Spear Reit Limited (SEA) Earnings Call Transcript & Summary

Good morning, everyone. Welcome back. Thank you again for joining us on our pre-close investor presentation for the half year 2021. We have opened up for some questions from the market, and we'll start now with answering some of those questions. If we do not get to all the questions today, please feel free to reach out to us. We're always happy to engage with you. So let's start. Christiaan?

Yes. Good afternoon, everyone. Quintin, the first question was, do you anticipate to maintain a similar collection of revenue build for the balance of the year ahead?

Thanks. I think we, as a team, believe that we are on a strong trajectory to maintain the current year-to-date collection percentages. We are targeting to maintain the mid- to high-road scenario within our scenario plan. And failing any major market failure or tenant failure, we anticipate that to remain the status quo.

Next question. What percentage of revenue generated is contractual versus nonrecurring?

Spear is a pretty straightforward business, easy to understand balance sheet and pretty easy to understand income statement. At this point in time, roughly 99.5% of revenue is contractual. And that's pretty much going to be how the business operates for the foreseeable future.

Okay. Next question. Are you happy with the LTV of 43% to 46%, considering current pressures on property valuations?

I think property valuations, if your properties had been aggressively valued up to now, then I think there would have been slightly more concern. I think we, as a team, are in the short term satisfied with the range of 43% to 46%. However, there is, per our medium- to long-term strategy, a market strategy and plan in place to reduce group LTVs.

I think you've answered that question already with the next one. Please give a guidance on your targeted LTV.

So I think within the interim period, the LTVs will be as per the outlook given in the presentation. But given the progress we are making with the disposal of portions of our noncore assets, we anticipate that roughly for the ZAR 148.8 million worth of assets that are currently either have transferred or in the process of disposal, we should see about a 2.5% to 3% reduction in group LTV post interims.

Please provide color on capital allocation. Would you favor balance sheet strength or high payout ratio?

I think as a business, we have always maintained that we want to operate with a strong balance sheet, and there's no reason to deviate from that plan right now. We also have no intention on losing our REIT status. As a executive team, we are in continuous discussions with our Board of Directors and our Audit and Risk Committee as to where we see our payout ratio strategy moving towards. And as a business, in the short, medium and long term, we anticipate to maintain between 80% and 100% payout ratio for the business.

Thank you. Given your progress on noncore disposals, is there any other assets you would consider disposing of?

I think in the business, as I alluded to in the May results presentation, there is no holy cow. As and when, if we get approached by a investor looking to acquire any one of our assets, we will give due consideration to the offer made, the strength of the offer and the counterparty's ability to actually do the transaction. And we will take it to our Investment Committee for consideration.

Yes. How did you decide between credits and deferments when requested?

It's -- unfortunately, with the onset of COVID-19, one has to manage the emotional part of the business, one has to manage the commercial part of the business in line with how to ensure the business has continuity. And the view taken on credits were effectively, if you look at the lockdown operating scenarios, tenants that simply could not physically operate or were unable to trade, there was a stronger weighting towards a credit through our triage approach; and tenants that were able to operate but were under slight cash flow pressure, they would qualify for a certain level of deferments.

Okay. Given the current environment, do you see any attractive buying opportunities?

I think as a business, as I mentioned, one of our values being consistency and transparency, we are seeing opportunities. However, our focus is to maintain balance sheet strength and -- as well as rental preservations at this point in time. All our energy and effort currently is being put into ensuring a high level of rental collections, managing every aspect of our business from a risk management perspective as well as implementing our renewable energy strategy for the business.

Given the borders remain closed, do you anticipate a much slower recovery than expected for hospitality?

I think as a province that's been hardest hit probably on the travel, tourism and hospitality sector, I do see that there would probably be a slightly prolonged return to business for the hospitality assets. However, even this morning, we saw a major uptick in inquiries and certain bookings at our DoubleTree by Hilton Hotel. There's quite a bit of traction in the market for bookings at 15 on Orange. And that's actually also to the point of hotels are able to provide safe, sanitized and secure accommodation for travelers. And I do believe that we'll probably see a recovery in the hotel sector quite a lot faster than what we'll see in the Airbnb sector, by example.

Okay. Yes, please go ahead.

Okay. So I've got a question here for Christiaan. Are you able to give any indication on what your property operating and management expenses have done over your FY '21 interim period? Has it decreased, increased or remained similar relative to last year?

