Spear Reit Limited (SEA) Earnings Call Transcript & Summary

[Presentation] Some incredible work. So we thought we'd soften you all up because these days we need a bit of softness to survive the cauldron of the listed property sector. So good morning again. Thank you all for joining us for the Spear FY '23 results presentation. You're all warmly welcome here today both in person and online. So let's get into it. So despite the numerous headwinds experienced and still being experienced, Spear has delivered a robust set of operational results for the year across a diversified portfolio. Our performance continues to reflect a nimble and consistent business that has been acutely and actively managed to best counter the negative market forces. Spear remains the only regionally focused REIT listed on the JSE. We obtain our specialization through investing solely in the Western Cape and our diversification through investing into industrial, commercial, retail and mixed-use assets. The benefits of Spear's regional approach cannot be understated when analyzing the business and the FY '23 results. Provincially, the Western Cape continues to set itself apart from a SA macro perspective in terms of reliable provincial infrastructure and municipal infrastructure. Another accolade that has recently been awarded, probably not necessarily an accolade, but we do have the lowest unemployment rate in South Africa at around 21.5%. Some of the greatest attributes of our business is a simple capital structure; no exposure to cross-currency interest rate swaps, 100% Western Cape focused, our proximity to our assets remains excellent, we have a positive and proven track record in the market, our portfolio continues to generate positive net cash flows from operations, management and the Board remain materially invested in the business displaying strong shareholder alignment and we're obsessed with an active asset management and a hands-on property management approach. Now these attributes may seem simplistic, but they continue to create moats around the core portfolio. It's been said before and I'll say it again, what gets celebrated gets repeated. And to our entire Spear team today, our Board of Directors and all of our stakeholders; I wish to thank you for the successful imprint that you've each made on Spear's FY '23 results and on the business going forward. If you have any questions during the course of the presentation, please e-mail them through to info@spearprop.co.za and we'll answer them after the presentation if you're viewing online. There also will be an opportunity, Sebastian will have a mic after the presentation to ask any questions from the floor. This is what we're going to be covering during the course of the presentation today. So the format this year will be slightly different as some of you might be pleased with, you won't have to listen to me for the bulk of the presentation. I'll be joined by Christiaan Barnard, our CFO; and Kim Pfaff-Karg, our Chief Investment Officer throughout the presentation and I'll come and take up their section as we move ahead. Just a reminder, our mission statement is to be the leading Western Cape focused REIT and to grow our distributions annually ahead of inflation and to operate within the top quartile of our peer group. Now mission statement isn't something that you change with the ebb and the flow of the markets. So for the most part, this has been true to -- we've been true to our mission statement. Going forward in this tough economic environment, things may be a little bit more challenging, but we'll continue to do our best. Having a look at the operating environment. There has been a little bit of light in the darkness, but the FY '23 operating context has been exceptionally challenging. Loadshedding has had cascading effects on South Africa as well as in the Western Cape. On many fronts, we've remained resilient. But beyond the stage 6 scenario, the entire province becomes susceptible to the national loadshedding grid. Given the effects of loadshedding and the inflationary environment we find ourselves in, there has been operating cost creep. This is the reality of life, but you'll see throughout this presentation that we've proactively managed the cost creep across our portfolio and Christiaan will take you through that in the financials. Close to the end of FY '23 we finalized the exit of our last hospitality asset 15 on Orange, which was disposed of ahead of forecast as well as at a very favorable disposal yield. Something that's been a hallmark of this portfolio since inception is its high occupancy rate. Since 2011 all the way through to 2023, we have never gone below 90% occupancy rate and we are close on a 93% occupancy rate currently. FY '23 rent reversions were negative, but they are improving year-on-year. They were negative 3.69% compared to a prior year negative 5.57%. So we are seeing a consistent moving towards an overall portfolio flat and hopefully positive rental reversions in time. We've seen year-on-year improvement in our in-force escalations. We ended off the year at a 7.4% in-force escalation across the portfolio, which is an improvement from FY '22 of 6.31%. Our debtors book has shown consistent shrinkage. We have an exceptionally front-footed debtors team that doesn't take no for an answer and we've seen very strong cash collections and positive tenant profiles being maintained regardless of the tougher macros being experienced in the economy. Given the current discount to our net asset value, we have been conducting a share repurchase program. For the FY '23 year, we repurchased 9.2 million shares and we'll continue to repurchase shares as and when market opportunities present themselves. We initiated the portfolio rebalancing with the disposal of 15 on Orange as well as the announced disposal of the Liberty Life Building to Capitec Bank. That disposal is still subject to regulatory approvals, but we do anticipate that to come through within the next month or 2. We successfully continued to implement our solar PV strategy. From 2018, we set out to cover at least 50% of portfolio assets with PV solar. As we stand here today, around 54% of our portfolio assets are covered with PV solar and the next strategy is to get that to over 60%, which we believe we will achieve by the end of this year. And we have also successfully redeveloped Bravo Park, which used to be called Blackheath Park, 16,000 square meter redevelopment for home comfort group Bravo Brands. That was completed at an accretive yield together with an improved weighted average lease expiry and improved average rate per square meter from what the prior tenants were paying. We have also just taken transfer on the 9th of May of The Island Urban Logistics Park, which will reflect in the Q1 numbers. Having a look at the operational update. These 7 points set out the key operational focus areas that a lot of our energy went into for this year