Spear Reit Limited (SEA) Earnings Call Transcript & Summary

Good afternoon, everyone, and thank you for joining Spear's interim results presentation for the half year 2022. It's just on 12:00, and it's my privilege today to deliver these interim results to you. The entire team at Spear has been exceptionally energized by the performance of the underlying portfolio over the period. The ongoing execution of our operating strategy has been fruitful and is added to the health of the overall portfolio. Sectoral performance has been good and has yielded acceptable results in the context of the current operating environment. Spear's hands-on asset management initiatives have not only strengthened the core portfolio over the last 18 months but has also positioned the business for meaningful growth into the future. The red list removals and the move to alert level 1 has been an extremely positive development for South Africa. Early signs of growing inbound travel can be seen in the hotel forward bookings. The global vaccination initiatives have had a positive impact on reducing lockdowns and infection waves. To date, around 21% of South Africans have been fully vaccinated, and we encourage more and more people to get vaccinated as our direct world and economies start to open up again. The sentiment certainly has transitioned from a pessimistic feeling to a more cautiously optimistic feeling in the last few weeks. During the presentation, if you have any questions, please feel free to e-mail them through to [email protected], and myself and our CFO, Christiaan Barnard, will be answering those questions straight after the presentation. Before I get into the presentation, I'd also like to take this opportunity to express my sincere gratitude and appreciation for each and every one of our team members at Spear and at multi-rooms. We could not do and deliver the results we have today without the efforts over the last 6 months. So I'm going to covering over the next hour or so. So moving through to our environmental update. Now the interim trading period has shown marked improvement compared to the half year 2021. But we remain fully aware that as an economy and as a nation, we're not quite out the words yet. The half year has presented its own challenges that required innovative solutions, and I'm pleased to report that Spear is stronger as a result and now better placed to build on the success achieved during the half year to finish the full year 2022 a lot stronger. Portfolio lease renewals and tenant retention targets set by management were achieved during the period. This has resulted in consistent portfolio cash flows being maintained and further vacancy creep being attenuated. As mentioned in the preclose, the operating environment over the last 6 months has been less volatile than in the half year 2021. Yet, certain aspects of the operating environment remain unpredictable. The third infection wave had a negative impact on market momentum. However, a strong bounce back has been seen in moving through alert level 2 down to alert level 1, as people are allowed now to gather in larger groups and the curfew hours have been extended. This certainly bodes well for both hospitality and the retail trade. Much to everyone's relief, South Africa is now off the U.K. travel red list since October 11. This, however, is a post-interim period event. However, I must note that the results thereof has generated a real and probable optimism in the market unseen in many, many months. The vaccination rollout, as mentioned, continues to gain momentum as expansion to younger age groups has commenced. And from our vantage point, we are definitely observed more and more companies returning to the office and believe this trend will continue to gain momentum for corporate South Africa over the coming months. Fortuitously, the half year has seen limited support measures having to be provided by Spear despite the onset of the third wave and its restrictions. And yes, there has been a subdued demand for office space during the interim period. However, very encouragingly, the recent uptick in office inquiries has resulted in some post-interim period office leases being concluded, and a further contraction of the vacancy rate reported in the interim results. Spear's industrial and convenience retail assets remain in very high demand for rental spaces. And we believe that the high occupancy rates and tenant retention rates in these parts of the portfolio are testament to the quality of these assets. 15 on Orange Hotel is open and trading under the Capital Hotel and Apartments banner as Spear has now started to realize earnings restoration on this asset. The full benefit of the earnings restoration will be felt in the last 6 months of FY 2022, given the fact that the new lease agreement only commenced in the middle of August 2021. It's our view that real estate really is the business of local markets. And Spear's regional focus has been an important contributing factor to the positive interim period performance. Just moving on to our mission statement and strategy. It's our north star to operate as a consistent and reliable dividend paying income fund and to deliver on our mission statement, which is to be the leading Western Cape-focused REIT and to consistently grow our distribution per share ahead of inflation on an annualized basis and to operate within the top quartile of our peer group. Our main objectives for FY '22 were to remain consistent in our business operations and to ensure that our rental enterprise was in the best possible shape. I'm super pleased to share with you the strategic highlights that we've achieved in this period. As a company, we've continuously and successfully navigated the COVID-19 operating environment. We've improved collections, which have resulted in an improved payout ratio for the period. We've maintained income statement consistency with an improved interest cover ratio. There's been a commencement of notable industrial logistics-focused leases with Grindrod, Nampak and Mambos Plastics distribution centers and that equates to around 57,000 square meters of GLA, which is equal to roughly 12.2% of total portfolio GLA. Spear's maintained a solid occupancy rate of 93% over the period and improving post-interim period. Our debtors' book has shrunk as cash collections have improved. Tenants have been able to repay all the debt, deferments and current rentals. Our earmark disposals of assets is well in progress, and we have successfully implemented our solar PV strategy, which has resulted in earnings accretion, which I will share with you further down in the presentation as roof lease income has commenced and overhead costs have been reduced while still recovering 100% of our consumption charges. Having a look at our strategic focus on the medium and long term. There will be a continuous narrowing of asset ownership to commercial, convenience retail and industrial assets with a sole focus on fixed income as opposed to variable income investments. As a business, we'll maintain our distribution payout ratio strategy to between 80% and 95%. We'll prudently recycle capital through earmark disposals and continue to have a sound capital allocation tree. We'll reduce and maintain our gearing ratio in line with our stated strategy of a band between 38% and 43% LTV. We'll maintain a conservative debt hedge profile of between 63% and 75% of our debt hedged at any given time for up to 36 months. We'll maintain a high percentage of portfolio occupancy and furthermore, unlock additional renewable opportunities and water augmentation measures in line with our ESG strategy across the current portfolio and growth assets. Looking beyond COVID-19, Spear's navigated the environment in the interim period successfully. The underlying business and the core portfolio is performing in line with management's forecast as daily asset management initiatives are executed. So having a look at the operating snapshot for the period. Trading conditions remain challenging, but they are improving. I highlight 4 key areas, which if you had to ask me what keeps you up at night, it's probably these 4 key areas of the business. In terms of commercial, it's common cause that the demand for commercial office space across the country, across the sector, has been subdued and which has forced us to be even more creative, even more