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Archives for October 2020

Spear navigates Covid-19 headwinds with a 96.9% rental collection rate and positive interim results

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“Spear has declared an interim distribution of 29.34 cents per share for the 6 months ending 31 August 2020. Operating in one of the most challenging modern-day trading environments Spear has successfully executed on its short term Covid-19 strategic objectives. Income statement consistency has been maintained with strong rental collections during the period of 96.9% of revenue billed. The leasing and property management team have achieved good results on renewals & relets for the period resulting in a 91.2% tenant retention rate. Spear’s regional focus and hands-on asset management approach has remained one of our competitive advantages as managements proximity to its assets & tenants have allowed for speedy engagements and crisis resolution in a mutually acceptable manner. During the interim period the core portfolio has remained resilient underscoring the deep value proposition that the Spear portfolio presents.”– CEO Quintin Rossi

Salient details for the FY21 interim period ended 31 August 2020:

  • Interim distribution declared of 29.34 cents per share
  • Payout ratio of 80%
  • Collected 96% of revenue billed for the interim period
  • 25% average in force escalation
  • Portfolio value R 4.46 billion
  • 54% increase in asset value
  • TNAV per share R 11.75 per share
  • Average property value R 138 million
  • Portfolio occupancy 91.2%
  • Average cost of debt 7.56% (69.90% hedged)

Cape Town, 30 October 2020: Spear REIT Limited (SEA:SJ), the only regionally specialised Real Estate Investment Trust (REIT) listed on the JSE, reported its interim financial results today, declaring a 29.34 cents per share distribution based upon an adjusted payout ratio of 80% of its funds from operations, amidst some of the toughest trading conditions in recent years for the South African listed real estate sector.

CEO Quintin Rossi has praised his management team and staff for their unwavering commitment and sacrifices during the interim period that gave Spear the momentum it needed to navigate these very challenging times. Rossi further notes that Spear’s hands-on management philosophy and regional focus has enabled the team to focus 100% of their attention and resources solely on the Western Cape.

Spear’s Western Cape real estate portfolio consists of 32 properties with a GLA of 453 016m2. The average property value has increased to R138 million compared to the previous reporting period of R130million. Spear began the FY21 with 130 000m2 due for renewal or re-let during the year, excellent progress has been made with 101 125m2 finalised during the interim period. Spear’s lease expiry profile remains defensive with a WALE of 28 months.

Spear’s Covid-19 operating environment

Spear has successfully adapted to a Covid-19 operating environment. All the necessary and required health & safety measures have been implemented across its business and portfolio to best safeguard staff, tenants and service providers.

Year to date rental collections under the circumstances have been satisfactory and in line with the high road scenario plan set out to the market in May 2020. Spear has reported the following FY2021 year to date rental collection percentages:

Rental collections vs revenue billed = 96.90%

Rental collections vs original budget (set in Dec 2019 and assumes no pandemic) = 86.13%

Management remains optimistic that it can maintain its robust collection momentum for the remainder of FY21 (in the absence of any significant tenant failure) as 100% of Spear’s tenants are legally able to operate from their premises and the lions shares of economic activity has recommenced across South Africa. During the interim period management has provided 192 of its 442 tenants with Covid-19 related relief.

The hospitality portfolio has been most severely impacted YTD as a result of Covid-19, associated lockdowns and travel restrictions. No income has been forecasted from any hospitality assets during FY21 irrespective of low levels of revenue being generated post the interim period. Spear has further announced that it has accepted a cash offer to dispose of 15 on Orange Hotel in Cape Town for a sum of R 280m. The proposed disposal is subject to a due diligence period & Competition Commission approval. Management has advised that it will exit the remainder of its hospitality assets in an orderly manner over the next 12-24 months. All disposal proceeds will be utilised to settle debt and support managements LTV reduction roadmap to achieve a targeted LTV band of 38% – 43%.