and going forward and they are summarized as commercial vacancy exposure in particular, vacancy creep mitigation, interest rate absorption capabilities, mitigation of negative rental reversions, our cash availability and treasury management, our collection profiles and our loan to value; and just to report back on how each of those factors were managed over the year. From a commercial vacancy exposure perspective, we have seen an uptick in letting inquiries as well as an uptick in conversion from inquiries to leases. From a vacancy mitigation perspective with the increased activity in the market that's going to and will have a positive impact on Spear's vacancy rate. I've spoken about the reversions, improved reversions from FY '22 to FY '23. We remain very liquid, cash availability of ZAR 270 million. Rental collections have moved beyond and back to pre-pandemic levels of 98.61%. This was as at April. Having reviewed it most recently, we're closer to 99% as some older debts have been settled. And we are also below our strategic LTV band of between 38% and 43% at the lower 36% level. Having a look at our corporate performance. So Spear's total return for the year relative to the Small Cap Index, the All Prop and the SA REIT Index was a negative 5%. However, when looking at us from an operational perspective, we have continued to operate within the top quartile of our peer group. From a sustainable earnings perspective, we have performed a lot better than many of our peers. However, lower levels of liquidity in our stock is a factor of our growth journey, which we just embrace and we navigate through that. And also the movement in bond yields had a negative impact on placing downward pressure on our total return for the year. In terms of our shares in issue: of the 244.8 million shares in issue, we saw a 22% trade ratio. Now ideally for us not that it's in our control, but we'd like to see that closer to the 35% to 40% level. We saw 53.9 million shares traded during the year for a total value of ZAR 413 million. What has, however, been encouraging to see is the improved liquidity in our stock, which has introduced additional institutional investors into our register over the last year. Having a look at our share repurchasing. So one of the factors of our capital allocation tree when we're trading at a discount to our NAV and our balance sheet is strong is to repurchase our own stock. We know the business, we know the assets, we know where the pressure points are and the yields are very attractive. So this is exactly what we've done. So at year-end 2022, we held 10.4 million treasury shares. We repurchased 9.2 million shares during the financial year. As part of our long-term incentive, 857,000 shares were issued and we were left with 18.7 million at year-end. Post year-end and with the blessing of the JSE, we continued our share repurchasing and we repurchased about 1.286 million shares, which took us to just under 20.1 million treasury shares held. This comes to about 8.2% of the company. We do plan to cancel approximately 50% of those shares. The repurchasing for FY '23 added ZAR 0.01 per share to our distributable income per share and increased our tangible net asset value by ZAR 0.12 per share. So having a look at our salient details. Spear owns 28 high quality Western Cape assets valued at ZAR 4.2 billion. We saw a decline of 5.85% of portfolio value, which is solely as a result of our disposals program disposing of just under ZAR 500 million worth of assets during the year. Our average property value has increased to ZAR 148.7 million per property, which is up from ZAR 143 million per property in FY '22. Our average valuation per property per square meter is ZAR 10,162 a square meter and I think there's a great value proposition there. If you're investing into the Western Cape, which I believe you should be doing, you can get access to a well-diversified portfolio with a strong industrial bias with high quality retail and commercial assets at just over ZAR 10,000 a square meter. Our in-force escalations, as I mentioned, have increased to 7.4%. Portfolio GLA just under 410,000 square meters. This does not include The Island acquisition, but does still include the Liberty Life property as it hasn't transferred. Portfolio occupancy is at 92.8%. Our weighted average is expiring 27 months with an average gross rental, which includes rates and taxes, of ZAR 98.17 per square meter. Our collections for the year, 98.61% and our net cash from operations after paying our dividend, after settling everything we need to settle was ZAR 43 million. Having a look at the financial snapshot. As you would have seen on SENS this morning announcing a DIPS for the year of ZAR 0.8214, a full year DPS of ZAR 0.7597 per share with a final DPS for the 6 months ending Feb 2023 of ZAR 0.3884 per share, which is a 11.31% growth in DPS compared to the prior year for FY '23. This is based on an average payout ratio of 92.45%. This 90% payout ratio was applied to the first 6 months of the year and a 95% payout ratio was applied to the final 6 months of the year. Having a look at our cost to income stats. Spear's cost to income -- SA REIT cost to income ratio was 43.45%, which is in fact 85 basis points lower than FY '22. Our SA REIT admin cost to income ratio was 6.05%, which was 36 basis points lower than FY '22. Maintaining a low overhead cost structure is key to our business strategy. As some of you might recall in the FY '22 results presentation, I made the comment that it is our intention to get our SA REIT admin cost to income ratio to be between 6% and 6.5% and I'm pleased to see that we've achieved that 6.5% ratio. Our tangible net asset value per share is ZAR 11.47 per share, which is an increase of 1.5% from the prior year and as I've mentioned what the repurchase has done to the tangible net asset value. LTV at year-end was 36.30% with a fixed debt ratio of 54%. This is on the low side and we will talk to that in detail during Christiaan's section of the presentation. Our weighted average debt expiry is 30 months with an average cost of debt of 8.66%, an average cost of fixed debt of 8.18% and an average cost of variable debt of 9.05%. Having a look at our collections. For the year we billed ZAR 574 million, we collected ZAR 566 million that's as at 1st of April. That has actually improved, as I mentioned, to close to 99%; but for the reporting purposes, we're reporting 98.61%. These collections include billings for February. Collections also include all recoveries. And our tenant receivables for the year ending 2023 was ZAR 7.98 million. Just how it stacks up sectorally. We collected 99% of our commercial rent, 100% of our hospitality rent which will also be the last time we're reporting on this hospitality segment, 98% of our retail rental and 96% of our industrial rental. I'm going to call on Christiaan Barnard to come and do the financial performance. Christiaan?

