Spear Reit Limited (SEA) Earnings Call Transcript & Summary

Good morning and thank you for joining Spear's FY '22 results presentation. My name is Quintin Rossi and I'm the Chief Executive of Spear REIT Limited, and I have the distinct pleasure of unpacking the FY '22 performance with you today. Spear's successful navigation of FY '22 is evidenced by certain strategic objectives that we have achieved in an extremely tough trading environment. Since inception, Spear has operated with a distinct focus on proximity to our assets, active asset management and a hands-on property management approach. This strategy has continued to create moats around our business and our core portfolio. Spear's regional approach cannot be understated when analyzing our business and our core portfolio. The reliable municipal and provincial infrastructure together with what I call the continuous maintenance and enhancement of the macro provincial infrastructure continues to set the Western Cape apart from the rest of South Africa. Spear's successful navigation of FY '22 was not some abstract idea, but it has become a loved experience by every single one of our team members. It's this collective focus and effort of the Spear team that's being recognized and celebrated here today. I believe that what we celebrate gets repeated and to this point, I would like to thank and celebrate our entire Spear team, our Board of Directors and all of our stakeholders for the positive imprint that they have made on the FY '22 performance. I truly look forward to achieving many more milestones in FY '23 and beyond. If you have any questions during the course of the presentation today, please e-mail them through to [email protected] and we'll answer them after the presentation. So having a look at what I'm going to be covering today in the presentation over the next hour or so. So moving into our environmental update. Management has through FY '22 maintained portfolio health and the stability of cash flow generation through asset management initiatives, which have improved income streams across the diversified portfolio. Cash collections have consistently improved, vacancy contraction has been evident in particular within our office portfolio, strategic disposals were concluded, renewals and tenant retention targets were achieved and the balance sheet was bolstered to position Spear for growth in the year ahead. A true sense of optimism exists as we move into FY '23. As mentioned in the pre-close presentation, FY '22 really was a year of 2 halves. The efforts put in by our assets and property management teams in the first half of the year and then the notable shift in the trading environment in the second half of the year created a positive momentum all the way through to the end of FY '22. The rolling back of COVID-19 related restrictions aided the recovery of the office market and broadly saved the hospitality sector. On a forward-looking basis, the trading environment has shown consistent improvement from that which we have all experienced over the last 12 to 24 months. International travel, tourism, return to office and retail performance reports are delivering all the right data and are pushing us into the recovery path. I believe that FY '22 was an inflection point between tenant support measures and income restoration for Spear. As mentioned, office demand has increased since October 2021 resulting in an overall increase in Spear's office accommodation portfolio. The industrial and convenience retail component of our portfolio has continued to display resilience and has contributed meaningfully to FY '22. The conversion of 15 on Orange to a fixed income lease had restored earnings from the 15th of August 2021. And also the disposal of the DoubleTree by Hilton prior to year-end had eliminated variable income from the Spear portfolio. We've closed out the financial year with a 94% occupancy rate. This fills me with immense pride and energy. Moving into our mission statement and strategic objectives. The greatest source of energy to the Spear team is that we understand the mission and we have all culturally brought into the mission and this is to be the leading Western Cape-focused REIT, to grow distributions per share ahead of inflation on an annualized basis and to operate within the top quartile of our peer group. Spear's hands-on and regional focus have been some of the key drivers to the successful execution of our mission statement. What have we strategically achieved? Firstly, we've achieved a 16.26% growth in our distribution per share for the FY '22 year, something that we are incredibly proud of as a team. We successfully navigated and exited the COVID-19 operating environment. We maintained income statement consistency with strong rental collections throughout the year ending off the year with a 98% collection rate. Spear achieved a 94% occupancy rate in addition to a 94% tenant retention rate on renewals and relets during the year. Our active management approach has mitigated deep negative rental reversions with a positive rental reversion of over 10% for the year. We've seen limited creep in our debtors book as older debt is being serviced together with our current rentals. We've had great success with our asset disposal strategy as mentioned with the disposal of the DoubleTree by Hilton in addition to the disposal of 6 Talana Close in Bellville South at a 6% premium to our book value after all costs have been deducted. Another milestone achievement for us as a management team is that we have successfully exited variable income exposure within the portfolio ahead of when we initially forecasted. We've implemented a robust PV solar strategy, which has resulted in portfolio accretion as roof lease income has been generated as well as overhead costs being reduced while still recovering 100% of our consumption. Management had achieved our strategic gearing ratio also ahead of our forecast to be in line with our strategy of between 38% and 43% with LTV at year-end of 39%. Our group ICR has improved to 2.19x and further improving bearing in mind that only the last 6 months of FY '22 generated hospitality related income. And then finally, we had raised ZAR 254 million of new equity positioning the business for growth prior to year-end. Having a look at our corporate performance. As a specialist REIT on a growth journey relative to our size, Spear has delivered top-notch corporate performance. Spear delivered a total return to shareholders for FY 2022 of 83%. Spear outperformed the All Prop by 61%, the SA REIT index by 57% and the JSE Small Cap Index by 44%. The above is calculated on the basis that you acquired 1,000 Spear shares on the 1st of March 2021 at a price of ZAR 5.20 with all your dividends having been reinvested on the payment date of each dividend. Also related to our growth journey out of our 244.8 million shares in issue, 58.5 million shares traded throughout FY '22 bringing a trade ratio of 24% and a rand value of ZAR 391 million. The ratio has improved significantly over the years and this improved liquidity has broadened our registered top institutional investors and fund managers specifically during FY '22. So moving on to our salient details. Spear owns 31 high quality Western Cape assets. Our portfolio value at year-end was ZAR 4.48 billion. Our asset value had declined marginally by 0.41% compared to the prior year. Our average property value was ZAR 143 million per property. Our average property value