SAREIT

SPEAR REIT LIMITED (JSE: SEA) marked its FY23 reporting period with an 11.31% growth in distribution per share (DPS), resulting in a DPS of 75.97 cents for the financial year and a final distribution per share of 38.84 cents for the 6 months ending 28 February 2023.

Spear reported annual revenue of R 581,2 million for FY23, up from R 574,8 million in FY22. CEO, Quintin Rossi says that management has held firm on its key strategic objectives of being Western Cape-focused specialists in industrial, commercial, retail, and mixed-use property assets.

The company’s strong focus on this strategy, coupled with the emphasis on hands-on asset management, has yielded fruitful results and has enabled it to navigate through a challenging and unpredictable trading environment, successfully.

Addressing shareholders at the FY23 annual results presentation, Rossi highlighted the company’s fundamental features, underpinned by a simple capital structure, and easy-to-understand business operating model. With no exposure to cross-currency interest rate swaps, Spear continues to maintain a robust financial position. A key strength of Spear is its acute understanding of the Western Cape real estate market and its by-design approach of being within close proximity to all of its assets.

Supported by a proven and positive track record, Spear has consistently generated positive net cash flows from its operations. The management team and board of directors are heavily invested in the business, showcasing a clear alignment of interests with shareholders. Spear’s revenue growth for the reporting period was 3.48%, complemented by a 5.43% net property operating profit growth.

Notably, expenses were prudently managed, with only a 1.15% increase in operating expenses and a 1.13% decrease in administrative expenses.

Rossi remarked: “These attributes, as simplistic as they may seem, continue to form the foundation of our core business. We remain dedicated to delivering value and driving growth in alignment with the interests of our shareholders.”

During the presentation, the company highlighted a 1.50% increase in Tangible Net Asset Value Per Share from FY2022 to R11.47. With a solid portfolio consisting of 28 assets valued at a total of R4.22 billion, Spear has achieved an impressive FY23 cash collection rate of 98.61%. The company has strategically reduced the size and value of its core portfolio through close to R500 million of assets sold. The disposals of non-core assets and assets in the hospitality sector bolstered the balance sheet and led to a reported Loan-to-Value (LTV) ratio of 36.30%.

This bodes well for the outlook, as Rossi confirmed: “The proceeds from these disposals have been strategically reinvested to strengthen the balance sheet, positioning Spear for future growth as opportunities arise amidst shifting interest rate cycles.”

Management reported improved in-force escalation metrics of 7.4% for FY2023, an uptick from 6.3% in FY22. A hallmark of Spear since its inception has been strong portfolio occupancy rates as management executes its early-engagement strategy. For FY23, the reported portfolio occupancy rate was 92.18%.

Outlook

The projected performance of Spear remains directly linked to its regionally focused strategy of operating within the Western Cape economy as it maintains resilience across the real estate sector. The effects of semigration and general confidence in provincial infrastructure and administration remain key capital attraction points, placing Spear in a favourable position to expand its investment universe further across the Western Cape.

Although the macroeconomic conditions within South Africa remain a major concern, exacerbated by the crippling energy crisis and high unemployment rate, Spear’s core portfolio remains defensive, underpinned by strong lease covenants in highly desirable locations within the Western Cape. Rossi accepts that the trading climate remains challenging, and the longer-term impact of the above factors is likely to affect cost creep, placing pressure on margins, cost of occupancies, and net property income.

Management will cautiously navigate and mitigate, as far as possible, the negative impact of interest rate increases and operating cost creep. Rossi noted: “We do expect our portfolio to generate some growth in the year ahead, but the extent of the growth is currently difficult to quantify given the myriad of headwinds South Africa is currently experiencing. But despite the headwinds already experienced and overcome, Spear’s FY23 financial performance has delivered impressive results, reflecting a focused, nimble, and consistent business approach. Spear remains a business that is acutely and actively managed to effectively counter negative market forces, and this strategy will continue moving forward,” said Rossi in closing.

Highlights

• Spear owns assets valued at R4.22BN, with a diversified portfolio consisting of 28 assets.
• Loan-to-Value (LTV) ratio stands at 36.30%.
• Distribution per Share (DPS) of 75.97 cents.
• Tangible Net Asset Value Per Share increased by 1.50% from FY2022, reaching R11.47.
• Cash collections at a 98.61% collection rate and net cash derived from operating activities amounting to R43M.
• In-force escalation of 7.4% for FY2023.
• 26 assets are directly supplied by the City of Cape Town’s electricity supply.
• ESG performance is real and measurable, through its bursary programme, solar PV, and water augmentation solutions, all continuing its policy of sustainable returns.