Good morning, everyone. Let me take you through a bit more of the detail of the financials. Let us start off reminding you all we prioritize us as an easy and simplistic company. Now once again I believe the numbers will showcase that. Income statement. Our revenue of ZAR 581 million includes smoothing. Excluding smoothing, ZAR 574 million, you will note that the revenue increased by 3.48%. On a like-for-like basis it was 6.12%. The difference in these numbers are purely due to disposals during the year, which Kim will touch on later in the presentation. Our net property operating profit grew by 5.43%; on a like-for-like basis, it grew by 8.39%. Now we achieved these numbers by significantly reducing our overhead structure and cost structures and putting a lot of hard work into mitigating cost creep. You will notice our operating expenses increased only by 1.15% and administrative expenses declined by 1.13% for the year. You will also note that in the income statement there is a ZAR 15 million of depreciation on tenant installation lines and commissions, which we believe is prudent to write-off the term of the lease to provide for further capital in the future to invest in tenant spaces. Our net interest declined to ZAR 135 million paid for the financial year from the prior financial year. This is purely because we settled variable debt asset from disposal proceeds. Now this improved our ICR to 2.51x from the prior year 2.19x. Just looking at the reconciliation of our FFO, once again you will see this is simplistic, easy to understand. The only adjustments made here are noncash flow IFRS adjustments, which leads us to a ZAR 188 million total distributable company FFO, which is 100% property related. There's no funnies in there, no capitalized cost, no oneoffs. These things are repeatable and we can continue performing at this level. As Quintin mentioned, DIPS is ZAR 0.8214 for the year, DPS ZAR 0.7597 for the year using an average payout ratio of 92.45%. Our DIPS grew by 5.31% for the year and DPS by 11.31%. Now as Quintin mentioned, we did increase our payout ratio from interims at 90% to finals at 95%. We did this because our collections was ahead of our scheduled budget as well as we believe we prudently provided for capital cost requirements. In the new financial year, we have a robust RMM schedule that we provide for as well as the depletion allowance that puts money back into our pocket to spend on tenant spaces. Our retained income after payout for the year is about ZAR 12 million net of tax. We do have some taxable retained income from our solar investments and I'm proud to say that we are one of the very first and few REITs to actually get a Section 12B deduction allowance approved by SARS to reduce and go into a sales loss in certain entities, which we can use in the future to reduce the taxable supplies. Our balance sheet, again very simplistic. Most of these items Quintin has touched on, but I think let's just go through a couple of items. Current assets you will note has increased significantly purely because of the fact that the Liberty Life Building and 12 Pickwick is held for sale, which Kim will discuss. Our noncontrolling interest declined as we increased our stake in the George development entity, which we will commence later in this financial year. Our current liabilities is significantly more than the prior year, no need for concern as this is purely related to the Liberty Life Building bond, which will be settled at the conclusion of the sale transaction later in the new financial year. Our LTV of 36.30% is below our strategic range of 38% to 43%. This was a target we set for ourselves at the beginning of the new financial year to get it and mitigate interest creep through settle of variable debt. Our tangible net asset value is ZAR 11.47, increasing from ZAR 11.30 in the prior financial year. Now let's look at the TNAV bridge and how we achieve this. Most of these adjustments is well known to our shareholders and nothing new except for the fact that the acquisition of our treasury shares, which increased our TNAV by ZAR 0.12 in the financial year. Again as we mentioned, 50% of it will be canceled. So this is a continuous increase in NAV and it shows as this is part of our 3-pronged capital approach, we will continue to purchase shares when it is accretive to the company and we will continue to increase the NAV and increase distributions in the forthcoming years. All the other adjustments are standard; valuations, payment of dividends. And then as well the TNAV decreased to ZAR 11.08 after payment of the current year dividend in June, but again it will naturally increase as we start accumulating our next financial year's dividend. Our funding maturity. Spear had total net debt of ZAR 1.53 billion; which about 53% is fixed, 47% is variable. Quintin mentioned the cost. Now we have a robust maturity profile, we don't believe there's any refinancing risks. All the current debt has already been renegotiated or will be settled when disposal proceeds are received. Now we do understand 53% is on the lower end of the range expected from our shareholders. But as you'll see on the graph on the right-hand side, we have a forecast leading up to the disposal of the Liberty Life Building, which will bring us back into our strategic range of 65% to 75%. In between that period of time, we will continue to monitor the swap market and we will continue to do what we need to get the fixed ratio up. Now the reason why it is low at year-end, the Liberty Life Building sale transaction was concluded just towards the end of the prior financial year. At the same time, the Liberty Life Building fixed came up for renewal. At that point in time to reincur the swap of fixed was substantially more expensive than variable debt and the current fixed in place. As the transaction is only related to the [ com-com ] approval, we did not want to incur further higher interest costs on swaps or fixes or incur breakage costs at a point when it was settled. So we took a strategic decision to leave it as variable and we will settle it at that point in time where it will naturally increase above the 65% that we target to keep for ourselves. Just an update on our covenants. Our covenants are 50% of the LTV, ICR of 2x. We are operating well within these margins with immense support from our financial institutions, which we always thank for their support. During the year, we concluded our very first sustainability linked loan of ZAR 230 million. This loan was at a significantly improved margin than the prior loan. The KPIs linked to this loan is BEE procurement as well as solar penetration and generation on our portfolio. We have ZAR 270 million of liquidity availability for acquisition and dividends. We refinanced debt of ZAR 455 million and we settled debt to the tune of ZAR 299 million giving us the low LTV of 36.30%. Our SA REIT LTV forecast of sensitivity. We started the year with 36.30%. The Island acquisition did occur already post this transaction, which will increase our LTV. Our final dividend to be paid in June will further increase as LTV is based on the net debt. The substantial movement in LTV downwards will be the disposal of the Liberty Life Building, which you will note will decrease our LTV by a forecast of 5.28% for the financial year. Now GAT is more commonly known as George Aerotropolis. This is our development company George, which we have received approvals for and we have forecasted for bulk infrastructure and platforming costs to be incurred quite soon. We will not forecast any top process point which is driven by a lease. Only when a lease is signed, we will incur costs and therefore then we will include it into the structure. Our forecast for the year after 12 months is that our LTV will be 36.16%. This does not include any further fair value adjustments or further cash collections in the portfolio. I believe this is still below our strategic range. Hence, we will continue on this trajectory while the interest rates are still volatile and high and we will much rather repurchase our shares with available cash as it comes with a better yield and keep our LTV on the lower side for now until we can better forecast interest rates. As I said, it's simplistic, it's easy and quick.

