Spear REIT Limited (SEA:SJ), with its exclusive focus on high quality Western-Cape only assets, released its FY2021 results on 14 May 2021.
Despite a period of tenant cashflow constraints due to Covid-19 and the national lockdown, deferred rental payment arrangements and a contraction in the local (and global) economy, Spear announced a final distribution per share (DPS) for FY2021 of 58.70 cents per share based on an 80% pay-out ratio and a full year rental collection rate of 97.79%. In addition to robust business performance under the circumstances, Spear launched a Covid-19 feeding scheme from its Double Tree by Hilton Hotel kitchen which ran from April 2020 – July 2020 providing daily warm meals to the less fortunate and feeding more than 50 000 people over this time.
“Although 2020 has been something of a wartime environment for businesses globally, the Spear team has navigated this time with agility and commitment, which is reflected in our 97.79% rental collection rate and FY2021 results, says CEO Quintin Rossi. “Our founding principles of being regionally focused and hands-on managers of our assets has helped us maintain high occupancy rates across a diversified portfolio.” Spear’s hands-on asset management and defensive asset diversification strategy played a key role in its FY2021 results with 54% of the portfolio by gross lettable area (GLA) comprising industrial assets.
Spear’s portfolio consists of 32 high quality, 100% Western Cape investment properties ranging from modern logistics, convenience retail, mixed-use and strategically located commercial office blocks. At year end Spear’s portfolio value was R 4,5 billion over a gross lettable area of 453 458m2. Spear has maintained an impressive occupancy rate over the year of 94% with in-force average escalations of 6.81%.
Management successfully reduced overheads during the year, which saw an overall reduction of net administrative cost-to-income from 5.71% to 5.48% due to aggressive controllable expenditure reductions, salary sacrifices and board fee reductions during the year.
Rossi says that “despite the severe impact of Covid-19 on the commercial real estate sector, with the SA REIT association estimating that close to R3bn in relief packages had to be provided to tenants across the listed property sector, our DPS decline was relatively controllable thanks to our asset diversification strategy in commercial, industrial, retail, residential and mixed-use/hospitality assets.” Spear’s Western Cape focus continues to pay off as income statement continuity and balance sheet management has ensured the business remained sufficiently capitalised and met all its covenants. Spear’s LTV at year end was 45.81%.
The FY2021 results are a feather in the cap of the Spear asset management team as portfolio leasing and retention was successfully executed under the circumstances. A total of 187 610m2 renewals/relets were concluded for the year with an average rental reversion of -3.70%. During the year, two 10-year development lease and extension agreements were concluded for a division of Grindrod Logistics and Nampak Limited totalling 30 000m2.
Spear’s average property value is R 139 million compared to FY2020 of R 129 million. The portfolio remains conservatively valued at R 9 816/m2, which remains below numerous benchmarked industry peers with similar portfolio compositions. Fair value devaluations for the reporting period were R 106 million. FY2021 valuations reflects a portfolio exit capitalisation rate of 9.25%. One third of the portfolio is valued annually by a JSE accredited, independent valuer with the balance valued by managements internal qualified valuer. Spear’s shares in issue net of treasury have increased to 205 733 231 translating into a SA REIT tangible net asset value per share of R 11.21 net of its final FY2021 distribution.
Spear’s LTV at year end was 45.81% (bank covenants at 55% LTV) with an amount of R 85 million gross debt being settled during FY2021. Spear’s average costs of debt declined by 149bps during FY2021 to 7.26%. Currently 56.5% of gross debt is hedged at an all-in cost of 8.66% and 43.5% of gross debt is variable at an all-in cost of 5.66%. Spear’s debt maturity profile is robust with zero refinancing risk to the business.
Spear’s industrial portfolio (243 162m2) offers a diversified mix of well-established industrial nodes consisting of mini, mid and large modern logistics units. Rental collection was 96.70% thanks to the easing of operating restrictions from Level 4 of the national lockdown onwards. Occupancy was 97.54% at year end. 154 971 m2 was renewed/relet with a 1.88% positive rental reversion.
Spear’s commercial office portfolio (141 867m2) had notable vacancies because of Covid-19. Management’s focus remains on reducing vacancies through a tenant-centric approach and regional expertise. Although the future of work and the workplace are arguable key unknowns, all the evidence suggests that a strong demand for commercial office will return. Occupancy was at 86.96% at year end. 23 012m2 was renewed/relet with a negative rental reversion of 1.79% with rental collections for the year at 96.70%.
Spear’s retail portfolio (40 351m2) consists of two open air convenience centres anchored by national grocers and numerous national line shop tenants. Most of Spear’s larger retail tenants were able to trade throughout the lockdown except for tenants like restaurants, coffee shops and gyms. Management’s approach was to be pragmatic, focusing on business continuity throughout the pandemic. Because Spear’s retail assets allow ample room for social distancing, a fast recovery is expected. Occupancy was at 99.6% at year end, with a collection rate of 95.58%. 9 628m2 was renewed/relet with a negative rental reversion of 8.80% with rental collections for the year at 95.58%.
Management excluded any hospitality revenue from its income forecasts for FY2021, given the uncertainty of when unrestricted travel would return. Although there was a gradual increase in trading from September 2020 with a positive outlook for the festive season, this was hampered by South Africa’s second wave of Covid-19 infections. The local and global vaccination rollout will be tantamount to the recovery pace of the hospitality sector. Local market penetration has been successful as regional business travel and regional leisure travel has recommenced. Smaller group meetings and accommodation business has been on the increase as economic activity increases.
As announced on SENS, management has entered into a fixed income lease agreement over the 15 on Orange Hotel with industry doyens The Capital Hotels & Apartments Group, which will further reduce Spear’s exposure to variable portfolio income and will have a restorative impact on group earnings during the second half of FY2022.
Outlook and guidance
Management’s guidance for FY2022 is a DPS growth of 6% – 8% per share from FY2021 (based upon a no less than 80% pay-out ratio). This guidance is based on assumptions that include ongoing macroeconomic recovery, no third or fourth wave lockdowns, lease renewals per company forecasts, no major tenant failures, an improved trading environment that includes international travel, and a successful rollout of the Covid-19 vaccine with a high efficacy rate.
Management and the board remain significantly invested in Spear and are fully aligned with shareholder interest. Management remains focused on rental preservation and growing cashflows as its hands-on asset management and tenant centric approach remains key to its operating strategy.
“Although the longer term economic effects of the pandemic on the real estate sector are difficult to predict, we are seeing signs of recovery as retail sales increase and restaurants, destination retail malls and airports become busier and busier, says Rossi. “I am incredibly proud of how in the face of a global pandemic and economic shutdown Spear’s portfolio occupancy rate has been 94% in FY2021 and our rental collections have been as robust as they have been to date. Our north star remains to be an authentic dividend paying REIT with a clear strategy to grow the Western Cape portfolio to a meaningful mid-cap size of R 15 billion with a market cap of R 10 billion over the next 5 years. We will however never sacrifice quality for quantity as we move closer to our asset value targets.”