per square meter was ZAR 9,669 a square meter. Our average in-force escalation was 6.31%. Our portfolio GLA, 457,950 square meters with a portfolio occupancy of just under 94%. This I do believe is as a result of our tenant-centric approach coupled with our early engagement strategy, which is also aligned with our historical strategy of always being close to our tenants. Our weighted average lease expiry profile is 27 months. Now we do make concerted efforts to try and push out this WALE as well as long as possible. But just given the pure fluidity of the last 12 to 24 months, our focus was on tenant preservation and rent preservation. So we would rather take a potential shorter-dated lease in this environment than sit with a vacancy given the fact that vacancies are that much more expensive and have a long enduring cost on the business. I must also add that we have also conducted longer-dated leases, especially on our industrial portfolio as which I'll get to later, which range from 5 to 10 years. Our average portfolio rental is ZAR 98.24 per square meter gross, which includes rate and taxes. And our FY '22 collections to what we've built was just under 90% -- 98% at year-end bearing in mind that our CFO told me just before the presentation that that's actually increased now to just over 98% given the fact that all the debt has been settled post year-end. Another point that I would like to point out for all listening today is that post the payment of our FY '22 final distribution, we are still sitting with ZAR 33 million in cash reserves, which we will continue to redeploy into the portfolio either through major CapEx projects when they come available or when they come up or other portfolio improvements, which means that we don't have to access any debt facilities within our portfolio to do major CapEx projects within our business. Having a look at our financial metrics. Spear's distributable income per share is ZAR 0.78 for FY '22. Spear's distribution per share is ZAR 0.6825 for the full year post the application of the 88% payout ratio, which is made up of the 85% payout ratio applied at interims and the 90% payout ratio applied at the final period for FY '22. The final distribution per share for the 6 months ending 28th Feb. 2022 was ZAR 0.3519 per share, which is a 19% increase from the prior period. Our FY '22 distribution per share growth was an impressive 16.26%. Spear's SA REIT cost-to-income ratio for the interim period was 44.30%. This is slightly higher than normal bearing in mind that no hospitality income was generated during the first half of FY '22 with only from the middle of August to the end of Feb did we receive hospitality income, which obviously -- which had a negative impact on the gross cost-to-income ratio together with some limited tenant support measures and other potential bad debt provisions that we had to make that drove up this slightly higher than what we wanted to be. Spear's SA REIT administration cost-to-income ratio was 6.86%. Now for us maintaining a low overhead cost structure is very, very important and we always try and maintain it between 6.5% and 6.7%. Spear's tangible net asset value is ZAR 11.30 per share being a decrease of 1.74% from FY '21. Spear's tangible net asset value net of distribution is ZAR 10.95 per share. Spear's loan-to-value at year-end was 39%. Spear's fixed debt ratio 67.03%. This is in line with our strategy of maintaining a 65% to 75% debt hedge profile of ranging from between 28 and 36 months. Now we do believe that given the fact that we are in a rising interest rate cycle, we would weigh up where we are in terms of some asset disposals to potentially rather settle debt as opposed to entering into punitive fixes going forward. Spear's average debt expiry profile is 28 months. This is already a 3-month improvement from the pre-close presentation. Our CFO has continued to do an excellent job managing the debt portfolio within the business amongst many other things and as a management team, we commend him. Spear's average cost of debt 7.32%. Spear's average cost of variable debt 5.92% at year-end. Average cost of fixed debt 8.34%. Turning to look at our collections. FY '22 collections were robust and as we stated many times by us as a management team, we have seen it trended back to pre-COVID-19 levels over the course of the year. Encouragingly, we have seen older debt being serviced and settled together with current rental obligations. The billings do reflect revenue after all credits and deferments inclusive of recoveries. So December 2021 the budgets were set at a forecasted revenue of ZAR 560 million. We had billed ZAR 554 million and collected ZAR 543 million. This is just a 98% collection rate. But also notably, tenant arrears at year-end amounted to 11.56% compared to the pre-close presentation which was at 21.4%. So we've seen a notable consistent decrease of tenant arrears. Having a look at the sectoral recoveries. We recovered 98% of our industrial rental, we recovered 97% of our commercial rental build, we recovered 96% of our hospitality rental build and 98% of our retail rentals build. So moving on to the financial performance. Spear's like-for-like income growth for FY '22 was 11.19%. Spear's like-for-like net property related income growth was 6.21%. Spear's like-for-like net property operating profit growth was 3.38%. Having a look at our IFRS compliant income statement. Group revenue was ZAR 574.8 million. Our property operating and management expenses was ZAR 195.7 million. Our net property income was ZAR 379 million with an administrative expense of ZAR 37 million generating a net property operating profit of ZAR 341,9 million. We had some income statement deductions come through of ZAR 25.8 million generating a profit from operations of ZAR 316,7 million. Spear's net interest cost for the year was ZAR 147.2 million generating a pretax profit of ZAR 168,8 million. Deduction of taxation of ZAR 3.9 million generated a post-tax profit for the year of ZAR 164.9 million. Our measurement within the REIT sector is distribution per share and based upon that 88% payout ratio, a ZAR 0.6825 per share distribution will be declared for FY '22. Spear's interest cover ratio was at 2.19x which already, if you look at the prior year, is an improvement from 2.11x to 2.19x. This chart on the screen is a great illustration of how revenue generation and restoration took place over the year and when we saw the material upticks taking place. You will see that the third wave hit South Africa between May and June 2021. You will also see that during the month of August, we started to recover deferred rentals as well as we had initiated the commencement of the new lease at 15 on Orange with the Capital Hotels & Apartment Group on a fixed income basis. Skipping back to June 2021, we saw another uptick in revenue as we had accrued the final income and collected the final payments from the prior tenant at 15 on Orange. In the pre-close presentation and earlier on in this presentation, I mentioned that FY '22 really was the year of 2 halves and this picture clearly illustrates just how restorative income generation was from August all the way through to the end of Feb 2022. Notably at the pre-close presentation, I was very optimistic with the letting activity and the letting momentum taking place across the portfolio and again one can see that not just in the contraction of our vacancy rate, but also in the improved revenues month-on-month to