Spear remains sufficiently capitalised with no going concern risks as solvency and liquidity ratio tests remained positive. Regular cashflow analysis is conducted to stress test cashflow on a rolling 12-month basis. This includes a range of scenarios of tenant collections and creditor requirements.

Management’s focus and energy remains on rental preservation and business continuity throughout the pandemic, associated lockdowns and beyond. Spear will not be issuing any distribution guidance for the second half of FY21. Management will provide a trading update and guidance of a final distribution per share in a pre-close presentation prior to year-end.

Rossi concludes that it remains difficult to fully predict the economic outcomes of the pandemic on the Real Estate sector, and on Spear as South Africa navigates its way through the aftermath of the Covid-19 pandemic and the severely negative economic consequences left in its wake. With the exception of a second wave of Covid-19 infections, significant market or tenant failure or another government-imposed lockdown, management is confident that cashflow generation will be maintained and that Spear will continue to operate within its high road scenario set out to the market during its May 2020 presentation.

Growthpoint receives world-leading green building certification

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The new Exxaro head office building in Centurion, developed and owned by Growthpoint, has achieved a 6-Star green rating.

The Growthpoint Properties owned and developed Exxaro head office in Centurion, Gauteng, has achieved 6-Star As-Built rating from the Green Building Council South Africa (GBCSA) under the Green Star New Build certification system.

Green building certification integrates a broad spectrum of green initiatives, and a 6-Star As-Built rating confirms via independent third-party verification that these initiatives have been implemented at a global leadership level.

The 18,500sqm building was conceptualised in a collaboration of Growthpoint’s Trading and Development team and Exxaro, and delivered by exceptional professionals. It is an excellent example of how Growthpoint’s development projects exceed expectations.

Exxaro’s head office is the second development in Growthpoint’s portfolio to achieve a world-leading 6-Star As Built rating. Earlier this year, One Discovery Place earned the same certification, outperforming its original 5-Star Design rating by achieving greater reductions in carbon emissions. The iconic 112,000sqm resource-efficient, cost-effective and environmentally-innovative Discovery head office in Sandton Central was developed in a joint venture by Growthpoint and Zenprop Property Holdings and is owned by Growthpoint (55%) and Zenprop (45%).

Grahame Cruickshanks, Growthpoint’s head of sustainability and utilities, comments, “To retain Growthpoint’s status as a green building leader among SA REITs, we believe it is important to progress our strategy by exploring new opportunities. We have intensified our focus on renewable energy with clean solar power, continuing our journey towards the goal of zero waste to landfill, and developing, testing and, in due course, implementing a carbon-neutral strategy.”

Growthpoint’s commitment to green building utilises certification strategically according to the property tenancy, age, grade and location. Ratings include world leadership (6 Star), South African excellence (5 Star) and best practice (4 Star). Growthpoint currently owns the biggest portfolio of green-certified buildings in South Africa, presently comprising 102 properties and an additional 10 buildings at the V&A. “Growthpoint is future-proofing its assets in a market where climate change and resource availability have become key risks for long-term business sustainability,” explains Cruickshanks.

The MSCI South Africa Green Annual Property Index has repeatedly demonstrated better returns on certified green office buildings. Driven by much better capital returns, the total return for green-certified offices significantly outperformed non-certified offices.

As well as environmental and financial benefits, green buildings have positive effects on the people who use them. Exxaro’s green certified head office provides it with enhanced resource efficiency in an optimal working environment, with indoor environmental quality being among the categories covered in Green Star certification. For Exxaro, this has been taken to an exceptionally high standard, resulting in its WELL rating – a first for Africa. The WELL Building Standard is a global rating system focused exclusively on how buildings, and everything in them, can enhance health and wellness. Scientific and medical research and leading property expertise form the basis of WELL.

“The Exxaro headquarters demonstrate excellent client and property-owner alignment on delivering a world-class facility where people’s positive experience at the workplace is a priority. This vision was made real with the backing of a brilliant professional team,” says Rudolf Pienaar, Growthpoint’s Chief Development and Investment Officer.