Thank you, Christiaan, and definitely a well-deserved round of applause for your astute financial management of the business. Having a look at the portfolio overview. So these are Spears' Top 5 assets and not only does it reflect our less is more approach, which is to own fewer assets, but assets of higher value; it also reflects a great picture of diversification across asset types and locations. Our Top 5 assets make up 50% of portfolio value and around 44% of portfolio GLA. You will also see that from a diversification perspective, we have a property like Sable Square and we'll get into a discussion about development bulk. We still have approximately 50,000 square meters of developable bulk available on this property, which hasn't been priced into any other valuations. And we also have the Liberty Life Building, which will be exiting the Top 5, which is around 9% of the portfolio, towards the end of this year. And then we have Northgate Park, which has started to morph more into a mixed-use commercial and retail node, which is currently the fifth largest asset in the portfolio. Having a look at the sectorial spread. So ZAR 4.2 billion portfolio; 50% of the value is commercial, 32% of the value is industrial, 17% is retail and 1% is the development land we have in George. We're not reflecting hospitality here because we've disposed of that asset, but we will reflect it in revenue because it was earned for the financial year. In terms of properties: 13 commercial assets, 9 industrial assets and 6 retail assets. In terms of revenue: 47% of our revenue is generated from the commercial portfolio which is also a key driver to the rebalancing of the portfolio which Kim will talk to in her presentation; 32% in industrial; 16% in retail and 5% as the final hospitality contribution to the portfolio. From an occupancy perspective pressure point; 84% commercial, you can see that both industrial and retail are strongly occupied at 96%. And from a GLA perspective, you'll see 56% of the portfolio currently which excludes The Island is industrial and 32% is commercial, which includes Liberty still and 12% retail. Just segmenting it a little bit further. We have about a 50-50 split between logistics and manufacturing. We use those terms slightly looser because our portfolio is made up of warehousing, distribution, logistics, multi-let industrial, bulk storage and small- to medium-sized warehousing. 229,000 square meters of GLA with a 96% occupancy rate contributing ZAR 183 million to our revenue. Commercial, you'll see that Spear is invested into all of the high-quality commercial nodes within Cape Town. 35% from a valuation perspective is in Century City, 22% in the CBD, 17% in Tyger Valley, 14% in Brooklyn not to be mistaken with Victoria, this is Northgate park on the N1 and 7% in Parow and 5% in Woodstock. From a GLA perspective, also the highest metrics in Century City were 35%, 20% in CBD, 17% in Tyger Valley, 12% in Brooklyn, 7% in Woodstock. In terms of occupancy and you can clearly see where the outliers are, Woodstock and Brooklyn are kind of the pressure points from a vacancy perspective. But we are pleased to report that by Q1, those metrics will have improved substantially. And from a revenue contribution perspective, ZAR 270 million contribution to revenue from the commercial portfolio driven by Century City and the CBD. In terms of retail, Spear has historically always only invested into convenience retail assets. By and large that convenience retail also comes with some destination retail. This is the smaller part of the portfolio, one where we'd like to invest more into the growth of this portfolio. But as many of you know, buying convenience retail assets in the Western Cape is not cheap and as value investors, we would look to buy stuff of value as opposed to overpaying for assets that look pretty. So from a valuation perspective: 80% of our portfolio is convenience retail, 20% is destination retail. That's predominantly made up of our Paarden Eiland portfolio, which is also fully let. We have about 60% of our GLA is in the convenience retail space and 40% in the destination retail. Occupancy rate exceptionally high at 96% with just under ZAR 92 million contribution to revenue. Having a look at the letting activity. As I mentioned, year-on-year improvement in the letting activity of the business coming from a negative 5.57% reversion in FY '22. We've improved that to negative 3.69%, which I think is a fantastic outcome for us. We had expiries and cancellations in the year of about 117,000 square meters. We renewed and relet around 105,700 square meters at a gross rental of ZAR 83 a square meter. Having a look at the vacancy profile. From a GLA of 409,000 square meters, we have 32,000 square meters of the portfolio vacant. Now for somebody that started my career as a leasing agent, this does bug me and there's a lot of time and energy that goes into solving these vacancy challenges, but we are operating in a tough macro. But there's a lot of progress being made in reducing this portfolio vacancy rate of 7.82%. In terms of occupied space, 377,835 square meters is currently occupied within the portfolio. 36% of that would be considered A-grade international, national and listed tenants; and 50% would be considered national tenants, small, invested tenants; 4% would be either being owner-run businesses, more entrepreneurial businesses; and the vacancy which is rounded up to 8%, which I would prefer not to round up, I'd prefer to round it down, but that is what it is. Then just having a look at the sectorial performance on a more granular basis. We've been quite encouraged to see that the retail portfolio has been trading very consistently regardless of economic pressures, inflationary pressures, et cetera. 41% of our tenants within our retail portfolio are nationals, which is a great credit risk mitigator for us within the convenience retail and destination retail portfolio. As a retail portfolio, we have no reliance on either local or international tourism, which has been under pressure as a result of the effects of COVID. We report a high occupancy rate of 96%, high collection rate of 98%, renewals are in line with our forecast. And it's also been encouraging to see larger retailers specifically coming through a season of mergers and acquisitions wanting to expand their spaces and open up additional stores. I attended the Pepco Landlords function where they set out a whole plethora of CapEx allocations for their various stores for the year, which was very encouraging. On the commercial side, letting activity has improved across the sector. Occupancy is not where we wanted. It's at 85%, collections at 99%. Return to office momentum has continued and I think it's going to accelerate with the effects of loadshedding as well as just the kind of dislocation between company culture and accountability, which will bode very well for Spear and office heavy landlords across the SA REIT sector. Office augmentations, tenants are renewing their leases. Some of them are taking more space, some are taking less space; but there has been a shorter-term increase in vacancies as a result of that. The international BPO market really has been a game changer for Cape Town and I think that the general Cape Town vacancy rate would be looking a lot worse if it wasn't for the uptake of the BPO sector within Cape Town. We've been a net beneficiary here where we've secured the Hilton Global call center downstairs just over 2,000 square meters and they're just about to commit to quite a bit more space, which is encouraging. But also what's going to be encouraging for the Cape Town CBD once Amazon eventually move out is that a lot of the space that Amazon will be giving up has already been taken up by international call centers, which is really good for the CBD. We've seen positive letting activity at No. 1 Waterhouse in Century City. We're now around 4% to 5% vacant with interest already on that space, which is positive. The sale agreement for Liberty Life has been concluded and we anticipate transfer towards the end of the year pending the regulatory approvals. The industrial portfolio continues to perform well and continues to deliver a strategy aligned outcome from an occupancy perspective, from a revenue perspective. There's been strong and continued demand for Spear's multi-let industrial parks specifically because as a portfolio, 26 out of our 28 assets are supplied by the City of Cape Town, which means that there is a buffering of loadshedding impacts that take place. We've completed the redevelopment, as I mentioned, of Blackheath Park. Pepkor has occupied 27 Junction Road and that is a hybrid between a manufacturing component and a distribution component for the Africa operations. And we have successfully taken transfer of The Island Urban Logistics Park, which is 100% let on the 9th of May. Then just our final report on hospitality. We disposed of the property 15 on Orange at the end of January or at the beginning of February, 2nd of Feb. We disposed of it at an 8.13% exit yield for ZAR 246 million and we are now out of hospitality. So please do not offer us any hospitality assets again. Just in terms of general business and portfolio update. The operating environment remains challenging, but we are up for the challenge and that is the benefit of being just focused on 1 region. We can really get into the nuts and bolts of every moving part and give oil where oil needs to be given. The industrial and retail portfolio continues to trade very well amidst the challenging market. The office portfolio, I do see green shoots and these green shoots are pretty much unique to the Western Cape because I don't see them too much in the rest of the country. The hospitality portfolio exit has been concluded and we'll continue to implement our solar PV and our water augmentation rollout across the portfolio. I don't think we're out of the woods yet in terms of water challenges so we do need to be conscious about that whenever we're making an investment into the region. Rental collections have been strong and receivables have been declining, which is really positive, which has also been one of the drivers behind the improved payout ratio. And our rebalancing -- I've spoken about the LTV, but our portfolio rebalancing is initiated post the disposal or 15 on Orange and the disposal of the Liberty Life Building. In terms of lease expiry by GLA, we are very pleased. 18% on average of the portfolio comes up for renewal and relet every year. This year in particular this FY '24 year, we'll be facing probably our highest industrial renewal cycle and I'm pleased to report that we are very much ahead of that curve already and we're going to be reporting some good metrics come Q1 and Q2 for the year ahead. Nothing in this graph keeps us up at night and we never take things as a full-on conclusion. But a key aspect of our management strategy is early engagement so we engage with our tenants early. We are very close to the market. We know what tenants are looking for space and what could materially augment their reasons to not renew and then mitigate against that. So I'm going to hand over now to Kim Pfaff-Karg, our Chief Investment Officer, to take us through the slides.

