Wrap Text
Voluntary Operational And Financial Update For The Third Quarter Ending 30 November 2023, Of The 2024 Financial Year
SPEAR REIT LIMITED
(Incorporated in the Republic of South Africa)
(Registration number: 2015/407237/06)
Share code: SEA
ISIN: ZAE000228995
LEI: 378900F76170CCB33C50
Approved as a REIT by the JSE
("Spear" or "the Company")
VOLUNTARY OPERATIONAL AND FINANCIAL UPDATE FOR THE THIRD QUARTER, ENDING
30 NOVEMBER 2023, OF THE 2024 FINANCIAL YEAR
1. INTRODUCTION
Spear is pleased to provide a high-level operational and financial update for the three months ending
30 November 2023 ("Q3") of the financial year ending 29 February 2024 ("FY24").
To date, Spear remains the only regionally focussed REIT listed on the JSE. Spear's sole focus on the
Western Cape has proven to be a sound investment strategy, despite the generally negative economic and
political climate in South Africa. Spear has stood out as a counter-cyclical real estate investment, with the
majority of Spear's key performance metrics outpacing its diversified peers with national asset ownership
strategies. Despite Spear's regional focus and active asset management approach to operating its
business, market headwinds cannot be fully mitigated at all times. Spear's core portfolio has for the most
part traded consistently through Q3 FY24, largely in line with management's expectations. Q3 FY24
presented numerous challenges both within the operating environment and with the out of the ordinary
"Cape Storms" of 2023.
By and large Q3 FY24 accomplished most of the key performance metrics set by management for the
reporting period which will have a positive effect across the operating business over the next two to three
quarters, as the major vacancy risk was mitigated, average in-force escalation rates were improved and a
marginal improvement to the weighted average lease expiry profile was achieved. Despite a marginal
increase in overall portfolio vacancies during Q3 FY24, management reports strong leasing demand across
the core portfolio with longer than normal decision making by occupiers being largely responsible for the
creep in the portfolio vacancy rate which is concentrated in the commercial portfolio.
Portfolio wide asset management initiatives are yielding strategy aligned outcomes, as rental reversion
milestones are met and improved average in-force escalation rates are maintained. Spear's portfolio rental
reversion rate for FY24 year to date was -1.12% (HY24: 3.57% and FY23: -3.69%) and the average portfolio
in-force escalation rate was 7.44% for the FY24 year to date (FY23: 7.40%).
Trading conditions continue to be extremely tough, despite the Western Cape's appeal and performance
and it therefore remains imperative that management continues to successfully implement its active asset
management and hands-on property management strategies. As advised during the HY24
communications, Spear's renewal profile has seen a proactive decline as renewals are concluded timeously
and, in some instances, well ahead of the expiry dates. Management is very pleased that this momentum
has continued into Q3 FY24, as in excess of 139 900 m2 of portfolio gross lettable area ("GLA") was either
renewed or relet from Q1 to Q3 FY24, versus the 133 343 m2 that was classified as portfolio GLA which
would either reach expiry or become vacant during the same period.
Spear's business is not immune to the macroeconomic environment, that has been one of volatility, low
growth and sustained inflationary pressures. Cost creep and rising interest rates have presented further
challenges which had to be absorbed and where possible mitigated to defend the overall operating and
financial performance of Spear on a year-to-date basis. Spear's Q3 FY24 update must be viewed in the
context that the SARB will likely maintain a higher for longer approach to the interest rate environment with
any potential rate cuts only foreseeable towards the second half of 2024. Diesel recovery from tenants has
remained consistent, with 96% of the cost of diesel supplied across the portfolio to operate back-up power
generators being successfully recovered.
The Western Cape provincial and municipal authorities continue to deliver on their commitment to improve
and invest in infrastructure in the region, as population growth numbers consistently tick upwards due to
semigration to the Western Cape. Spear's Western Cape hands on property management approach will
continue to contribute to improved core portfolio metrics and the ongoing financial and operational health
of Spear, during FY24. Spear's high-quality portfolio remains defensive in nature, positioning the Company
to take advantage of growth opportunities in the Western Cape.
The expansion of two major PV Solar roof projects were concluded during Q3 FY24, which will add 2.1 MW
of additional solar capacity to the Spear portfolio once commissioned in Q4 FY24. The roof rental structure
of the expansion projects will enhance non-GLA revenue with both projects being concluded on 25-year
roof rental agreements which include annual escalation rates. Currently three wheeling projects are
undergoing feasibility studies to ascertain the suitability and viability of implementation. Upon
commissioning of the two expansion projects, Spear's total PV Solar installed energy production capacity
will be just under 8 MW, generating 25% of Spear's total portfolio wide electricity demand.
