducing the company’s loan-to-value. He said that Fairvest was operationally strong and well-positioned for growth.
A determined focus on leasing had a positive effect on Fairvest, while vacancies had peaked at approximately 8% mid-year, strong letting and tenant retention of over 87% then reduced them to 5.9% by year-end. Vacancies in the office portfolio have been brought down from 16.7% at the interim stage to 13.6%, industrial vacancies were maintained at a low 1% and retail vacancies reduced from 4.9% at the interim stage to 4.3%. The recovery in the SA retail sector continued, the industrial portfolio was strong with rising demand for large multi-let parks, while the office sector remained under pressure because of oversupply. It was pleasing to note that some green shoots were evident across all three sectors, as consumer confidence improved.
As much as 246 797m2 of space came up for renewal during the year, of which 215 632m2 was renewed or re-let. New deals in respect of 76 472m2 were concluded. Rental reversions were within expectation, at a negative 6.4% overall, comprising retail at negative 2.6%, office at negative 16.6% and industrial at positive 0.4%.
The weighted average lease escalation across the portfolio was 6.4%, at an average net monthly rental per m² per sector of R133.12 for retail, R95.58 for office and R43.96 for industrial. The weighted average lease expiry was 29 months. Operating costs were well-managed with the majority of increases well below inflation.
Fairvest continued to invest in its property portfolio, with capital expenditure of R149.7m incurred, excluding Indluplace, of which R20.2m related to further investments in solar initiatives. Some 35 solar plants were fully operational with 14.9 Megawatt installed capacity, producing 8.1% of the combined portfolio’s electricity cost for the year. A further four solar plants were in construction and would add 1.9 Megawatt of capacity. The combined value after the construction of Fairvest’s 39 solar plants will be R174.3m at a capacity of 16.8 Megawatts. Water management also received strong focus with the strategic installation of smart monitoring equipment completed at eight properties and 13 groundwater harvesting plants in operation.
Wilder said the merger with Arrowhead Properties was value-enhancing, uplifting the combined entity’s earnings and NAV, providing greater scale, improving share liquidity and entering, or being up-weighted in various property indices. This should ultimately broaden the investor base and increase demand for the company’s shares. Fairvest’s medium-term goal is to return to a retail-only fund focused on the underserviced market, as it believed that specialisation contributed to outperformance.
Currently, 65% of the fund’s revenue comprises retail. Wilder said to maximise performance, scale is also required and the management team is focused on assessing value maximisation opportunities for each property portfolio.
“We are focused on being a retail specialist fund. We will gradually sell non-core properties at the right price,” said Wilder.
During the year, Fairvest concluded seven disposals, valued at R96.5m, at an average premium to book value of 1.4% and an average yield of 10.1%, which Wilder said is commendable in the current environment. The assets were identified as non-core and comprised four retail assets with a combined vacancy of 26%, one empty office building and two industrial buildings. A further seven properties valued at R500.9m were currently classified as held-for-sale pending registration and transfer.
At year-end, Fairvest had debt of R6.1bn, which represents a group loan to value (LTV) ratio of 38.1%, down from from 39.2% at when interim results came out, and well within the group and portfolio LTV’s covenants. Loan facilities of R2.6bn would expire within the next 12 months and the refinancing of a significant portion of these loan facilities is well-progressed and expected to be concluded within the next few months.
Fairvest anticipated net property income from the core portfolio, on a like-for like basis, to increase by between 2% and 4% for the 2023 financial year. The fund’s operational performance was expected to remain robust, with strong growth from the retail and industrial sectors, partially offset by further pressure on the office sector. The significant increases in interest rates during the year would however have an negative impact on earnings for the 2023 financial year, through higher finance costs.
Dipula and Indluplace were expected to continue to pay distributions for the full year in line with their current year distributions. The current dividend payout ratio of 100% of distributable earnings would be maintained and reviewed on a bi-annual basis. Fund managers tend to invest in Reits like Fairvest because they pay the majority of their distributable income as dividends by definition. Many Reits other than Fairvest have had to cut their payout ratios as they battle a weak economy where it is difficult to raise rental rates for tenants and also where it is difficult to attract capital.