innovative as to our leasing solutions across the portfolio through variously flexible lease terms, dynamic rate products along with attractive installation offerings. And I'm pleased to report that these are starting to bear fruit right now for us. In terms of hospitality, this is specific to the half year. Obviously, there's been muted international travel, given the effect that we've been on these travel red list for so long. We've had to pivot towards a stronger local market focus with long-stay accommodation packages, local market accommodation and conference packages in order for us to generate operating revenue. Now since the October 11 announcement, we have seen a marked increase in hospitality activity, together with the alert level adjustments as more people can meet and more people can actually have in-person meetings and conferences. As a management team and as stated to the market, we remain committed to the exit of our hospitality assets and inroads have been made to have 0 variable income on the Spear portfolio by no later than half year 2023. Vacancy creep. Now the COVID-19 and work from home has had a material impact on the office market with vacancy creep setting in across the sector. Spear has not been immune to this vacancy creep as can be seen in the vacancy rate. Our leasing team has made some strong inroads with aggressive marketing and letting initiatives having been initiated and a quite a few post-interim results leases being concluded. Negative rental reversions. Now defending income on expiry has become tougher and tougher. And I believe that we've achieved very acceptable results in this regard. I'm really satisfied with the letting activity stats that we'll share with you further in our presentation. Spear has, in my opinion, performed better than its peers during the period with the single-digit negative rental reversions once extrapolating out the hospitality portfolio. Now despite these above 4 points and challenges, I'm still comfortable and confident that our guidance provided to the market is sound and achievable for FY '22. Rental collections have been in line with management's forecast as cash collections continue to improve on a month-on-month basis. The balance sheet and income statement has remained robust and meeting all covenants. As mentioned earlier, tenant cash flow assistance has reduced significantly. Liquidity availability has remained sufficient, with Spear meeting all its operating expenses and interest costs without any concern. There's been no going concern risks, and Spear has ZAR 180 million in cash availability and liquidity measures, and that's increasing on a month-to-month basis. Our funders, Standard Bank Real Estate Finance and Nedbank Corporate Investment Banking remain aligned and supportive of Spear strategies. As I said, from a short- to medium-term perspective, we remain sufficiently capitalized. Our solvency and liquidity measurements have been passed, and our FY '22 renewal and relet program has been consistent. And most importantly, given the strong cash collections, the half year '22 growth in distribution per share is 12.66% based upon the increased payout ratio of 85% on a like-for-like basis compared to the prior half year, where we paid out 80%, it would be a 6.09% DPS growth for the period. Moving through our salient details. Spear's portfolio consists of 32 high-quality Western Cape assets with a portfolio value of ZAR 4.55 billion. Asset value growth compared to FY '21 was 1.25%. The average property value ZAR 140.7 million. The average property value per square meter ZAR 9,563 a square meter. The average in-force escalation was 6.44%. Portfolio GLA at the end of August 2021 was 470,881 square meters. I will segment it into asset types further down the presentation. Portfolio occupancy rate came in just under 93% for the period. The weighted average lease expiry is 27 months. Now as a management team and as an asset management team, we made concerted efforts to try and push that expiry profile out for longer and longer. However, given the diversified nature of the portfolio, together with the operating environment we find ourselves in, I would, far rather, take a more flexible lease as opposed to a vacancy in these times. Encouragingly, we are also seeing longer lease commitments coming through from between 3 years to 10 years, which can be displayed both on the leases with Mambos, Nampak and Grindrod, by example. The average portfolio rental is ZAR 95.32 per square meter gross. Our year-to-date collections are an impressive 97.33%. And this is as a result of our hands-on approach. Our debtors' team must be commended. They've done an excellent job by staying on top of the debtors' book. And today, I'm exceptionally pleased that we are moving back to pre-COVID collection levels in terms of our rentals. When looking at the budget that was set in January 2021. We've recovered 96.4%. And the main variance between the 2 is a lower utility charge recovery as opposed to what we forecasted in January 2021. Moving on to the financial metrics. Our distribution per share growth is 12.66% based upon the 85% payout ratio. Our distributable income per share for the period is ZAR 38.89 per share. Our distribution per share for the half year after applying the 85% payout ratio is ZAR 33.06 per share. Our SA REIT cost-to-income ratio is 43.13%, which is higher than we would like it to be. And this is as a direct result of lower-than-expected hospitality income for obvious reasons as well as the ongoing cost to maintain our COVID-19 operating environment from a health and safety perspective, additional bad debt provisions, further deferments applied to the third wave lockdown. Having a look at our cost-to-income ratio in terms of our administration cost income ratio was 6.86%, and we are focusing on reducing that to below 6% in the coming half year. Spear's tangible net asset value per share, ZAR 11.94 per share, which is up by 3.83% from ZAR 11.50 from FY 2021. The increase is as a result of recognizing treasury shares as a balance sheet asset, which we have not done in the prior financial year. We've seen a tangible net asset value growth of 3.83% per share and a net of distribution SA REIT TNAV of ZAR 11.61 per share. Spear's loan to value for the interim period was 45.1% post any fair value adjustments having been made. Spear's fixed debt ratio was 55.16%. This is below our desired levels and post our interims, the fixed debt ratio will increase closer towards 60% as our CFO monitors constantly the market to strike a hedge at the most opportune times. Our average debt expiry profile is at 30 months with no refinancing risk within excess of ZAR 513 million worth of debt renewed and extended during the interim period at improved rates. Our average cost of debt has reduced to 7.1%, which is about a 25 basis point reduction from the FY '21 year. Our average cost of variable debt is 5.62%, and our average cost of fixed debt is 8.34%. Having a look at our collections. Our year-to-date collections have been largely in line with management's forecast. Encouragingly, as mentioned earlier, we are seeing all the debt being serviced with current rental obligations. The billings reflect all credits and it's all revenue after credits and deferments, including recoveries. Our income budget was set in 2021 January using some of the best assumptions for the year ahead. Some of those assumptions have proven true, and some of those had to be adjusted in the light of the third wave during the period, predominantly relating to the gyms, to other inbound travel operators, some restaurants and some beauty spas. The tenant arrears at the end of the interim period amounted to ZAR 17.33 million, excluding VAT. However, that has decreased post interim period to ZAR 7.26 million, excluding VAT, which is extremely encouraging. At the end of the period, the total provision for bad debt was ZAR 4.26 million, which equated to roughly 24.57% of total tenant arrears. And just having a look at the slide, we had budgeted rental revenue of ZAR 274 million for the period. We had billed ZAR 271 million. We collected -- of that ZAR 264 million, which is a 97.33% collection to build. Having a look at the segmented rental recoveries, we've recovered 96% of our retail rent, 98% of our commercial rent, 97% of our industrial rentals and 98% of our hospitality rentals. The anomaly of hospitality was as a direct result of the spa requiring assistance during the third wave. So moving on to our financial performance. Group revenue for the interim period was ZAR 286. 