Spear Reit Limited (SEA) Earnings Call Transcript & Summary

Welcome all of you to Spear's Half year Interim Results Presentation. We're going to be kicking off and also welcome to those that have joined us on the Spear YouTube channel today. It's truly always such a privilege for us as a management team to deliver the results to our shareholders and stakeholders. And it would be remiss of me not to also extend my appreciation to our incredible team, some who are here today and some are in the engine room for the results. We get to deliver the pretty pictures and be part of the success, and we want to thank them. And especially in this period has been really busy for us. We've just yesterday, taken transfer of another ZAR 1.146 billion worth of assets, and that's transferred successfully into the portfolio, which really sets us up. Thank you. It really sets us up for the next chapter of our growth story, which really has been an incredibly blessed one over the years. What you'll see here today is results that do reflect consistency in a tough operating environment. We believe that we've set the right foundations in the half year to achieve real growth for the full year ahead. As you would have seen, we've entered into a new season in the South African political landscape with the introduction of the GNU, which by all accounts really has created a new sense of optimism in South Africa and has also resulted in somewhat of a resurgence in the property sector overall. For those that are not too familiar with our business, Spear remains the only regionally focused REIT listed on the JSE. We obtain our specialization through investing into the Western Cape and our diversification through investing across high-quality industrial, commercial, retail and mixed-use assets. Now, asset growth hasn't been the primary objective of our business. Our business' primary objective has been focused on high-quality assets with sustainable income that we can generate out of these assets. But, over the years, since inception, we have consistently grown the business in a meaningful way that has been accretive to shareholders over the years. As a business, we've executed on all of the strategic objectives that we've set out for the half year. And I'm pleased to say that not only have our assets been contributors, but the actual Western Cape economic macro situation has been a key contributor to the success of what Spear is today. Just having a look in terms of the presentation today, what we'll be covering. We'll try and keep it brief so we can give you some snacks afterwards. But if you do have any questions during the course of the presentation, there will be a time for Q&A afterwards. And if you're online, please e-mail any questions you have to info@spearprop.co.za, and we'll answer them straight after the presentation. I'll be joined today in my presentation with Christiaan Barnard, our CFO; and Kim Pfaff-Karg, our CIO, which will be sharing different segments of the presentation today. Just a reminder about our mission, our mission is to be the leading Western Cape-focused REIT to grow our distribution on an annualized basis and also to operate within the top quartile of our peer group. Now, just to have a look at the summary of what the half year has manifested, trading conditions have remained challenging. We've been in an environment where interest rates have been higher for longer. We're in an environment where we've seen consistent operating costs creep, coupled with subdued economic growth. But the balancing act of that is that there are green shoots that have emerged post the formation of the GNU. We've seen that in tenant commitments where tenants are willing to commit to longer leases for space that could provide for additional growth over a period of time, where historically, I think before the elections, it was a real kind of wait-and-see attitude. And we've even seen that manifest over the vacancy contraction within our portfolio over the half year. As I mentioned, we've seen a material letup in Spear vacancies for the half year in excess of 9,000 square meters of GLA has been taken out of the vacancy, which is very positive as the Western Cape continues to attract new office users, new industrial users and the retail segment just continues to remain very strong. I'm sure we're all very relieved. We've been 200-plus days without load shedding, which definitely has created a lot more confidence for companies to dust off the old CapEx allocations and start to make investments, which obviously has a cascading effect on things like the unemployment rate, contraction of unemployment rate, the labor force participation rate in addition to economic growth, which is positive for the property sector. Our PV, we've gone very long into PV solar and having 200 days load shedding free allows our PV solar plants to really operate optimally. They are grid tied. We haven't committed to any battery investments at this point in time. And again, the counterbalance, the GNU can't fix everything because they can't control the weather, but we have had some severe weather in the Cape during the months of July and August, which have impacted our R&M budget to a certain degree, which we believe we'll be able