Wrap Text
Voluntary Operational And Financial Update For The First Quarter, Ending 31 May 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 FIRST QUARTER, ENDING
31 MAY 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
31 May 2023 (“Q1”) of the financial year ending 29 February 2024 (“FY24”).
As the only regionally focussed REIT listed on the JSE, Spear continues to benefit from owning high
quality assets solely in the Western Cape. The core portfolio has traded consistently through the first
quarter of FY24, largely in line with management’s expectations. A key focus area for management has
been to aggressively reduce the portfolio vacancy rate, with a distinct focus on materially reducing office
portfolio vacancies and to execute its continued cost containment strategy.
By and large the first quarter has seen improvements across the operating business, with a reduction in
portfolio vacancies by 1.02% from 7.82% (32 034 m2) in FY23 to 6.80% (28 995 m2) in Q1 FY24. The key
drivers behind this contraction have been the successful execution of Spear’s letting and renewal
strategy together with an uptick in demand for office space across Spear’s commercial portfolio and
continued demand for space in Spear’s multi let industrial parks.
FY24 remains embryonic, however, management is confident that the positive inroads made into the
portfolio vacancy rates and the resultant improved revenue generation, bodes well for Spear throughout
FY24. Furthermore, portfolio wide asset management initiatives are yielding strategy aligned outcomes,
as positive rental reversion milestones are met and improved average in force escalation rates are
maintained. Spear’s portfolio rental reversion rate for Q1 FY24 was +4.17% (FY23: +3.69%) and the
average portfolio in force escalation rate of 7.40% (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. During Q1 FY24, 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 confident this momentum will be sustained throughout FY24.
Despite Spear’s regional focus, it remains exposed to the South African macro-economic environment
that has been one of volatility, low growth and sustained inflationary pressures. Cost creep and rising
interest rates have been challenges, which management has tackled head on to mitigate the impact
thereof, where possible, on the financial performance of Spear in FY24.
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 specialisation has provided a
level of insulation from the real estate headwinds being experienced in other parts of South Africa.
Management is confident that this specialisation 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.
Spear’s balance sheet and income statement remain healthy, as receivables are reducing in line with
management’s forecast, despite the economic headwinds being experienced in South Africa. Cash
collections for Q1 remain consistent, with sustainable cashflows across the portfolio, which management
believes will be maintained throughout FY24.
2. OPERATIONAL UPDATE FOR THE THREE MONTHS ENDING 31 MAY 2023
Sectoral Update:
Industrial:
Spear’s industrial portfolio has maintained its robust performance during Q1 FY24, with consistent
demand for industrial rental opportunities. A key differentiator in the attractiveness of Spear’s multi-let
industrial parks, has been the availability of electricity supply during certain stages of loadshedding when
other metro’s are without electricity, which is achieved through pro-active curtailment agreements with
the City of Cape Town.
Operational metrics within the industrial portfolio have gone from strength to strength with rental
reversions printing positive 10% for Q1 and in force average escalations being the highest of all sub-
sectors of the Spear portfolio, at 7.63%. Spear’s industrial portfolio vacancies have declined from a
vacancy rate of 2.23% of total portfolio GLA in FY23 to 1.50% of total portfolio GLA in Q1 FY24.
Spear’s 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. Per the disclosure schedules below
both letting and renewal activity during Q1 have been in line with management’s expectations.
Convenience Retail:
The Q1 performance of Spear’s convenience retail portfolio has been satisfactory, despite the growing
pressure facing consumers, as living costs creep upwards and high interest rates impact disposable
income availability. Spear has diligently stuck to its strategy of only investing into the convenience retail
sub-sector, which has shown more resilience in both the recent bear and bull markets. Spear’s retail
assets have performed consistently and maintained their historically high occupancy rates of 99.47%
during Q1, generating stable cashflows despite a marginal negative rental reversion. Defensively
positioned, in a market where tenant credit risk may be more prevalent, 41% of Spear’s retail portfolio by
GLA is occupied by national tenants on long-dated leases with excellent payment records.
Spear’s retail portfolio comprises of convenience and destination retail assets, located in prime locations,
servicing the full spectrum of the living standards measure scale.