year-end. Having a look at our reconciliation of our funds from operation. I have touched on the final distribution per share, the payout ratio, the growth of 16.26% and then the DIPS growth of 6.29%, which is in line with the forecast we provided to the market in May 2021 of having a distributable income growth per share of between 6% and 8%. Looking at the summary of our comprehensive income. ZAR 164 million with some accounting adjustments coming through of ZAR 18.2 million predominantly made up of an add-back for fair value adjustments, asset impairments of ZAR 267 million -- ZAR 267,000, deferred tax movements of ZAR 542,000, straight lining of leases ZAR 20 million and the anticipated dividend post the capital raise of ZAR 10.3 million giving us a SA REIT FFO of ZAR 157 million. There were some company-specific adjustments for future CSP awards of ZAR 9.4 million together with provisional tax paid on retained earnings for 2022 of ZAR 4.4 million. Our total distributable company FFO was ZAR 170.9 million. As you would note during interims, we paid -- we declared a distributable income per share of ZAR 0.3889, which was a capital value of about ZAR 79.3 million. And then for the final distributable income per share, we declared ZAR 0.3910 per share, which is a capital sum of ZAR 91.6 million generating a full year DIPS of ZAR 0.78 per share. During interims, we had 203 million shares in issue net of treasury and during our final period, we had 234 million shares in issue net of treasury. As you can see in the slide the reconciliation of the distribution over the interim period and the final period, the difference there is that the interim period payout ratio was 85% and the final period payout ratio was 90% giving us a blended annualized payout ratio of 88% with a distribution per share of ZAR 0.6825 with the cap being a capital value of ZAR 149.9 million. Post tax we have a net retained income of ZAR 16.5 million. Having a look at Spear's balance sheet. Another hallmark of our business is that we have an easy to understand income statement and a straightforward balance sheet. Total assets ZAR 4.5 billion, total liabilities ZAR 1.85 billion, noncurrent liabilities of ZAR 1.7 billion, current liabilities of ZAR 76 million. As stated, 234 million shares in issue net of treasury compared to the prior year of 205 million shares. Spear's gearing ratio at year-end 39% compared to the prior year of 45.8%. Net asset value per share of ZAR 11.30 at year-end with a tangible net asset value per share net of distribution of ZAR 10.95. Now just to stay on this balance sheet. This balance sheet reflects the execution of management's LTV production strategy. The latter was achieved ahead of our forecast, which truly will bolster the balance sheet and will set Spear up for the next phase of our growth journey. Having a look at our TNAV bridge. Our TNAV per share at February 2021 was ZAR 11.50. Profit for the year, excluding fair value adjustments, was ZAR 0.71. Our distribution paid was ZAR 0.54. Fair value adjustments and impairments was ZAR 0.01. Private placement was ZAR 0.34. Our IFRS 2 expense for the future CSPs was ZAR 0.04. Issue of treasury shares for the CSP was a reduction of ZAR 0.06 giving us a tangible net asset value per share at the end of Feb 2022 of ZAR 11.30. Payment of the final distribution for FY '22 reduces that by ZAR 0.35 and which gives us a SA REIT tangible net asset value per share of ZAR 10.95. Having a look at our funding maturity slides. Spear's group debt profile is balanced and robust. With group LTV at 39.05%, we have seen a marginal increase in our average cost of funding to 7.32%. Our average cost -- our total net debt at the reporting period was ZAR 1.78 billion. 67% of our debt is fixed at an average cost of 8.34% with a weighted average maturity profile of 31 months with 33% of our debt being variable at 5.92% with a weighted average maturity profile of 39 months. On a blended basis, a 28-month weighted average maturity profile. We believe that the debt segmentation is well segmented, has robust maturities and they truly pose little to no refinancing risk to the business. Following on to our group covenants. At the end of the financial period, Spear's strictest covenants were an LTV of 55% and an interest cover ratio of 1.75x. At year-end compared to the strictest covenants, we were as you know at 39.05% with an interest cover ratio of 2.19x. Spear's strictest covenants will amend from FY '23 going forward where it would reduce from 55% to 50% LTV covenants and an interest cover ratio of 2x. Bearing in mind just a reminder is that Spear's ICR will continue to improve given the fact that we now will have 1 full year and beyond of hospitality income coming into the income statement. A successful private placement was concluded prior to year-end raising ZAR 254 million at ZAR 8.40 per share, which saw the issuance of just north of 30.2 million new shares, which increased the shares in issue to 244 million and the market cap settling above ZAR 2.1 billion. Spear remains highly liquid with ZAR 230 million in cash availability and with this also increasing. And further down the presentation, I will show you the work that we did at Nampak as an example was fully funded out of cash reserves. ZAR 280 million of debt was refinanced during FY '22 and ZAR 270 million of debt was settled during the year. Taking a forward-looking approach on our SA REIT LTV. At year-end LTV, as you know, 39.05%. The disposal of 6 Talana will see that reduce by 95 basis points. The acquisition of 27 Junction Road will see it increase by 80 basis points. The disposal of Island Business Park, which is now purely awaiting transfer, it's fully unconditional will reduce the LTV by 28 basis points. The final distribution per share cash payment will increase the LTV by 1.85%. We are looking to make another industrial investment, which should increase the LTV slightly by 34 basis points. We do anticipate, and given the fact that this is a forward-looking 18-month time horizon, the disposal of 15 on Orange through the call option that we have with the Capital Hotels & Apartment Group should see a 370 basis point reduction in LTV together with another disposal that we are considering at the moment, which should see a further 122 basis point reduction. So all things being equal and together probably with a host of assumptions, we would say that within the next 18 months the LTV would drop below our strategic objective of between 38% and 43% to just under 36%. Therefore, giving us sufficient headroom to grow the business in line with our strategy. Moving on to our portfolio overview. Spear's Top 5 assets reflect not only our lens is more approach to owning fewer assets, but assets of higher value, but also reflect the diversification of the portfolio. Notably these 5 assets make up 47% of total portfolio value, they make up 177,000 square meters of owned GLA which is 38.82% of Spear's GLA. One of the other hallmarks of all 5 of these properties is that they all operate with a very high occupancy rate. The only property out of these 5 that does not have a 90%-plus occupancy rate at this stage is #2 Long Street and this is because it's on roughly 88% occupancy rate and we are on the cusp of pushing that back over the 90% at the moment. These properties also display incredible value as well as are really located in high quality locations across the Western Cape. Looking at the sectoral split by value, revenue and