9 million, which is a 12.67% increase on a like-for-like basis with HY '21. Property operating expenses was ZAR 92.3 million. Administration expenses ZAR 18.2 million. Our net property operating profit increased by 5.87% to ZAR 176. 2 million. Noncash deductions amounted to negative ZAR 32 million, which was predominantly made up of a ZAR 13.9 million devaluation in investment property, ZAR 8.7 million fair value adjustment to treasury shares held, a negative ZAR 6.5 million depreciation and amortization on installations that are not of a capital nature and a negative ZAR 2.7 million share-based payments giving us a profit from operations for the interim period of ZAR 144.2 million. Our net interest costs for the period was ZAR 74.4 million, giving us a pretax profit of ZAR 69.8 million. On application of the 85% payout ratio that gives us a distribution per share of ZAR 33.06 per share. Spear's interest cover ratio is well above our strictest covenants at 2.15x and improving as the 15 on Orange lease comes into effect. Having a look at our company FFO reconciliation. Flowing from the income statement, ZAR 69.8 million. We do have some net add backs to the value of ZAR 6.7 million, which were the fair value adjustments to investment property. The equity instruments held at fair value of ZAR 8.7 million as well as the negative ZAR 15.9 million on the lease smoothing. That gives us an SA REIT FFO of ZAR 76.5 million. We added in the CSP awards of ZAR 2.7 million, giving an interim distributable company FFO of ZAR 79.3 million. Native treasury, Spear has 203.9 million shares in issue, giving us an interim distributable income per share of ZAR 38.89 per share. Application of the payout ratio of 85% gives us an interim distributable company FFO of ZAR 67.4 million and a DPS of ZAR 33.06 per share, reflecting a 12.66% increase in DPS compared to HY '21. Having a look at the balance sheet. Again, just to mention, easy to understand, no funding structures and the balance sheet is absolutely clean, making us a very, very straightforward rental enterprise business. Total assets of ZAR 4.7 billion, of which ZAR 4.5 billion being bricks and mortar. Total liabilities, ZAR 2.2 billion, of which ZAR 2.1 billion were property-related debt. An interim period around 17% of the debt portfolio was current liabilities. And as part of the debt portfolio management, a portion of our debt will remain short-dated typically within a 12- to 18-month profile for us to take advantage of pricing levels and the benefit of 0 breakage costs on settlement in the event of a portfolio-related disposal. At the end of the interim period, the LTV was at 45.9%. This is at the upper band of management's LTV strategy, and I believe it is only one way for it to go from here, and that's down. Management strategy is to align our LTV ratio between a 38% and a 43% band, probably with a midpoint of roughly between 40% and 41%. The execution of our LTV reduction roadmap is underway with active asset disposals negotiations starting to bear fruit. So having a look at our TNAV bridge. Starting at Feb 2021, tangible net asset value of ZAR 11.50. We had the profit for the year, excluding fair value adjustments, of ZAR 0.45. Distribution paid in June 2021 of ZAR 0.29. Fair value adjustment on our treasury shares of ZAR 0.04 per share. Fair value adjustment of investment property of ZAR 0.07 per share. Treasury share recognition of ZAR 0.38 per share. IFRS 2 expense for future conditional share plan of ZAR 0.01 per share, giving us a TNAV per share at August 2021 of ZAR 11.94 per share. Our HY interim distribution of ZAR 0.33 per share gives us a SA REIT tangible net asset value of ZAR 11.61 per share. Moving on to our funding slide. Management's hands-on approach has not been limited to the real estate assets owned by Spear. Management has been proactive in actively managing the debt portfolio of Spear to position the balance sheet in the most robust possible way. Spear CFO, Mr. Christiaan Barnard, has done exceptionally well in negotiating and extending finance agreements with our respective funders at very opportune times. The benefits of this approach will bode well for Spear and the business's overall cost of debt on a forward-looking basis. As mentioned earlier, Spear's average cost of debt has been reduced by 25 basis points to 7.01%. Our total gross debt is ZAR 2.1 billion, of which ZAR 1.2 billion is fixed, being 55.16% of total debt at an all-in cost of 8.34% for a weighted average period of 34 months. Now this is moving closer and closer towards our internal hedge strategy in terms of tenure, and now we are just working towards getting our internal percentages higher and higher. Our variable debt is just under ZAR 1 billion, which makes up about 44.86% of the total portfolio debt at an all-in cost of 5.62% for a weighted average period of 31 months. Having a look at our debt maturity schedule, we present a very robust maturity profile with ZAR 34 million of debt coming due in FY '22, ZAR 241 million of debt coming due in FY '23, ZAR 1.04 billion in FY '24, ZAR 405 million in FY '25 and ZAR 439 million in FY '26. As mentioned, it's a very robust profile, no plausible refinancing risks in our view, with over ZAR 1.8 billion of debt only due for refinancing from FY '24 and onwards. So having a look at our portfolio covenants as well as some interim refinancing highlights. As disclosed in the results presentation and the half year pre-close presentation, Spear strictest covenants were relaxed for the FY '21 and FY '22 measurement periods as follows. So currently, our strictest covenants on LTV is at 55% and ICR at 1.75x. As at the interim period, LTV is at 45.91%, providing sufficient headroom and optionality for the business. And our interest cover ratio is at 2.15x and consistently improving as the material implementation of the 15 on Orange lease comes through going forward into the balance of the financial year. Further highlights. We refinanced ZAR 513 million worth of debt during the period, of which ZAR 480 million was fixed at improved -- at a 73 basis point improvement on cost. Now if you take that post the interim period, we further refinanced an additional ZAR 257 million of debt, totaling ZAR 770 million worth of debt refinanced post interims and during the interim period, which results in about 37% of the debt portfolio refinanced at improved rates and for increased tenures. So moving on to the portfolio overview. These are Spear's top 5 assets by value. These assets make up over ZAR 2 billion in value or 45.9% of total portfolio valuation. This equates to 177,713 square meters of GLA which is around 37% of total portfolio GLA. These top 5 assets are an incredible display of high-value portfolio diversification across asset type with all these assets located in sought-after nodes underpinned by strong lease covenants. Given Spear's less-is-more approach of owning fewer assets, but rather assets of higher value, the focused asset management initiatives can be easily measured and adjusted towards market conditions at any point in time. Four out of the top 5 assets are valued in excess of ZAR 400 million per property, and these are typically the size of assets that we would like to own going forward into the future. Another key aspect to note which is not only common thread in the top 5 assets, but also a common thread throughout the portfolio is that all 5 assets are conservatively valued. And when benchmarked against our peers, they fall generally below the benchmark average valuation per square meter per asset type. Having a look at our sectoral split by value, making up the ZAR 4.55 billion in portfolio value, ZAR 2.2 billion of commercial office space, ZAR 1.2 billion of industrial assets, ZAR 636 million of retail assets, ZAR 379 million of hospitality assets and ZAR 49 million of development land. On an HY '21 revenue basis, the office portfolio contributed ZAR 128 million in rental revenue; in the industrial portfolio, ZAR 90 million; the retail portfolio, ZAR 42 million; and the hospitality portfolio, ZAR 11 million. On a GLA basis, 28% of the portfolio is commercial. 