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Gemgrow focuses on noncore asset disposals ahead of proposed Arrowhead merger

15th May 2019 BY: Nadine James
Creamer Media Writer

JSE-listed real estate investment trust (Reit) Gemgrow Properties COO Alon Kirkel believes the company’s focus on recycling noncore assets and managing its yield profile has created a more attractive asset for the proposed merger with its parent company Arrowhead Properties.

He told Engineering News Online on Wednesday that the proposed merger, which was first announced in April, would result in synergistic benefits for all shareholders.

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He explained that both companies’ boards were supportive of the merger and that the Reit was preparing to seek shareholder and Competition Commission approval.

The merger is expected to be concluded by September.

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Kirkel further pointed out that the Reit, in implementing its defensive strategy, was building itself up for an economic uptick. “We’ve recycled assets that were nonperforming . . . those that weren’t delivering enough yield. We’re trying to create a stronger service offering as part of our tenant retention programme, and we’ve bolstered our new deals team, which handles 26 000 m2 worth of new deals each quarter.”

Further, this change has resulted in a portfolio that is of similar quality to that of Arrowhead’s, while the strong balance sheet has made the Reit a more desirable asset.

Kirkel noted that the proposed transaction would give Gemgrow scale and liquidity.

Once concluded, the enlarged entity will have the same shareholder base as that of Arrowhead at present and will have the scale as well. “We’ll have R11-billion in physical assets, compared to Gemgrow’s current base of R5.6-billion, and R16-billion in total assets.”

He noted that, in the meantime, the Reit would continue to target efficiencies, balance sheet strength and provide a service-driven offering.

FINANCIAL RESULTS

For the six months ended March 31, the Reit reported a 17.8% year-on-year increase in revenue, as well as dividends of 54.54c per A share and 35.31c per B share, which was a marginal improvement on the guidance communicated to the market at the end of the previous financial period.

The portfolio is more diversified, deriving 39% of its income from office space, 36% from retail and 25% from industrial.

Vacancies increased in line with expectations, from 7.6% at the end of the 2018 financial year to 9% for the period under review, as a result of several leases not having been renewed, in line with the Reit expectations.

Office vacancies grew to 14%, while the retail and industrial sectors had vacancies of 6.6% and 7.2% respectively.

Kirkel noted that vacancies accounted for just 73 000 m2 of Gemgrow’s 815 000 m2 gross leasable area.

Moreover, Gemgrow CFO Junaid Limalia explained that, by disposing of noncore and nonperforming assets, its vacancies would decline.

Moreover, additional staff were employed to improve oversight in key areas. The two asset managers and two leasing consultants are, over the short to medium-term, expected to assist in managing lease expiries and reducing vacancy rates.

Additionally, “the balance sheet remains strong and although the loan-to-value ratio has increased to 32%, we expect to reduce debt levels and debt costs through a combination of proceeds from planned disposals and the use of excess funds to reduce loan values in access facilities.”

Following the transfer of R761-million of assets acquired last year, Gemgrow’s portfolio now comprises 163 properties valued at R5.6-billion, up from R4.8-billion as at September 30, 2018.

It disposed of R425-million of noncore assets of which eight properties valued at R98-million were transferred in the interim period. The remaining properties are expected to be transferred during the remainder of the current financial period.

Limalia commented that Gemgrow’s focus for the second half of the financial year would be on strengthening its portfolio, by continuing to sell more noncore properties so that it “can grow on a sustainable basis.”

Further, he noted that, “naturally, the key focus is to meet and improve on the guidance – which remains a work in progress.”

Kirkel added that, from an operational perspective, Gemgrow was working on efficiencies, and was looking into technology to speed up the processes involved in finalising transactions, while also becoming more paperless and streamlined. 

EDITED BY: Chanel de Bruyn Creamer Media Senior Deputy Editor Online
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