Wrap Text
Unaudited Consolidated Interim Results For Six Months Ended 31 August 2018
SPEAR REIT LIMITED
Incorporated in the Republic of South Africa
Registration number 2015/407237/06
JSE share code: SEA
ISIN: ZAE000228995
(Approved as a REIT by the JSE)
("Spear" or "the group" or "the company")
Unaudited consolidated interim results
for six months ended 31 August 2018
Highlights
- 41.73 cents per share
Interim distribution target achieved
- 9% - 11%
FY2019 distribution growth forecast
- 98.88%
Occupancy rate
- R3.37 billion
Asset value
- 7.68%
Asset value increase from FY2018
- 36 months
Weighted average lease expiry ("WALE")
- 36.01%
Fund loan-to-value ratio ("LTV")
Nature of the Business
Spear REIT Limited listed as a Real Estate Investment Trust ("REIT") on the AltX board of the
Johannesburg Stock Exchange ("JSE") on 11 November 2016 and moved to the main board of
the JSE on 22 May 2017. Its main business is investing in high-quality income-generating real
estate across all sectors within the Western Cape, predominantly in the Cape Town region.
The company conducts its business directly and through a number of subsidiaries, collectively
referred to as the "group".
The company's property and asset management functions are internally and directly managed
by the Spear executive management team.
Condensed Consolidated Statement
of Financial Position
Group Group Group
Unaudited Unaudited Audited
6 months 6 months Year
ended ended ended
August 2018 August 2017 February 2018
R'000 R'000 R'000
ASSETS
Non-current assets
Investment property (including straight-line
accrual) 3 374 513 2 713 264 2 912 417
Property, plant and equipment 3 597 284 1 785
Financial assets 61 408 - 55 810
Deferred taxation 6 780 6 533 5 838
3 446 298 2 720 081 2 975 850
Current assets
Non-current assets held for sale - - 221 492
Financial assets 10 926 62 822 6 466
Trade and other receivables 8 455 8 720 13 132
Cash and cash equivalents 17 404 10 675 10 220
Insurance claim receivable - 5 178 178
36 785 87 395 251 488
TOTAL ASSETS 3 483 083 2 807 476 3 227 338
EQUITY AND LIABILITIES
Shareholders' interest
Share capital 1 756 761 1 531 702 1 547 407
Share-based payment reserve 7 256 4 332 4 394
Accumulated income 398 512 175 256 365 517
Total attributable to owners 2 162 529 1 711 290 1 917 318
Non-controlling interest 54 155 55 217 54 155
2 216 684 1 766 507 1 971 473
Liabilities
Non-current liabilities
Financial liabilities 1 070 502 1 010 144 1 053 434
1 070 502 1 010 144 1 053 434
Current liabilities
Financial liabilities 144 615 - 152 536
Other financial liabilities - 6 485 -
Loans from related parties 3 087 444 8 411
Trade and other payables 47 551 22 779 40 840
Deferred revenue 644 1 117 644
195 897 30 825 202 431
TOTAL LIABILITIES 1 266 399 1 040 969 1 255 865
TOTAL EQUITY AND LIABILITIES 3 483 083 2 807 476 3 227 338
Number of ordinary shares in issue 185 388 709 162 515 859 165 190 689
Treasury shares (196 955) (211 573) (1 424 139)
Net ordinary shares in issue 185 191 754 162 304 286 163 766 550
Gearing ratio (%) 36.01 37.23 38.48
Net asset value per share (cents) 1 166 1 053 1 161
Tangible net asset value per share (cents) 1 163 1 049 1 157
Condensed Consolidated Statement
of Comprehensive Income
Group Group Group
Unaudited Unaudited Audited
6 months 6 months Year
ended ended ended
August 2018 August 2017 February 2018
R'000 R'000 R'000
- Contractual rental income 155 389 90 405 232 896
- Tenant recoveries 47 244 16 979 54 179
- Straight-line rental income accrual 6 257 8 662 16 980
Property revenue 208 890 116 046 304 055
Other income 3 729 4 703 12 540
Total revenue 212 619 120 749 316 595
Property operating and management expenses (68 284) (29 717) (87 422)
Net property-related income 144 335 91 032 229 173
Administrative expenses (10 901) (7 203) (17 530)
Net property operating profit 133 434 83 829 211 643
Fair value adjustment - investment properties 24 204 80 141 252 535
Depreciation (1 090) (44) (441)
Formation and listing cost - - (314)
Share-based payment expense (2 862) (392) (455)
Profit from operations 153 686 163 534 462 968
Net interest (50 315) (29 502) (76 044)
- Finance costs (54 964) (31 535) (82 297)
- Finance income 4 649 2 033 6 253
Profit before taxation 103 371 134 032 386 924
Taxation (241) - (695)
Profit for the period 103 130 134 032 386 229
Other comprehensive income - - -
Total comprehensive income for the period 103 130 134 032 386 229
Attributable to:
Equity owners of the parent 101 010 132 971 383 186
Non-controlling interest 2 120 1 061 3 043
Total comprehensive income for the period 103 130 134 032 386 229
Basic earnings per share (cents) 58.20 111.37 271.60
Diluted earnings per share (cents) 58.20 111.37 271.60
Distribution per share (cents) 41.73 36.95 78.50
Interest cover ratio (times) 2.53 2.55 2.56