Spear's balance sheet and income statement remain robust and well managed as cost of debt has improved
by 4bps during Q3 FY24 and Spear's fixed debt ratio has increased to just under 40% (the strategic band
of fixed debt is for 65% to 75% of Spear's debt to be fixed for a period of 24 to 36 months)
Cash collections for Q3 FY24 remain consistent at 97.76%, with sustainable cashflows across the portfolio,
which management believes will be maintained throughout FY24. Receivables remain under control,
despite the economic headwinds being experienced in South Africa.
2. OPERATIONAL UPDATE FOR THE THREE MONTHS ENDING 30 NOVEMBER 2023
Sectoral Update:
Industrial:
Spear's industrial portfolio remains a key performer within the core portfolio as well-located assets not
materially impacted by the severity of loadshedding remain in high demand. The industrial portfolio has
maintained its robust performance during Q3 FY24, with consistent demand for industrial rental
opportunities. Spear's load curtailment initiatives in certain multi-let industrial parks offer users consistent
energy supply, during certain stages of loadshedding when other metros are without electricity.
Operational metrics within the industrial portfolio have remained consistent and in line with management's
expectations despite the tough trading and economic environment. Rental reversions for FY24 have printed
a positive 5,40% and in-force average escalations being the highest of all sub-sectors of the Spear portfolio,
at 7.66%. Spear's industrial portfolio vacancies have declined to 1.41% as at Q3 FY24 from a vacancy rate
of 1.43% of total portfolio GLA in HY24.
Bulk infrastructure works have commenced on site at Spear's 30 000 m2 GTX Industrial Park in George,
which will continue for the next 4 months. Letting enquires have been strong since the launch of the
development, resulting in the acceleration of top structure site development plans across the eight
respective sites.
Spear's defensive industrial portfolio comprises multi-let industrial, urban logistics, warehousing,
manufacturing and logistics assets in sought after locations within the Cape Metropole, at rental rates that
remain attractive across the board for small, medium and large enterprises. Spear's industrial portfolio
makes up 58% of total portfolio GLA further underpinning the high-quality nature and attractiveness of the
regionally focussed core portfolio.
Convenience Retail:
Spear's convenience retail portfolio has made material strides during Q3 FY24, despite the growing
pressure facing consumers, as living costs creep upwards and high interest rates impact disposable
income. Spear has diligently stuck to its strategy of only investing into the convenience retail sub-sector,
which has shown more resilience in the current macroeconomic climate.
Spear's retail assets have performed consistently and have returned to their historically high occupancy
rates of 97.05% during Q3 FY24, generating stronger cashflows and generating a positive rental reversion
rate of 4,65%, with in-force average escalations improving by 14 bps from HY24 to 7.24% in Q3 FY24.
Spear's retail portfolio remains defensively positioned, in both location and tenant mix composition in a
trading environment where tenant credit risk may be more prevalent with 41% of Spear's retail portfolio by
GLA being occupied by national tenants on long-dated leases with excellent payment records.
Spear's retail portfolio is located in high-growth nodes servicing a wide range of LSM groups. The diverse
mix and product offering of the retail portfolio has resulted in numerous brand additions by national retailers.
Commercial:
Despite a valiant effort to aggressively reduce the commercial office portfolio vacancy rate Q3 FY24 ended
off with an increased office vacancy rate due to a protracted lease negotiations on a large commercial area
that was vacated at 100 Fairways, Parow, Cape Town at the end of November 2023. The total area vacated
at the end of November 2023 was 7,534 m2 of which 2,203 m2 has already been relet (effective
immediately) at 5% higher gross rental than the exit rental of the previous tenant. As advised the balance
of the vacant space being 5,330 m2 is currently in an advanced stage of negotiation with a large occupier.
Management is confident that this vacancy is transitory in nature and will not be maintained in the short
term given the shortage of supply in the large occupier spaces in Cape Town.
Letting activity within the commercial portfolio has been remained consistent and encouraging, with
additional inroads being made into office vacancies at No. 2 Long Street, Northgate Corporate Office Park
and Sable Square.
Spear's commercial assets are all located in sought after locations, fitted with sufficient back-up power
generation capacity, have generous parking ratios and are positioned to the market with attractive lease
terms which have been key drivers to the letting activity year to date.
Outside of just the large occupier demand Spear's commercial portfolio remains well positioned to benefit
from the return to office momentum as small and medium scale occupiers return to the office leasing market.