GLA. From a value perspective: 6% of the portfolio is made up of hospitality, 15% made up of retail, 29% of value made up of industrial and 49% of value made up of commercial. From a revenue perspective: 5% is made up -- is generated from our hospitality asset, 15% from our retail assets, 34% from our industrial assets and 46% from our commercial assets. On a GLA basis: 4% of our GLA is exposed to hospitality, which is fixed income, 0 variable income; 11% exposed to retail; 56% of our GLA, which really has been an incredible moat around our business during the last 18 to 24 months, is made up of industrial; and 29% of our GLA, all located in high quality locations that enjoy high tenant demand is 29% of our GLA. Looking at the segmented asset profile. We have 1 hospitality asset, as I mentioned, on a fixed income lease, 6 retail assets, 10 industrial assets and 14 commercial assets. From an occupancy perspective: hospitality is at 97% occupancy, retail is at 98% occupancy, industrial at 97% occupancy and commercial at year-end which I do believe is at the cusp now of going over 90% is at 87%. Having a look at a little bit more granular detail on the commercial portfolio. For those that are familiar with Cape Town will see that Spear's commercial assets are truly located in highly desirable commercial nodes of Century City, Cape Town CBD, Tyger Valley, Brooklyn, Parow, Woodstock and Paarden Eiland. Have we felt pain in our commercial portfolio? Yes, there have been some pressure points. But I do believe that the fact that the Western Cape has never been a highly speculative market when it comes to office developments, vacancy overhang hasn't been a bugbear for our business as much as it has been within other regions and other businesses. Where have I felt the biggest pain over the last, call it, 18 to 24 months is in our Woodstock portfolio where we do run a 48% occupancy rate. But we are placing aggressive marketing campaigns and aggressive asset management initiatives in place to mitigate that and push that up right up to about 70% prior to our interim reporting period for FY '23. Other than that, from a valuation perspective, a revenue segmentation perspective and a GLA perspective; I believe the fact that we have 36% of our GLA -- 34% of our GLA and 36% of our value and 34% of our revenue centered around Century City as a well-established high desirable commercial node is a great feather in our cap as well as our singular CBD asset being #2 Long Street which is almost 90% let being the second highest contributor towards revenue as well as GLA. Moving on to our industrial portfolio. The industrial portfolio from a valuation perspective is split 50-50, about ZAR 635 million on either side of multi-let manufacturing and logistics. From a revenue perspective, 55% of our revenue is generated from multi-let industrial manufacturing and about 45% of our revenue is generated from logistics assets. From a GLA perspective, there's almost a 50-50 split again; 51% of our assets from a GLA perspective are multi-let manufacturing and 49% logistics. And on an occupancy rate perspective, 97% multi-let manufacturing occupancy rate and a 96% occupancy rate for our logistics portfolio. Looking at our retail portfolio. Whilst we generally term our total retail portfolio as convenience retail, we have also segmented some of that convenience into what we call destination retail. 80% of the Spear retail portfolio is made up of convenience retail and about 20% is made up of destination retail. Where are these destination retail locations? They range from Paarden Eiland to Viking Business Park and the convenience retail is centered around Sable Square in Century City precinct. Having a look at from a revenue component, 81% of our revenue is generated from our convenience retail assets and 19% from our destination retail. From a gross lettable area perspective, 60% of our assets on a GLA basis is convenience retail and 40% is destination retail with destination retail having 100% occupancy and convenience retail a 96% occupancy rate. Moving on to our letting activity for the period. During the year, we had 158,424 square meters come up for renewal and relet. We have successfully renewed and relet 149,000 square meters of gross lettable area. This is a positive rental reversion of 10.38%. Now given the fact that we've always been absolutely transparent with our disclosures. If we had to extrapolate out the anomaly, which is the 15 on Orange lease that went effectively from an asset that was generating 0 to generating what it's generating on the slide, which would symbolize a 221% increase in your positive rentals. We extrapolate out hospitality. And of the commercial, retail and industrial portfolio; we had 142,000 square meters come up for renewal and relet, of which we converted 133,000 square meters of GLA at a negative rental reversion of 5.57%. Now notably this is a 94% retention rate across over 1/3 of the total portfolio. Another point to make is that within our third quarter update given to the market, our negative rental reversions were trending towards a negative 5.85% and at interim period a negative 5.78%. So although still being negative, we believe that having improved to 5.57%, this must be one of the market-leading rental reversion reschedules that you would be seeing in the FY '22 reporting season. Having a look at our tenant and vacancy profile. As mentioned previously, at interims Spear had a 7.21% vacancy rate. We have through a lot of active asset management and aggressive leasing reduced that to 6.24%. We've had a notable improvement in our office vacancies and this has continued as return to work and return to office momentum has started to increase across the Cape Metro. We have a 28,580 square meter vacancy at the moment across the portfolio, of which 2,200 square meter is in retail, 17,200 square meter in commercial, 8,500 square meter in industrial and 484 square meter in hospitality. As you can see from the slide, over 50% of the vacancy is made up of offices. From a tenant analysis perspective, Spear currently has 404 tenants across the portfolio. They occupy 429,100 square meters. Based on a GLA basis, our tenant segmentation is as follows: 46% of our tenants are large nationals and international tenants made up of government and major franchises; 43% of our tenants are national tenants, smaller listed tenants and professional service firms; 4% are owner managers, entrepreneurs and small to medium enterprises; and then we have the 6% vacancy rate. Spear's lease expiry by GLA. We have on average 16% of the portfolio that comes up for renewal and relet annually. We believe that this is a robust profile, a profile that is reflective of our early engagement strategy and also a profile that reflects the limited vacancy risk that exists across the portfolio. We do see an increased industrial renewal profile for the next financial year in FY '24, but we've already started conversations with those tenants to ensure that our retention rates remain in the upper 90 percentiles. Having a look at our valuations. Notably across the ZAR 4.48 billion of assets that Spear owns, we only saw a negative ZAR 2 million devaluation for FY '22, which is a 0.05% devaluation of assets. We believe that this is as a result of our conservative approach that we take to asset valuations. We have made even more conservative adjustments to our discount rates, our capitalization rates as well as our exit cap rates, growth