Condensed Consolidated Statement
of Changes in Equity
Accu- Total Non-
Share mulated Equity attributable controlling Total
capital profit reserve to parent interest equity
Group R'000 R'000 R'000 R'000 R'000 R'000
Balance as at
1 March 2017 917 538 65 331 3 939 986 808 - 986 808
Sale of investment
in subsidiary - - - - 54 155 54 155
Profit for the
period - 132 971 - 132 971 1 061 134 032
Issue of shares 614 164 - - 614 164 - 614 164
Distributions to
shareholders - (23 046) - (23 046) - (23 046)
Share-based
payment expense - - 392 392 - 392
Balance as at
31 August 2017 1 531 702 175 256 4 331 1 711 289 55 216 1 766 505
Balance as at
1 September 2017 1 531 702 175 256 4 331 1 711 289 55 216 1 766 505
Profit for the
period - 250 215 - 250 215 1 982 252 197
Distribution
to minority
shareholder - - - - (3 043) (3 043)
Issue of shares 24 762 - - 24 762 - 24 762
Disposal of
treasury shares (9 057) - - (9 057) - (9 057)
Distributions to
shareholders - (59 954) - (59 954) - (59 954)
Share-based
payment expense - - 63 63 - 63
Balance as at
28 February 2018 1 547 407 365 517 4 394 1 917 318 54 155 1 971 473
Balance as at
01 March 2018 1 547 407 365 517 4 394 1 917 318 54 155 1 971 473
Profit for the
period - 101 010 - 101 010 2 120 103 130
Distribution
to minority
shareholder - - - - (2 120) (2 120)
Issue of shares 196 886 - - 196 886 - 196 886
Acquisition of
treasury shares 12 468 - - 12 468 - 12 468
Distributions to
shareholders - (68 016) - (68 016) - (68 016)
Share-based
payment expense - - 2 862 2 862 - 2 862
Balance as at
31 August 2018 1 756 761 398 511 7 256 2 162 528 54 155 2 216 684
Condensed Consolidated Statement
of Cash Flows
Group Group Group
Unaudited Unaudited Audited
6 months 6 months Year
ended ended ended
August 2018 August 2017 February 2018
R'000 R'000 R'000
Cash generated from operations
Profit before tax 103 371 134 032 386 924
Adjustments for:
Straight-line revenue accrual (6 257) (8 662) (16 980)
Fair value adjustments - investment property (24 204) (80 141) (252 535)
Depreciation 1 090 44 441
Finance income (4 649) (2 033) (6 253)
Finance cost 54 964 31 535 82 297
Rental loss credits - (1 586) (2 059)
Share-based payment reserve 2 862 392 454
Reclassification of trade receivables (4 460) - (4 752)
Changes in working capital
Trade and other receivables 4 677 (628) (5 040)
Trade and other payables 6 711 1 224 19 288
Cash generated from operating activities 134 105 74 177 201 785
Finance income 2 742 2 033 1 602
Finance cost (54 964) (31 535) (82 297)
Distribution paid (68 016) (23 046) (83 000)
Taxation (paid)/received (241) 11 11
Net cash generated from operation activities 13 626 21 640 38 101
Cash flows from investing activities
Acquisition of investment property (262 554) (363 050) (1 278 255)
Cost incurred on developments (30 482) - -
Proceeds on sale of investment property 223 522 - 15 968
Acquisition of subsidiary (62 282) - -
Acquisition of property, plant and equipment (1 937) (199) (1 734)
Movement in financial assets - (9 532) -
Proceeds from insurance receivable 178 13 509 18 508
Net cash used in investing activities (133 555) (359 272) (1 245 513)
Cash flows from financing activities
Proceeds from share issue 116 632 457 407 482 168
Proceeds from financial liabilities 57 147 - 761 214
Repayment of financial liabilities (48 000) (127 248) (33 696)
Loan advanced to minority shareholder (72) - (48)
Advance from related party - - 4 530
Repayment of related party loan (5 324) (3 437) -
Loan advanced to tenant (5 869) - -
Repayment of finance lease - (112) (112)
Proceeds from tenant loan 131 - -
Proceeds from other financial liabilities - 6 485 -
Purchase of treasury shares (2 902) (395) (16 669)
Proceeds from sale of treasury shares 15 370 2 975 7 613
Net cash generated from financing activities 127 113 335 675 1 205 000
Total cash movement for the period 7 184 (1 957) (2 412)
Cash at the beginning of the period 10 220 12 632 12 632
Cash at the end of period 17 404 10 675 10 220
Summarised Operating Segment Information
Unaudited for the period ended 31 August 2018
Profit from Investment
Revenue operations property
R'000 R'000 R'000
Industrial 60 061 37 733 872 391
Commercial 78 192 73 432 1 358 458
Retail 38 436 25 723 515 751
Hospitality 24 015 17 956 525 693
Residential 3 760 3 132 81 834
Non-property 1 898 (10 548) 13
Straight-lining of leases 6 257 6 257 20 373
Total 212 619 153 685 3 374 513
Selected Explanatory Notes
to the Results
1. Earnings per share
This note provides the obligatory information in terms of IAS 33 Earnings Per Share and SAICA
Circular 2/2015 for the group and should be read in conjunction with note 2, where earnings are
reconciled to distributable earnings. Distributable earnings determine the distribution declared to
shareholders, which is a meaningful metric for a stakeholder in a REIT.