Local and global studies show that better indoor air quality, lighting and acoustics lead to an improvement in people’s health, well-being and cognitive performance.

“This supports the relevance and functionality of the workplace when there is much change taking place in this field,” points out Paul Kollenberg, Growthpoint’s Head of Asset Management: Office. He adds, “Growthpoint’s portfolio of highly efficient office buildings achieve a lower cost of occupancy for clients, a lighter impact on the environment and a better return for investors. The signature Exxaro and Discovery buildings exemplify the calibre of offices in our portfolio. These are the types of workspaces that we believe our clients are going to want in order to support their employees’ health and well-being and their businesses’ performance.”

SA REIT Association Rolls Out Repositioning Strategy; Strengthens Capacity

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The SA REIT Association (SA REIT or the Association), the representative umbrella body for South Africa’s listed property sector is rolling out a repositioning strategy and additional capacity to support South African REITs adjust for long-term sustainability.

Established in 2013 following the introduction of the REIT structure in South Africa, the Association is entering a new maturity phase. The transition is on the back of the appointment of Joanne Solomon as full-time CEO and its 2020 AGM when the decision was taken to grow SA REIT’s responsibilities, activities and services to members as well as a wider stakeholder group.

Estienne de Klerk, Chairman of the SA REIT Association, commented: “We have made good progress to ensure that SA REIT is positioned to provide a compelling support structure to its members and meet their needs during this challenging time for our industry. Joanne Solomon’s appointment as CEO was a significant milestone, bringing a wealth of relevant experience and the dedicated capacity to fulfil our strategic objectives and drive new initiatives.”

As part of SA REIT’s repositioning process, a range of new initiatives are being rolled out, including the establishment of two new Committees (Institutional and Research) and a comprehensive stakeholder engagement plan to grow the involvement of institutional investors, universities and large private property investors.

Commenting on her role since being appointed as SA REIT CEO, Joanne Solomon said: “I have worked closely with SA REIT’s Executive Committee to update our strategic priorities in line with the changing environment. In particular, I look forward to strengthening relationships across a wider range of sector stakeholders to create a united voice on critical regulatory and business issues whilst also ensuring the availability of relevant statistics and information to support meaningful engagements.”

The new Research Committee, chaired by Amelia Beattie, will provide high quality, independent research related to the South African listed property sector. The committee will be crucial in the growth of the Association as it aims to become a trusted research source hub for members and the industry at large.

A number of changes also took place across the existing five committees which continued to progress their respective focus areas including the industry consultation process with regulators regarding temporary amendments to the REIT legislation as well as the release of the well-received Second SA REIT Best Practice Recommendation for Financial Reporting, with the JSE considering it a benchmark for other sectors to follow

“The property sector continues to play a vital part in socio-economic development and our members have responded decisively to the environment by expanding SA REIT’s capacity to bring the sector closer together. I am excited to continue working with current and future members to drive good governance, innovation and international best practises that will maintain REITs’ position as an attractive investment class in the long term,” concluded Solomon.

Accelerating e-commerce trends and consolidation of supply chains proving to be COVID-19’s silver lining for Polish logistics sector

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Rosebank, South Africa, 23 October 2020: While sentiment towards global real estate has fallen sharply, the outlook for the Polish logistics sector is proving to be COVID-19’s silver lining. Exceptional demand from tenants for space close to urban clusters, growing preference for e-groceries and a rethink of supply chains are combining to drive the sector forward according to Poland-focussed European Logistics Investment (ELI).

Since 2018, Netherlands based ELI, in which Redefine Properties has a 46.5% equity interest, has developed eight assets, with another five under construction, and six under due diligence for future development. ELI consists of a Polish-focused logistics platform of approximately 527 000sqm of standing assets, 145 000sqm of assets under development and over 1 million sqm of potential development pipeline.