to kind of smooth out over the balance of the year. And I think for any property manager or asset manager, operating cost creep has remained a challenge. And, for us, we can kind of summarize it in these 4 areas. The interest rate environment has been, as we've said, taken a bit of cream off the top. However, we've seen a rate cut coming through in September, which will provide some relief. The higher R&M spend during the severe weather condition periods in the Cape has pushed expenditure to higher than normal levels, but it's transient. It's not something that's structural in nature. And we do believe that for us, we want to stabilize, keep making sure that the core portfolio remains stable, generating stable cash flows. So we intervene and we intervene quickly and we do what is necessary. The city of Cape Town has a dual tariff system, a winter tariff and summer tariff. The first 6 months of the year generally is the more punitive to us as property owners. So, we're absorbing that winter tariff in the first 6 months of the year, and then there will be a normalization of that tariff through the balance of the year. And finally, insurance and SSR on a forward-looking basis. The part of insurance providers is becoming smaller and smaller in South Africa. So the pricing challenges in terms of cover costs and SAR costs have increased higher than what we expected. But we do believe that we've put measures in place where we can cut other costs within our business to absorb those increases over the course of the year. But I do think this is an issue that will face every single property owner in South Africa going forward. In terms of our portfolio indicators, our year-to-date occupancy has increased to 95%, and that is really for us, something to be extremely proud of. One of the hallmarks of our business since inception has been that we've always operated with a high occupancy rate. From the end of the FY '24 year to the half year, we've increased our portfolio occupancy rate by 200 basis points. Our occupied GLA is 385,730 square meters. And we probably pose one of the best in-force escalation rates in the country at around 7.47%. And on a diversified portfolio, our WALE 26 months, which typically we don't necessarily see that as a threat. We actually see it as an opportunity to be able to asset manage shorter-dated leases to better escalation rates and possibly turn those into longer-term leases. In terms of rent reversions, we've seen on a year-to-date basis for the year, a positive 5.35% rental reversion. I'll touch on that in more detail in the letting activity slide, which is incredibly positive for us as we've seen net gains across the sub-sectoral performance for the year. We've renewed and relet in excess of 63,000 square meters. What's significant about this number is that this has been achieved in the first half of the year. On an annualized basis, we have about 18% of the portfolio that comes up for renewal and relet every year. This is effectively almost 16% of the work has already been done, and we're already now working on kind of achieving the next financial year's targets. Then in terms of collections, robust collection profile of just over 98%. In an environment where economic growth is under pressure and cost creep is an issue, tenants are not immune from that. And there have been a couple of outliers where we've had to kind of manage the situation, but we're very comfortable that we've managed it appropriately and delivered a very acceptable collection rate on a year-to-date basis. In terms of acquisition growth, you would have seen on SENS yesterday that we took transfer of all of the Emira assets yesterday. I want to just also commend our team and also our suppliers. We took transfer ahead of schedule. Anticipated transfer date was around December. There was also a price escalation condition in the sale, which we managed to mitigate quite a large portion of given that we took transfer earlier than anticipated, which I think is a huge benefit to Spear and to our stakeholders. We've been quite active in getting involved into that portfolio. Just a quick recap, 93,000 the Emira portfolio that we've acquired, 93,500 square meters of GLA, diversified good quality, great location assets, industrial, medical, retail and commercial, all-in well-established nodes and coming into the portfolio at probably a 1% vacancy rate. So, I think that will just really slot very nicely into the Spear portfolio. And we're also joined today here by our new asset manager, Simon Reilly. So, welcome to the family, Simon. Simon had looked after the Emira portfolio that we've acquired for the last 20 years. So there's a lot of institutional knowledge that comes over to Spear, which we're grateful for. So, we look forward to a fantastic journey with you. We've also been busy on the capital recycling front, preparing for this new acquisition. We disposed of the Liberty Life Building just up the road to Capitec Bank for R400 million. That closed in the first quarter of this year. We also disposed of 142 Edward Street, R43 million in Tyger Valley. The net proceeds between the two, we utilized towards our cash pot for the Emira transaction, about R160 million. And, on Tuesday, we went unconditional