October 25 2024 15:00
SOUTH AFRICA – WESTERN CAPE
Spear Reit, the only Western Cape specialist landlord that is listed on the JSE has been entrusted to take its investors on a path of consistent returns as it carefully invests in, and manages premium assets across the province.
The company, which initially listed on the AltX of the JSE on November 11 2016, and which then moved to the main board of the bourse on May 22 2017, released a stellar set of financial results for the first half of its 2025 financial year this week. The results covered the six month period from the end of February 2024 to the end of August 2024.
Spear grew its distributable income per share 2.05% during the reporting period to 41.61 cents on a period-by-period basis; a healthy performance given that it was operating in a high interest rate environment in this period. The interest rate cutting cycle only began in September. Spear’s dividend per share grew 3.14% compared with the prior corresponding period. The company declared a dividend of 39.53 cents, based on a 95% payout ratio. Spear is one of a limited number of Reits paying in excess of 90% of their distributable income as a dividend each financial year. Reits are required to pay at least 75% of their distributable income as dividends to their shareholders. Reits are favoured by pension fund investors who seek regular dividend payouts from their investments and a lack of volatility in the overall return of these stocks.
The group is a real estate investment trust (Reit) which was formed to enable numerous people to invest in the Western Cape effectively. Spear owns and manages an assortment of commercial properties across its portfolio which is valued at R4.22bn. Its keen stewardship of these assets helps its tenants to thrive so that they can serve their customers and reward their staff. Spear’s CEO Quintin Rossi says the company is committed to the Western Cape for a plethora of reasons. Its commercial centre; Cape Town stands out among other cities across the world in terms of “investable-ness” over a sustained period.
“The Western Cape has the lowest unemployment rate compared with the other eight provinces, at about 24%. We have found that when corporates and global investors consider deploying capital in South Africa, they look at the Western Cape first. It’s inspiring to note that the city of Cape Town is also set to spend R43bn on infrastructure over the next three years while, for comparison Johannesburg is spending R21bn over the same period. The story of capital is that it is lazy. It goes along the path of least resistance,” Rossi says.
He says companies like Spear need to excel so that they reward investors and help to uplift the Western Cape economy, playing a role in justifying the province’s investment case.
Commenting on the results, Rossi says he is impressed with that which his team ha achieved.
“Within the context of the persistently tough trading environment, we are pleased with Spear’s performance in HY2025. The interim period has established a solid foundation to build on for the remainder of the financial year. Our Western Cape-focused strategy, coupled with our hands-on asset management approach, have allowed us to continue delivering value to our stakeholders as Spear delivers a mission statement-aligned financial and operational outcome for the reporting period,” he says.
“We continue to be optimistic as the economic landscape shows signs of improvement, particularly since the formation of the Government of National Unity (GNU) in SA, the easing off of loadshedding thanks to the stabilisation of the national grid, and the commencement of the interest rate tapering cycle by the Reserve Bank, which have all positively impacted investment confidence,” he says.
Rossi believes that there are encouraging signs for the country’s real estate markets overall, as sovereign bond yields compress, inflation comes under control and economic expansion begins. These markets will see improved occupancy rates, increased tenant activity, and stronger financial performance.
Spear grew its revenue 6.34% excluding smoothing, driven by strong leasing activity, reduced vacancies and the maintenance of in-force escalations.
Spear achieved a 6.34% increase in group revenue, driven by strong leasing activity, reducing vacancies, and maintaining in-force escalations. The net property operating profit for the reporting period saw an increase of 1.92% compared with the half-year period to end-August 2024, reflecting resilient expense management. No smoothing of revenue occured.
Nesi Chetty, fund manager and Head of Property at Stanlib, says Spear is a stand-out performer in the current financial reporting season.
“Leasing fundamentals across the Spear portfolio have been strong over the past 12 months. A buoyant jobs market, scarcity of land, an increasing Business Process Outsourcing (BPO) presence in the Western Cape, along with strong asset management from the company, have contributed to the strong year-to-date occupancies and escalation rates,” he says.
Many landlords in the Mother City are signing up BPO companies and service providers as tenants at their offices. BPO groups are involved when companies outsource some aspect of their operations to a third-party vendor or service provider. A BPO call centre is a team of outsourced agents who handle incoming and outgoing customer calls for other businesses. BPO companies like to be in Cape Town as the city has similar time zones to Europe and labour costs are relatively lower than in a number of other markets.