FY24 Q3
Development Total FY23
Industrial Commercial Retail FY23 Q3
Land FY24 Q3 Total
Number of properties 9 13 6 28 30 28
Value of properties
1,536,624 2,159,406 708,507 55,801 4,460,338 4,441,120 4,215,939
(R'000)
Value % 34% 49% 16% 1% 100% - -
Property revenue excl
59,966 75,990 24,354 7 160,317 143,868 573,764
smoothing (R'000)
Revenue % 37.40% 47.40% 15.19% 0.00% 100% - -
GLA m² 252,941 126,235 47,366 - 426,542 426,029 409,868
GLA % 59% 30% 11% 0% 100% - -
Vacant area m² 6,033 19,724 1,397 - 27,154 29,303 32,034
Vacancy per sector % 2.39% 15.63% 2.95% - - - -
Vacancy on total GLA % 1.41% 4.62% 0.33% - 6.37% 6.88% 7.82%
Reversion % YTD 5.40% -2.60% 4.65% - -1.12% -4.44% -3.69%
Weighted average in-
7.66% 7.42% 7.24% - 7.44% 6.75% 7.40%
force escalation %
Weighted average lease
25.55 29.38 24.00 - 27.09 26.81 26.93
expiry (Months)
Group FY24 Q3 HY24 Total FY23 Total
Loan to value % 40.70 39.58 36.30
Interest cover ratio Times 2.32 2.36 2.51
Tangible net asset value R 11.46 11.62 11.47
Total distributable income R'000 48,500 90,991 188,417
SA REIT Cost to Income % 43.38 43.32 43.45
SA REIT Administrative cost to income % 5.51 5.77 6.50
Weighted average cost of debt % 9.55 9.59 8.66
Weighted average cost of variable debt % 10.10 10.17 9.05
Weighted average cost of fixed debt % 8.55 8.27 8.18
Fixed debt ratio % 38.02 33.76 53.61
Weighted Average expiry of debt Months 27.07 27.00 30.14
Number of net shares in issue '000 222,780 223,173 226,065
Letting activity
The table below includes only leases that were concluded and signed during the 9 months ended
30 November 2023.
Gross Gross
Expiries and Average Renewals / Average
rental at New Rental
Vacated Gross expiry New Lets Gross New
expiry Rental reversion
GLA m² rental R/m² GLA m² Rental R/m²
R'000 R'000
Commercial 32,313 4,758 147.24 30,378 4,357 143.41 -2.60%
Industrial 89,958 5,033 55.95 98,776 5,825 58.97 5.40%
Retail 11,071 1,124 101.49 10,756 1,142 106.21 4.65%
Total 133,343 10,915 81.86 139,910 11,324 80.94 -1.12%
As communicated during the HY24 interim results presentation, improved reversionary metrics were
starting to manifest in the commercial portfolio as a result of stronger letting activity and improved leasing
terms being concluded with tenants. The latter improvements resulted in the negative rental reversion rate
moving from -7.87% at HY24 to -2.60% for the FY24 year to date.
The industrial sub-sector showed a consistent positive rental reversion rate of 5,40%, as successful renewal
terms were negotiated at improved rental rates given the prime locations of Spear's assets, the availability
of more consistent electricity supply and the holistically attractive nature of Spear's rental terms.
The retail sub-sector showed a marked recovery in rental reversion profiles from HY24 with a positive rental
reversion rate of 4,65%. Trading across the retail portfolio has been strong for the quarter and an overall
improvement in the rental rate per square meter achieved on new leases has boosted the reversionary
profile from a HY24 negative rate to a positive rental reversion rate for the FY24 year to date.
Post 30 November 2023 the following leases have been concluded:
Vacant Space Let circa 2 346 m2:
Offices – 415 m2, No. 2 Long Street, Cape Town
Offices – 748 m2, 34 Marine Drive, Paarden Eiland
Retail – 332 m2, 78 on Edward, Tygervalley
Industrial – 290 m2, Blackheath Park, Blackheath
Industrial – 560 m2, Mega Park, Bellville South
FY24 lease renewal and letting activity momentum remains positive, as aggressive letting and marketing
strategies yield results. The portfolio vacancy rate as at 13 December 2023 is 6.19% being a contraction of
0.18% since end of Q3 FY24.
3. FINANCIAL UPDATE
Group funding
Management has been actively monitoring the hedging environment to increase the group hedging profile
in line with its strategy, either through market products or asset disposals. Debt hedging products have
become less expensive as the interest rate cycle telegraphs a decline over the next 7 to 8 months.