55% of the portfolio is industrial, 11% is retail and 6% hospitality. Having a look at our letting activity for the period. Another testament of our early engagement strategy, our hands-on approach. We have achieved what I believe to be some of the top rental reversion. It's an incredible result for the trading conditions that we find ourselves in. During the period, we had expiries of 89,748 square meters. We renewed and relet 82,000 square meters at a positive rental reversion of 22.1%. Yes, the hospitality lease is an outlier. Once we extrapolate that out, we had renewed and relet 65,000 square meters -- 65,800 square meters of the 73,500 square meters of expiries at a negative 5.78% reversion. Notably, we had a positive reversion on the retail portfolio with the negative reversions on the commercial and industrial portfolio. Spear's expiry profile remains defensive at 27 months. And our consensus view is that the portfolio's rentals are largely either on market or slightly below market as we continue to navigate through this trading environment. The industrial reversion is due to one particular tenant vacating, which was on a shorter-dated lease, which was replaced with a long-dated tenant on 11,000 square meters, which was within management's forecast and factored into our FY '21 income budgets. Having a look at the tenant and vacancy profile. At the interim period, Spear's vacancy percentage was at 7.21%, being 33,900 square meters of vacancy, predominantly made up of the commercial office sector, but we have seen some meaningful inroads into that area at the moment. I do believe that as a business, we've topped out in terms of our vacancy creep. And I'm pleased to report that post interims, that vacancy rate has already dropped to below 7%. Our industrial vacancies, predominantly made up of smaller units, comes to 10,824 square meters, and our retail vacancy is 3,229 square meters with 0 hospitality vacancies. On a GLA basis, we have occupied GLA of 436,000 square meters, 949 -- sorry, excuse me, 436,949 square meters is occupied with 408 tenants. We've segmented them based on GLA. We have 50% of our GLA is occupied by what we classify large national -- international tenants and large listed tenants. 40% of our GLA is occupied by national tenants, smaller listed tenants and professional service firms. And the other 3% is effectively entrepreneurial businesses and owner-managed businesses with a 7 -- reflecting a 7% vacancy rate. Having a look at the lease expiry profile. In line with management's forecast, 14% of the portfolio comes up for renewal on an annualized basis. We believe that our early engagement strategy with our tenants does allow us to manage and control this percentage of vacancies, and we believe that we should start to see a further improvement on that expiry profile going forward. We do note that in FY '23, we have a larger-than-normal industrial expiry profile coming up, but rest assured that we've already engaged with numerous of these tenants and we've already presented quite a few term sheets, which are currently being considered. Moving on to our portfolio valuations. So management, together with our external valuers, believes that Spear's valuations reflect fair value and in some instances, below market benchmark values compared to our peers. In our valuation approach, we've attributed no value to undeveloped portfolio bulk and in any of our valuations. And the current bulk available for interest sake on the portfolio without causing income drag is around 60,000 square meters which is a pure NAV enhancement for shareholders and the bulk that will require demolition in the fullness of time, which may result in certain costs being capitalized and potentially a minor income drag, is around 80,000 square meters, giving us around a exploitable available bulk of 140,000 square meters across the portfolio. In terms of the valuations, Spear has applied an average exit -- average discount rate of just on 13% with an average exit capitalization rate of 9.49% which is about a 0.24% increase from the prior year, which was 9.25%. We have a 4% growth rate and an average expense growth rate of 6%, around 0.5% to 2% structural vacancy that's embedded in the valuation technique as well as a void period of between 2 and 4 months. This has resulted in the following metrics. If I segment them per property, our average property value for industrial is ZAR 123,500,000; for commercial, ZAR 160,900,000; retail, 105,900,000; and hospitality, ZAR 189,500,000, giving us an average valuation per property of -- on the portfolio level of ZAR 140.79 million. When you look at every one of these assets and you look at the average valuation per square meter, first of all, it's well below replacement. And second of all, when compared to some of our peers, is well below the average valuation attributed to the similar assets in some of the locations, giving us an, on a portfolio level, average valuation of ZAR 9,563 per square meter. For the period, we have had portfolio devaluations of ZAR 13.97 million, which is roughly a drop of 0.31% in portfolio value. Moving on to our sustainability update. As a business, we align ourselves with the people, planet and profit approach to business operations. Our sustainability strategy is modeled and tested on every investment considered and executed upon by the business. We continuously seek opportunities to place less and less reliance on fossil fuel generated electricity and renewable energy solutions such as solar PV and water augmentation systems will continue to be rolled out across the portfolio. To give you a snapshot on the 32-property portfolio, we have saved 2.8 million kilograms of carbon emissions. We've planted the equivalent of 21,707 trees. And during the interim period on our PV solar plants, we have generated over 1.8 million kilowatt hours of electricity. Where are we with our solar strategy? So we have currently 9 active and commissioned solar plants on the portfolio, with a further 9 being built as we speak, not yet commissioned, which will give us a portfolio coverage of around 18 solar plants across the portfolio. Currently, 28% of the portfolio has got solar solutions and in future, an additional 34%, which will give us in excess of 50% of the portfolio covered in solar before the end of FY 2022. The only caveat is subject to commissioning by the city of Cape Town. Our average solar penetration rate is 28%, with a future penetration rate on new installations of 30%, giving us a 29% average penetration rate. Now the penetration rate is effectively the self-generation rate that the PV solar generates on property, effectively what we are able to not rely on from either Ascom or the city of Cape Town. In terms of kilowatt hour peak, we are generating 3,970-kilowatt hour peak of solar power on our portfolio at the moment with an additional 4,035 kilowatt hour peak to be generated, giving us a 8,005 kilowatt hour peak capacity into the future. We've adopted a two-pronged approach when it comes to our solar strategy in terms of how we install them and how we actually finance them or how we generate income from them. We have adopted one being a roof rental approach. Effectively, for many, many years, the roof of our property has only kept out the rain and effectively kept the place cool or kept it warm. We've unlocked it into an income stream with a 25-year cash flow. We've entered into -- we currently have 7 roof rental agreements in place over the portfolio with an additional 4 future roof rentals, giving us a total of 11. And we've also entered into a 7-year all-in fixed finance agreement on 7 of our installations, 2 which are already currently operating and 5, which are future projects. Just looking at the financial metrics, on an average annual roof rental per property basis. Now take that times the costs we will be generating ZAR 239,000 per annum per property and an annual average savings per finance property will be saving ZAR 345,000 per property on an annualized basis. Looking at the value of our investment, the total value of the PV solar investment in terms of the kit on the roofs will be just under ZAR 80 million. Moving on to our sectoral performance. Spear's sectoral performance has been resilient for most part, as displayed in the level of collection set out earlier. Now dissecting the sectoral performance for the half year provides deeper context to the trading