May 23 2024 18:00
Spear Reit, the Western Cape specialist landlord is one of the most reliable property funds on the JSE and has again rewarded shareholders with the stellar set of financial results for the year to end-February 2024.
The company saw its full-year distribution per share (DPS) rise 3.8%; impressing the market while many of its peers saw their DPS grow beyond 1% or even shrink in the latest reporting season. South Africa’s real estate investment trust (Reit) sector has been through a difficult recovery post the pandemic. Many landlords are adjusting to how living, working and playing has changed. Numerous people are working from home permanently or their employers have implemented hybrid models. Many people are also shopping online for everyday products such as groceries and work clothes. Some SA Reits are trading at discounts off around 75% below their net asset value levels.
Spear reported a distribution per share of 78.86c, up from 75.97c a year ago. The distributable income per share increased 1.04% to 82.99c. The final distribution per share (DPS) for the six months ended February 2024 increased 4.37% to 40.53c.
The final DPS was based on a payout ratio for the final six months of the year, amounting to 96% of distributable income per sahre, equating to an annualised average payout ratio of 95%.
During the reporting period, Spear achieved a significant milestone as it marked the first year in which its annual gross revenue surpassed R600m, driven by a 5.92% increase in group revenue for the year.
Management renewed or re-let 153,383m2 of space, at an average negative reversion of 0.37%.
The group’s net asset value per share increased 2.79% to R11.80. Revenue increased 6.57% to R619m. Spear reported a portfolio occupancy rate of 93.12%. The company’s loan-to-value (LTV) decreased to 31.6%, from 36.3% a year ago. Fund managers prefer for Reits’ LTVs to be below 40%. LTVs are considered a measure of a Reit’s balance sheet health. Any number over 40% can imply that a Reit is under financial stress.
Spear listed in November 2016 with a R1.4bn property portfolio and a market capitalisation of R800m. Eight years later the group’s assets are set to be worth R5.4bn and its market capitalisation sits at R2.2bn, with its shares trading at a sizable discount. The group is optimistic that when interest rates start to ease globally and commercial real estate moves out of a highly challenging operating cycle, this discount will decrease as more people embrace Spear which is a well-liked specialist landlord.
“Real estate is the business of local markets, and we believe that a concentrated and localised approach provides relief from several of the headwinds being faced in the real estate sector in South Africa. In our focused regional approach, we have the ability and skill set to continue to invest, develop, and redevelop across four key asset types: industrial, retail, commercial, and mixed-use,” says CEO and co-founder of the fund, Quintin Rossi.
Quintin Rossi – Spear Reit CEO
Rossi explained that when Spear listed, its assets included a mix of industrial, retail, commercial, hotel and mixed use assets, totaling 172 000m2 of gross lettable area (GLA). The Spear portfolio was 99% Western Cape at the time with one legacy asset being owned outside of the Western Cape. Today, 100% of Spear’s assets are in the Western Cape.
“From 2016 to date the portfolio has undergone some churn in terms of ordinary disposals along with strategic shift disposals as Spear exited the hospitality sub-sector post the Covid-19 pandemic,” says Rossi.
In April, Spear which is the only regionally focused Reit listed on the JSE, announced that it had acquired a real estate portfolio from diversified group, Emira Property Fund worth R 1.146bn. Emira wanted to to sell its Cape assets. The acquisition fitted perfectly with Spear’s investment strategy and expanded its GLA to 502,000m².
“The portfolio has grown from R 1.4bn in 2016 to R4.6bn in 2024 with our average asset value per property increasing to R157m per property. Since 2018 the Spear portfolio has been 100% Western Cape. Currently the GLA under ownership is just shy of 430 000m2 and, post the implementation of the Emira transaction will increase to 502 000m2 of GLA and total asset value of R 5.4bn billion of 100% Western Cape real estate assets,” says Rossi.