rate and expense rates for the FY '22 reporting period compared to the prior year, which you will see on the right-hand side of the slide. When looking at Spear's portfolio on a total portfolio valuation perspective, you'll see the average portfolio valuation of just under 100 per property -- of just under ZAR 143 million, which is ZAR 9,669 per square meter for a fully diversified portfolio. Now on a segmented basis, our average property value per segment for industrial is ZAR 127 million, which is ZAR 4,897 a square meter. On commercial is ZAR 158 million, which is ZAR 16,600 a square meter. On retail is ZAR 110 million, which is ZAR 13,500 a square meter. In hospitality ZAR 279 million, which is ZAR 16,700 per square meter. I do believe that the portfolio will continue to maintain this fair value given the fact that from a rental perspective, we believe that Spear has always maintained either on market or slightly below market asking rentals, which has not only resulted in a high occupancy rate, but also has resulted in Spear's valuations never being aggressively or ever being aggressively over market. Moving on to our sustainability update. At the onset of Spear's initiation of our renewable energy drive, as a management team we set out a goal for ourselves that we would within the first 2 years of this PV solar strategy like to cover more than 50% of the portfolio in PV solar. So how have we done? Currently we have 14 properties that have installed solar capacity with 2 future projects currently underway, which will take it to 16. We currently have 45% of the portfolio covered with PV solar with another 6% of future additions coming in, which will be the first milestone of our strategy being achieved to get us to 52% coverage of PV solar before the end of the FY '23 financial year. We also were mindful of what the penetration rate would be on every installation, which is effectively the on-site generation compared to what you consume from your provider either Eskom or Council. Currently we are generating a 22% on-site penetration rate, which we self-generate. And then with the installation of the other 2 projects, that will push up to 25% with the other 2 projects generating a penetration rate of 27%. The total kilowatt hour peak installed on solar is currently 5,626 kilowatt peak. That will increase by another 2,200 kilowatt peak taking us to 7,831 kilowatt peak. We took a 3-pronged approach when we initiated our solar strategy. The first was a roof rental approach where we would generate 25-year cash flows on fixed term leases roof rentals effectively unlocking the roof asset for us as a business. Currently we have 7 roof rentals with 2 future rentals in the pipeline giving us a total of 9. We also adopted an installment sale model where we would utilize the savings generated on the PV solar on that section to effectively to pay down that system. We currently have 4 of those with 3 future in the pipeline, which will give us a total of 7. Then the third leg was an owned CapEx model where we would identify a high traffic shopping center, Sable Square as an example, where we deployed over ZAR 7.6 billion of CapEx and that penetration rate has actually exceeded our expectations and ranges through between 29% and 35%. From an income perspective, how have we unlock this to improve income for the business? Our average roof rental per property is ZAR 153,000 per annum. On a future perspective will be ZAR 327,000 giving us an average total on an annualized basis of ZAR 194,000, which is effectively a ZAR 1.7 million a year consistent 25-year cash flow for Spear. On an average saving perspective from the finance portfolio, we would see a total annualized saving per property of ZAR 428,000, generating savings of north of ZAR 2.9 million per annum. On a valuation perspective in terms of the value of the kit that's installed on our roofs. Of the roof rentals, we have in total including future projects ZAR 53 million worth of solar kit. In terms of the finance portfolio, about ZAR 13.9 million. So in total, we have north of ZAR 75 million worth of solar plant installed across our portfolio. Moving on to our sectoral performance. Spear's portfolio has displayed resilience across the balance sheet and income statement as I've shown you throughout this presentation. Within the sectoral performance, we can show more granular detail on how each sector has performed and what we are seeing on the ground. From a retail perspective, 48,000 square meters of GLA which makes up about 11% of the portfolio from a GLA perspective. Notably 41% of our convenience retail GLA is let to national tenants. All our retail assets are classified as convenience retail. This subsector has truly been the most resilient across asset types within the retail sector. Notably none of Spear's retail assets are reliant on local or international tourists. Our retail portfolio occupancy has been 95.34%. Our collections have been 98% versus revenue billed for the period. We provided credits and deferments to retail tenants to the values of ZAR 1.3 million in credits and ZAR 485,000 in deferments. The fourth and the fifth COVID wave has had very little impact on our retail tenants and in particular, the fifth wave was effectively a nonevent for our entire portfolio. The letting activity still remains in line with our expectation with the bulk of our renewals being concluded per our budgets. We've seen no significant tenant failures occurring and we don't anticipate any to occur. We also consistently are receiving very favorable feedback from our tenants as they are starting to see much more feet coming through the centers, in particular the fact that our shopping center -- both of our shopping centers are open air shopping centers making people a lot more comfortable to come and go and also we don't charge for parking. So people can access and egress fairly freely. What are we seeing on the ground? We see low levels of income risk as 100% of our tenants are paying and trading. I do just want to disclose that the gyms and some of our food retailers have taken longer to recover therefore requiring longer-term lease restructuring as a result of the various COVID impacts and social distancing requirements. Another encouraging point is that we are seeing our tenants upgrading their spaces, which means that not only are they generating revenue for survival, but they're also generating enough revenue to reinvest into the operational spaces. Having a look at our commercial portfolio, 132,000 square meters of GLA. All of our commercial assets, as I mentioned earlier in the Top 5 slide and also in the segmental slide, are located in highly attractive and established office nodes within Cape Town. Letting activity has notably improved since October 2021 and this is evidenced by the fact that not only have we been letting up office space across the portfolio, but most recently we had let over 90 parking bays in the CBD to one of the South African banks as they start to bring back staff on a Tuesday, Wednesday, Thursday and every alternate Friday. Office portfolio occupancy has been at 87%. Our collections have been at 97% versus revenue billed. We provided credits of ZAR 311,000 and deferments of ZAR 142,000 during the year to our office tenants. Our portfolio remains attractively positioned to offer both expansion and contraction space to third-party tenants and also our very hands-on and active marketing approach allows us to provide bespoke and