ARROWHEAD PROPERTIES LIMITED - Strategic update, changes to the board and potential streamlining of the group

Strategic update, changes to the board and potential streamlining of the group

ARROWHEAD PROPERTIES LIMITED
(formerly Gemgrow Properties Limited)
Incorporated in the Republic of South Africa)
(Registration number 2007/032604/06)
JSE share code: AHA ISIN: ZAE000275491
JSE share code: AHB ISIN: ZAE000275509
(Granted REIT status with the JSE)
(“Arrowhead” or “the company” or “the group”)


STRATEGIC UPDATE, CHANGES TO THE BOARD AND POTENTIAL STREAMLINING OF THE GROUP


Strategic update

Arrowhead’s strategy remains to deliver sustainable income to shareholders by being invested in a property
portfolio capable of delivering long-term growth. Key components of this strategy have included the sale of
non-core properties that do not meet Arrowhead’s investment criteria, and the use of the bulk of the proceeds
from these sales to further strengthen the balance sheet by reducing debt.

Prior to COVID-19 and the national lockdown, Arrowhead had, as communicated, made good progress on the
implementation of this strategy, disposing (over a 24-month period) of R1.4 billion of non-core properties (at
an average 2% discount to book). The success of this strategy ensured that Arrowhead entered the current
difficult period in a far stronger position than would otherwise have been the case, enabling the company to
assist its tenants and service providers through this crisis.

As a result of the company’s proactive steps, rental collection levels through the national lockdown (at 75%
and 65% for April 2020 and May 2020 respectively) have been ahead of our revised COVID-19 cash flow
forecasts while still accommodating tenants genuinely in need of assistance. Much of the rental relief took the
form of rental deferrals, so we expect these percentages to improve. We are also seeing a steady improvement
in June with collections already at 66% (compared to 51% at the same time last month). We are cautiously
optimistic that this represents the start of a recovery in collections closer to pre-COVID-19 levels yet stress
that significant uncertainty remains.

Despite these promising indicators, the economic impact of the steps taken to limit the spread of COVID-19,
will exacerbate what was already a difficult economic environment. However, the board is of the view that,
even taking into account the potential impact of this economic environment on sustainable rental levels and
underlying asset values, the company’s assets are being significantly undervalued by the market.
Consequently, it is appropriate to intensify its focus, in the short term, on strengthening the company’s balance
sheet as well as its operating efficiency and cash flows in order to further unlock the value inherent in the
company’s assets.

This focus includes three main priorities:

-   an expanded disposal programme;
-   enhanced operational efficiencies and reduced operational costs; and
-   identifying opportunities to simplify and streamline the group.

The board believes that a strong focus on these priorities will unlock value for shareholders, while also
reducing risk and enhancing the company’s ability to deliver sustainable income to its shareholders.

The expanded disposal programme

Until now the company has only sold assets that do not meet Arrowhead’s long-term investment criteria.
Under the expanded disposal programme, the company will also pursue the sale of a limited number of its
larger assets provided that this significantly strengthens its balance sheet.

We are mindful that this is an uncertain environment, where asset sales at reasonable levels may be
challenging. However, our team has a track record of disposing of assets at good values, in a difficult market.
We are confident in their ability to apply the same approach to our expanded disposal programme.

We will remain disciplined sellers, and the existing programme of selling non-core assets will continue.

Operational efficiencies, cost savings and changes to the board of directors

Given the potential risks to revenue, it is important that the company take advantage of all available
opportunities to increase efficiency and reduce operating costs.

As previously announced, between March 2019 and March 2020, we increased our staff complement from 20
to 34. This increased head count has already led to efficiencies and cost savings (which have more than offset
the additional salary cost). There remain a number of areas where this enhanced internal capacity can improve
operational efficiencies and reduce costs. We have begun a process to unlock these further cost saving
opportunities.

The company is also focused on reducing administration expenses wherever possible. In this regard a decision
has been made to freeze the salaries of certain key executives namely the Chief Executive Officer, Chief
Financial Officer, Chief Operating Officer and Chief Investment Officer.

A decision has also been made to reduce the size of the board. Riaz Kader and Alon Kirkel have agreed to
step down from the board with effect from 1 October 2020 while retaining their executive roles and
responsibilities (as Chief Operating Officer and Chief Investment Officer, respectively). They remain
important and valued members of the executive team and integral to delivery of the new strategy.

A process is underway to review the composition of the balance of the board, and further announcements will
be made in due course.

Simplify and streamline group structure

An exercise has been initiated to evaluate the cost benefit and other possible implications of merging
Arrowhead and Indluplace Properties Limited. Further details will be announced in due course.

Additionally, we continue to actively seek a basis to unlock value from our holdings in Rebosis Property Fund
Limited and Dipula Income Fund Limited.

9 June 2020


Advisor to Arrowhead
Ferryman Capital Partners

Sponsor
Java Capital

Date: 09-06-2020 05:45:00
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