JSE-listed real estate investment trust (Reit) Arrowhead Properties on Wednesday posted a 6.02% growth in dividend to 87.52c a share for the financial year ended September 30, in line with its forecast.
However, Arrowhead is forecasting a 6.5% reduction in dividend growth for the 2018 financial year, as the impact of a volatile and deteriorating operating environment bites, sending the company’s shares plunging over 10% on the Johannesburg bourse on Wednesday morning.
“We believe that, in the current economic environment, the company needs to be conservative. As a result, we have taken the strategic decision that, with effect from the 2018 financial year, we will no longer distribute any amounts that do not reflect a sustainable income base from which the company can deliver growth,” the Reit said in the financial results publication.
The new forecast reflected the full impact of the negative rental reversions and increased vacancies, it said, adding that it was mulling the possibility of changing the dividend declarations from quarterly to semi-annually.
The current market conditions are marked by “skittish investors”, low business confidence and tenants delaying letting decisions where possible, thereby translating into lower rentals, higher tenant installations and higher broker commissions.
Arrowhead posted revenue of R1.9-billion for the year to September 30, a rise on the R1.5-billion achieved in 2016.
However, the increase was attributed to income derived from Gemgrow during the year under review, yearly escalations to existing leases and Indluplace acquiring a portfolio of income producing residential property of R499.3-million.
Vacancies increased from 7.8% in 2016 to 12.1% in the year under review.
“The rapid deterioration of market conditions, combined with many single-tenanted expiries that Arrowhead experienced during the year, led to this increase in vacancy, especially in the office market,” the company commented.
This has prompted Arrowhead to transition out of single-tenanted buildings over the medium term to reduce the risk associated with single-tenanted buildings.
The shrinking pool of tenants that resulted in heightened competition between property owners also negatively impacted on Arrowhead’s ability to fill vacant space and renew leases.
Arrowhead pointed out that the forecast did not account for the letting of vacant space or potential future acquisitions, which could present an upside.
However, the forecast, which has not been reviewed or reported on by the group's auditors, also assumes that there is no further material deterioration in the prevailing macroeconomic conditions, that no major tenant corporate failures will occur and that tenants will be able to absorb rising utility costs and rates recoveries.