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SPEAR REIT LIMITED - Voluntary Operational and Financial Update for the Financial Year Ended 29 February 2024

Release Date: 03/04/2024 11:00
Code(s): SEA     PDF:  
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Voluntary Operational and Financial Update for the Financial Year Ended 29 February 2024

(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")

29 FEBRUARY 2024


   Spear is pleased to provide a high-level operational and financial update for the financial year ended
   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 investment
   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 FY24, largely in line with management's expectations.

   FY24 accomplished numerous key performance metrics set by management for the reporting period which
   should present positive momentum within the core portfolio in FY25 and beyond. Management are confident that
   major vacancy risk remains mitigated, average in-force escalation rates remain ahead of market benchmarks
   and the weighted average lease expiry profile reflects the diversified nature of the Spear portfolio. Portfolio
   occupancy rates remain within the mid-90 percentile, as the general leasing demand across the core portfolio
   remains strong and the successful conclusion of leases after the FY24 year-end further improving occupancy

   Portfolio wide asset management initiatives are yielding strategy aligned outcomes, as rental reversion metrics
   continue to move in the right direction. Spear's portfolio rental reversion rate for FY24 was -0.37% (HY24: 3.57%
   and FY23: -3.69%) and the average portfolio in-force escalation rate was 7.52% for FY24 (FY23: 7.40%).

   The trading environment remains tough, despite the Western Cape's appeal and performance, and it therefore
   remains imperative that management continues to successfully implement its active, hands-on asset and
   property management strategies. Spear's lease renewal strategy has been successfully executed throughout
   FY24 as renewals were concluded timeously and, in some instances, well ahead of the expiry dates. Strong
   leasing and lease renewal momentum has been maintained in FY24, as more than 153 383 m2 of Spear's
   portfolio gross lettable area ("GLA") was either renewed or relet during FY24, versus the 142 770 m2 that was
   classified as portfolio GLA which would either reach expiry or become vacant during FY24.

   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 higher-for-longer interest rates presented further
   challenges which had to be absorbed and, where possible, mitigated to defend the overall operating and financial
   performance of Spear for FY24. Spear's FY24 update must be viewed in the context that the SARB will likely
   maintain a higher-for-longer approach to interest rates, with any potential rate cuts only foreseeable towards the
   second half of 2024. Diesel cost 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 province, as population growth numbers consistently tick upwards due to
   semigration to the Western Cape. Spear's Western Cape hands-on approach has continued 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 FY24, which added 2 MW of additional
   solar capacity to the Spear portfolio. 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. Furthermore, three new solar PV installations are in the planning phase, in a bid to add
   between 9 and 10 MW of total installed capacity over the next 12 to 18 months, generating 25% of Spear's total
   portfolio wide electricity demand.

   Spear's balance sheet and income statement remain robust and well managed and Spear's fixed debt ratio has
   remained at just under 50% (the strategic target is for 65% to 75% of Spear's debt to be fixed for a period of 24
   to 36 months) and overall group loan to value ("LTV") was at 31.60% as at FY24 year-end.

   Cash collections for FY24 remained consistent at 98.43%, with sustainable cashflows across the portfolio, which
   management believes will be maintained into FY25. Receivables remain under control, despite the economic
   headwinds being experienced in South Africa.


  Sectoral Update:


  Spear's industrial portfolio remained a key performer within the core portfolio, as well-located assets which are
  not materially impacted by the severity of loadshedding, remain in high demand. The industrial portfolio has
  maintained its robust performance during FY24, with consistent demand for industrial rental opportunities.
  Spear's load curtailment initiatives in certain multi-let industrial parks continue to 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. Rental reversions for FY24 continued to be positive at 6.12% and in-force average escalations
  were the highest of all sub-sectors of the Spear portfolio, at 7.72%. Spear's industrial portfolio vacancies remain
  low at 1.76% as at FY24 year-end.

  Ongoing bulk infrastructure works continue on site at Spear's 30 000 m2 GTX Industrial Park in George, with
  phase 1 anticipated to be completed during April 2024. Letting enquires remain strong since the launch of the
  development, resulting in the acceleration of top structure site development plans across the eight respective

  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 59% of total
  portfolio GLA, further underpinning the high-quality nature and attractiveness of the regionally focussed core

  Convenience Retail:

  Spear's retail assets have continued to perform consistently at high occupancy rates of 95.54% during FY24,
  generating consistent cashflows and a positive rental reversion of 11.03%, with in-force average escalations of
  7.47% as at FY24 year-end. 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.
  Pick n Pay leases approximately 0.93% of the total Spear portfolio GLA and makes up only 1.32% of the
  aggregate contractual rental income of Spear.