environment and what management prioritized asset management initiatives. Having a look at the retail portfolio, this is a 48,695 square meters of GLA, which is roughly 10% of the portfolio. And defensively, we have around 41% of our convenience retail GLA is led to national tenants on long-term leases. All our retail assets are classified as convenience retail. This subsector has been the most resilient. None of Spear's retail assets are reliant on local, no international tourist markets. Our strong performance from convenience retail portfolio has resulted in an occupancy rate of 93.37% and a collection rate of 96% versus revenue build for the period. During the half year, we provide credits and deferments to retail tenants to the following values, ZAR 872,000 worth of credits and ZAR 485,000 worth of deferments. The adjustment to the lower alert levels has been really good for tenant turnovers in the stores. Letting activity has been in line with our expectations, with the bulk of renewals taking place in line with management's budgets for the period. There's been no significant retail tenant failures during the period as we believe that the design of the open air centers that we own have allowed and given customers a little bit more peace of mind to be able to quickly go in and out of the various stores without being in an enclosed mechanically ventilated shopping center. This is what we've observed. We observed lower levels of income risk as close to 100% of tenants are trading and paying rent. Our gyms and some food-related tenants are taking longer to recover, requiring some longer-term lease restructures. And we have noted an improved footfall and increase in basket sizes by our national tenants. Having a look at our commercial portfolio. This comprises 133,879 square meters of GLA, which is around 28% of total portfolio. All of Spear's commercial assets are in highly attractive and established office nodes in Cape Town. Subdued tenant demand continues to impact the sector on a general basis. The office portfolio occupancy for the period was 85.15%. And this is predominantly due to COVID-19 to tenants taking a wait-and-see approach in terms of further lockdowns and further restrictions in addition to one of few liquidations and business closures. Collections have been strong at 98% versus revenue build for the period to date. Spear provided credits and deferments to office tenants to the following values, ZAR 200,000 worth of credits and ZAR 32,000 worth of deferments. Spear's portfolio is attractively positioned to offer both expansion or contraction space to third-party tenants due to its attractive lease terms and generally below-market asking rentals. Now we have seen expansion and contraction, both in our portfolio and in office inquiries coming into the portfolio as companies do adapt to a hybrid work regime as well as certain social distancing requirements. Our lease renewal negotiations have been more challenging, but the bulk of our renewals have been concluded in line with management's forecast. So in terms of observations. Asking rentals have softened as general vacancy rates in the office sector creep up. We have also seen that there will probably be a prolonged increased vacancy rate in the office sector in addition to increase our competition for tenants. The return-to-work momentum has increased with the vacancy rollout. And then the cost of installing tenants will become more and more expensive. And the positive side is that there's been post interim periods, a notable increase in office inquiries together with some positive conversions to lease agreements. Moving on to the industrial portfolio, which comprises 260,229 square meters of GLA, which is roughly 55% of total portfolio. The industrial portfolio has been exceptionally resilient over the period, with several material new lets and relets taking place in a very challenging market. The industrial portfolio occupancy is just under 96%, with collections of 97% versus revenue build for the period. Spear has provided 0 credits and 0 deferments to our industrial tenants during the interim period. This remains -- strong demand remains for Spear's industrial rental properties. We've concluded, as mentioned, a 10-year lease over 32,000 square meters of GLA with Grindrod, a long-term lease over 11,000 square meters with Mambos Plastics, a national retailer, as well as an extension of a 10-year lease agreement with Nampak liquids, together with an extension of their facility over to -- on 14,500 square meters of GLA. It is noted that currently, the demand for our larger industrial portfolio is our stripping supply, which is very, very positive for us as a business. In terms of some observations, we've initiated robust load shedding curtailment measures on our large power user assets. We've -- there will be increased capital requirements to maintain the quality of the industrial portfolio. The cost of new developments and zoned land makes current portfolio -- the current portfolio mix very well positioned to retain its current strong tenancy base as it is becoming more and more expensive to build new land costs -- or industrial land is through the roof. And we believe that given the quality and the size and the diversified mix of the industrial portfolio, we are well positioned to see a stronger-than-anticipated rental growth on that underlying portfolio going forward. Moving on to hospitality. That comprises 27,606 square meters of GLA, which is roughly 6% of total portfolio GLA. Having a look at the DoubleTree by Hilton. We have seen improved trading since adjusted alert levels have been coming through by government. We've seen improved occupancy rates along with meetings, food and beverage and conferencing improving. By example, we historically, under previous alert levels, you could only have 100 people meeting in a venue. That was increased to 250 people, which was further increased to 750 people. And on the conference side, we saw a notable uptick in physical delegates attending after those changes, which had a 3 -- two-pronged improvement for the company's revenue because those delegates would partake in food and beverage and would typically stay in the hotel during the conference, which would bode well for rooms revenue. What is our focus? Our focus, as advised to the market, is to dispose of our hospitality assets. In the interim, we will obviously consider other alternative uses, in particular for the DoubleTree, which could comprise of potential residential, potential co-living or medical facilities on a forward-looking basis. So Africa has now moved off of the U.K. red list. And we've seen positive tourism inflow, and we anticipate this to remain for the balance of the year. We do note that a fourth wave, whatever that could look like, could hamper this a little bit. But based upon what we have in our information at our disposal and the business on the books, things are looking a lot more positive. Having a look at 15 on Orange. As announced on SENS on the 18th of March 2021, management entered into a triple net fixed income lease over 15 on Orange. The fixed income lease significantly reduced Spear's exposure to variable income. The Capital Hotel and Apartments Group has now completed an ZAR 18 million refurbishment of all rooms and some public areas. The capital expansion was self-funded by the capital group, and the capital 15 on Orange lease commenced on the mid-August 2021. So having a look on the right-hand side of the slide. It's a slide that you are probably familiar with by now, where we just illustrate the restorative nature of the earnings, thinking back to FY '21, hotel, the rental generated for the full year was ZAR 1.8 million. With the implementation of the new fixed income lease, Spear will generate for the FY '22-year ZAR 10.4 million in terms of net rental, which would have a ZAR 5.06 accretion to the DIPS on a property basis. And on a group basis, we would have a ZAR 4.19 improvement to our DIPS. Looking forward, on a full 12-month basis, it would have a ZAR 19.2 million net rental increase into the revenue of the company, which would be a ZAR 9.33 improvement on property, distributable income per share and a group DIPS improvement of ZAR 4.67 per share. Now having a look at some observations. Now the business and travel market has shown some signs of improvement during the interim