with the disposal of 100 Fairways with the Competition Commission approving the disposal of R160 million to the City of Cape Town. So, all of this has aggregated the cash pot towards the redeployment of that capital. And also, to note that 100 Fairways, there was zero debt drawn against that asset. So the full proceeds will be redeployed. Christiaan will deal with the financial summaries, but just to touch on the balance sheet just quickly. We have a 23.9% loan-to-value for the period. As Christiaan will talk about later that will start to kind of tick up a little bit with the implementation of the Emira portfolio. Our hedge ratio equally 90.45% and our interest cover ratio at the period was around 3x. In terms of sustainability, I mentioned earlier that Spear has gone quite long into PV solar. We adopt a people, planet profit approach, and we believe that we can leverage off of the roof spaces of the properties we own to create value. And that would typically be, call it, non-kind of fixed income because it's obviously based upon performance. One new installation plus two new site expansions were completed. Spear is now approximately 60% of the portfolio is covered in PV solar. All the systems are grid tied, and we took a decision to not invest into batteries for two particular reasons. The one is that the City of Cape Town operates generally at two levels below the national loadshedding schedule once and if loadshedding takes place. And secondly, because the City of Cape Town will be finalizing their second dispatchable power tender for implementation within the next 12 to 18 months, which means that between Stage 1 and Stage 4, if it ever has to come back, Cape Town will be free of loadshedding. And at this reporting period, 93% of our assets are supplied from electricity supplied by the City of Cape Town. So, those were some of the rationales as to why we didn't go down the battery route. 25% of our energy is supplied by PV solar. The Emira portfolio we've taken on, we'll scale an additional 1.5 megawatts of PV solar onto those assets because none of those assets have got PV solar, and they'll form part of our three-pronged solar strategy. Some might be CapEx, some might be roof rentals and some might be installment sales. So, we're still targeting three wheeling projects at this stage. The City of Cape Town has not officially implemented a wholesale commercially operational wheeling regime. So they're still in pilot phase. And we do anticipate that we will slip stream into that commercial viability once it's implemented. In terms of our development growth, in the industrial, we've got two opportunities that we are working on at the moment. One is in George, the development of GTX Park right next to the George Airport. We are at the back end of our civils infrastructure at the moment. We're just waiting for a couple of rubber stamps to come through from AXA, but we should be in the ground on top structures by the end of the first quarter next year. That is 30,000 square meters. It's made up of eight different sites ranging from, say, 300 square meters mini units to a 10,000 square meter warehouse. And the second is the expansion of our Bravo Park. It's on land that we already own, which is great for a development feasibility because there's a zero land cost imputed into that development feasibility. We intend to extend the park by about 7,000 square meters, and that is tenant driven. So it's not speculative. We're currently busy with our plan approval with the City of Cape Town so that when we do secure a tenant, we can shorten the period between build time and occupancy time. So, moving on to the corporate performance. Spear has remained a very strong total return performer for shareholders, both in the half year, in the 12 months to end of August as well as over a 3-year period. We've delivered a 17.2% total return too in the half year. We've also seen a marked improvement in our liquidity. In September, the JSE upgraded Spear to a ZA002 status. That means that we're trading north of R30 million of shares per month. Now we've been on a liquidity journey for a couple of years as we've transformed our register from predominantly kind of private client held to more institutionally held. And just given the fact that Spear's investment case of being Western Cape only focused. We've also attracted institutional support more on an off-benchmark basis, which we believe they've been generously rewarded for the investment into Spear. We've traded for the half year, ZAR 167 million worth of shares, about ZAR 19.2 million in volume. When you're a small to medium cap, it is tough out there from a liquidity perspective, but we believe that if we just keep focusing on the right building blocks, building the income statement, building the right quality assets and just doing the basics continuously well, we'll start to attract more and more retail investors and obviously more and more institutional investors. So moving on to our salient details. Just bearing in mind that as of yesterday, this slide has increased from 27 assets to 40 assets, but we'll talk about the half year. Spear owns 27 high-quality Western Cape assets valued at about ZAR 4.22 billion. We have seen a decline in