Growthpoint Properties Limited (JSE: GRT) delivered a 4.6% increase in half-year dividend per share (DPS) to 64.3cps and 2.3% growth in SA REIT funds from operations (FFO) of R2.7bn for the six-month period to 31 December 2022. Distributable income per share (DIPS) was also up 1.3% to 77.9cps. Group property assets grew by 2.0% to R174.1bn and hard currency dividend income increased by 10.1% to R763m.

Norbert Sasse, Group CEO of Growthpoint Properties, attributes this defensive performance to excellent results from the V&A Waterfront and ASX-listed Growthpoint Properties Australia (GOZ), improved letting and reduced vacancy in the South African portfolio, and Growthpoint Investment Partners’ ongoing attraction of quality co-investors.

Sasse comments, “Growthpoint’s results achieved during another exceedingly challenging period reflect the strength and diversification of our businesses and the quality of our earnings.”

Growthpoint creates space to thrive with innovative and sustainable property solutions in environmentally friendly buildings while improving the social and material wellbeing of individuals and communities. It is an international property company invested in real estate in SA, across Africa, Australia, Poland, Romania and the UK, and the largest SA primary listed REIT. Growthpoint is a FTSE/JSE Top 40 Index company, a constituent of the FTSE EPRA/NAREIT Emerging Index, and has a long-standing inclusion in the FTSE4Good Emerging Index and the FTSE/JSE Responsible Index.

Growthpoint continued to focus on robust balance sheet and liquidity positions to execute its three strategic thrusts: international expansion, SA portfolio optimisation and growing income streams from Growthpoint Investment Partners’ assets under management (AUM).

In line with its steady performance, Growthpoint increased its dividend payout ratio to 82.5% from 80.0% at the prior half year, retaining R472.9m before tax to fund capital expenditure and development and execute its strategies while ensuring balance sheet strength.

Its conservative group SA REIT loan-to-value (LTV) ratio increased slightly to 38.8% mainly due to debt funded acquisitions in Australia. The REIT ended the period with R1.6bn cash on its SA balance sheet and R10.3bn in SA unused committed debt facilities. This includes contingencies for the upcoming maturity of its USD Eurobond of R7.4bn in May 2023, which it will repay with facilities in place.

Growthpoint’s strategic international investments continued to grow incrementally to 43.7% of property assets by book value and 31.0% of earnings before interest and tax. It owns 59 office and industrial properties in Australia valued at R60.5bn through a 62.7% shareholding in GOZ and five community shopping centres in the UK valued at R7.2bn through a 61.5% investment in LSE- and JSE-listed Capital & Regional (C&R). Through a 29.4% investment in LSE AIM-listed Globalworth Real Estate Investments (GWI), Growthpoint owns an interest in 71 office and industrial properties valued at R56.1bn in Romania and Poland. Its effective share is R16.5bn.

GOZ delivered a stellar performance with AUD net property income up by 19%, driving up AUD FFO by 12.5%, to deliver 2.9% distribution growth of AUD10.7cps. Effective withholding tax increased from 10.0% to 14.0%. The balance sheet strength of this core investment for Growthpoint can be seen in its low gearing of 34.5% and AUD357.4m of undrawn debt.

All GOZ portfolio metrics are excellent: it is 96.7% occupied by gross lettable area (GLA), with 95% of the portfolio leased to the government, listed and large organisations. GOZ has successfully integrated its recent acquisition of Fortius Fund Management, which introduced AUD1.9bn of third-party funds under management to GOZ.

“GOZ delivered a fantastic performance to extend its track record of quality asset management, ESG performance and attractive long-term total returns. It has confirmed its FY23 DPS guidance of AUD21.4cps,” says Sasse.

GWI produced a resilient performance even with global challenges affecting its operating markets. It offered a scrip dividend of EUR0.15cps for its half year to 31 December 2022, equalling R166.6m for Growthpoint, which all major shareholders have committed to take up. GWI sustained good liquidity and remained moderately geared at 42.7%, with EUR625m of new financing secured and no material debt maturity until March 2025.