He was confident that Spear would be able to maintain its payout ratio at about 95%. Spear has performed well while the listed property sector continues to face challenges because of South Africa’s sluggish economic climate, persistent loadshedding, albeit in a hiatus, higher-for-longer interest rate environment and the more gradual return-to-office trend, according to Rossi.
Rossi emphasised the importance of Spear’s Western Cape specialisation, saying “This has been one of the key enablers in achieving our strong financial performance during financial year 2024. Our highly motivated and focused asset and property management team has also played a significant role, generating value across our core portfolio by following the hallmark of Spear’s active management approach”.
Spear met numerous strategic targets during the reporting period thanks to the strong stewardship of Rossi and his team.
The group acquired The Island Urban Logistics Park on the May 9 2023, for R185m at an initial yield of 9.75% which is aligned with Spear’s strategic objectives to continuously increase portfolio exposure to high-quality industrial real estate with a focus on logistics, urban logistics and bulk warehousing within the Cape Town Metropole.
The Island
Since the acquisition, the property has yielded 10.17% for the 2024 financial year, demonstrating Spear’s active asset management style and ability to find value. The Island acquisition bolstered Spear’s high-quality industrial portfolio and will meaningfully contribute to the sustainable cashflows generated across the balance of the 100% Western Cape portfolio, Rossi says.
During the fourth quarter of 2024 financial year, two new PV solar installations were completed: an extension of Mega Park and Sable Square, which added 2MW to Spear’s PV solar portfolio. Management adopted a three-pronged approach to Spear’s PV Solar rollout, including a combination of capital expenditure installations, roof rental installations with long-dated lease agreements, and instalment sale installations.
Mega Park
Sable Square
To date, more than 55% of the current Spear portfolio has PV solar installed. The commissioned capacity generated 7.4MW in FY2024 and is forecast to generate just under 8MW of electrical supply, providing up to 24% of Spear’s total future energy demands.
Spear started phase 1 bulk infrastructure works on GTX Park in George. GTX Park is located within the greater 1.2 hectare Airport Business Park precinct of George, neighbouring the George Airport.
GTX Park
On the February 7 2024, Spear announced the completion of a private placement and raised R313.5m worth of new equity, demonstrating the market’s confidence in the group.
Spear’s tangible net asset value (TNAV) per share increased 2.79% to R11.79, compared with R 11.47 in the 2023 financial year. This increase was primarily attributed to upwards portfolio fair value adjustments at year-end. The core portfolio showed welcomed asset value growth from growing cashflows and improvements in general real estate fundamentals in the Western Cape, with a like-for-like total of R153m increase in portfolio fair value adjustments in the 2024 financial year.
Spear also exhibits one of the most favourable rental reversion profiles among listed property companies in terms of operational performance with a negative 0.37% rental reversion profile for the diversified portfolio during the reporting period.
Spear’s industrial portfolio demonstrated resilience and growth, with robust occupancy rates of 97.03% and strategic acquisitions like The Island Urban Logistics Park, driving expansion. Similarly, high occupancy rates of 95.54% and positive rental reversion rates in the retail sector underscored stable performance, supported by a defensive positioning strategy and a significant proportion of long-term national tenants. Despite challenges, the commercial sector saw post-period improvements, with occupancy levels at 84.37% and successful relets signalling positive momentum for Spear’s office portfolio.
While the Western Cape demonstrates resilience within a challenging macroeconomic climate, the upcoming general elections on the 29th of May 2024 mark a significant juncture in South Africa’s political landscape.
As many business leaders navigate through economic uncertainties, including muted growth and persistent challenges, Spear’s focus remains on mitigating negative impacts and fostering growth opportunities, Rossi says.
“Despite the hurdles, we anticipate our portfolio to chart a growth path in the year ahead, driven by strategic resilience and prudent management.” says Rossi.