Andrew Konig, CEO, Redefine Properties says, “We continue to prioritise efforts and leverage opportunities to expand through the development of well-located assets occupied by high quality tenants. Our strategy is centred on creating a well-diversified and leading Polish logistics platform capitalising on the strong economic and real estate fundamentals in the sector.”

The sector’s buoyancy can be attributed to factors like construction lead times, which tend to be relatively short, as well as low capital expenditure. In times of volatility, assets that require smaller capital outlay can be appealing because of their capacity to preserve investor returns.

“We see a huge potential to create a large and diversified portfolio with a good mix between built-to-suit, inner -city, multi -tenanted and single -tenanted developments in prime nodes. Over the next five to seven years, we will be looking to increase our Polish industrial assets to up to 2 million sqm in size and target EUR1 billion in gross asset value,” adds Konig,

“Poland is a prime location for the logistics sector due to the country’s position in central Europe. Moreover, it is a liquid real estate market with high investor appeal and producing hard currency free cashflow.”

Occupier demand in Poland continues to be driven, among other factors, by e-commerce with small warehousing units within the inner city areas and last mile facilities close to urban centres much in demand and leading to higher rentals and asset values. Poland is also fast becoming a significant logistics hub for international players and is very competitive compared with Western Europe in terms of rental rates and labour costs.

“The industrial sector had its best six months, until June 2020. Twenty deals with a total volume of almost EUR1.2 billion were recorded, mainly driven by large portfolio transactions. Prime warehouse yields stand at 6.25% with quality assets, with long leased assets trading at sub 5.00%, and Warsaw inner city projects at around 5.50%,” says Pieter Prinsloo, Redefine Europe CEO.

“As the popularity of online shopping grows, the demand from occupiers will also increase. During the pandemic, consumers rediscovered the convenience of online shopping, even adding groceries to their checkout baskets. As retailers and logistics firms race to deliver a seamless experience and faster services, demand is likely to rise sharply for light industrial properties in close proximity to city centres,”

The sector benefitted from a spike in e-commerce and courier service activity during the COVID-19 period resulting in some tenants taking short-term leases to secure additional space. This was as a result of many companies holding greater amounts of inventory to buffer their supply-chain responsiveness.

Poland is also seeing a wave of new businesses wanting to move manufacturing away from Asia and closer to customers in Europe. The supply chain disruptions from COVID-19 is proving to be the biggest motivator.

“Quality assets are our competitive edge and we have a substantial development pipeline in prime investment markets and locations. Our efforts to strengthen the balance sheet continue and where we can, we will refinance developments on completion at better interest rates as the lending market improves,” concludes Konig.

“We follow a simple recipe for success, secure long-term leases with high-quality tenants, maintaining low operational expenses while optimising capital structures, as well as ensuring transparency and regulatory compliance. We focus on creating sustained value.”

Equites’ high quality logistics portfolio proves its resilience

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Highlights

Distribution per share stable at 74.44 cps

100% of distributable earnings paid in cash to shareholders NAV per share growth of 0.4% to R17.44 Loan-to-value of 29.5%

Like-for-like (“LFL”) net rentals in South Africa increased by 6.2%

Average collection rate above 99.0% over the last six months across South Africa and the United Kingdom

Cash and available facilities available in excess of R1.0bn

R600 million raised in senior unsecured floating rate notes

Weighted average lease expiry robust at 10.0 years, up from 9.3 years in prior year

All-in cost of debt decreased by 50bps since year-end to 5.44%

Vacancies well contained at 3.8%

Level 4 B-BBEE rating, verified black ownership of 51%

Cape Town, 13 October 2020 – Equites Property Fund Limited (Equites) today announced distributable earnings for the six months to 31 August 2020 of 74.44 cents per share, consistent with the distribution of 74.43 cents per share in the prior year. Net asset value per share increased by 0.4% to R17.44. The fair value of the property portfolio increased by 19.7% to R16.2 billion at 31 August 2020, with most of the growth in the property portfolio attributable to pre-let developments in South Africa and the United Kingdom which were completed over the last twelve months, together with the impact of foreign currency fluctuations over the period.