Thanks. On a like-for-like basis, we do expect property office space to decrease. Given the aggressive cost-cutting measures we implemented, as Quintin discussed in the presentation, we worked on a 61% break-even scenario, and we worked very hard to cut into that cost. But given the growth of the portfolio on a year-to-date basis, we expect it to remain flat or slightly increase due to the fact that we had to have various COVID-19 costs increase in the business to make sure we comply with government regulations. And that -- and also the given that we have -- due to the closing of offices, there was a significant decrease in utility costs, which fall under operating costs.

Thank you. Any other questions there?

There's a few more. Just a couple of questions regarding our vacancies. The question relates to, it was mentioned that retail jumped from 4% to 7% to 9.9%. The 764 square meters only accounts for around 2.2 percentage points. Could you give us some sense of where the rest of the vacancy came from under the retail portfolio?

Yes. So just to talk to that part of the presentation, my point was that what can be regarded as COVID-related casualties in terms of vacancy was 764 square meters, bearing in mind that we have about 130,000 square meters of renewals that take place annually. So within the portfolio, there is natural turn of churn of tenants that choose to either move to other properties or choose not to renew their leases for a variety of reasons.

Another vacancy question regarding the office portfolio. Office increased from 4.9% to 8%. There was a tenant that left however. Where could the rest of the vacancy space come from?

So as I've mentioned also in the presentation that leases that were coming up for renewal and relet within the last 3 months. There were, in some instances, quite a couple of headwinds where there were knee-jerk reactions from tenants that were also aggressively looking to cut costs. And that, unfortunately, gave rise to additional vacancy within the portfolio. But again, as a business, being effectively a glorified leasing operation, churn happens within every part of the portfolio.

And I assume that will be the same for the question regarding industrial. It increased slightly.

Correct.

Operations, where do you anticipate the escalations to drop to year-end with what you have learned from the recent negotiations?

I think property escalations, whether it's negotiated on a retail, commercial and industrial basis, are slightly different. It depends whether it's a single-tenanted property or a multi-tenanted property as the operating costs relating to that particular asset are slightly different. What we have found is on our single-tenanted properties that we are under negotiation with at the moment, lease escalations could range between 5.5% and 7%. On the multi-tenanted properties where there are other value-added services, those escalations would range between 6% and 8%.

I think there are some finance questions you can ask me.

Just in terms of credits and deferrals. Christiaan, how long is the average deferral term?

Well, let's start by saying, I think the shortest deferral term we had was 1 month and the longest would have been 12. So -- but on the average portfolio, they range between, let's say, 3 to 5 months. And we've intentionally structured it that way, that we're going to obtain the deferrals and have it paid back before the end of our financial year.

And what is the accounting treatment for the deferrals and the credits?

Well, credits, we would credit in the month which the credit relates to. So thus, if a tenant couldn't operate in April and a credit was provided, it would be credited in that month. That is done also for cash flow purposes, where you would -- if you didn't credit it, you would still be liable for the VAT on that. So we credit in that month. And deferments were similar. We would have removed it from the tenant's statement in the period it relates to, and we would rebill it in the period they would need to repay it back also to make sure that the cash flow and the VAT purposes doesn't eat into our cash balance.

And on those deferrals, were there any interest charges relating to that?

On some. Again, it was on a case-per-case basis in that range, anything from prime minus 1% to plus 2%, but as agreed per tenant.

Okay. Thank you very much.

I think that covers most of the questions. We did the questions here. We have discussed disposals. We also have discussed payout ratios. And then there is nothing further that I have seen that we have not covered. Let me just check the e-mails. One more question here. We received the question, are the property externally valid at interim stage? Or is it management valuations at interim or external valuations at full year? I think I can answer that question. At the interim stage, it was all done by a Chief Investment Officer, which is a registered valuer, which was done on a 5-year cash flow basis. We've -- all of them are done internally. And at year-end, we will go to a external valuation. Where we're at the minimum purchase requirement, we will do 1/3 external and the remainder will be internal also on a 5-year cash flow DCF basis.

I think that concludes all the questions. Again, we thank you all for your ongoing support. We assure you of our best endeavors at all times. And we look forward to reporting back to the market closer to November 2020. Thank you very much.

Thank you, everyone.