  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 Offices:

  During FY24 slower than anticipated progress was made in vacancy contraction within the office sub-sector,
  however, letting momentum has improved since year-end. Despite this, occupancy levels were at 84.37% end
  FY24. The total office areas vacated or expired at the end of February 2024 was 36 096 m2 of which 37 602 m2
  has already been relet (effective immediately) at -4.67% gross rental reversion. Management is confident that
  the higher than normal Spear office vacancy percentage is transitory in nature and will not be maintained in the
  short to medium term given the shortage of supply in quality occupier spaces in Cape Town.

  Letting activity within the commercial office portfolio has remained consistent and encouraging, with additional
  inroads being made into office vacancies at No. 2 Long Street, Northgate Corporate Office Park and Sable
  Square. No. 1 Waterhouse (Century City), Bloemhof (Tygervalley), Omnipark (Tygervalley) and Liberty Life
  (Century City) are all fully let.

  Spear's commercial office 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 office portfolio remains well positioned to benefit
  from the return to office momentum as small and medium scale occupiers return to the office leasing market as
  notable leasing momentum at No. 2 Long Street and Sable Square started to manifest.

The table below summarises the operating metrics of Spear's portfolio, by sector:

                                 Industrial      Commercial         Retail    Develop-    FY24 Total     FY23 Total
                                                     Office                  ment Land
 Number of properties                        9            14            6                         29            28
 Value of properties             1,623,200         2,213,460      734,314       56,421     4,628,065      4,215,939
 Value %                               35%              48%           16%          1%          100%           100%
 Property revenue excl             218,538          292,103        96,592           74       608,141       573,764
 smoothing (R'000)
 Revenue %                          35.94%           48.03%        15.88%        0.01%         100%           100%
 GLA m²                            252,941          126,235        47,366            -       426,542       409,868
 GLA %                                 59%              30%           11%          0%          100%
 Vacant area m²                       7,503          19,736          2,113           -        29,351         32,034
 Vacancy per sector %                2.97%           15.63%         4.46%            -              -               -
 Vacancy on total GLA %              1.76%            4.63%         0.50%            -         6.88%         7.82%
 Reversion % YTD                     6.12%           -4.67%        11.03%            -        -0.37%        -3.69%
 Weighted average in-                7.72%            7.43%         7.47%            -         7.52%         7.40%
 force escalation %
 Weighted average lease               23.82            28.58         23.51           -         25.94          26.93
 expiry (months)

Letting activity

The table below includes only leases that were concluded and signed during the FY24.

                  Expiries       Gross            Average       Renewals /   Gross New    Average       Rental
                  and            rental at        Gross         New Lets     Rental       Gross New     reversion
                  Vacated        expiry           expiry        GLA m²       R'000        Rental R/m²
                  GLA m²         R'000            rental R/m²
 Commercial             36,096          5,561          154.05       37,602        5,522        146.85       -4.67%
 Industrial             92,278          5,113           55.40      103,554        6,088         58.80        6.12%
 Retail                 14,396          1,458          101.25       12,227        1,374        112.41       11.03%
 Total                 142,770         12,131           84.97      153,383       12,985         84.66       -0.37%

As communicated during the various updates provided by management during FY24, consistently improving
reversionary metrics were printed on a core portfolio level as a result of stronger letting activity and improved
leasing terms being concluded with tenants, despite the impact of the negative rent reversion print in the
commercial office sub-sector.

  The commercial office sub-sector has shown consistent improvements resulting in the negative rental reversion
  rate moving from -7.87% at HY24 to -4.67% for FY24.

  The industrial sub-sector continued to produce consistent positive rental reversion of 6.12%, 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 strong positive
  rental reversion rate of 11.03%. Trading across the retail portfolio has yet again 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 FY24.

  Post 29 February 2024 the following leases have been concluded to date:

   Property                        Sector                   Type                                           Size m²
   Blackheath Park                 Industrial               Vacate and relet                                 1,354
   Blackheath Park                 Industrial               Vacate and relet                                  187
   2 Long Street                   Office                   Vacant                                           1,217
   Sable Square                    Office                   Vacant                                           1,095
   Sable Square                    Retail                   Vacant                                            100
   Northgate                       Office                   Vacate and relet                                  114
   Mega Park                       Industrial               Vacant                                            482
   Omnipark                        Retail                   Vacant                                              93
   Omnipark                        Office                   Vacant                                            273
   Upper Eastside                  Retail                   Vacant                                            126
   Viking Park                     Office                   Vacant                                            106
   Viking Park                     Office                   Vacant                                              96
   Viking Park                     Office                   Vacant                                              60
   No1 Waterhouse                  Office                   Vacate and relet                                  245
   Mega Park                       Industrial               Vacant                                           1,900

  FY25 lease renewal and letting activity momentum remains positive, as aggressive letting and marketing
  strategies yield results. Taking the above letting activity into account together with other portfolio movements,
  the vacancy as at 28 March 2024 has decreased to 6.70% from 6.88% at FY24 year-end.