CEO, Andrea Taverna-Turisan, said: “The last six months, falling squarely within periods of lockdown both in South Africa and the United Kingdom, have been the most challenging in our trading history. While the logistics asset class remained resilient relative to other asset classes, the impacts of the lockdowns in both jurisdictions could not be escaped in totality. Against this adversity, our portfolio strategy of targeting quality assets on long-dated leases (Equites’ WALE is 10 years) with a strong predominance of A-grade tenants (94.6%), as well as our low vacancies (3.8%), continued to support a high level of income predictability and low risk of default on our rental streams. In addition, strong in-force escalations provide us with stable and predictable growth for the duration of the leases.”

Equites is the only specialist logistics REIT on the JSE with a market capitalisation of R11 billion and 63 properties under management. The portfolio has been carefully curated to bring together prime logistics assets in the most desirable locations, let to blue-chip covenants on long dated leases. Equites is currently included as the 8th largest company in the FTSE/JSE SAPY index (by market capitalisation) and has cemented its ranking as a fixture in this and other indices. The logistics asset class has been proven to outperform in key markets over time, and through careful acquisition and development activity, Equites has managed to unlock significant value. These factors have contributed to strong appetite and support from equity capital markets and has allowed Equites to generate market-beating returns for investors since listing.

In the past six months, the slowing growth in the United Kingdom economy has been exacerbated by the pandemic. The economic risk presented by a depressed economy as well as the uncertainty relating to Brexit is, however, largely offset by the large-scale adoption of e-commerce and the demand drivers which has been propelling the investment case for logistics properties. The pandemic has further accelerated e-commerce penetration, with United Kingdom internet sales as a percentage of total retail sales surging from 19% in 2019 to 26% in the first half of 2020. As a result, intensifying occupier demand for new A-grade logistics facilities is evident, with a 48% increase in the space take-up in the United Kingdom in 2020. Equites expects online retailers to continue to drive the demand for logistics facilities, especially in respect of last-mile facilities.

While e-commerce penetration in South Africa remains relatively low (1.4% in 2019), research suggests that online sales could comprise more than 5% of total retail sales this year, accelerated by lockdowns during the pandemic. The strongest driver of occupier demand in the South African logistics market, however, continues to stem from supply chain optimisation, with a notable trend in the retail space on investing in digital transformation and online platforms, these typically being supported by additional warehouse space.

Equites’ diversified blue-chip tenant mix further strengthened the naturally defensive nature of its portfolio. Rental collection rates remained between

98.1% and 100.0% over the lockdown period, both in South Africa and the United Kingdom. R30 million of rental deferrals were granted in South Africa and £326 000 in the United Kingdom, most of which is expected to be recovered within the current financial year. Equites also conducted a thorough COVID-19 credit risk assessment, which resulted in an expected credit loss of R3.7 million across the portfolio has been recognised as an impairment loss in profit or loss.

Total direct COVID-related costs for the six months to August 2020 amounted to approximately R29 million. The costs include, inter alia, the funding of tenant deferrals, the cost of holding cash on money market and in reserves to prevent any liquidity issues, providing contractors with once-off grants to continue to pay the lowest income earners on site and ensuring the protection of their employees. The more lasting COVID-19 impact on its operating performance will however be in indirect costs in respect of delays in construction, delays of rental inflows from new developments, postponement of expansion plans and the loss of development leases due to delayed investment decisions for a post-pandemic environment.

Developments

During the period, Equites completed three developments in South Africa, with a capital value of R107 million and two developments in the United Kingdom, valued at £25 million. Equites also has ongoing developments of close to R1 billion in Gauteng and Western Cape and £12 million in Leeds, United Kingdom, which should be completed in the current financial year.