Thank you, Quintin. Good morning, everybody. It's an absolute pleasure to be with you here today. I will be presenting the Spear investment strategy and our execution thereof followed by the Spear portfolio valuations. The Spear investment strategy. First and foremost, we are a 100% Western Cape focused fund, which means that we exclusively invest in the Western Cape and we will continue to do so. We like to be within 1 hour's drive or flight in the case of George from each of our assets. From a sectorial point of view, we intend to consistently have an industrial and retail focus both in terms of gross lettable area and in terms of value. For us, less is always more. And thus from an individual asset point of view, we aim to have a minimum asset size of ZAR 100 million unless an acquisition is particularly strategic to the fund. Our emphasis will always be on quality over quantity. We will only invest in assets that meet our strict investment criteria, which is good quality assets in key locations with strong covenants on long-dated lease terms. Over the next 5 to 10 years, we plan to unlock embedded bulk across our portfolio, of which we have around 150,000 square meters. And finally, we intend to grow our portfolio to a meaningful mid-cap-sized fund of around ZAR 15 billion. We are not obsessed with this number. It is more of a growth intent than a target value. I will now take you through our execution in terms of acquisitions, noncore disposals, strategic redevelopment and development growth. Acquisitions, this year we purchased 2 good quality industrial facilities and a further 24.39% stake in our land George Aerotropolis in the Garden Route. The combined value of these 3 acquisitions is just shy of ZAR 263 million. Our first acquisition is 27 Junction Road. It is a good quality 14,000 square meter industrial facility located in the well-established and popular industrial node of Parow. The improvements are located on a 2.4 hectare piece of land with a ring road surrounding the facility. We purchased this asset on a short-dated lease to accommodate the requirements of Pepkor, who subsequently signed a 129-month triple-net lease over the facility with us. This property we purchased for ZAR 65 million at an initial yield of 9.78%. This is one of those strategic acquisitions, which is below our minimum investment size of ZAR 100 million. Our most recent acquisition is The Island in Paarden Eiland. It is a high quality 22,000 square meter urban logistics facility. An urban logistics facility in short is a hybrid big box industrial, retail, last mile logistics facility located in the inner city. You may be familiar with this asset as it is home to family favorites CityROCK and Epic Padel, which is one of the only indoor padel courts in Cape Town. Other notable tenants is Film Media Services and the luxury Oggie Flooring. We purchased this property at ZAR 185 million at an initial yield of 9.75%. Both of these acquisitions are great fits for Spear and represent immediate value uplift and increased exposure to the industrial sector. The yields at which we acquired these assets are very attractive having a positive impact on our overall portfolio earnings immediately from the respective dates of transfer. I'll speak to the increased stake in George Aerotropolis under development. Noncore disposals: as you can see, we have made significant progress in terms of our disposals. We sold 3 noncore assets, all at premiums to our book values. And as Quintin mentioned, we successfully concluded the sale of our final hospitality asset being 15 on Orange in accordance with our stated strategy to exit the hospitality sector. As such and as mentioned by both Quintin and Christiaan, we have achieved our goal of decreasing our loan to value to well below our target range of between 38% and 43%. As you can see on the table above, it's a little bit unclear, but we sold 6 Talana Road at an 8% premium to book. We sold Island Business Park in Paarden Eiland not to be confused with our latest acquisition The Island. They are very similar names, but this is a small commercial asset which we sold at 7.5% premium to book. And 5 Fitzmaurice Avenue in Epping we sold at a 2.4% premium to book. As mentioned, these 3 disposals were noncore, all being below our minimum threshold of ZAR 100 million and they also represented certain risk nuances. We utilized the disposals of these sales to accretively settle debt, to repurchase shares and to partially fund our 2 industrial acquisitions. This is a good example of how we have recycled capital to invest into better quality assets with longer weighted average lease expiry profiles and with stronger covenants. 15 on Orange. I won't go into too much. Quintin did mention that we sold it for ZAR 246 million at an 8.13% yield. As we had no debt on this facility and it was a share sale, we utilized the funds to settle debt which was immediately accretive to the fund. The aggregate proceeds of these 4 sales was just shy of ZAR 425 million. After our 2023 financial year, we concluded a further 2 sales, which we thought worth mentioning today. 12 Pickwick Road is another noncore asset below ZAR 100 million and then of course the much publicized sale of the Liberty Life Building for ZAR 400 million. This sale was strategic to us and it will significantly reduce our exposure to the office sector and in particular to single tenanted risk. Worth noting is that all of these transactions, with the exception of 6 Talana Road and Island Business Park, was sold directly by Spear and thus no third-party brokerage fees were due, which is testament to our strong relationships within the industry. Portfolio segmentation. What we would like to demonstrate with this slide is that post the Liberty Life disposal and The Island acquisition and assuming there are no further changes to our property portfolio, in terms of value; industrial will now make up 37%, retail, 18%, developments 1% and offices will be reduced to 43%. From a gross lettable area point of view; an overwhelming 61% of our portfolio will be industrial, 12% retail and 28% offices. Comparing this analysis to what Quintin presented earlier, it is clear to see that the sale of 1 building being Liberty Life, which currently makes up 9% of our portfolio, can alter the sectorial