Management concluded fixes to the value of R194 million at a base rate of 7.80% for 3 years during
Q3 FY24. Management is of the view that SWAP rates will in all likelihood start to taper off in Q4 FY24 and
will allow it to act on its hedging strategy as and when feasible options become available. The strategy
remains to have a defensive hedging profile in place of between 65% to 75%, as market conditions permit,
without having a negative impact on earnings.
Covenants
Covenant 30 November 2023
Loan-to-value 50% 40.70%
Interest cover ratio 2 times 2.32 times
Spear's LTV is in line with the LTV sensitivity as disclosed in the HY24 interim results presentation. Spear's
internal strategy is to operate within a 38% to 43% LTV ratio at varying times within property cycles.
Currently the Spear LTV is in the mid-point of the internal LTV band. The disposal of the Liberty Life Building
in Century City will further reduce Spear's LTV by 5%, dropping the group LTV ratio to between 34% and
35%, prior to any fair value adjustments, by the end of FY24.
Cash Collections and availability
The Spear group's cash collections remain strong at just under 98% for the FY24 year to date. Post the
HY24 distribution payment, the Spear group has R120 000 000 in available cash. The positive collections
and increasing levels of available cash will support a continued dividend pay-out ratio of between 94% and
95%.
4. OUTLOOK
The macro-economic climate remains extremely challenging despite the stronger performance of the
Western Cape provincially in various sectors of the economy. The national unemployment rate must be
mitigated through jobs growth and investment by both the private and public sector in order to drive growth
in gross domestic product. Headwinds in the national logistics eco-system within the ports and rail networks
is a further growth inhibitor for South Africa and unnecessary contributor to cost price inflation. Amidst all
of the aforesaid, green shoots continue to emerge as real strides are made to stem the impact of
loadshedding within the Western Cape and South Africa. The Western Cape has lead by example in driving
down the unemployment rate in the province and boasting the highest job growth numbers of a South
African province and the lowest provincial unemployment rate in South Africa for 2023. 2024 will be another
watershed year for South Africa and we emphatically encourage every South African who is willing and
able to exercise their democratic right to cast their votes during the 2024 general elections.
The positive effects of semigration and strong return of the tourism and hospitality sector to the Western
Cape will bode well for Spear for the balance of FY24 and beyond. Nodal expansion of residential areas
and mixed use precincts have driven demand for space solutions across the Spear portfolio and will drive
economic investment and development within the Western Cape for the foreseeable future as the entire
province is positioned as an investment opportunity with dependable municipal infrastructure.
The trading environment will remain challenging on all fronts, as consumers absorb the higher cost of living
and the operating- and occupancy- cost increases impact the net revenue base of tenants. The prospect
of an interest rate tapering cycle in South Africa towards the second half of 2024, bodes well for the general
South African economy as well as the real estate sector, as contracting finance costs coupled with stronger
portfolio in-force escalations would result in improved profitability.
Management has maintained a highly strategic, obsessive and focussed approach to cost controls and
asset management over the Q3 FY24 period and remain confident that Spear will continue to deliver
credible, predictable and consistent outcomes for all stakeholders.
Despite the transitory increase in portfolio vacancies, the improved overall operating metrics of the portfolio
have reversed the negative distributable income per share ("DIPS") as reported in the HY24 interim results
presentation. Given the available information management has at its disposal at the time of this update,
management guides that the full year FY24 DIPS will be within a range of a 0% to 1,5% higher than the
DIPS of FY23.
Spear's guidance is based upon, informed by and impacted by the following:
- loadshedding stages are mostly limited to between stage 1 and stage 4 in City of Cape Town for the
remainder of FY24;
- vacancies are reduced in line with management's forecast;
- lease renewals are concluded in line with management's forecast;
- no major tenant failures occur during the year;
- tenants continue to successfully absorb rising costs associated with utility charges, municipal rates
and diesel charges;
- no further SA Reserve Bank interest rate hikes; and
- no civil unrest within Cape Town, the Western Cape or South Africa.
Any changes in the above assumptions may affect management's forecast for the year ending
29 February 2024.
The information and opinions contained above are recorded and expressed in good faith and are based on
reliable information provided to management.
No representation, warranty, undertaking or guarantee of whatsoever nature is made or given with regard
to the accuracy and/or completeness of such information and/or the correctness of such opinions.
The Q3 FY24 financial information contained in this announcement has not been audited or reviewed by
the external auditors of the Company.
Cape Town
14 December 2023
Sponsor
PSG Capital
Date: 14-12-2023 10:30:00
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