1.1 Basic earnings per share
Group Group Group
Unaudited Unaudited Audited
6 months 6 months Year
ended ended ended
August 2018 August 2017 February 2018
Shares in issue
Number of shares in issue at end of
year net of treasury shares 185 191 754 162 304 286 163 766 550
Weighted average number of
shares in issue 173 569 356 119 392 694 141 084 847
Diluted weighted average number
of shares in issues 173 569 356 119 392 694 141 084 847
Basic earnings per share
Earnings (profit attributable to
owners of the parent) (R'000) 101 010 132 971 383 186
Basic earnings per share (cents) 58.20 111.37 271.60
Diluted earnings per share (cents) 58.20 111.37 271.60
1.2 Headline earnings per share
Reconciliation between basic
earnings and headline earnings:
Earnings (profit attributable to
owners of the parent) (R'000) 101 010 132 971 383 186
Adjusted for:
Fair value adjustments to
investment properties (gross) (24 204) (80 141) (252 535)
(tax) - - -
Headline earnings (R'000) 76 806 52 830 130 651
Headline earnings per share:
Headline earnings per share (cents) 44.25 44.25 92.60
Diluted headline earnings
per share (cents) 44.25 44.25 92.60
2. Reconciliation between earnings and distributable earnings
2.1 Distributable earnings
Unaudited Unaudited Audited
6 months 6 months Year
ended ended ended
August 2018 August 2017 February 2018
R'000 R'000 R'000
Earnings (profit attributable to owners
of the parent) 101 010 132 971 383 186
Adjusted for:
Fair value adjustments to investment properties (24 204) (80 141) (252 535)
Straight-lining of leases adjustment (6 257) (8 662) (16 980)
Equity-settled share-based payment reserve 2 862 392 455
Deferred tax realisation - - 695
Less: Profit not distributed - - (2 483)
Antecedent dividend* 3 946 15 489 16 348
Distributable profit 77 357 60 049 128 686
* In the determination of distributable earnings, the group elects to make an adjustment for the antecedent distribution arising
as a result of the capital raise on 11 June 2018 as well as the private placement of shares in the acquisition of Webram Four
(Pty) Ltd during the period for which the company did not have full access to the cash flow from such issues.
Number
of shares
Number of shares in issue at period end 185 388 709
Less: Treasury shares (196 955)
Number of shares in issue net of treasury shares 185 191 754
Distribution declared and distribution per share
Distributable earnings (cents per share) FY2019 FY2018
Interim distribution 41.73 36.95
Final distribution* 44.71 41.55
Total distributions for the period 86.44 78.50
Year-on-year growth forecast (%) 10.11 -
*FY2019 final distribution forecast
Introduction
Spear REIT Limited (JSE code: SEA) is the only regionally specialised Real Estate Investment Trust
listed on the Johannesburg Stock Exchange ("JSE").
Its main business is investing in high-quality income-generating real estate across all sectors within
the Western Cape, predominantly in the Cape Town region.
Spear's mission statement is to be the leading Western Cape-focused REIT and to consistently grow
its distribution per share ahead of inflation and within the top quartile of its peer group.
Management's proximity to assets remains excellent and its acute understanding of the Western
Cape real estate market truly makes Spear a regional specialist with access to excellent investment
pipelines and development opportunities to further enhance an already high-quality real estate
portfolio.
During the interim period both the regional economy of the Western Cape along with the national
economy of South Africa have been facing various headwinds ranging from severe droughts which
negatively impacted the tourism and hospitality sector in the Western Cape to national economic
challenges leading to low overall growth and declining business confidence.
Management resolved to stay focused on business continuity through its early engagement and
tenant-centric approach, resulting in continued sustainable revenue growth and the achievement
of its interim results despite an underperforming hospitality sector.
Growing cash flows and continual distribution growth will remain a primary Spear objective, which
management believes clearly displays management and shareholder alignment.
Financial results
The board of directors is pleased to announce an interim distribution of 41.73 cents per share for
the six months ended 31 August 2018.
Spear's results are in line with the forecast as disclosed in its results for the year ended 28 February
2018 and a testament to Spear's focus, active asset and property management along with prudent
financial management of the going concern.
On a like-for-like basis, interim period to interim period dividend per share growth is 6.5%
(15 on Orange, Mega Park, No. 2 Long Street, MWEB HQ and Tyger Manor Shopping Centre
transferred into the portfolio either at the half year or after, therefore the full effect on their respective
incomes are not reflected). Spear's tangible net asset value per share has increased marginally
since year-end to R11.63 (0.49% increase) as a result of new acquisitions and the disposal of two
assets during the interim period.
The financial results achieved are attributable to the high-quality nature of Spear's assets, strong
contractual income and recoveries together with cost containment and savings on finance costs.
Despite increasingly tougher trading conditions particularly in the hospitality sector, which has
underperformed the rest of the Spear portfolio, distributable income targets were achieved.
Positive rental reversion on lease renewals and relets have been key contributors to the financial
results for the interim period.
Vacancy rates across the portfolio have reduced to 1.12% (FY2018: 1.95%) as a result of management's
execution of its leasing strategy.
During the interim period, management concluded the disposal of two properties generating
R223.5 million net disposal proceeds, which have been redeployed into the acquisition of two
properties for R160 million at a blended yield of 10.72% and reduction of debt of R48 million. More
detailed commentary on capital management and strategy is provided in the sections below.
Active balance sheet management has seen group gearing reduce to 36.01% (FY2018: 38.48%)
during the interim period as a result of debt reductions and restructuring.
There is no immediate debt refinancing required within the business. A detailed debt expiry schedule
is provided within this report.
Property portfolio
Spear's current property portfolio consists of 33 high-quality assets with an average value per asset
of R102 million per property, being an 8.8% increase during the interim period (FY2018: R94 million)
and total gross lettable area ("GLA") of 376 757m2 valued at R3.37 billion.
The portfolio's income stream is underpinned by contractual escalations of 8.04%, a weighted
average lease expiry ("WALE") of 36 months (FY2018: 33 months) together with a high percentage
of A-grade tenants (listed and large nationals) comprising 57% of portfolio GLA. Vacancies across
the portfolio are significantly below the national average and reported IPD SA Annual Property Index
statistics with an overall vacancy of 1.12% at the end of the interim period (FY2018: 1.95% portfolio
vacancies).
The information below provides a snapshot of the property portfolio as at 31 August 2018.