tailor-made leasing solutions for interested parties. As mentioned, the hybrid work regime is showing a stronger trend to a 3- to 4-day work week. And if anybody that lives in Cape Town has traveled into the city recently, the traffic on the N1 and the R27 and the N2 has notably increased which for us as property people, we look at how much traffic is on the road. And also when talking to the Cape Town City Improvement District team, they also weigh the amount of cigarette butts that they pick up on the streets to gauge what the kind of foot traffic is within the Cape Town CBD. And I assure you, per the Chairman Mr. Rob Cain, that those tonnages have continuously increased over the last couple of months. What are we observing? We are observing that the return-to-office momentum is now a reality. As I said before, the work from home is not a one-size-fits-all solution. We do believe that there are aspects of the commercial world that can work from home. But fundamentally speaking to tenants within the tech space, speaking to tenants within the design space, within the professional services space; the call for the return to office is now larger than ever. Securing the tenants, given the fact that there is increased vacancy across the commercial office sector, will be costly and that would obviously result in tenant installation allowances and incentives having to be a lot more generous. But we have noted a general notable improvement in terms of office demand ranging from 100 square meters to 2,000 square meters. Unlike the rest of the country, in particular [indiscernible], shadow vacancies in Cape Town have been extremely rare. And recently, as I pointed out with the uptick in office demand, we are seeing less and less brokers offering space on behalf of other tenants that are looking to reduce their space within their longer-term lease commitments. Moving on to our industrial portfolio. The industrial portfolio, as I mentioned earlier, comprises of 259,000 square meters making up 56% of our total portfolio. Our industrial portfolio has been resilient over the period with several new lets and relets taking place in a challenging market. Our industrial portfolio occupancy has just been under 97%. We've collected 98% of our rentals. We provided no credits and no deferments to our industrial tenants during the year. We've seen consistent strong demand for our industrial rental properties. We concluded a long-term lease over 11,000 square meters this year with Mambo's Plastics for their new distribution center. We've concluded a new 10-year lease with United Container Terminals, part of Grindrod Logistics business on a new 10-year lease. We concluded the warehouse expansion together with a new 10-year lease with Nampak Liquids, over 14,500 square meters. Just those 3 total just under 60,000 square meters of GLA making up 22% of Spear's industrial GLA. Further additions post year-end, which I'll touch on, was the acquisition of 27 Junction Road which is 11,500 square meters of GLA off the back of a new 10-year and 9-month lease with Pepkor Limited. Observations made. As mentioned, the industrial demand for small to large users remained strong. We call this the small to medium businesses rising out of the ashes of COVID-19. We note that Cape Town is running out of developable industrial land in sought after locations, which means that northwardly pricing trajectories are forecasted for existing built and available industrial properties. And then vacancy contraction is evident across the spectrum as demand does outstrip supply. The increased level of loadshedding does concern us. But what we did as a management team, proactively we engaged with and concluded loadshedding curtailment programs on our large manufacturing facilities therefore mitigating some of the risk that loadshedding presents to our manufacturing tenants within the portfolio. Moving on to hospitality. As announced on SENS, Spear disposed of the DoubleTree by Hilton. [Technical Difficulty] The feedback we get from the team at the Capital Group is that occupancies have been consistently increasing, that business has started to return to the Cape Town CBD and also business travel has actually recovered a lot faster than anybody anticipated. Then just having a look at the earnings slide, which I have shown in the past 2 presentations. But just the significant impact that the 15 on Orange fixed income lease had on FY '22 with a contribution of ZAR 10.4 million towards our income statement, which would contribute over ZAR 0.05 on a property level to the distributable income per share and will contribute over ZAR 0.04 to our group distributable income per share and that was only for 6 months. In terms of FY '23 we'll have a full year's worth of income, which will generate just under ZAR 20 million worth of rental income for the group which is on a property DIPS it will be ZAR 0.0933 and on a group DIPS it will be ZAR 0.0467. Now this is purely looking at 15 on Orange in isolation. It doesn't take into account any other enhancements, any other vacancies that are let across the rest of the portfolio. Some observations. As mentioned, the core markets have shown strong signs of recovery. We recently hosted the Mining Indaba in Cape Town. Hotels were full, restaurants were overflowing, car rental agencies were without vehicles. So positively the U.S. market, the U.K. market, the German and the Dutch market are showing a very, very strong return to normal coming to South Africa. The hospitality sector has had to place less reliance on the local market to generate revenue. And then the meetings, incentives, conferencing and exhibitions business has also recovered a lot faster than anticipated. Just last week Virgin Atlantic had announced that they would recommence their Cape Town-London route as of November and then following through into 2023 would look at taking it right through the year, which is extremely positive as we now have the likes of Emirates, Lufthansa, Turkish Airlines, Qatar Airlines and now Virgin Atlantic flight schedules coming back to what we saw in a pre-COVID context. And ultimately also within the Western Cape, if you consider our busiest time of the year over the December months, tourism spend for the province was roughly ZAR 800 million, which over an annualized basis that ZAR 800 million forms part of the total pot of ZAR 5.8 billion, which is extremely encouraging for a sector that has been pained by the impacts of COVID. So having a look at our general business updates across the segmented portfolio. Trading conditions have improved across Spear's portfolio. Our ongoing implementation of our PV solar rollout and water augmentation initiatives continue to bear fruit. Our industrial and retail portfolio is showing the most resilience, which makes up jointly 49% of our portfolio revenue, 44% of our portfolio value and 67% of our total portfolio GLA which is very, very defensive. Our office leasing momentum has contributed towards vacancy contraction during the second half of the year. And our final hospitality asset is fixed income triple net and yielding. Our rental collections continue to remain robust in close to 100% further bolstering our cash reserves. Our debtors management has been on target with good monthly recoveries and receivables taking place. Our LTV reduction roadmap has been achieved ahead of our schedule. Our asset disposal strategy is on track with notable success for the year. And also our portfolio