split meaningfully. We're certainly making progress in moving closer to our segmentation split, which would ideally in terms of value comprise 50% industrial, 20% offices, 25% retail, 5% mixed-use development. Again this is not a definitive target, but it is more of a medium- to long-term outlook. Strategic Redevelopment: Bravo Park in Blackheath. With some strategic maneuvering, we were able to accommodate the outgoing tenants of 27 Junction Road, which was 1 of our acquisitions, being Bravo Brands at our existing facility in Blackheath Park. We were only able to accommodate Bravo by enacting on our redevelopment clauses to create a single large pocket for Bravo by giving our smaller tenants notice to vacate. This redevelopment cost ZAR 74 million. It comprises 13,000 square meters of existing GLA, which is approximately half of the entire facility, and plus 3,000 square meters of newly constructed GLA. Bravo took occupation of the premises in January this year on the back of a brand new 10-year lease. This redevelopment has unlocked net asset value in terms of rental uplift from an average of ZAR 42 a square meter gross to ZAR 53 a square meter gross. This is a great example of how we have capitalized on an opportunity by finding a home for Bravo Brands within the Spear portfolio. Development Growth: George Aerotropolis in the Garden Route. As mentioned earlier, we acquired a further stake in Georgia Aerotropolis thus our shareholding is now at 75.6%. This development opportunity comprises a 7.75 hectare piece of land located directly across from the George Airport. George is a sought after tourism, agricultural business and investment destination. It is ideally located between Cape Town and Port Elizabeth. The entire Garden Route spanning from Mossel Bay all the way to Plettenberg Bay has experienced significant growth in the past 2 decades with George being at the epicenter of this growth. George links seamlessly to all major towns in South Africa via the N2 highway and of course the George Airport. The land has been rezoned for light industrial development and forms part of a greater scheme, which will be known as the Airport Business Park. Our approved bulk is 35,000 square meters. This development will be tenant driven and it will not be speculative. We will be targeting warehousing, cold storage, urban logistics and agri logistics users. The anticipated full development cost including land will be ZAR 390 million. On an exciting note, we will be breaking ground on this development in July. Marine Place: as mentioned in previous results presentations, this is an ambitious project with an estimated total development cost of around ZAR 1.4 billion. Given Spear's current market cap, we will only undertake this development with a strategic co-partner. We have approved rights of around 52,000 square meters. The envisaged design will have a strong residential bias together with showroom retail, convenience retail, shared offices and modern industrial towards the rear of the development. The properties are currently fully let and yielding an acceptable return and as such, we are in no rush to develop these properties and will only do so when market conditions are more conducive. And that concludes our investment strategy and our execution thereof. I will now take you through the Spear valuations. In accordance with the JSE requirements, 1/3 of our property portfolio is valued annually externally. However, this year we have increased that ratio to almost 50%. The remainder of the portfolio is valued by myself and it is qualified by our Executive Committee. As an aside and for those of you who do not know, I am a qualified professional valuer. I am also a member of the Royal Institution of Chartered Surveyors. I have 15 years' experience valuing for the majority of the SA listed REITs as a third-party valuer. So now that you know you're in good hands, I'll take you through the Spear valuations. When comparing this year's portfolio to that of last year, the portfolio now comprises 28 properties versus 31 properties, which is of course due to our noncore disposal strategy. And thus expectedly, our total portfolio value has declined from ZAR 4.4 billion to ZAR 4.22 billion. However, on a like-for-like basis, our portfolio has in fact increased by 25.3% representing a marginal increase of 0.64%. When analyzing our portfolio from a sectorial point of view, the industrial and retail properties have continued to perform well. The average industrial property has increased to ZAR 5,792 and the average retail property has increased to ZAR 14,470. Our office portfolio, on the other hand, for obvious reasons has faced headwinds and has not fared as well specifically due to increased vacancies and pressure on rentals. Fortunately, we do not see this as a long-term trend in the Western Cape and we anticipate this to be the troughing out of the office valuations. The average office value has declined to ZAR 16,192. When analyzing this rate per square meter per sector, you will notice that our portfolio is conservatively valued and it is well below the replacement costs of each sector. In addition, it is important to note, as Quintin mentioned earlier, that not ZAR 1 has been attributed to the additional bulk across the Spear portfolio, of which we have around 150,000 square meters. Considering the bulk values range arguably between ZAR 1,800 a square meter and ZAR 3,500 a square meter, it is clear to see that there is considerable unrealized value in the Spear portfolio. Across all sectors, the average value per property has increased, all of which are above our target minimum threshold of ZAR 100 million, which is aligned with our less is more approach. Broadly speaking, our valuation assumptions are similar to those of last year. However, it is important to note that each property is analyzed individually year-on-year and certain parameters are adjusted as and when it is deemed necessary. The value of our portfolio has held up well despite extremely challenging macroeconomic conditions. However, given that we are a 100% Western Cape based portfolio, we are best placed to reap the rewards once the property fundamentals turn in our favor. And that concludes the property valuations. Thank you very much. I'll now hand back to Quintin.