Top 10 properties by value
Value Gross Percentage
including lettable of total
lease asset area value Valuation
Property R'000 Sector m2 % R/m2
Mega Park, Bellville 427 656 Industrial 86 095 12.68 4 967
2 Long Street, Cape Town 422 505 Commercial 25 085 12.53 16 843
Sable Square Shopping
Centre, Milnerton 375 333 Retail 30 947 11.13 12 128
15 on Orange, Cape Town 312 996 Hospitality 16 726 9.28 18 713
UES DoubleTree by Hilton,
Woodstock 219 728 Hospitality 11 427 6.51 19 229
MWEB Head Office, Bellville 148 400 Commercial 11 195 4.40 13 256
1 Waterhouse Place,
Century City 113 203 Commercial 11 030 3.36 10 263
Blackheath Park, Blackheath 111 532 Industrial 37 334 3.31 2 987
Old Mutual Private Wealth,
Century City 99 093 Commercial 4 199 2.94 23 599
Blackheath Warehouse,
Blackheath 89 065 Industrial 22 315 2.64 3 991
2 319 511 256 353 68.78 9 048
Value Gross
(excluding lettable Vacant
Number of lease asset) area area Vacancy
Vacancy profile properties R'000 m2 m2 %
Industrial 8 872 391 193 690 - 0.00
Commercial 17 1 358 458 112 119 2 662 2.37
Retail 5 515 751 34 795 1 234 3.55
Hospitality 2 525 693 28 153 331 1.17
Residential 1 81 834 8 000 - 0.00
33 3 354 127 376 757 4 227 1,12
Sectoral performance
Industrial
The industrial portfolio has traded robustly through tough economic conditions currently
experienced in the market and management's hands-on asset management approach has paid
dividends resulting in satisfactory tenant retention and renewal rates.
The industrial portfolio offers a diversified industrial offering situated in well-established industrial
nodes consisting of mini, mid-size and large industrial units.
The industrial portfolio has delivered high occupancy rates and strong performance in line with
management's expectations during the reporting period with positive relet and rental reversion
and no major tenant movements.
The industrial portfolio (193 690m2) occupancy was at 100% at the end of the interim period and
remains well poised to continue to perform in line with management's guidance.
Commercial
The commercial sector has not been immune to the tough trading conditions currently experienced
in the market with a 2.37% commercial office vacancy during the reporting period translating to
2 662m2 of GLA.
Office sector lease renewals continue to be concluded with positive rental reversions achieved
in the majority of renewals during the reporting period showing a 9.99% upward rental reversion.
Excellent progress has been made on the letting of the office additions at Sable Square with 2 638m2
of the 3 100m2 of additions having been let at or in excess of the R125/m2 excluding VAT level.
Only 480m2 of office vacancy remains, which is currently under negotiation.
The bulk of commercial vacancies are attributable to the office space at No. 2 Long Street in the
region of 2 000m2. Letting of the offices at No. 2 Long Street has gained momentum with a number
of new lease agreements being close to concluded, which would see a further reduction of the
group's commercial vacancies.
As the economic climate deteriorates further management is mindful that the commercial office
sector could be negatively impacted as tenants look to cut staff costs, optimise space and reduce
overheads, which could lead to a sharp increase in office vacancies across the real estate sector in
the coming months. Spear's hands-on approach and early engagement strategy will be critical to
safeguard the business against increased vacancies.
The commercial portfolio (112 119m2) occupancy was at 97.63% at the end of the interim period.
Retail
The retail portfolio consists of two convenience retail centres that offer an ultra-convenience retail
experience with ample parking.
Spear's retail assets are located in high-growth nodes servicing the Century City and Northern
Suburbs market. During the reporting period 44% (15 259m2) of retail GLA (34 795m2) was occupied
by national retail tenants. Management has been gratified at the positive performance of its retail
assets amid tough trading conditions during the reporting period with key retail tenants showing
positive growth in store revenue and footfall.
Spear's retail assets will remain attractive locations for retailers to trade from given their high-
quality tenant mix geared towards a convenience retail offering, ample shopper parking, ease of
access and egress along with plum geographical locations offering easy access to all main arterial
transportation routes. Management will remain focused on the acquisition of convenience retail
assets given their defensive nature in showing constant footfall and turnover during good and tough
trading conditions in the market.
The retail portfolio (34 795m2) occupancy was at 96.45% at the end of the interim period.
Residential
Spear's residential portfolio for the reporting period continued to perform to the satisfaction of
management with 100% occupancy rates.
Currently only 2.12% of GLA is exposed to the residential sector, however, management has stated
its intention to increase Spear's residential holdings closer to 15% of GLA and 12% of portfolio value
in the medium term through the development of approximately 200 residential units at Sable
Square and 200 residential units in Paarden Eiland as part of its mixed-use development plans for
the two assets.
Hospitality
The current performance of the domestic economy and environmental impact continue to present
challenges to the hospitality sector as both transient and group business have been severely
impacted by the drought experienced in the Western Cape. The hospitality sector over the reporting
period has continued to operate under extremely tough trading conditions.
The drought in the Western Cape has been broken and a strong focus now is to rebuild hospitality
occupancies and room rates as a key recovery metric to the overall hospitality sector.
The pace at which the recovery of the hospitality sector will take place at this stage remains
uncertain due to the shift in interest by dominant markets to other destinations during this time.
At best, management is of the opinion that some green shoots on the recovery path have already
started to show, however, meaningful recoveries will most likely only start to emerge towards the
start of 2019.
A weakened local currency and volatile emerging and competing markets to our destination might
aid our recovery in building buyer confidence in our overall offering.
Although occupancies might initially return, the biggest challenge will remain in recovering lost
rate strength experienced during the downturn.
The hospitality portfolio (28 153m2) occupancy was at 98.87% at the end of the reporting period.