renewals are continuously being done in line with management's forecast. Having a look at our development projects and acquisitions. The growth journey of Spear has been and will be a mix of organic growth together with development, redevelopment and portfolio enhancements together with the acquisitive growth of income-producing assets within the Western Cape. During the year, the following noteworthy events and post year-end took place. As mentioned earlier, we concluded the extension of the Nampak Liquids facility in Epping. We extended the warehouse by a further 2,000 square meters. We installed a brand new roof together with a mega PV solar plant. Now this redevelopment cost was ZAR 34 million and the lease we concluded was a new 10-year lease with Nampak Liquids and the finalization yield on completion was 9.33%. When I spoke about free cash flow earlier, I also alluded to this particular property. It's worth noting that the full extension and works was funded out of cash reserves. We did not have to go to our bankers or our funders to draw down on any debt facilities to complete this work. Having a look at our development growth. We believe as we traverse out of the COVID-19 operating environment that we are moving closer and closer towards the time horizon for us to push the button on this development in Paarden Eiland. As stated previously, we would be looking for a development partner to execute on this development with us and we have been inundated with calls from developers and other REITs to partner with us on this development. Marine Place is an 18,000 square meter contiguous [ urban ] where we have been awarded the rights to develop a mixed-use precinct of 52,000 square meters comprising of roughly 13,500 square meters of convenience retail, approximately 2,000 to 3,000 square meters of what we call hybrid offices and approximately in a change of our decision-making with regard to what type we'd like to do -- what type of development we'd like to do on this property. Instead of adding another hospitality product, we'll be increasing our residential offering to approximately 1,000 residential units with uninterrupted views from [indiscernible], Table Mountain, Signal Hill, Lion's Head and Robben Island as well as the ocean. We believe that this would be a product that given its proximity to the Cape Town CBD would be a very attractive mixed-use precinct. We also are conscious about the fact that we are spearheading a change in use within the Paarden Eiland landscape and as a result, we have also provided for certain, call it, high-tech industrial units on the back end of the development. We anticipate, as mentioned, a development cost of roughly ZAR 1.4 billion and the target yield on completion is a 10% targeted yield. For the avoidance of any doubt, currently all the structures that are on this particular on-lease urban are fully tenanted and let and yielding. So there's 0 income drag on any of the assets that are based on this particular urban that we will be developing. We do still have another 4.5 years to entrench our rights in terms of the approved rezoning we received from the City of Cape Town. In terms of a post year-end acquisition, which adds incredible value to the Spear portfolio. We had acquired #27 Junction Road and that was a -- it's an 11,500 square meter industrial property, which is comprised of both logistic space and manufacturing space. The property has been let to Pepkor on a new 10-year lease, which will commence within the next 10 months post the completion of tenant-specific installation work. Also for the avoidance of doubt, the property is currently tenanted and yielding. I was asked on Twitter a few days ago what was the acquisition yield. So I'm pleased to disclose that the acquisition yield on this particular property was 9.78% and it transferred into the portfolio on the 9th of May 2022. And typically, these are the type of assets that you will see more and more of featuring in the Spear portfolio. As we have stated previously and I also talked to it in the outlook where the strategic objectives will be in terms of the acquisitive growth in the portfolio and they will be centered around industrial and convenience retail together with a host of other asset types. Moving on to our outlook. The Western Cape real estate market has proven to be more resilient than most of the other provinces in South Africa. The provincial and metropolitan infrastructure has made it possible for the entire province to be considered an investment opportunity for Spear. The post-pandemic road ahead offers attractive growth opportunities for our business. We will maintain a bias towards industrial warehousing, logistics and convenience retail assets within the Western Cape. Spear will maintain and strengthen where needed our best of breed management team. We believe that semigration to the Western Cape will continue to gain momentum, which will directly and indirectly benefit Spear as mid-to high LSM categories of people with strong balance sheets, disposable income and employment will utilize our retail centers, will rent our office space and will operate their businesses from our business and industrial parks across the Western Cape. We have seen improved economic activity across the Western Cape, which is evident in the data provided by Wesgro, ACSA and the retail center -- retail sector, all reinforcing our optimism. Given the geography of the Cape metro, the scarcity of zoned land and developable land; we will start to see a further expansion upwards towards the West Coast, upwards towards N1 of new residential, retail and industrial nodes as more and more South Africans choose to make the Western Cape their economic and residential home. The letting activity for FY '22 has given us the confidence that we would see further vacancy contraction across the portfolio in FY '23 and beyond. The core portfolio remains defensive in nature underpinned by strong lease covenants and high quality tenants. Given the diversified nature of the portfolio and our regional focus, we are in a good position to keep delivering on our market guidance and our forecast. We will seek out growth opportunities within the Western Cape to continuously improve the core portfolio through acquiring and developing real estate assets. We'll continue our strategy of prudently recycling capital into longer-dated investment opportunities as was displayed with the disposal of 6 Talana and the acquisition of 27 Junction Road within the Western Cape. As a management team and as a Board, we will remain materially invested in Spear, which displays strong shareholder alignment. We will make continuous operational enhancements to improve the day-to-day operational execution and success of our business. Management's aim is to within a period of 6 to 7 years grow the portfolio assets to assets under ownership of roughly ZAR 15 billion. Now the following slide is a representation of this what we call the execution of our inorganic pipeline. Now what you will see here is that we're showing you the growth from FY '18, which really was the kind of commencement of Spear's growth journey in terms of asset growth, all the way through to the FY '22 year. And then we have provided what we would call a forecast as to where we see the growth opportunities within the portfolio happening from FY '23 to FY '28. We anticipate that through some smart negotiation, the utilization of our script, the utilization of recycling capital