May 24 2023
A handful of ingredients has created Spear Real Estate Investment Trust (Reit); one of the best managed property stocks on the JSE which can genuinely be expected to meet its growth targets over the next five to ten years.
Spear, which listed in November 2016 with a portfolio worth R1.4bn, set out to attract investors as being the first regionally focused property fund listed on the JSE. Almost seven years on, Spear has earned its chops and now owns a portfolio worth R4.22bn, which includes 28 industrial, commercial, retail, and mixed-use properties, located in the Western Cape.
The group which released financial statements for the year to end-February 2023 on May 22, explained how it has ambitions to be a mid-cap stock with assets worth R15bn in the next five to ten years, and these ambitions are not misplaced.
Spear showed in its all-round stellar results that it is a reliable investment. The group again grew its dividend for yet another financial period, pleasing investors who want to receive consistent income returns. During the reporting period, Spear grew its dividend per share 11.31% to 75.97c from 68.25c. The group reported annual revenue of R581.2m for the 2023 financial year, up from R574.8m in financial year 2022, representing 3.48% growth. This was complemented by 5.43% net property operating profit growth.
Bravo Park, Blackheath
Expenses were also prudently managed with only a 1.15% increase in operating expenses and a 1.13% decrease in administrative expenses.
“It is a pleasure to present results for seventh reporting period. We have worked tirelessly to develop Spear, and, in this period, our hands-on asset management has yielded fruitful results, enabling the fund to navigate through a challenging and unpredictable trading environment with success,” says CEO Quintin Rossi.
Rossi has been a part of Spear since inception in 2011, first as managing director and then as CEO from 2018 onward.
He believes that Spear’s unwavering commitment to the Western Cape as its investment universe will continue to hold it in good stead well into the future. The province is positioning itself as an economic centre in South Africa. While Gauteng is the largest commercial area in Africa, the Western Cape competes in a plethora of ways and wins on many frontiers.
The City of Cape Town is committed to a sustainable future. Rossi explains that this evident in in how much the City has budgeted for infrastructure over the next three years compared with other metros.
The City of Cape Town has budgeted R43bn for infrastructure spending for the next three years starting in the 2023/24 financial year, while Johannesburg has only budgeted R22bn, eThekwini R19bn, Ekhurhuleni R8bn, Tshwane R7bn, Nelson Mandela Bay R5bn and Buffalo City R3bn.
United Container Depot, Beaconvale
Spear in the meantime is an attractive, well-structured, and simple to understand property fund. The group has recently gained new institutional investors as they trust the fund’s track record and are won over by the Cape success story. Spear Reit is underpinned by a simple capital structure and its easy-to-understand business operating model.
“We don’t have exposure to cross-currency interest rate swaps and Spear continues to maintain a robust financial position. A key strength of Spear is our acute understanding of the Western Cape real estate market and our by-design approach of being close to all our assets,” he says.
Spear achieved a 1.5% increase in tangible net asset value per share in the reporting period, from financial year 2022 to R11.47. The group achieved a cash collection rate of 98.61%. Spear rationalised its portfolio, selling nearly R500m in assets.
The disposal of non-core assets and assets in the hospitality sector, including 15 on Orange to the Capital Hotels and Apartments group, bolstered the balance sheet and led to a stronger loan-to-value (LTV) ratio of 36.30%.
Radnor Road DC, Parow Industria
“The proceeds from these disposals have been strategically reinvested to strengthen the balance sheet, positioning Spear for future growth as opportunities present themselves when the interest rate cycle changes,” says Rossi.
Spear will increase investments in industrial warehousing, logistics and convenience retail assets in Blackheath, Epping and Parow in Cape Town. Spear also holds a controlling stake in George Aerotropolis Proprietary Limited which is developing an industrial park opposite George airport.
The group will also soon commence with Marine Place, a R1.4bn mixed-use project located on Marine Drive, in Paarden Eiland, which is one of the most sought after industrial and supplementary commercial real estate investment areas in the Cape. The project has a targeted yield of 10%.
There were improved in-force escalation metrics of 7.4% for financial year 2023, an uptick from 6.3% in financial year 2022.
Post the reporting period, the sale of an industrial property in Salt River and the Liberty Life office park achieved book value of R462m.
Looking forward Spear is well-protected against loadshedding and uncertainty around energy supply in South Africa.
As many as 26 of Spear’s assets are directly supplied by the City of Cape Town’s electricity supply. The group’s economic, social and governance (ESG) performance has also been impressive. Spear has implemented solar PV and water augmentation solutions and runs an ESG-related bursary programme.
Bravo Park, Blackheath
Spear’s immediate future is directly linked to its regionally focused strategy of operating within the Western Cape economy as it maintains resilience across the real estate sector.
The effects of semigration by entrepreneurs, skilled professionals, and large businesses themselves to Cape Town and towns in the province and general confidence in provincial infrastructure and administration remain key capital attraction points, placing Spear in a favourable position to expand its investment universe further across the Western Cape.
Although the macroeconomic conditions within South Africa must remain a major concern, worsened by the crippling energy crisis and high unemployment rate, Spear’s core portfolio remains defensive, underpinned by strong lease covenants in highly desirable locations within the Western Cape.
Management will cautiously navigate and mitigate, as far as possible, the negative effects of interest rate increases and operating cost creep.
“We do expect our portfolio to generate some growth in the year ahead, but the extent of the growth is currently difficult to quantify given the myriad of headwinds South Africa is currently experiencing. But despite the headwinds already experienced and overcome, Spear’s financial 2023 financial performance has delivered impressive results, reflecting a focused, nimble, and consistent business approach. Spear remains a business that is acutely and actively managed to effectively counter negative market forces, and this strategy will continue moving forward,” says Rossi.
Viking Park, convenience retail centre, Cape Town
The executive team of CEO: Rossi, CFO: Christiaan Barnard, COO: Cliff Toerien, CIO: Kim Pfaff-Karg is focused on the groups’ targets which are aligned with those of its shareholders. Spear is also carefully guided by an exceptionally talented board which includes chairman Abu Varachhia, non-executive deputy chairman Mike Flax, independent non-executive director Brian Goldberg, lead-independent non-executive Jalal Allie, independent non-executive Bongani Raziya as well as non-execs Sean McCarthy and Dr Rozett-Phillips.
“My team and I are honoured to lead Spear on a path of growth and prosperity as South Africa works through its toughest challenges in decades and the Western Cape positions itself as the prime investment hub,” Rossi says.
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