Tenant grading
Gross Gross
lettable lettable Number
area area Number of tenants
m2 % of tenants %
A - Large nationals, large
listed and government 216 525 57 101 26
B - Smaller international and
national tenants 115 128 31 195 50
C - Other local tenants and
sole proprietors 29 982 8 91 24
Parking and storage 10 895 3 - -
Vacant 4 227 1 - -
376 757 100 387 100
Letting activity
Spear began the interim period with an opening vacancy of 6 334m2 and with 81 881m2 expiring
during the period.
Management has successfully renewed and relet 81 002m2 (98.93%) at a positive reversion of 6.92%.
Only the retail sector showed negative rental reversions on renewal rates which was isolated to one
historical lease agreement that had to be rebased after the expiry of the initial 10-year lease period
prior to the commencement of the new 10-year lease term.
The table below reflects the letting activity of the interim period:
Expiries and Gross expiry Renewals/ Gross new Rental
cancellations rental New lets rental reversion
YTD GLA R/m2 GLA R/m2 %
Industrial 69 599 32.92 69 114 35.02 6.40
Commercial 9 347 149.00 9 063 163.88 9.99
Retail 2 935 112.08 2 825 101.46 -9.48
81 881 81 002 6.92
Spear's lease expiry profile remains defensive with a WALE of 36 months.
Spear's asset and property management team has a hands-on approach to tenant retention and
actions tenant engagements well in advance of expiry to ensure business continuity and risk
management for the business.
Lease expiry profile
Lease expiry profile Industrial Commercial Retail Hospitality Residential Total
based on GLA % % % % % %
Vacant 0 3 3 1 0 1
Monthly 2 1 0 0 0 1
Expiries for 09/2018
- 08/2019 18 16 17 1 0 15
Expiries for 09/2019
- 08/2020 31 40 18 0 0 30
Expiries for 09/2020
- 08/2021 30 14 27 2 0 22
Expiries for 09/2021
- 08/2022 1 6 20 0 100 7
Expiries for 09/2022
- onwards 18 20 15 96 0 24
100 100 100 100 100 100
Lease expiry profile Industrial Commercial Retail Hospitality Residential Total
based on revenue % % % % % %
Monthly 3 1 0 0 0 2
Expiries for 09/2018
- 08/2019 14 14 21 4 0 14
Expiries for 09/2019
- 08/2020 35 45 14 0 0 37
Expiries for 09/2020
- 08/2021 30 16 31 9 0 20
Expiries for 09/2021
- 08/2022 1 6 17 0 100 7
Expiries for 09/2022
- onwards 17 18 17 87 0 20
100 100 100 100 100 100
Weighted average in force escalations and yields
Escalation Yield
% %
Industrial 8.53 8.99
Commercial 7.89 8.51
Retail 7.72 8.99
Residential 8.00 7.74
Hospitality Note 1 and 2 6.72
Group average 8.04 8.41
Notes:
1. DoubleTree by Hilton Cape Town has a lease with a third party operator which is based on a fixed (60% of budgeted
EBITDA) and variable (95% of actual EBITDA less fixed rental) lease.
2. 15 on Orange, African Pride, has a full variable lease based on monthly hotel turnover.
Acquisitions and disposals
The group acquired the following properties during the period ended 31 August 2018:
Cash/
Acquisition Debt share Acquisition
value funding funding yield
Transfer date R'000 R'000 R'000 %
Island Business Park,
Paarden Eiland 08/03/2018 24 000 - 24 000 9.31
Blackheath Park,
Blackheath 12/04/2018 110 500 49 725 60 775 10.43
Old Mutual Private Wealth,
Century City 12/07/2018 98 000 - 98 000 9.22
1 Waterhouse Place,
Century City 24/07/2018 114 500 - 114 500 12.22
347 000 49 725 297 275 10.30
The group disposed of the following properties during the period ended 31 August 2018:
Cash
Disposal payment Disposal
value value yield
Transfer date R'000 R'000 %
Tyger Manor, Tyger Valley 20/06/2018 75 000 75 000 8.00
142 Bree Street, Cape Town CBD 18/07/2018 150 000 150 000 3.00
225 000 225 000 5.50
Capital expenditure and redevelopment
Spear embarked on a number of capital expenditure projects during the interim period:
78 on Edward, Tyger Valley
Management actioned the redevelopment of two assets into a consolidated A-grade office building
on Edward Street, Tyger Valley off the back of increased tenant demand and low overall area
vacancies. The overall development costs of 78 on Edward on completion will be R89 million with
the completion date being end of December 2018.
The initial yield on cost will be 9% based upon all vacant units being let in line with the approved
development feasibility. At the end of the interim period management was in advanced negotiations
with users for 2 650m2 of the available 3 500m2 being developed.
The development comprises 1 500m2 prime high street retail space, 2 500m2 of AAA-grade office
space and a parking ratio of four bays per 100m2 let.
No. 1 Waterhouse, Century City
The property is located in the sought-after Century City precinct. The building is made up of
10 500m2 of office space over four levels with a parking ratio of four bays per 100m2.
The property was acquired vacant at R10 000/m2 with a two-year head lease in place from the
seller. Management has embarked on a full refurbishment project on this property with a capital
expenditure allocation of R70 million. Based upon management's feasibility and projected net
income stream on completion the target yield will be in the region of 9,5%.
Completion date of the No. 1 Waterhouse project will be April 2019.
15 on Orange Hotel & Spa, Cape Town
Management undertook a critical assessment of the product offering at 15 on Orange Hotel and
concluded that the hotel was not a beneficiary of the leisure market given certain limitations
to the property at the time. Furthermore, the conference offering presented itself as detached
from the food and beverage offering in the hotel, which hampered synergies between the two
key components that typically should operate hand in hand. In consultation with Marriott it was
agreed to relocate certain portions of the conference offering to the main hotel public area levels.
Management has embarked on key enhancements to the pool area, food and beverage areas and
conference areas allocating R44 million as capital expenditure on this property. Project completion
is set for end of October 2018.