Thank you very much, Kim. Just to move on from that. From an ESG perspective, Spear weaves into our investment approach an ESG strategy. Our ESG strategy seeks to capture measurable value for our stakeholders across the board while still staying true to our nature of being a focused real estate business. So having a look at our PV solar, which is 1 aspect of our ESG strategy. As I mentioned earlier, we set out in 2018 to cover at least 50% of our portfolio assets with solar. We have achieved that with around 54% currently and that should increase to 59% as we expand the solar plant at Sable Square as well as at Mega Park before the end of this year. We have about 18,900 solar panels deployed across the portfolio and that is deployed in a 3-pronged approach. One, which is a self-funded model, which is a power purchase agreement we have at Sable Square. And we have a roof rental model, which is funded through a European infrastructure fund and that gives us a 25-year cash flow across our property portfolio unlocking additional income streams on this asset basically on a roof that was always there that we managed to unlock for the period. They are responsible for all maintenance, all insurance, so on and so forth. And then we have installment sale, which does give us a bit of a tax advantage. We were able to pay off these systems using the savings generated on the PV solar. Our entire solar portfolio is grid tied. We haven't invested into any batteries yet. Batteries do come with their own challenges, they are very expensive and they do have very specific insurance requirements that add additional layers of cost to your mitigation measures. However, on a penetration rate perspective, we're penetrating on solar, 21% of our power is being generated from our solar plants on assets that have solar and around 31% on future assets when we take into account the expanded 2 sites. And in terms of solar penetration for the total portfolio, which is an interesting stat, is based upon all the work we've done in the solar portfolio. 15% of the power that we're generating on the total portfolio, which includes with solar and without, is around 15% and that would increase materially to 24% as we expand the facilities at Sable and Mega Park. Then just having a look at some further ESG factors. Christiaan mentioned the sustainability linked loans. We concluded with Standard Bank our maiden sustainability linked bond. We have got some key KPIs that we are needing to achieve in order to qualify for this funding and we are very confident that we will be achieving that. In the beginning of the presentation, you saw where we invest into is from a socioeconomic perspective. But maybe saying that I did not mention in that initial video was also that we've donated the roof solar at Radnor Road DC, which is occupied by Super Group, to fund the previously disadvantaged students from UCT studying property studies as a bursary. And then the third leg is as a small REIT and a growing REIT, it's important for us to improve our BEE equity ownership. For that reason, Spear has provided corporate guarantees totaling around ZAR 77.8 million since inception of our listing, for the financial year provided ZAR 52.5 million. There was no cash provided by Spear. It was effectively a corporate guarantee BEE equity ownership. The BEE shareholder would purchase the shares on the open market. They would utilize their own cash, which is a prerequisite for us as the equity, and then the funder of choice would provide a 70% loan to value. There's a session and pledge of those shares back to the funders with a very healthy margin of safety. And this is one way where we've almost doubled our BEE equity ownership from 11.31 points in FY '22 to 20.03 points in FY '23. That is unaudited, but we're pretty confident that that's going to be the number that it comes out to. And then just having a look at the outlook, you see how foggy it is there. But anyways, we've got our headlights and torches on. So the macroeconomic headwinds do remain a major concern for us as well as an unacceptably high unemployment rate within South Africa despite the resilience of the Western Cape. The trading environment will remain challenging on all fronts in the short to medium term and in our view limited to almost 0 economic growth in this period. The real estate fundamentals will continue to shift on a geographical basis towards the Western Cape as we've all seen through the likes of semigration and business relocations. But I think also that from a geographical perspective within the Western Cape, you have parts of Cape Town and the Greater Western Cape that are supplied by Eskom and parts that are supplied the city of Cape Town. As I mentioned earlier, a competitive advantage for us as Spear is only that we have 2 assets that fall outside of the City of Cape Town supply; one which is a manufacturing facility, but has got sufficient redundant power supply to continue operations and the other which is a distribution center. The rest all are benefiting from City of Cape Town supply. Material infrastructure investment across the Western Cape will continue to create opportunities for Spear as the urban edges expand. And just to give you an idea, over the next 3 years the City of Cape Town will be investing ZAR 43 billion into infrastructure within the city. The City of Joburg over the same period will only invest ZAR 22 billion. The City of Cape Town currently has a population of 4.6 million people compared to the City of Joburg has a population of 5.6 million people. This is extremely positive for the Western Cape. Having a look at the other metros: Ekurhuleni, Tshwane, Buffalo City, eThekwini and Nelson Mandela Bay; when you collectively look at their 3-year CapEx budget for infrastructure, it's ZAR 1 billion less than what the City of Cape Town has allocated, which equates to ZAR 42 million versus the City of Cape Town's ZAR 43 million over the next 3 years. In addition to that, the City of Cape Town have also announced a 10-year CapEx or infrastructure CapEx program of ZAR 120 billion, which just allows the city both urban edges, but the city to house more and more people and businesses as the Western Cape starts to differentiate itself to the rest of the South African trading environment. Some who follow me on Twitter would have seen that I tweeted this. Investment capital follows good governance, clean audits, execution of infrastructure investment and clear intent to mitigate and end loadshedding. Of which all of these key imperatives, the provincial and municipal leadership of the Western Cape I see as top of the agenda. Loadshedding is a real and present threat to any operating business in South Africa and operating costs creep will persist as landlords literally burn cash to keep the lights on, absorb increased rents and taxes and mitigate rising interest rates. We remain optimistic that the city will come through with their plan to have another 500 megawatts of dispatchable power towards the end of 2024 available to protect city customers from being loadshedding free between Stage 1 and Stage 4, which will be a fantastic achievement for the City of Cape Town. We'll continue our ESG strategy to deliver a people, planet, profit aligned approach. Our portfolio rebalancing will result in a more defensive portfolio, as Kim has touched on. And we'll continue to execute on our 3-pronged capital allocation strategy, which will seek out both organic, inorganic and NAV growth opportunities in the year ahead. There will be major focus and efforts on reducing portfolio vacancies and we'll make sure that the portfolio remains defensive underpinned by strong lease covenants and high quality tenants. So having a look at the guidance. So the macroeconomic climate, I've made it small so you can hardly read it. The macroeconomic climate remains challenging as the longer-term impact of both loadshedding and interest rate costs have not yet been fully felt by SA businesses. We will mitigate where possible the negative impact of those 2 factors and we do expect a measure of growth in the portfolio in the year ahead. The extent to that growth at this point in time is difficult to quantify and that is partially due to the ongoing loadshedding being experienced in the SA economy. We will provide you with additional updates in our Q1 update to the market and obviously remain available to engage with you, our shareholder base, on an ongoing basis. Our guidance will be informed and impacted by the following. I think 1 thing that I'll probably put top of the agenda is that the grid doesn't collapse, that loadshedding stages are mostly limited to Stage 1 and Stage 4 within the City of Cape Town, that our vacancies are reduced in line with our forecast, our lease renewals are concluded in line with our forecast, we don't have any major tenant failures during the year and just the caveat is we don't have any concerns in that regard as we stand here today. And our tenants continue to successfully absorb the rising costs associated with utility charges, municipal rates and diesel charges. And we don't have any further unexpected reserve bank interest rate hikes other than what we have budgeted for and that there's no civil unrest within Cape Town, the Western Cape and South Africa. Any changes to these assumptions would impact our forecast. So that brings us to the end of our presentation. I really want to thank you all for attending today. And we're going to just give it a few minutes to check if there's been any questions that have come through via the online platform and then also take any questions from the floor. Thank you very much.