Commercial:
Spear’s commercial portfolio has started to show early signs of vacancy contraction, which will benefit
Spear from Q2 onwards. The return to office momentum has been maintained, but so has the stickiness
of the hybrid work model. The increased letting activity in certain parts of the commercial portfolio has
been encouraging, with inroads being made into office vacancies at No. 2 Long Street, Cape Town, No. 1
Waterhouse, Century City, Bloemhof Building Tygervalley and The Upper Eastside Mixed Use Precinct
in Salt River. The positive impact that the local and international BPO sector has had on general
commercial office vacancy contraction in the greater Cape Metropole, cannot be understated. All of
Spear’s commercial assets are fitted with back-up power generation capacity, have generous parking
ratios and attractive lease terms, and remain well placed to benefit from improved letting activity. The
letting of a further 2 400 m2 of office space, is at a very advance stage of negotiations, which should
meaningfully contribute to further decreases in portfolio vacancy rates during FY24.
Spear’s commercial portfolio remains well positioned to benefit from the return to office momentum as
small, medium and larger scale users start to return to the office leasing market. On a per property basis,
improved enquiry metrics have been evident as a result of focussed and strategic marketing initiatives.
Development Total
Industrial Commercial Retail FY23 Q1 FY23 Total
Land Q1
Number of properties 9 13 6 - 28 31 28
Value of properties 4,423,31
(R'000) 1,508,542 2,155,927 707,842 51,002 3 4,474,684 4,215,939
Value % 34% 49% 16% 1% 100% 100%
Property revenue excl
smoothing (R'000) 44,731 69,502 23,961 56 138,250 143,209 573,763.69
Revenue % 32.28% 50.16% 17.29% 0.04% 100% 100%
Gross lettable area m² 245,714 131,923 48,951 - 426,588 445,559 409,868.48
Gross lettable area % 58% 31% 11% 0% 100% 100%
Vacant area m² 6,409 20,337 2,249 - 28,995 27,462 32,034
Vacancy per sector % 2.61% 15.42% 4.59% - - - -
Vacancy on total GLA
% 1.50% 4.77% 0.53% - 6.80% 6.16% 7.82%
Reversion % 10.73% 4.73% -5.57% - 4.17% -5.79% 3.69%
Weighted average in-
force escalation % 7.63% 7.43% 7.17% - 7.40 6.54 7.40
Weighted average
lease expiry (Months) 23.59 29.02 28.12 27.25 25.73 26.93
Group FY24 Q1 FY23 Total
Loan to value % 39.06 36.30
Interest cover ratio Times 2.52 2.51
Tangible net asset value R 11.68 11.47
Total distributable income R'000 43,152 188,417
SA REIT Cost to Income % 43.79 43.45
SA REIT Administrative cost to income % 6.40 6.50
Weighted average cost of debt % 9.16 8.66
Weighted average cost of variable debt % 9.89 9.05
Weighted average cost of fixed debt % 8.18 8.18
Fixed debt ratio % 47.53 53.61
Weighted Average expiry of debt Months 26.39 30.14
Number of net shares in issue ’000 223,676 226,065
Letting activity
The table below includes only leases that were concluded and signed as at 31 May 2023.
Expiries and Gross rental Average Renewals / Gross New Average
Rental
Vacated at expiry Gross expiry New Lets Rental Gross New
reversion
GLA m² R'000 rental R/m² GLA m² R'000 Rental R/m²
Commercial 7,034 1,006 143.08 7,596 1,138 149.85 4.73%
Industrial 10,420 563 53.99 11,589 693 59.79 10.73%
Retail 2,223 300 134.94 2,357 300 127.42 -5.57%
Total 19,677 1,869 94.99 21,541 2,131 98.94 4.17%
Notable post-Q1 progress has been made in vacancy contraction within the commercial office sub-sector
which will add positive impetus to Q2 and the balance of FY24. Commentary on this is provided further
down in this trading update.
The industrial sub-sector showed strong double digit positive rental reversions for Q1, 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 was the only sub-sector that printed a negative reversion profile for Q1. This was
as a result of two retail tenants at Sable Square coming off long term leases that escalated well above
market. Management had budgeted for these two reversions in the formulation of the FY24 total portfolio
revenue budget in December 2022.