It continued its capital focus on logistics facilities in Romania, acquiring a small-unit logistics facility of 7,100sqm and delivering six developments of 104,400sqm. It has three new logistics facilities under development totalling 30,000sqm. In Poland, it completed refurbishing two mixed-use properties of 74,800sqm. GWI achieved good letting and reduced vacancies slightly to 14.4%.

“GWI is showing stable performance with increased inflation underpinning rental increases, although there are some signs of operating metric softness and a slight fall in valuations.  We continue to seek solutions to maximise the value of this investment,” notes Sasse.

C&R declared a dividend of GBP2.75pps, totalling R50.4m for Growthpoint, which will be reinvested. C&R’s reset LTV ratio remained stable at 41.0%. It disposed of its Blackburn asset for GBP40m. Valuer’s rental assumptions increased despite valuations declining by 5% on a like-for-like basis because of increases in risk-free rates.

Its community-focused needs-based retail strategy remains relevant and is driving improved operating metrics, including footfalls increasing by 7% compared to 2021. C&R delivered solid letting in the period with 54 leases signed at a 34% premium to previous rentals. Its portfolio is 92.3% let by GLA.

“We continue to believe in this platform, its management and its ‘needs-based’ community retail strategy. C&R is showing pleasing balance sheet stability and operational resilience. As the business continues to evolve, so is its management platform, and it has a clear roadmap detailing the potential to grow adjusted profit by more than 20% in the medium term,” Sasse says.

Good letting activity in Growthpoint’s SA portfolio reduced vacancies, which returned to single-digit territory, moving from 10.3% to 9.9% in the six months. Its SA property values increased for the first time since the pandemic, growing 1.4% (R998m) to R70.3bn and signifying greater stability and some recovery.

Growthpoint owns and manages a diversified core portfolio of 371 retail, office, and industrial properties across SA. It manages these assets to optimise their value over the long term but also seeks to sell non-core assets and recycle capital to rebalance its portfolio towards higher growth sectors and regions. It sold 19 non-strategic properties for R756.3 during the period, making a profit on book value of R7.6m. Growthpoint has sold R10.5bn of properties in South Africa since 2017.

Strong leasing performance in Growthpoint’s industrial property portfolio saw vacancies significantly down in the half year, from 5.7% to 4.3%. Coastal areas outperformed. This set the stage to successfully negotiate better annual lease escalations, supported by a higher inflationary environment, however negative reversions on renewal persist. Positive key metrics drove up the industrial portfolio value by 1.9%. Taking advantage of the demand for industrial properties, Growthpoint continued selling non-core smaller assets to owner-occupiers and investors.

The retail property portfolio reflected pleasing performance with good trading density growth of 8.6% and core vacancies at a stable low 3%. While leases continued to revert negatively and rental escalations on renewal remained under pressure in 2022, Growthpoint is starting to achieve renewal growth and improved lease terms, supporting retail portfolio valuations increasing 1.9%.

More staff are returning to offices in line with company policies and with the ongoing impact of loadshedding. Businesses that previously gave up space are starting to take up office space again, and as such interest in Sandton offices is picking up. Vacancies of 20.4% show a stabilisation, coming down slightly from 20.7% over the six months. The renewal success rate improved from 58.0% to 66.4% in a market where tenants continue to consolidate and reduce space. The office portfolio resumed its capital growth at a modest 0.7%, reflecting better sentiment and stability for the sector notwithstanding negative reversions on renewal.

Growthpoint’s broad development expertise creates opportunities to generate profits and supports its disposal strategy by unlocking the best value from non-strategic assets. The contribution to distributable income from trading and development was a steady R77.0m for the period.

Growthpoint strives for excellent environmental, social and governance (ESG) performance. During the year it continued its solar energy drive, incentivised to help its tenants to avoid the impacts of loadshedding, and in pursuit of its environmental commitments and carbon neutral 2050 target.

Loadshedding in SA started in late 2007, and since then, Growthpoint has evolved and improved its response, first with generators and now focusing on solar power. Growthpoint’s active investment in solar plants will see it more than double its 13.5MWp of installed renewable energy generation to 27.4MWp before end-June 2023 at an investment of R210m. In total, this takes the replacement cost of its solar plants to around R400m. It also has 332MW of generation potential from 334 backup generators and spent R47m spent on diesel during the six months. Growthpoint’s energy management ensures that its portfolio of properties is well backed-up to sustain tenant businesses.