Okay. And in terms of any questions from the floor. We've got 1 hand over there and then a second question, okay? So we'll get to you now and then Francois, okay. Any other questions so I can just kind of line it up. Okay. So we'll be back. So I'll just wait for the benefit of our vast YouTube followers to log back on.

Firstly, congrats on a great set of results in the operating environment. 3 very quick questions. I promise I'll be quick. First one, just on operating costs, I know you said that it was up 1%. Have you got the like-for-like number like you did on revenue?

Yes, 3%.

3%. Then the admin costs went backwards 1%. Do you feel that, that is sustainable? Is there any more low-hanging fruit on the next financial year or can we underwrite sort of an inflation, inflation plus type increase for the '24 year?

Yes, that's a fair assessment. The biggest decrease in the prior financial year is we've seen a lot more quick activity in the court so we have a lot less legal costs incurred as well as our collection improved, our bad debt has significantly decreased. So as that continues, we don't foresee that they will continue like in FY '22. So we believe that we can have hopefully less than inflation increase in the new financial year.

All right. Great. The final one is you said as part of the guidance, no unforeseen or unbudgeted interest rate increases. Just maybe some clarity on what you are actually underwriting? Are you underwriting rate cuts towards the end of the year or is it 1 more coming now in this week I think and then sort of staying flat or just what is your underwriting assumptions, the base case?

So our forecast was we've gotten it right so far. I think the 50 bps that we had previously in March, we expect it to be 25 bps, 25 bps. So that was a bit accelerated in our forecast. So whatever we're going to see now, we will have to mitigate through our prudent cash collections and settlement of debt towards the end of the year. So we are confident. We updated our budgets last week so if we get another 25 bps now, we can absorb it. 50 bps, we will have to revisit the market and see what we can do to mitigate that. So it is a bit of a moving target because we don't know exactly and I think everyone in the room will share the sentiment, we don't know what the SARB is going to do come Thursday.

Yes. And also maybe hopefully we're not going to be trading in any arms anytime soon again because that obviously creates a lot of uncertainty with regard to the currency. So we can do pretty much whatever we can to position South Africa, to position our business. But if our government keeps on scoring own goals and try and pass them back on to the man on the street, it is difficult to try and operate within some sort of a guidance. I mean we were all of the opinion that we're going to start seeing a tapering off of interest rates towards the end of the year and the jury is kind of out on that 50-50 if that's going to still be the case. And also we hope that the President kind of fills the vacant seat on the SARB Board because I do think the Governor has got disproportional power in terms of his decision-making to wield that interest rate axe. It does work. It's just for the stream so people online can hear you.

Maybe just to clarify your guidance in terms of growth. I think you mentioned you expect the portfolio to produce growth. Is that distributable income growth or is that rental growth? First question. Second one, I think Kim, you've mentioned that there was a 9.7% acquisition yield at I think it's the [ PEP ] facility, right?

They're both quite similar. It's The Island, 9.78%.

Okay. Is that on the initial short lease that was in place or is that on the renegotiated 10-year lease?

So the one regarding Pepkor, it was on the short dated lease.

Okay. Is there a substantial difference between the level of rent on the new and short lease?

It's marginal. I mean it's a few basis points and I think it's informed by the long-dated nature of the lease, Pepkor has got stronger negotiation power. But all in all on a triple-net basis, from a rate per square meter as well as initial yield perspective, we were very satisfied with it.

And your development in George, is that signaling wider sort of expansion that you have in mind or you still want to be peninsula focused mostly?

I think the focus for the business will be predominantly within the Cape Metro. One thing about the Western Cape, which is unique to this province, is that with the level of infrastructure investment in the second place province-wide, it makes the entire province an investment case for Spear. Now we take pride in the fact that we're hands-on managers of our assets so we don't want to spread ourselves too thin. So from a development activity perspective, you'll see that George development take place over the next couple of years. But you'll see a bias towards Cape Town, Stellenbosch, Somerset West; these kind of real kind of closer proximity areas with a overwhelming bias to the city of Cape Town with Cape Town Metro.