Capital allocation and strategic focus
Management will focus on long-term shareholder returns by investing into yield-enhancing assets
and continuing to grow sustainable cash flows for the business.
The South African economy and real estate sector remain under pressure, largely driven by political
uncertainty, contagion in the sector and emerging markets sell-off, creating various headwinds
for management to navigate. Under the current trading conditions management has remained
selective with capital deployment into new assets during the interim period. Over the next 12 months
management believes that asset pricing will adjust to levels that talk to the overall group strategy
of acquiring high-quality earnings-enhancing Western Cape assets. Given Spear's regional focus
management is confident that access to quality assets will continue well into the future.
Balance sheet and risk management
Management remains focused on balance sheet and risk management factors that impact the
day-to-day operations of the business.
Management has strengthened its relationship with key funding partners to ensure that Spear's
balance sheet reflects a well-managed and active business poised to take advantage of funding
opportunities and deal flow when they are presented. Management aims to maintain gearing levels
at around the 40 - 45% loan-to-value ("LTV") level on group debt together with an acceptable
hedging policy to provide income certainty in challenging economic times.
Spear's debt portfolio remains actively managed with an all-in cost of debt for the reporting period
of 9.04% and a hedged ratio of 42.13%.
The group's gearing levels at the end of the interim reporting period was at 36% translating to a
6.43% decrease from the end of FY2018.
Spear's revised debt expiry profile below provides short to medium-term refinance risk with the
bulk of Spear's debt becoming due for renegotiation in FY2021.
Cost to income
Net total cost to income for the period was 22.12%, increasing from 18.51% as at 28 February 2018.
The increase is directly related to the significant increase in utility rates and property expenses.
Administrative cost to income for the period was 5.92%, increasing from 5.85% as at 28 February
2018. The increase is directly related to the employment of additional staff with the increase in the
property portfolio.
Note: Revenue excludes straight-line income adjustments.
Distributable earnings
The board approved and declared distribution number 4 of 41.73 cents per share on 18 October 2018.
The distribution declared is an increase of 12.93% over the distribution for the six months ended
31 August 2017.
The forecast distribution for the year ended 28 February 2019 remains on target.
FY2019
Distribution number 4 - Interim distribution recommended by the board and
approved on 18 October 2018 41.73
Distribution number 5 - Forecast final distribution 44.71
Total distribution for the year ending 28 February 2019 86.44
Borrowings and funding
The group obtained funding for property acquisitions through one capital raise and increasing bank
borrowings as disclosed under acquisitions.
Number
of shares Price Value
Capital raise date (million) (Rand) (R million)
11 June 2018 11.85 10.00 118.5
Group gearing
Gearing Variance
% %
31 August 2017 37.23
28 February 2018 38.48 3.36
31 August 2018 36.01 (6.43)
Average
Average Variance fixed cost Variance
Cost of debt for period % % % %
31 August 2017 9.23 9.51
28 February 2018 9.25 0.22 9.45 (0.60)
31 August 2018 9.04 (2.30) 9.09 (3.84)
The in-force cost of debt for the next 12 months of operation will be further reduced to 8.89% through
management's active debt management.
The rate does not include any potential interest rate increases from the South African Reserve Bank.
Amount
R'000
Variable borrowings 703 163
Fixed borrowings 511 954
Total borrowings 1 215 117
Percentage fixed 42%
Debt expiry
R'000 %
FY2019 44 615 4
FY2020 100 000 8
FY2021 511 954 42
FY2022 403 166 33
FY2023 155 382 13
1 215 117 100
Tangible net asset value
The tangible net asset value per share increased by 0.49% from R11.57 per share to R11.63 per share.
Growth
Tangible net asset value Rands %
28 February 2017 10.03 -
31 August 2017 10.49 4.61
28 February 2018 11.57 10.31
31 August 2018 11.63 0.49
Receivables
Amid increasingly tougher trading conditions, receivables represented 3.1% of total revenue
excluding smoothing. Management has commended its debtors management team for the prudent
collections and low receivables. Management is cognisant of the fact that as South Africa continues
to be negatively impacted by the weak macro-economic environment, the probability of a higher
percentage receivables cannot be discounted, however, a concerted effort is made to guard against
receivables creep.
Provisions for bad debt cover all debtors greater than 90 days with adequate provisions made for
doubtful receivables.
Sustainability
PV solar roll-out
As part of Spear's sustainability strategy, a renewable energy roll-out has commenced with the first
PV solar installation at Sable Square Shopping Centre in the Century City area.
The PV solar installation will be a 800kWh system at a cost of R9 million with a payback period of
four years. The latter installation will become active by 1 October 2018.
A further 10 assets have been earmarked as part of the phase one roll-out, which would result in
an additional 3.7MWp of renewable energy generated from alternative sources on Spear rooftops.
Total earmarked expenditure for FY2019 will be R49 million with an average payback period of
four years. On completion and full commissioning 33% of the Spear portfolio will be equipped with
a PV solar solution.
Water continuity
Spear's water continuity programme continues to be implemented across key parts of the portfolio.
Capital expenditure on water continuity projects amounted to R5 million ranging from additional
boreholes, water tanker trucks, water filtration systems and water storage tanks. The DoubleTree
by Hilton Hotel in Woodstock post the implementation of the water continuity plan is generating
120 000 litres of potable water daily to service both the hotel and the balance of the mixed-use
scheme. Water usage across the portfolio has been reduced with the implementation of tap
aerators, waterless urinals and hand sanitizers where applicable. Pre-diluted cleaning materials
have been deployed across the portfolio and where possible grey water is used for exterior cleaning
and irrigation.
Board appointments
Shareholders were advised that Dr. Rozett (Roze) Phillips had been appointed as a non-executive
director with effect from 16 July 2018 and will be approved by shareholders at the next AGM to
be held.