Post 31 May 2023 the following leases have been concluded:
Vacant Space Let:
Offices – Upper East Side, Salt River = 1 700m2
Offices – 28 Marine Drive, Paarden Eiland = 193m2
Offices – Sable Square = 32m2
Offices – Sable Square = 150m2
Offices – Bloemhof Building, Tygervalley = 603m2
Retail, Upper East Side, Salt River – 121m2
Re-let / Pre-let:
Industrial, Mega Park, Bellville South – 4 220m2 *
Industrial, Mega Park, Bellville South – 4 724m2 *
Industrial, Mega Park, Bellville South – 5 986m2 *
Industrial, Mega Park, Bellville South – 10 000m2 **
*Ardagh Glass (formerly Consol Glass) will be vacating several units at Mega Park, Bellville South at the
end of November 2023. Testament to the strong demand for Spear’s multi-let industrial parks, 85% of
the 22,047 m2 of lettable area which Ardagh Glass will be surrendering has been pre-let at improved
gross rentals which are 6% higher than Ardagh Glass’ expiry rentals, with annual compounded rental
escalations at an average rate of 7% and an improved weighted average lease expiry term from 5 months
to 72 months. With strong interest in the remaining 15% of the space to be surrendered by Ardagh Glass,
in respect of which leases are expected to be concluded imminently.
**Bounty Brands have increased their occupancy at Mega Park from 6 000 m2 to 10 168 m2 on a new
10 year lease from 1 December 2023.
FY24 lease renewal and letting activity momentum remains positive, as aggressive letting and marketing
strategies yield results.
Acquisitions and disposals
Spear took transfer of The Island, Urban Logistics Park in Paarden Eiland on 9 May 2023, and all property
and asset management controls have been put in place by Spear. Management looks forward to the
contribution that this asset will make to the revenue generation and overall quality of the core portfolio.
Management did not conclude any new acquisitions during Q1, as acquisition yields have not been in
line with its required rates of return coupled with the lack of availability of investment grade assets which
meet Spear’s strict investment criteria.
As previously announced on SENS, Spear disposed of the Liberty Life Building in Century City to Capitec
Bank Limited, and all conditions precedent have been fulfilled following receipt of the unconditional
approval of the transaction by the Competition Authorities, on 20 June 2023.
Management will redeploy the disposal proceeds in line with its capital allocation strategy, which, in the
case of the Liberty Life disposal will be to settle the debt related to the property and to retain the balance
of the disposal proceeds as liquidity availability for growth related initiatives.
ACQUISITIONS
Property Name Purchase Consideration Transfer Date Initial Yield
The Island Urban Logistics
Park, Paarden Eiland R185 million 09/05/2023 9.42%
DISPOSALS
Property Name Disposal Consideration Expected Transfer Date Status
All conditions
Liberty Life, Century City R400 million Sept/Oct 2023 precedent fulfilled
3. FINANCIAL UPDATE
Group funding
The Liberty Life Building debt facility of R375 million was renewed on a short term basis until
31 January 2024 on the same terms, with no settlement fees. The debt will be settled on registration of
transfer of the property to Capitec Bank Limited.
Management is actively monitoring the hedging environment to increase the group hedging profile in line
with its strategy, either through market products or asset disposals. Current debt hedging products are
expensive given the movement in the prime lending rate and the costs associated to these hedging
products. Management is of the view that interest rates will in all likelihood start to taper off in Q4 FY24
and it will 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 31 May 2023
Loan-to-value 50% 39.06%
Interest cover ratio 2 times 2.52 times
Cash Collections and availability
The Spear group’s cash collections remain strong and post the FY23 final distribution payment, the group
has R125 000 000 in available cash. The positive collections and increasing levels of available cash will
support a continued dividend pay-out ratio of between 93% and 95%.
4. OUTLOOK
Macro-economic headwinds remain a major concern in South Africa as the low economic growth
environment, unacceptably high unemployment rates, punitive impact of loadshedding and interest rate
hikes consistently erode any prospect of material growth. The trading environment will remain
challenging on all fronts, as consumers absorb the higher cost of living and operating and occupancy
cost creep impact the net revenue base of tenants.
As the financial year is in its infancy, Spear’s Q1 operating metrics set out in this update must be viewed
in the context that the SARB may still increase interest rates by a further 25 to 50 bps, which would have
an impact on the pending FY24 forecast, which management intends to provide to the market in due
course. Management is steady at the wheel and is implementing multiple initiatives across the core
portfolio to continue to deliver credible, predictable and consistent outcomes for all stakeholders.
Spear’s guidance once provided will be 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;
- mitigation of 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 Q1 FY24 financial information contained in this announcement has not been audited or reviewed by
the external auditors of the Company.
Cape Town
5 July 2023
Sponsor
PSG Capital
Date: 05-07-2023 04:30:00
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.
Sharenet Sites 