period, but we believe that going forward, that, that would just continue to gain momentum, both for the local and international market. Food and beverage and conference demand has improved with increased person's meetings permitted, as I explained earlier. And then lastly, the world is opening up. Post the preclose, South Africa has moved speedily in the right direction with regard to global best practice as well as the digitization of vaccination passports making it a lot easier for the rest of the world to trust that we are moving in the right vaccination direction. So having a look at the general business updates. Despite the positive performance of the interim period, the trading conditions do still remain very tough. We do see the earlier signs of increased demand for our rental properties. As I've mentioned, the industrial and retail portfolio has been the most resilient. The office sector vacancy creep will be mitigated but will be mitigated in the near term as we started to see office inquiries and conversions taking place. The 15 on Orange leases commenced mid-August with Capital Hotel and Apartments Group, of which the benefits I've explained in the previous slide. Our collections continue to improve towards pre-COVID levels month-on-month. Our balance sheet remains robust and actively managed. Our debtors book remains on target with good recovery momentum on receivables. Our asset disposal and LTV reduction program is ongoing and in line with our stated strategy. And our renewal program is in line with management's forecast. So having a look at some development and redevelopments and organic portfolio enhancements over the period. Over the course of FY '21 and through FY '22, 2 portfolio enhancement projects were undertaken off the back of long-term leases and blue-chip lease covenants. The total capital cost spend was around ZAR 78.4 million, with both completion -- completed -- completion yields to be around 9%, with these escalations averaging in around 6% compounded per annum. The first was a redevelopment of 1 Beacon Way for Grindrod Logistics subsidiary, Novamarine, which was a 30,238 square meter redevelopment as a container terminal. This property had a very specific zoning, which allowed us to secure this tenant. The redevelopment cost for this particular development was ZAR 44.4 million with an initial yield achieved of 9.03%. Having a look at the second project, which was the extension of the Nampak lease for a further 10 years, which is for the liquids division, manufacturing bottle caps and closures. We had an existing facility of 12,500 square meters. We had additional land, which was at a 0 cost, which were able to unlock value of an additional 2,000 square meter warehouse. We have, in addition to that, done some capital upgrade to the property in addition to a roof replacement and a 1-megawatt solar plant. The 2,000 square meter extension is now complete, and Nampak is paying rental on that additional space, and the solar installation and roof replacement is underway and will be complete by the end of the calendar year. Having a look at one of our more ambitious projects. And as disclosed in prior presentations, Spear has successfully rezoned our Marine Place site of which the sites consist of around 5 urban, which will be consolidated and will form part of the greater Marine Place development. The time horizon due to COVID has been pushed out as to when the development will commence given its -- both its mixed-use nature and the scale -- the sheer scale of the development. Just knowing what we know now, just with the benefit of hindsight and the pandemic environment, we may play around with the basket of rights, and we may increase the residential component and decrease the office component of this particular mixed-use development. But rest assured, all sites that form part of this future development are fully let and yielding. There's 0 income drag being experienced on any of these assets as we buy our time towards improved market conditions. There's also 0 interest capitalization taking place on this proposed development land. Spear will, in time, seek a development partner to co-develop the site with us. And once completed, we believe that this will be one of the most iconic peripheral CBD mixed-use developments with uninterrupted views of Table Mountain, Lion's Head and Table Bay in Paarden Island posting in excess of 600 to 800 residential units and 12,500 square meters of convenience retail as well as high-tech, midsized industrial units on the back end of the site. Moving along to our outlook and guidance. Our focus is to remain -- is to maintain our interim period performance. The trading environment, we believe, will remain tough. However, our portfolio segmentation, asset location and strong lease covenants will continue to bode well for Spear. Our core portfolio will continue to display resilience, positioning Spear for ongoing sustainable income growth. We have noted an increase in localized and non-localized letting inquiries post the KZN and outing unrest, which will result in short- to medium-term vacancy contraction. Spear's hands-on asset management approach will continue to deliver value for shareholders as further portfolio opportunities unlocked through both the solar PV, third-party signage and cell tower cash flow enhancements. The vaccine rollout momentum and red list removal has positioned SA towards recovery. And our tenant collections are moving closer and closer towards our pre-COVID levels. And Spear remains well capitalized with sufficient liquidity measures available. Our renewal and relet momentum will be maintained. And our LTV reduction roadmap is to gain momentum as disposals are finalized, moving us towards a stated band of 38% to 43% LTV within the next 12 months. When we look at our guidance, Spear will remain and maintain its high-quality portfolio of Western Cape assets. Our strategic growth objectives will be centered around modern logistics and industrial warehousing, convenience retail and data center assets. Privately held Western Cape real estate portfolio acquisition opportunities exist for Spear, offering added scalability for Spear in the medium to long term. It is our intent to solely own fixed income assets by half year 2023. Spear will unlock further portfolio cash flows through its solar PV rollout. As cash collections continue to strengthen back to pre-pandemic levels, management may further increase its payout ratio for the full year 2022. And then in terms of our guidance, we remain firmly on track with our guidance to achieve the DPS growth of 6% to 8% for the FY '22 year based upon the payout ratio of 80%. And as stated, these adjustments -- payout ratio adjustments may happen based upon improved cash collection performance. Now as always, there are quite a few qualifications that we do not expect any further prohibitive lockdowns or a deeply infectious fourth wave that the macroeconomic recovery will commence, that lease renewals will be completed in line with our forecast. We won't have any major tenant failures during the period. And then our tenants will maintain the ability to settle current rental, historical deferments together with the rising cost of occupancy. South Africa remains off of travel red list, resulting in an inbound travel recovery momentum. The return-to-office momentum will increase as vaccination percentages increase nationally. If we won't experience significant periods of load shedding or national grid failure and that there is no major civil unrest within the Western Cape and South Africa, as experienced earlier this year in Gauteng and KZN. Any changes to the above assumptions may affect our forecast. Now management's portfolio focus will remain well targeted and obsessive and results-orientated. Our proximity to our assets remains a competitive advantage for the business, which will result in active letting, vacancy reduction, cost-to-income ratio management and sustained income growth for shareholders into the long term. As always, management will remain engaged with its shareholder base through regular updates and engagements as the business successfully navigates the balance of FY 2022. This brings us to the close of the presentation. We'll be back with you shortly to answer any questions that may have come up during the presentation. Thank you for tuning in. [Break]

