The JSE-listed group aims to sell its industrial and office portfolios over the next year so that it can be retail specialist fund again
May 31 2023
Fairvest, the JSE-listed real estate investment trust (Reit), is set to become a specialist retail property group again. Before Fairvest took over Arrowhead Properties about a year ago, it was a retail group. It then inherited a mixed portfolio when it acquired Arrowhead.
Fairvest’s CEO Darren Wilder said on Wednesday at the release of financial results for the six months to end-March 2023, that the group was thrilled with its performance and could move to rationalising its portfolio further.
The group is now listed on the JSE and the A2X stock exchanges and owns a portfolio worth
R11.9bn, including retail, office and industrial properties across SA which take up 1 127 134 m2 of gross lettable area. It also owns a 5.1% stake in diversified Reit, Dipula Income Fund and 60.9% of residential specialist landlord, Indluplace Properties. Indluplace, which was originally listed out of Arrowhead, is set to be sold to SA Corporate Real Estate. SA Corporate wants to amalgamate Indluplace’s assets into its African Housing Company residential portfolio. Fairvest has a market capitalisation of R5.3bn, meaning it is trading at a hefty 55% discount to net asset value value (NAV).
The company has an A-B share structure which appeals to investors with different risk profiles.
A dividend of 64.60c per A share was declared and a dividend of 20.97c per B share was declared. The group retained a pay-out ratio of 100% unlike a number of competing Reits which have chosen to pay out less of their distributable income. These funds haven battled to grow their rentals as their tenants face a recessionary economy. Reits are also grappling with high interest rates which is making their cost of debt higher.
Faivest achieved strong positive rental reversions on renewals of 1.8% and reported a 5% increase in net property income on a like-for-like basis. It achieved a vacancy rate of 5.96% and the tenant retention rate improved significantly to 90.7%. The group also got its loan-to-value (LTV) to sit at 38.4%. LTV is an indicator of financial health for a property group and the strength of its balance sheet. It is calculated by looking at a property’s debt relative to the value of its asset portfolio. Fund managers advocate that LTVs should not exceed 40% as a prudent ceiling. LTV is a measure which Fairvest wants to get this metric even lower in the coming months.
Fairvest refinanced R2.1bn in debt at significantly improved margins after the reporting period’s end.
“We are focused on transitioning our portfolio to be a convenience retail portfolio while creating long-term shareholder value,” said Wilder.
The group owned 137 assets with an average property value of R87.2m at the end of the reporting period, with 51% of the properties located in Gauteng by gross lettable area. The portfolio comprised of 67% retail, 22% office and 11% industrial properties by revenue. Its retail assets tend to be in semi-urban areas and cater for the working class.
SA Corporate Real Estate will acquire all of the issued shares of Indluplace for R3.40 per share.
Fairvest provided a binding commitment to SA Corporate to vote in favour of the scheme for
its 61% shareholding. Fairvest expects the R651.4m proceeds from the disposal to
initially be allocated to floating rate debt, which will reduce the group LTV to approximately
33%.
During the period under review, Fairvest sold 4 assets for R252.5m at an average
premium to book value of 0.2% at an average yield of 11.2%. Three more assets, valued at
R85.5m were transferred during May 2023, with a further 7 assets worth R356.6m having
been sold and are still to be transferred, subject to conditions precedent.
“These assets were identified as non-core. We have managed, on an ongoing basis, to continue to sell assets to our network of buyers,” said Wilder.
The Group entered into interest rate swaps of R3.4bn to hedge 71.1% of total debt.
Fairvest is in the process of implementing an integrated back up power strategy in response to the recent, severe load shedding. This backup power strategy encompasses an investigation into transitioning from on-grid to off-grid or semi off-grid solar systems. It also includes utilising advanced technology such as fuelsaving equipment, batteries, and expanded generator capacities, all aimed at maintaining
business continuity in adverse conditions.
Currently, the Group operates 47 generators, accounting for 11.9 MVA of installed capacity.
This provision allows 42% of the portfolio to benefit from partial or full backup power.
Over a six-month period, Fairvest spent R8.3m on diesel, recovering R7.2m.
The group has 38 fully functional solar plants with an installed capacity of 16.4 MWp. During the
six-month period, these solar plants contributed to 11.7% of the portfolio’s total electricity
demand, yielding clean energy worth R16.6m.
Fairvest anticipates that distributable earnings per B share for the complete financial year will range
between 40.50 and 42.00c per share. In accordance with the Group’s memorandum of
incorporation, the distribution per A share is set to rise by the lesser of 5% or the most recent
Consumer Price Index.
The group’s board has resolved to maintain the current 100% dividend pay-out ratio of distributable
earnings. Reits are required to pay at least 75% of their distributable income as a dividend each financial year.
alistair@propertyflash.co.za