Spear’s team is optimistic about the future. In the upcoming fiscal year, while the trading environment is expected to pose challenges, particularly with consumers facing heightened living costs, the potential onset of an interest rate tapering cycle in the latter half of 2024 brings a glimmer of optimism for both the South African economy and the real estate sector.
Lower financing expenses, coupled with stronger portfolio escalations, are poised to bolster Spear’s profitability, Rossi explains.
Management expects there to be net operating income (NOI) growth at property level in the year ahead, but the extent of distributable income growth in the form of a forecast compared with the 2024 financial year is difficult to quantify at this stage.
Th is given, in particular the higher-for-longer interest rate environment, operating cost creep, and the impact of load-shedding in South Africa in the year ahead.
Management will endeavour to provide an update on its 2025 financial DIPS guidance at its interim 2025 results.
“To navigate market pressures and counteract the absence of real growth stimuli, Spear remains committed to maximising value in the current subdued trading climate. While mindful of the challenges ahead, we maintain cautious optimism that financial year 2025 will align with our mission statement, delivering favourable outcomes for our stakeholders. We are perfectly positioned to seize growth opportunities as they arise and remain confident in our ability to adapt and thrive in an evolving economic landscape,” says Rossi.
Spear’s share price has climbed 19.7% over the past three years. It closed 0.63% higher at R7.95 on Thursday.
Spear was founded in 2011 as a private equity real estate investment business focusing on owning Western Cape assets with a Cape Town preference. The founders of Spear, industry stalwarts Mike Flax, Abu Varachhia and Rossi have propelled Spear from a private equity fund to a JSE listed Reit. Rossi as CEO, is supported by a top-quality executive team being Chief Financial Officer Christiaan Barnard, Chief Investment Officer Kim Pfaff-Karg and Chief Operations Officer Cliff Toerien.
Spear obtains its specialisation through regional investment and its diversification through varying asset type investing.
Spear is a fully internally managed Reit conducting all asset, property, financial and development management in-house. Spear owns No.2 Long Street in Cape Town which is currently where its head office is located.
Spear’s growth intent is to own a high quality, diversified Western Cape only portfolio of R15bn over the next four to seven years with a market capitalisation of circa R9bn.
Rossi says Spear is an attractive buying proposition for investors.
“Investors who allocate their capital to an investment in Spear will get exposure to 100% Western Cape real estate that is located in high quality areas and underpinned by strong lease covenants. Given Spear’s well diversified portfolio investors access a portfolio that has delivered sustainable cashflows from inception, a portfolio that delivers net cashflows from operations, a business that has no exposure to cross currency interest rate swops, a simplistic capital structure that is understandable and investable together with a portfolio that has delivered a total return to shareholders over the past three years of 16% assuming dividends were reinvested and a total return for the 2024 financial year of 23.1% beating the SA Reit Index by 12.8% and the JSE Small Cap Index by 15.8%,” he says.
Spear’s strategy is to remain solely invested in the Western Cape per management’s strategic intent since inception.
“Spear’s focus is quality over quantity and given our active asset management approach to our portfolio operations we like to be within one hour of everyone one of our assets,” says Rossi.
Another attractive attribute about Spear is that it boasts one of the highest inside ownership holdings of any SA Reit with around 23% of shares in issue being held by its board, management and staff. The latter is a strong display of alignment of shareholder interests with those parties related to Spear.
“Investors are assured that they are investing in a business that prides itself in an active asset management approach to the core portfolio and a team of dedicated managers that have delivered market leading rental reversion, in-force escalation and occupancy metrics consistently since inception,” Rossi says.
“Spear’s mission is to be the leading Western Cape focused Reit, to grow our distributions ahead of inflation on an annualised basis and to operate within the top quartile of the SA Reit landscape on a consistent basis. Investors get a management team that has intimate knowledge of the market in which they operate and a proven track record delivering earnings growth and net asset value growth to the market,” he says.
alistair@propertyflash.co.za
This is a paid feature for Spear Reit.