Roze holds the position of Management Consulting lead and Geographic Council member for
Accenture Africa, and is a board member of Accenture South Africa. She also serves as the
Innovation lead, creating the enablers for innovation on the continent. Roze has over 20 years'
experience in consulting to consumer-related industry clients across the value chain with the intent
of driving better strategic and sustainable outcomes while transforming business and improving
well-being in Africa.
With the advent of digital technologies, Roze now assists public and private sector clients to unlock
the business and societal value that can be created through utilising these digital technologies.
Roze is executive sponsor and member of the board of trustees for Born to Succeed, a public benefit
organisation dedicated to empowering young South African women with the necessary skills and
providing mentorship to prepare them for the workplace and find employment.
Born in Cape Town, Roze holds an MBChB degree and an MBA degree from the University of Cape
Town and a postgraduate diploma in Futures Studies from the University of Stellenbosch. Prior to
joining Accenture, she was a medical doctor at Groote Schuur Hospital and a specialist scientist at
the SA Medical Research Council.
Outlook
The portfolio remains stable and well positioned to deliver on management's guidance for the 2019
financial year. Spear remains a pure property investment company with a well-diversified, defensive
and stable core property portfolio. The South African economy and political landscape remain in
uncertain territory placing strain on its people and its investment attractiveness.
Spear remains committed to South Africa and contributing to job creation and skills development in
the Western Cape to reduce the burden that unemployment places on South Africa and its people.
- Management will focus on improving the core portfolio through the acquisition of yield-enhancing
assets within the Western Cape.
- Management will continue to focus on prudent capital management and deploy its capital
resources with both an entrepreneurial and value investor mindset, seeking to carve out
additional returns through its value enhancement strategies.
- Management remains heavily invested in Spear and has committed to the retention of respective
investments within Spear to reinforce its alignment with shareholder interests.
- Management is confident that Spear is trading on a stable management platform which will
ensure that the company's growth objectives are achieved both in the form of assets and human
capital. The reporting period has not just been a period of growth in asset value but also growth in
the human capital required to successfully execute the day-to-day operational requirements of
the business. Management is pleased to report that highly skilled real estate professionals have
been added to the Spear team, which further underpins the value proposition when conducting
any form of business with the group.
- The company will continue its tenant-centric approach which has created strong customer loyalty
and high tenant retention rates within the core portfolio.
Prospects and guidance
The political and tough economic environment remains a concern as business sentiment continues
to deteriorate and the increased cost of living places continued pressure on the general population.
Management has noted that the local market continues to weaken which may start to put further
pressure on general business resulting in undue pressure on the commercial office market as
companies move to cut overheads and optimise their trading space.
The potential for an upward trend in commercial office vacancies in a low-growth economy may
be a tough reality that lies ahead.
The guidance provided in May 2018 is unchanged. The trading conditions within the hospitality
sector have started to improve with early green shoots becoming evident in hotel occupancies.
Management has to the best of its ability forecast its earnings with the above in mind, having taken
the necessary steps to best mitigate against any further downturn.
Management remains confident that demand for its high-quality rental properties across the various
sectors within the Western Cape will continue given its tenant-centric approach and hands-on
asset management skills. The core portfolio continues to perform to management's expectations.
The guidance has been based on the assumption that over the course of the next six months:
- a relatively stable macro-economic environment will prevail;
- lease renewals are concluded as per the company forecast;
- no major tenant failures will take place;
- tenants will successfully absorb rising costs associated with utility consumption charges and
municipal rates; and
- trading conditions continue to improve in the overall tourism sector directly related to hotel
occupancies and room rates.
Any changes in the above assumptions may affect management's forecast.
The interim distribution of 41.73 cents per share is in line with management's guidance set out for
the period ending 31 August 2018.
The information and opinions contained above are recorded and expressed in good faith and are
based upon 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 forecast for the period ending 28 February 2019, is the sole responsibility of the directors and
has not been reviewed or audited by Spear's independent external auditors.
Subsequent events
The directors are not aware of any events that have occurred since end of the financial period,
which have a material impact on the results and disclosures in these unaudited consolidated interim
financial results.
Please refer to the SENS announcement released on 2 October 2018 relating to the disposal of
non-core assets. The SENS announcement is available on the company's website.
Basis of preparation
The unaudited consolidated interim results for the six months ended 31 August 2018 are prepared in
accordance with the JSE Listings Requirements and the requirements of the Companies Act of South
Africa. The JSE Listings Requirements require interim reports to be prepared in accordance with the
framework concepts and the measurement and recognition requirements of International Financial
Reporting Standards ("IFRS"), the SAICA Financial Reporting Guides as issued by the Accounting
Practices Committee and Financial Reporting Pronouncements as issued by the Financial Reporting
Standards Council and to also, as a minimum, contain the information required by IAS 34 Interim
Financial Reporting. Except for the adoption of revised and new standards that became effective
during the year, all accounting policies applied in the preparation of these unaudited interim
consolidated financial statements are in terms of IFRS and are consistent with those applied in the
previous consolidated financial statements. There was no material impact on the annual financial
statements as a result of the adoption of these standards.
Christiaan Barnard CA (SA), in his capacity as Chief Financial Officer, was responsible for the
preparation of the unaudited consolidated interim results for the six months ended 31 August
2018. These consolidated interim results have not been reviewed or reported on by the company's
auditors.
Interim distribution for the six months ended 31 August 2018
Notice is hereby given of the declaration of interim distribution number 4 of 41,72738 cents per share.
