The management team has warded off inflationary pressures, interest rate hikes, operating ‘cost-creep’ and general trading challenges and defended the net property income line successfully, reporting an increase of 5.93% in net property operating profit compared to the prior corresponding period.
During the results’ presentation to shareholders, CEO Quintin Rossi stressed that sustainable cash-flow is at the centre of the investment team’s objectives, no matter the market conditions. “The high quality and defensive nature of Spear’s asset base coupled with strong lease covenants, all overseen by a highly experienced asset management team have reaped the results,” said Rossi. With revenue of R294million for the period, Spear owns 30 properties across retail, commercial, industrial and hospitality sectors. A total Gross Lettable Area (GLA) of 443 155m2 maintaining a consistently high occupancy rate of 94%. The Spear portfolio is currently valued at R4.48 billion. This is underpinned by contractual escalations of 6.34%, WALE (weighted average lease expiry) of 27 months and a high percentage of A-grade tenants. Letting activity shows a notable improvement on rental reversions, reported this period at (4.08%) and attributed to a flattening-out and move from negative towards positive rental growth territory.
Spear maintains its exit strategy of its hospitality assets and the only remaining holding in this sector, 15 on Orange is let on a fixed-income, triple net lease agreement to The Capital Hotels & Apartment Group with zero exposure to variable income. Rossi advised that he anticipates Spear to be fully divested out of the hospitality sector by HY2024.
Attesting to the company’s Western Cape-only strategy Rossi outlined the Cape’s Real Estate performance which has fared far better than the balance of the South African property market, and acknowledged that the effects of semigration and the localisation of supply-chain-management solutions have provided great opportunities for their existing portfolio, notably in the industrial sector, which covers 57% in gross lettable area under ownership. Commercial nodes show an acceleration trend, which in Rossi’s opinion is underpinned by the Western Cape metropole and City of Cape Town’s drive to alleviate the electricity crises, along with its administration targets which are set to encourage investment into the province.
Construction cranes crisscross the Western Cape skyline with all property types under development says Rossi– signifying the 33% year-on-year increase in value of the building plans approved in the Western Cape this year, with R17.8 billion between January and June of 2022 alone. “This will no doubt mean a long-term benefit to the Cape Metropole and Western Cape as infrastructure programmes are fundable and maintenance programmes are continuously executed,” he said.
According to Christiaan Barnard CFO at Spear REIT, management will maintain its ongoing solar PV and water augmentation commitments across the portfolio, with a target of over 50% solar coverage earmarked. This is in line with efforts to place less reliance on fossil, fuel-generated electricity supply and reducing the group’s carbon footprint.
Spear’s Loan to Value (LTV) of 38.69% is fully aligned with the growth strategy of operating a group LTV band ranging between 38% - 43% at any given time. Three non-core assets have been disposed of over the past nine months with a capital value of R179 million. All properties were sold at a premium to book value and the disposal proceeds will be redeployed into accretive investment opportunities. Organic portfolio improvements to the value of R74 million have been allocated to the redevelopment of 50% of Blackheath Park as a result of the successful conclusion of a long-term lease with local manufacturer, Bravo Brands.
The group recently announced a R185m acquisition of 21 000m2 urban logistics park, “The Island”, situated in Paarden Island, Cape Town, funded via proceeds realised from recent non-core disposals and bank debt. The Island Urban Logistics Park is 100% occupied by local and international tenants. As supply chains and logistics services are redesigned as a result of the global pandemic and the adoption of a China-Plus-One strategy, urban logistics parks have become attractive investment opportunities in South Africa.
Outlook
Rossi confirmed that Spear remains ‘on track’ to achieve a distributable income per share (DIPS) growth of between 5% and 7% for FY2023 based on no further Covid-related lockdowns, a realisation of the forecasted vacancy and lease renewal rates, mitigation of repo rate increases from the Reserve Bank, and no worsening load shedding burdens for the forthcoming months. Moody’s revised City of Cape Town rating to ‘investment grade with a stable outlook, as well as Ratings Afrika announcing City of Cape Town as the only metro still considered financially stable. This underpins Spear’s outlook that the Western Cape is poised to outperform the rest of the South African economy and drive development as job and income growth in the region surpasses other provinces.
Spear REIT Limited is the only regionally, specialised Real Estate Investment Trust listed on the JSE stock exchange.