Fairvest Property Holdings Limited and Arrowhead Properties Limited merged on 26 January 2022, creating a property company holding a diversified portfolio of retail, office and industrial properties valued at a R11.77 billion, across all nine provinces of South Africa. Fairvest’s portfolio comprises 143 assets with a GLA of 1 160 585m2 , with retail properties representing 65%, office 24% and industrial 11% of the portfolio. The group also holds a 61% interest in residential property owner, Indluplace, and an 8.6% interest in Dipula Income Fund .

Fairvest CEO, Darren Wilder said that the property sector, along with South African economy, has been severely impacted by the ongoing effects of the COVID-19 pandemic, as well as the civil unrest and floods in Kwa-Zulu Natal. Despite the challenging environment, Fairvest reduced vacancies in the period and continue to do so, and achieved a strong performance from the direct portfolio.

Operations

The Fairvest team continued to perform by responding and adapting to the volatile environment. For the six months to 31 March 2022, GLA of some 139 000m² came up for renewal, of which more than 123 000m² were renewed or re-let, representing an aggregate retention 88.5% of GLA. Vacancies at the end of the period was 4.9% for retail and only 1% for industrial. Office vacancies were 16.7%, as the sector remains under pressure.  While the reletting required a negative rental reversion of 7.8% overall, the weighted average lease length was sustained at 28 months, despite the tough environment.  The weighted average lease escalation across the portfolio was 6.7%.

The retail and industrial portfolios performed well in the tough economic cycle, while the majority of the office portfolio held its own in a sector under pressure. Wilder said that the team has identified only about 25% of the office portfolio where performance was regarded as problematic, and these properties are receiving intense focus.  

Strategic progress

The integration of the two businesses commenced in February 2022, with the main objective being that of  transitioning to a convenience retail portfolio while creating long-term shareholder value. The first order of priority has been to invest sufficient time in aligning staff to a new culture and obtaining a detailed understanding of the Arrowhead portfolio. Wilder said, based on this thorough assessment, it is pleasing to report that the Group believes that the value Fairvest first recognised for shareholders, is realisable. The transaction has been earnings and NAV accretive from inception and there is opportunity to extract further value out of the acquired portfolio. The management team is now in the process of assessing value extraction opportunities for each individual property. In the interim, Fairvest will continue to do what it does best - to focus on leasing space and collecting rent.

The group will also continue to invest in its properties, with total capital expenditure of R86.4 million on refurbishments and backup water and electricity facilities in the past six months.

Fairvest has made good progress towards moving toward its medium term goal of a retail only fund focused on the underserviced market. The Group has successfully disposed of a number of properties over the past 18 months. During the period under review Fairvest successfully contracted for four disposals to the value of R61.6 million at a modest, 1.5% discount to book value, which Wilder said is commendable in the current environment. The disposals comprised two retail and two industrial buildings.

Debt and funding

At period-end, Fairvest had debt of R6.11 billion, which represents a Loan to Value (“LTV”) ratio of 39.2%, well within the Group and portfolio LTV covenants. Weighted average cost of funding was 8.4% and 69% of total interest rate exposure was hedged. Loan facilities of R2.98 billion will 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 by the end of the financial year. The Group had cash on hand and undrawn debt facilities of approximately R484.1 million at period-end, providing ample headroom to execute its strategic initiatives.

Environmental, Social and Governance (ESG) Projects

Fairvest currently operates 33 solar plants with 14.2 Megawatt installed capacity and a further six solar plants in construction which will add 2.4 Megawatt of capacity. The total value of the plants is R173 million. Water management is also a key focus with several smart monitoring and water harvesting plants in operation and more plants in the exploration phase.

Outlook

The Group, in the revised listings particulars issued in December 2021, forecasted distributable income for the 2022 financial year to be 126.22 cents per A share and 41.48 cents per B share. Wilder said that Fairvest expects the current difficult operating environment to continue in the short- to medium-term. However, despite the challenging environment, the Group is pleased to note that given the performance of the portfolio, the successful implementation of the merger and the synergies achieved through the merger, distributable income per B share for the 12 months to 30 September 2022 has been revised upwards to between 0% and 5% higher than the previous forecast, with no change to the forecast distributable income per A share.