Spear achieved like-for-like contractual income growth of 9.54%, and like-for-like net property operating profit growth of 9.48%, driven by decreased vacancies and strong in-force escalations and rental reversions. During the interim period, rental reversions improved to +5.35%, indicating positive outcomes in lease renewals and relets.
Spear’s R4.22bn portfolio consisted of 27 property assets, with a total gross lettable area (GLA) of 405,709m² at the end of the reporting period. Post-period Spear completed the acquisition of a Western Cape portfolio. Rossi says that while the period presented several challenges, including increased property operating and management expenses because of the severe effect of storms and record-breaking rainfall in Cape Town between June and August 2024, profitability was only marginally affected by the higher-than-normal repairs and maintenance interventions required.
“We are laser focused on absorbing these additional costs in the final six months of the 2025 financial year,” he says.
Northpoint Logistics Park, Brackenfell
Spear’s portfolio’s occupancy rate improved 200 basis points to 95%, with its office assets standing out, with more than 9,000m² of commercial office space let during the reporting period. This resulted in a 616 basis points improvement in commercial office occupancy. This suggests that certain offices in the Western Cape are attracting high quality tenants again. Employers and employees are also working in offices again especially within certain multinationals.
“Our marketing and leasing initiatives have contributed to these positive outcomes, as management prioritised reducing overall vacancy rates, particularly in the office portfolio,” says Rossi.
At the end of the reporting period, the overall portfolio vacancy rate had dropped to 4.92%, down from 6.88% at the end of the 2024 financial year. This improvement is well below the national average vacancy rates recorded by the Investment Property Databank (IPD) and the South African Property Owners Association (Sapoa).
Spear’s contractual escalations averaged 7.47%, and the weighted average lease expiry (WALE) is steady at 26 months, providing stability to the company’s income stream.
Spear’s balance sheet is also robust, with gearing reduced to 23.93% from 31.60% over the six months. Gearing measures a company’s debt relative to its asset base. For Reits, we also refer to this as the company’s loan-to-value or LTV. Spear had disposed of non-core assets, including the Liberty Life Building in Century City and 142 Edward Street in Tygervalley. These disposals strengthen the company’s liquidity position and enable management to allocate capital into strategy aligned Western Cape investment opportunities.
Spear has no immediate debt refinancing obligations, because of proactive management its debt. Spear’s rental collections were strong, with a collection rate of 98.05% for the reporting period.
Chetty says Spear is trading at an attractive forward dividend yield, while still reflecting a notable discount to its latest reported net asset value (NAV).
“The company maintains a robust pipeline of value-creating opportunities, including planned brownfield redevelopments. Spear is steadily becoming a core holding in many property funds, particularly within the small to mid-cap segment,” he says.
Rossi is optimistic about the prospects for the remainder of the 2025 financial year. The company is integrating its newly acquired real estate portfolio, wroth R1.146 billion, from JSE-listed Emira Property Fund. This follows the announcement in October confirming the successful implementation of the transaction. Following this acquisition, Spear’s total portfolio value increased to R5.36bn, with a market capitalisation of R3.2bn.
“We remain focused on executing our strategic priorities for FY2025. With our high-quality portfolio, strong tenant relationships, and active asset management approach, this is an exciting time for the real estate sector and Spear is well-positioned to continue delivering value to our shareholders and stakeholders in the months ahead,” he says.
Spear provided full-year distribution guidance, forecasting DIPS growth of between 2% and 4% compared with the 2024 financial year, with the payout ratio maintained at 95%.
This outlook is supported by key assumptions, including no load-shedding for the remainder of the year, reduced vacancies, successful lease renewals, and stable tenant performance in absorbing rising utility and municipal costs.
“Our full-year guidance reflects the strength of our team and portfolio. We are confident that, with these positive indicators, we can continue to achieve our strategic objectives for the year,” says Rossi.
Independent analyst, Keillen Ndlovu agrees that Spear is on a strong path.
“Spear crafted a unique/niche strategy of focusing on the Western Cape, widely considered the best-performing and best-managed province in South Africa. There is increased interest in Spear. However, its size and liquidity are a constraint for some institutional investors. Management has been carefully growing the portfolio through acquisitions and increasing its shares in issue, and therefore market capitalisation, through private placements,” he says.
View the Spear HY2025 results here:
https://spearprop.co.za/pdf/financial-results/2025/SEAHY25.pdf
alistair@propertyflash.co.za
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