“Our SA business is well positioned with a strong balance sheet and good liquidity. We are encouraged by improvements in the industrial and retail portfolios and pleased at the increased stability evident in the office sector. Our focus remains steadily optimising our SA portfolio, including reducing its reliance on the national electricity grid and fossil fuels,” says Sasse.

The post-pandemic rebound in international tourists and the return of events led to excellent performance across the board from the iconic V&A Waterfront, Cape Town, in which Growthpoint has a 50% interest with its share of property assets valued at R9.2bn. Precinct-wide, vacancies are at a low 0.7% and demand for space is strong. The V&A achieved exceptional growth in net property income of 23.0%. Record December 2022 retail sales surpassed R1bn, 28% higher than December 2019.

Restaurants that closed during the pandemic reopened their doors, and the hospitality sector delivered a strong performance. The occupancy and rate metrics of all V&A hotels increased and were on par with or exceeding pre-Covid levels. The V&A ensured that all retail, restaurants and hotels could trade through the 208 days of loadshedding in 2022, which carried a R21m diesel cost.

Demand for V&A offices is strong, with vacancies a mere 1.2%. The new 10,500sqm office development in the Canal District will be entirely occupied by Investec and will be completed in the last quarter of 2023. Residential-to-let vacancies dropped from 18% to 5% over the six months. Marine and industrial achieved a 45% increase in net property income. The cruise season launched in October 2022 with 18 vessel visits and some 42,000 passengers and crew processed at the V&A. A further 52 vessels are booked to the May 2023 season close. Casual berthing of superyachts and charter vessels performed excellently.

“The V&A has shrugged off the effects of the pandemic to deliver a very healthy performance, and all sectors are enjoying low vacancies and strong demand,” says Sasse.

Growthpoint Investment Partners contributed R48.1m in management fees and R79.0m in dividends to Growthpoint. It continued growing AUM and attracting appetite from top-quality co-investors. Growthpoint’s capital-efficient alternative real estate co-investment platform, which includes three funds, added nearly R1bn AUM during the period as it grows towards its goal of R30bn AUM by the end of FY27.

Growthpoint Healthcare REIT delivered DPS growth of 7%, attracted a R500m investment from the Namibian Government Institutions Pension Fund (GIPF Namibia) and sold 15% of its management company to Kagiso in February 2023. GIPF’s investment reduced Growthpoint’s shareholding to 39.1%. SA’s first unlisted healthcare REIT has a property portfolio valued at R3.6bn. It acquired its first logistics asset in the period and has earmarked some of the R340m of debt funding available from the IFC for two development projects that will increase healthcare facilities in KwaZulu-Natal.

Growthpoint Student Accommodation REIT performed in line with original income expectations. It attracted a R250m investment from GIPF Namibia and is in the process of a R2.5bn capital raise, which will close in August 2023. Growing its AUM, it acquired one plot of land and is developing two new student accommodation projects for the 2024 academic year. Growthpoint has a 14.3% investment in SA’s first unlisted purpose-built student accommodation REIT, which has a R2.7bn portfolio of 6,443 beds in Johannesburg, Pretoria and Cape Town.

Lango Real Estate successfully concluded a capital raise of USD125m, including an investment from Growthpoint of USD30m (R513.8m). The funds will be deployed to enter the Nairobi, Kenya, market and reduce debt. The protest-damaged Circle Mall in Nigeria is fully reinstated and commenced trading in phases from November 2022. Growthpoint holds an 18.4% shareholding in Lango, which has a USD612.3m portfolio of prime office and retail assets in Ghana, Nigeria and Zambia, and land in Angola.

“Growing Growthpoint Investment Partners is a strategic focus. We aim to increase AUM and seek new co-investment opportunities that appeal to quality investment partners but are distinct from Growthpoint’s retail, office and industrial core assets,” says Sasse.

Growthpoint’s diversified portfolio, strong balance sheet and stable hard currency dividend income streams position the company defensively for the rest of FY23. However, with elevated uncertainty in the local and global macroeconomic environment and rising interest rates and inflation, Growthpoint still expects to deliver muted full-year DIPS growth.

“Growthpoint has a defensive, diversified business with the great strengths of skilled people and a strong balance sheet. We have clear and robust strategies and remain committed to creating and conserving value for all our stakeholders,” says Sasse.