  The table below provides a financial snapshot of Spear, as at FY24 year-end:

                                                               FY24 Total       FY23 Total
   Loan to value                                %                    31.60           36.30
   Interest cover ratio                         Times                 2.28            2.51
   Tangible net asset value per share           R                    11.79           11.47
   Total distributable income                   R'000              200,805         188,417
   SA REIT Cost to Income                       %                    43.69           43.45
   SA REIT Administrative cost to income        %                     6.00            6.50
   Weighted average cost of debt                %                     9.48            8.66
   Weighted average cost of variable debt       %                    10.16            9.05
   Weighted average cost of fixed debt          %                     8.55            8.18
   Fixed debt ratio                             %                    47.24           53.61
   Weighted Average expiry of debt              Months               24.67           30.14
   Number of net shares in issue                '000               260,086         226,065
  Group funding

  Management continues to actively monitor 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 shows signs of tapering but remains relative on par to variable debt.
  Management concluded fixes to the value of R194 million at a base rate of 7.80% for 3 years during Q3 FY24
  when there was temporary reprice in fixed rates. Management is of the view that SWAP rates will in all likelihood
  start to taper off in mid FY25 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.


                                        Covenant   29 February 2024
   Loan-to-value (post capital raise)   50%        31.60%
   Interest cover ratio                 2 times    2.28 times

  Spear's LTV is below the LTV sensitivity band as disclosed in the HY24 interim results presentation, mostly due
  to the capital raised via private placement in February 2024. 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 below the internal LTV band.
  The disposal of the Liberty Life Building in Century City will further reduce Spear's LTV by +-6%, dropping the
  group LTV ratio to between 25% and 26%.

  Cash Collections and availability

  The Spear group's cash collections remain strong, at just over 98% for FY24 and the Spear group has
  R180 000 000 in available liquidity. The positive collections and increasing levels of available cash will support
  a proposed final dividend pay-out ratio of 96%.


  Despite the Western Cape's commendable performance across various sectors, South Africa still faces
  significant macroeconomic challenges. To tackle the national unemployment rate, both private and public sectors
  must prioritise job creation and investment to stimulate GDP growth. Issues within the national logistics
  ecosystem, particularly in ports and rail networks, hinder growth and contribute to inflation. Nevertheless,
  progress is evident, especially in the Western Cape, where efforts to mitigate loadshedding effects and improve
  the Cape Metro rail network are underway. The province has notably reduced its unemployment rate to within a
  small percentage of dropping below 20% and leads in job growth compared to other provinces in South Africa.

  The expansion of residential areas and mixed-use precincts has increased demand for space solutions across
  Spear's portfolio and is poised to drive economic investment and development in the Western Cape as more
  money is deployed into the local economy creating a cascading effect across the real estate landscape. This
  trend underscores the province's appeal as an investment opportunity, supported by reliable municipal

  Despite these opportunities, the trading environment will remain challenging, with consumers grappling with
  increased living costs. The prospect of an interest rate tapering cycle in the second half of 2024 offers optimism
  for both the South African economy and the real estate sector. Lower financing costs, combined with stronger
  portfolio escalations, would have the effect of enhanced profitability for Spear.

  FY25 will require even more intensive asset and property management initiatives to mitigate macroeconomic
  pressures and lack of real growth pressures. Spear will maintain its highly strategic and focused approach to
  cost controls, asset management and leasing management to create and unlock value in the current suppressed
  trading environment. We are cautiously optimistic that FY25 will be another year that delivers mission statement
  aligned outcomes for Spear's stakeholders and we remain confident that Spear is well positioned to take
  advantage of growth opportunities as they present themselves over the course of the year.

  As announced on SENS on 2 April 2024, Spear has entered into agreements to acquire a Western Cape property
  portfolio from Emira Property Fund Limited ("Acquisition") for R1,146 billion, and management will endeavour
  to finalise and implement the Acquisition as soon as possible. In addition to the execution of its operating strategy
  and ongoing hands-on management of the core Spear portfolio during FY25, management will work diligently
  on the incorporation and stabilisation of the new Western Cape property portfolio following the Acquisition.


   Based on the improved overall operating metrics of the portfolio and given the information available to
   management at the date of this update, management maintains its guidance that the FY24 distributable income
   per share ("DIPS") will be within a range of a 0.75% to 1,50% higher than the FY23 DIPS.

   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.

   Spear's annual financial statements for FY24 are expected to be released on or about 22 May 2024.
   Shareholders are advised that Spear's auditors have not yet finalised their audit of the FY24 financial information,
   on which this announcement is based, and that the information contained in this announcement has not been
   audited or reviewed by the external auditors of the Company.

Cape Town
3 April 2024

PSG Capital

Date: 03-04-2024 11:00:00
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