and utilization of our debt portfolio that we can grow this portfolio by a further ZAR 9 billion by FY '28, FY '29 with a distinct focus, as I've said numerous times, on industrial; which within industrial have a subsector of warehousing, logistics and manufacturing. Given the fact that the world supply chain requirements have changed notably in the last 24 months, we are seeing that a lot of companies are taking a China plus 1 approach where they are looking to manufacture more products locally. So we want to be able to play in the space with the large retailers looking to onshore manufacturing, to onshore storage as we've seen that the historical just-in-time inventory systems are not applicable in this new world that we live in. We'll also see the addition of urban logistics to our portfolio. We'll see the potential addition of data centers, telcos, towers in addition to convenience retail and mixed-use. The largest mixed-use scheme, which I just touched on a few moments ago, is the Marine Place which is the 52,000 square meter mixed-use development. But just also for the avoidance of doubt, we're not obsessed with size but we are rather obsessed with income. So we will grow meaningfully to optimize the portfolio strategy when and where possible. But our focus, and this is an undertaking we give to you as our shareholders, is that growing our income in line with our mission statement is a key and main priority for us as a business. Moving on to our guidance. Spear will maintain its Western Cape focus and consistently seek growth opportunities. We'll continue to acquire high quality assets in conjunction with the development of brown and greenfield opportunities within our sectoral focus and growth strategy. Our proximity to our assets will remain excellent to enhance asset and property management. To the best of our ability, the FY '23 DIPS forecast has been formulated. Our guidance for FY '23 will be an increase of DIPS of between 5% and 7% from 2022. Spear's payout ratio will be set at 90% of DIPS going forward. Now this guidance is provided upon the following assumptions. Our national state of disaster is not unnecessarily prolonged or implemented going forward with relation to lockdowns. There will be no further COVID-19 lockdowns that limit the economic activity to take place. The vacancies are reduced in line with our forecast. That our lease renewals are concluded in line with our forecast and that no major tenant failures take place during the year. And that our tenants are able to successfully absorb the rising costs associated with utility charges and municipal rates and that loadshedding does not become a permanent feature in the operating environment. Any changes to this assumption may affect our forecast and just to note that this forecast has not been reviewed by our auditors. As a management team, we will continue to engage with the market. We have adopted a quarterly update initiative as the team will remain accessible to the market as Spear trades through FY '22. And just in closing, Spear will remain obsessively focused on our assets, our tenants and our overall business operations throughout FY '23 in our pursuit of real estate excellence. This brings us to the end of our presentation. I wish to thank you for logging on today and listening to what we had to say and really just celebrating with us the milestones we achieved in FY '22 amidst the tough trading environment. I'll be back on with you in a few minutes with our CFO, Christiaan Barnard, to field any questions that may have come through during the presentation. Thank you very much.

Welcome back to the FY '22 results Q&A. I'm joined here by my colleague, Christiaan Barnard, our Chief Financial Officer. We haven't received many questions so either the market is tired of hearing me speak or the presentation was comprehensive enough. But just a reminder, we do remain accessible to our shareholders. So if there are any questions that come through that we don't answer during this Q&A session or if you are wanting to send through something at a later stage, please feel free. We have had 2 questions come through in the past couple of minutes. So I'll just hand over to Kim, our CIO, to just ask the questions for us.

Thanks, Quintin. The 2 questions are from Adrian Jardine. The first one, can you comment on leasing activity that has taken place post financial year-end especially for the office portfolio? What is the current momentum like?

Yes. So encouragingly, we are still in that momentum phase. Post year-end we have -- of that 17,000 square meters of office vacancy, we have let approximately a further 1,200 square meters in the Northern Suburbs, in the Tyger Valley -- one of the buildings in Tyger Valley as well as in Waterhouse in Century City and on the 18th floor of this particular building #2 Long Street. So I'm continuously encouraged. Just even talking to 1 of our tenants yesterday, they currently occupy about 1,200 square meters with us and they have actually just acquired another business and are looking at increasing their footprint from 1,200 square meters to 2,000 square meters. And the discussion was how have you found your staff wanting to come back to the office. And he said that he's had staff that have not been able to function from home because their living conditions may be different, access to broadband as well as loadshedding has played a massive role in people not being able to fully function and give sufficient output working from home. So we continuously see inquiries coming through and we are trying to as aggressively as possible and within the confines of economics offer a win-win rental solution to our office users that inquire within our portfolio. But we are very much open for business. And given the fact that we are so regionally focused, it does help us in the pursuit of reducing that office vacancy even further.

The second question from Adrian for Christiaan. Is it correct that you currently do not use swaps to hedge your interest rate risk? In order to hit your target 75% hedge ratio in the next financial year, would you consider entering swaps or are you aiming to use disposal proceeds to settle variable rate debt?

We do use swaps. We prefer using property specific vanilla fixes, but we have 2 swaps with 2 specific properties, which we have entered into in the last couple of months of the financial year, which was very fruitful for us. And we always consider them, but we've generally found that property specific features have been more beneficial to Spear with lower cost to the company. And yes, we would definitely consider entering into swaps if they are at the right pricing point. And we are definitely looking at using disposal proceeds to settle debt and we will be doing so from the latest disposal that we have concluded in terms of one of the smaller assets we've disposed of being Island Business Park. And if the others are sold that we have in our till, we will definitely first look at disposing of debt if there isn't any other accretive acquisitions we can do with that specific debt.

There are no further questions.

Well, ladies and gentlemen, thank you again for logging on and being with us today. We appreciate it. And we assure you that as a business, our focus is to unlock shareholder value to create consistent income and to build a high quality portfolio within the Western Cape that we can all be proud of. Thank you very much. Take care, stay warm and God bless.

Thank you.