Welcome back to the half year interim results Q&A session. I'm joined here by my colleague, Christiaan Barnard, who is our Group CFO. And we haven't got too many questions today, which hopefully is a good sign if we answered all your questions, but I'm going to just defer to Kim, our Chief Investment Officer, to ask any questions.

Thanks, Quintin. The first question is from France from [ Danco Investment ]. It's for you. Other than the stated ESG initiatives, what other initiatives are being implemented across the portfolio that talk to your broader ESG strategy?

Thank you. It's a great question. And I think, obviously, it's a very common -- very topical theme at the moment. And as I mentioned in the presentation, as a business, we adopt a people, planet, profit approach to ESG strategy. And other than the solar initiatives that we've embarked on and the water augmentation initiatives, we have an addition leveraged off of our assets through the use of solar to generate additional income to fund a bursary at university for previously disadvantaged female studying property studies through the brilliant work of the Women's Property Network Educational Trust. And we believe that, that, for us, is a very people-focused aspect of our ESG strategy. In addition, we've also launched a retail offering under the brand of the law market, where we have provided tradable space through a capital investment into the fit-up of space for predominantly female entrepreneurs. Just given the impact of COVID, the retail sector was really taken out of the needs, and the cost of setting up a retail space was unfortunately not something that startups were able to afford. And we've effectively created a retail market offering entrepreneurs space to trade, which is another example. In addition to that, we have also funded the establishment of a container refurbishment operation, where we place containers that are refurbished in specific locations, where we partner with informal traders in order to give them a leg up as opposed to a handout in order for them to become a meaningful partner within the economy. And those are just some of the examples outside of the typical renewable energy and water savings initiatives that we see as a part and parcel of our ESG strategy.

Thank you. David from [ Bays & Bulls PTY Limited ] has a comment and question. Well done on the increased payout ratio. You comment that your cash collections continue to improve. Can one assume that your payout ratio will improve ahead of guidance? Christiaan?