Their development team in South Africa continues to innovate and create a product offering which is unmatched in the South Africa context. With baseline specification aligned to global best practice and the highest quality materials to ensure low maintenance and enhanced longevity of every item, their logistics properties remain highly sought-after. Their ability to create value further stems from the acquisition of well-positioned land suitable for development, the procurement of tenants through development leases and managing the construction process through the entire lifecycle.

Equites’ strategic partnership with Newlands , a local logistics developer, provides them with the opportunity to unlock value on land holdings in the United Kingdom in the coming years, and to grow the portfolio by developing assets at a discount to market value.

Equites and Shoprite concluded a joint venture to own and manage a portfolio of distribution centres and associated undeveloped bulk land in Brackenfell in the Western Cape and Centurion in Gauteng, which was announced in February 2020. Post period end, all conditions precedent were met and transfer of the distribution centres are imminent.

Conservative valuations

Equites continues to make significant progress towards increasing the frequency of external valuations and have externally valued over 75% of its income producing portfolio between February and August 2020.

The COVID pandemic and prevailing macroeconomic climate has caused uncertainty regarding valuations, however, both in South Africa and the United Kingdom, high quality logistics real estate has proven to be resilient. Both discount rates and exit capitalisation rates have remained relatively flat for prime logistics assets, with a slight moderation in discount rates for more specialised assets and certain low coverage sites.

Prudent balance sheet management

Equites believes that a robust treasury policy is a cornerstone from which to maximise stakeholder value. The optimal mix of debt and equity is continuously evaluated to minimise their cost of capital wherever possible. Equites’ loan-to-value at 29.5% remains well within its target of 25%-35% over time. At 31 August 2020, 95.6% and 86.9% of the existing term loan balances and total committed future cash outflows were hedged, respectively. The group has reduced the all-in cost of debt in South Africa and the United Kingdom by 93 bps and 4 bps, respectively, over the past six months. On a fully hedged basis, its all-in cost of debt is 6.05%, with a weighted average debt maturity profile of 3.5 years. Given its exposure in the United Kingdom, it continues to manage foreign exchange rate risk to provide short-term stability in the growth in distributable earnings but to gain from the hard currency appreciation over the medium and long term.

Equites has established several diversified sources of debt funding both in the United Kingdom and in South Africa and now have debt facilities of R6.0 billion across term facility agreements, unsecured listed and unlisted notes and working capital facilities. They issued a significantly oversubscribed R600 million, 3-year, unsecured floating rate note at an interest rate of 3-month JIBAR + 205bps during September 2020. Post period end, it also concluded a first-of-its-kind in the South African REIT sector, R1.6 billion facility agreement, linking the all-in cost of debt to its ESG risk rating score.

Equites has more than R1.0 billion of undrawn available facilities and cash and short-term deposits, enabling them to execute its development pipeline while providing the necessary flexibility to execute on any further opportunities should these arise. Their robust credit metrics have culminated in GCR affirming Equites’ national scale long term rating as A+(ZA) and the short-term rating at A1+(ZA), with a change in outlook from Stable to Positive. Their conservative financial profile has enhanced the robustness of its balance sheet in a turbulent economic environment.

Sustainability and transformation

Equites’ continued efforts towards sustainable value creation have reduced its environmental footprint through green building techniques, provided significant community upliftment through their social programmes, reduced energy costs for its tenants and lowered its funding costs. Its transformation initiatives have also earned Equites a level 4 B-BBEE rating for the third consecutive year, with a verified black ownership of 51%.

Prospects

Taverna-Turisan said: “While the effects of COVID are still unfolding, we are confident that we have effectively managed the first-round impacts of the pandemic and have amassed a portfolio which will continue to be resilient in the face of adversity. For this reason, the board expects that the company will achieve full year dividend growth of 2% – 4%.

Equites has established itself as a leading owner and developer of high-quality logistics assets in South Africa and the United Kingdom, an asset class that is expected to continue to outperform over time. The disruptive impact of e-commerce is creating profound structural tailwinds which makes this market increasingly desirable and Equites is strongly positioned to benefit from this trend.”

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