As Spear is a REIT, the distribution meets the definition of a "qualifying distribution" for the purposes
of section 25BB of the Income Tax Act, No. 58 of 1962 ("Income Tax Act"). Qualifying distributions
received by South African tax residents will form part of their gross income in terms of
section 10(1)(k)(i)(aa) of the Income Tax Act. Consequently, these distributions are treated as income in the
hands of the shareholders and are not subject to dividends withholding tax. The exemption from
dividends withholding tax is not applicable to non-resident shareholders, but they may qualify for
relief under a tax treaty.
South African tax residents
The dividend received by or accrued to South African tax residents must be included in the gross
income of such shareholders and will not be exempt from income tax (in terms of the exclusion
to the general dividend exception, contained in paragraph (aa) of section 10(1)(k)(i) of the Income
Tax Act, because it is a dividend distributed by a REIT. The dividend is exempt from dividends
withholding tax in the hands of South African tax resident shareholders, provided that the South
African resident shareholders provide the following forms to their Central Securities Depository
Participant ("CSDP") or broker in respect of uncertificated shares, or to the company, in respect of
certificated shares:
- a declaration that the dividend is exempt from dividend tax; and
- a written undertaking to inform their CSDP, broker or the company, should the circumstances
affecting the exemption change or the beneficial owner cease to be the beneficial owner, both
in the form prescribed by the Commissioner for the South African Revenue Service.
Shareholders are advised to contact their CSDP, broker or the company to arrange for the above-
mentioned documents to be submitted prior to payment of the dividend, if such documents have
not already been submitted.
Non-residents shareholders
Dividends received by non-resident shareholders will not be taxable as income and instead will be
treated as an ordinary dividend which is exempt from income tax in terms of the general dividend
exemption in section 10(1)(k)(i) of the Income Tax Act. It should be noted that up to 31 December
2013, dividends received by non-residents from a REIT were not subject to dividend withholding
tax. Since 1 January 2014, any dividend received by a non-resident from a REIT will be subject to
dividends withholding tax at 20%, unless the rate is reduced in terms of any applicable agreement
for the avoidance of double taxation between South Africa and the country of residence of the
shareholder concerned. Assuming dividends withholding tax will be withheld at a rate of 20%, the
net dividend amount due to non-resident shareholders is 33,38191 cents per share. A reduced
dividends withholding rate in terms of the applicable Double Taxation Agreement ("DTA") may only
be relied on if the non-resident shareholder has provided the following form to their CSDP or broker
in respect of uncertificated shares, or the company, in respect of certificated shares:
- a declaration that the dividend is subject to a reduced rate as a result of the application of DTA;
and
- a written undertaking to inform their CSDP, broker or the company, should the circumstances
affecting the reduced rate change or the beneficial owner cease to be the beneficial owner, both
in the form prescribed by the Commissioner for the South African Revenue Service.
Non-resident shareholders are advised to contact their CSDP, broker or the company to arrange
for the above-mentioned documents to be submitted prior to payment of the dividend, if such
documents have not already been submitted.
The number of ordinary shares in issue on declaration date is 185 388 709.
The company's tax reference number is 9068437236.
Holders of uncertificated shares have to ensure that they have verified their residence status with
their CSDP or broker. Holders of certificated shares will be asked to complete a declaration to the
company. The distribution is payable to shareholders in accordance with the timetable set out
below:
2018
Declaration date Thursday, 18 October
Last day to trade cum dividend distribution Tuesday, 6 November
Shares trade ex dividend distribution Wednesday, 7 November
Record date Friday, 9 November
Payment date Monday, 12 November
Share certificates may not be dematerialised or rematerialised between Wednesday, 7 November
2018 and Friday, 9 November 2018, both days inclusive.
In respect of dematerialised shareholders, the distributions will be transferred to the CSDP/broker
accounts on Monday, 12 November 2018. Certificated shareholders' distribution payments will be
paid to certificated shareholders' bank accounts on Monday, 12 November 2018.
On behalf of the Board
Spear REIT Limited
Cape Town
18 October 2018
Abubaker Varachhia Quintin Rossi Christiaan Barnard
Non-executive Chairman Chief Executive Officer Chief Financial Officer
Directorate
and Administration
SPEAR REIT LIMITED
Incorporated in the Republic of South Africa
Registration number 2015/407237/06
JSE share code: SEA ISIN: ZAE000228995
(Approved as a REIT by the JSE)
("Spear" or "the group" or "the company")
Registered Office
16th Floor
2 Long Street
Cape Town, 8001
(PO Box 50, Observatory, 7935)
Contact Details
info@spearprop.co.za
www.spearprop.co.za
Directors
Abubaker Varachhia* (Chairman)
Michael Naftali Flax (Deputy Executive Chairman)
Quintin Michael Rossi (Chief Executive Officer)
Christiaan Barnard (Chief Financial Officer)
Brian Leon Goldberg*#
Jalaloodien Ebrahim Allie*# (Lead Independent Director)
Niclas Kjellstrom-Matseke*#
Cormack Sean McCarthy*
Dr. Rozett Phillips*#
* Non-executive
# Independent
Company Secretary
Rene Cheryl Stober
Transfer Secretaries
Computershare Investor Services Proprietary Limited
Rosebank Towers, 15 Biermann Avenue, Rosebank, 2196
(PO Box 61051, Marshalltown, 2107)
Independent Reporting Accountants and Auditors
BDO Cape Town
6th Floor, 123 Hertzog Boulevard
Foreshore, Cape Town, 8001
(PO Box 2275, Cape Town, 8000)
Sponsor
PSG Capital Proprietary Limited
1st Floor, Ou Kollege Building
35 Kerk Street, Stellenbosch, 7600
(PO Box 7403, Stellenbosch, 7599)
Legal Advisor
Cliffe Dekker Hofmeyr
11 Buitengracht Street, Cape Town, 8001
(PO Box 695, Cape Town, 8000)
Bankers
Nedbank Limited
Standard Bank Limited
Investec Limited
Cape Town
18 October 2018
Date: 18/10/2018 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
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