Thank you. Yes, it certainly has improved. And as Quintin mentioned in the presentation, we've actually seen a steady increase of people paying not only the current rental, but their arrears, which we have collected in terms of the prior year, which actually has reduced our requirement from major provisions. Therefore, our cash availability is better, and we could consider improving our payout ratio to 85%. And we believe on the continued trend that we're having now, we could look at even increasing that to a possible of 90% to 95% towards the end of the financial year, if the current status quo remains in collections.

The next question is for Quintin from [ Porsche Mebane ]. You note that demand for industrial currently outstrips the supply. Do you -- does this mean that Spear will be embarking on land acquisitions for development?

Thanks. I think specifically, demand for larger industrial, we've seen, has and is outstripping supply. And yes, I think that as value investors, we may be looking at 1 or 2 land portions at acceptable rates per square meter. But again, we would far rather be acquiring existing warehousing and initiating some sort of refurbishment interventions because we believe that once you couple the rising land costs for industrial zone land in the Western Cape, together with the construction costs, we'll probably do better acquiring existing industrial and redevelop it as opposed to developing Greenfields. However, that being said, in specific areas where we can acquire land at acceptable levels, like we've done right next to the airport in George, we are busy in -- we are in the process of putting together a 65,000 square meter multi-property industrial estate located right next to the George International Airport. So it's a bit of a mixed approach where we would look at brownfields redevelopment to enhance value and Greenfields development when the land cost and the development cost is justified.

I have a question from [ Nick Creher ]. Indications are that Cape Town will have a very busy holiday season. What do forward-looking bookings look like at your hotels?

Yes. Thanks, Nick. Forward-looking bookings are looking very positive, not only for the tourism market, but also for the conferencing market, which has been very positive. In addition to talking to car rental operators, there is currently a massive demand for rentals of SUVs and people -- larger groups transporters, which is pointing towards a very, very strong festive season and holiday season for the Western Cape. Booking lead times still remain quite short, given the fact that there have been talks of a fourth wave. But for now, business on the books for the balance of October and November look positive. And December is currently looking exceptionally strong. Now we can only specifically talk to the DoubleTree because as noted, the 15 on Orange is now on a fixed income lease with the Capital Hotel and Apartments Group, who have, in conversation with us, reported strong uptake in rooms bookings for the month of October right through to February 2022.

Nick also has another question. He says, how many gyms do you have in your portfolio? Our channel checks indicate that there has been a strong recovery in gyms since moving to level 1. So I'm surprised that you're seeing a slow recovery. Can you give us more thoughts on your predictions of rental from this space?

Yes. So I think, obviously, the information that we presented in the presentation today relates to the interim period. We haven't been operating at the alert levels that we are right now during the interim period. But one also has to look at the -- not just how many gym members are coming back to the gym, but what is the cancellation rate versus the sales rate? Because outside of the dumbbells and the kettlebells that you find in a gym, at the back end, you've got a massive sales team that is constantly trying to sell more and more memberships. And as economic conditions ebb and flow, you have a situation where gym membership cancellations and subscription of new members also fluctuate. And what we've seen is that as a result of this pandemic environment, many South Africans, during the heightened levels of lockdown, decided to create a little home gym. And you probably -- we've seen a slower -- in talking to our gym operators and we only have 2. We have a zone fitness at our convenience retail center Sable Square on about 1,600 square meters, and we have a privately managed and owned gym in Tyger Valley on about 500 square meters. We have seen a return. However, the biggest kind of concern has been the rate at which new members are signing up. Hence, for us, having to take a view on those restructuring of leases. In discussions with those gym owners, they do believe that we should be back to pre-pandemic rental levels prior to the end of FY '22, which is the end of Feb 2023.

Christiaan, a comment and question for you. Well done on the improved cost of debt. Can you share your views on interest rates? And how will you respond for the business?

Sure, very topical question. Right now, I believe, South Africa with rising inflation or not specifically in South Africa, but worldwide and where rates are going. We do believe that interest rates will rise in short term. It's just a question of will it be in the next or the second next MCP meeting. And we do believe it will come. It's just a matter of time. Therefore, we have renegotiated a large portion of our fixed debt already extended terms to make sure we don't fulfill of a short-term fixed lease expiry. And we made that comment previously to our shareholders, we will definitely work on that. But however, we do believe rather than fixing current variable debt, which will cost us a bit of money to pay, we would rather naturally increase our rates through disposals. As we dispose, we'll settle variable fixed debt and therefore, naturally increasing our fixed ratios. So yes, we do believe it's coming. The extent and how quickly the ramp-up will be is still yet unknown as various analysts, economists debating that fact out there, but I do believe we will, at least in January, start seeing the first rate of increase from this up.

And the final 2 questions that I have are from [ Sal Matofa ] for Quintin. What is the best use of cash on the company balance sheet? And how does the company intend to raise capital to fund future growth?

So I think there's obviously 2 parts of that question, the best use of our capital. If we had to deploy it. Well, the best use of our capital right now is to hold on to it. And the second best use is obviously to buy back our own shares, given the fact that they are trading at a significant discount to our NAV. I do believe that the stock is oversold, but that's my personal opinion. And then in terms of raising equity, we've always been a business that raises what we need when we need it. And right now, we're just not willing to issue shares at such a notable discount. You will note that we haven't offered a dividend reinvestment program for the interim period, just given the fact that there's such a deep discount between the trading price and the tangible negative value. So right now, as Christiaan mentioned, through our disposals program, we would exit assets and deploy the proceeds of those assets towards our debt portfolio to better align our LTV in line with the strategy of 38% to 43%, aiming to reach that midpoint of between 40% and 41% before the half year 2023.

Thank you.

Thank you, everyone. That brings us to the end of the question-and-answer session. I appreciate you all logging on today. We sincerely appreciate the trust that you continue to place in Spear and its management team with your capital, and we look forward to providing further updates as we continue to successfully navigate FY 2022. Take care, and God bless.

Bye-bye.