portfolio value by just under 9% for the period, which is directly related to the disposals I mentioned earlier of Liberty Life and 142 Edward Street. Our average property value is ZAR 153.8 million, and our average value per square meter is about ZAR 10,233 per square meter. In my opinion, I think it's a very compelling investment proposition for any investor that's seeking indirect real estate exposure to the Western Cape at an entry point of ZAR 10,200 a square meter. That's well below replacement cost of any of the sub sectoral assets that we invest into. Our average in-force escalation of 7.47%, portfolio GLA at 405,709 square meters. Occupancy, as I mentioned, at just over 95% and improving our WALE at 26 months. Our average rental rate per square meter, 100 a square meter, which includes rates and taxes. Then on the collection front, as I mentioned, very strong. We have a superb debtor's team, never say dire debtors' team, always going for it, which obviously has resulted in a strong collection profile. On industrial, we collected 97% of our rent. On commercial, 98% and on retail, 95%. So, having a look at the financial snapshot, for the half year, we've announced a distributable income per share growth of 2.05% compared to the prior financial period and a distribution per share growth of 3.14% for the period. That translates to around ZAR 0.4161 of DIPS and ZAR 0.3953 DPS. Our payout ratio has been maintained at 95%, Christiaan will touch on what it was prior in his section of the presentation. Cost-to-income ratio at 45.76%, slightly higher than what we'd like to be, but it's probably contributed with the disposal of the one large asset prior to the take on of the Emira portfolio. We've maintained a very good overhead cost structure, cost-to-income ratio. We try and maintain between 5.5% and sub-6% as best possible. Then our TNAV is ZAR 11.74 per share. There's been a marginal decrease as a result of the shares for cash issue and CSPs, but it's very marginal compared to the prior financial year of ZAR 11.79. Our TNAV, which is deducting the distribution is ZAR 11.34. Very strong balance sheet, 23.93% loan-to-value. Our fixed debt ratio as we prepared for the take on of the new portfolio, 90.45%. Our average debt expiry is 25 months with an average cost of debt around 9.43%, average cost of fixed debt at 9.08% and our average cost of variable debt at 10.12%. I'm now going to hand over to Christiaan to take us through the financial performance.

Good morning, everyone. Thank you for being here again. Some of this will be repetitive, but as always, it's worth repeating. Quintin did say I'll be brief, but I'll try and slow down today, I promise. Looking at our income statement and the balance sheet for the year, we purely focused on our core portfolio and strengthening our balance sheet in anticipation for Emira. So it might look a bit like it was static for the period, especially on the balance sheet, but there was a lot of focus placing on strengthening towards the acquisition of Emira. So, you will see on the income statement, our total revenue grew by 6.34%, excluding smoothing. Now, if you look at the contractual rental income, it was only 1.9%, but that's purely because of the disposal of the Liberty Life Building as well as 142 Edward. On a like-for-like basis, it actually increased by 9.54%, which is extremely strong. And that just shows you the strength of the in-force escalations together with the significant reduction in vacancies in the interim period. Again, our NOI, excluding Swing grew by 1.92% on a like-for-like basis, 9.48%, again, showing the work that is done on the core portfolio, anticipating the strength and growth coming forward from the Emira portfolio. Now, OpEx increased by 13.64%. This does look high, but look at the tenant recoveries line, which is well increased by 18%. The majority of the OpEx sits in your council utilities. Our interim period is always laden with 3 months of period of winter tariff in the city of Cape Town, and that's why we pay for that privilege to have a lower load shedding levels and consistent power supply. That is the cover from tenants. It does increase the cost of occupancy, but we ensure that we recover the majority of it. The spread between the 18% and the 13% is made up from the fact that we have a very large solar portfolio. Now, your solar generation is significantly cheaper than what you can do from Council. So there's always a margin within that, and that gives you the spread between the 18% and 13%. Some other factors within the 13% is your rates and taxes. In the prior corresponding period in July, the city of Cape Town did a significant revaluation of the rent roll, and they increased the valuation by 16%. Now the prior corresponding period where there was 2 months of that. This year, there was 6 months of that number, which we had to absorb against another major increase. Quintin did touch on this period of storm damage we had in R&M. So we had to absorb those. We did majority of the work. And, again, that is not repetitive. We said so last year. And, yes, the storms are even worse this year with stronger wins. But again, we had sufficient R&M budgets to absorb these still giving us growth within the financial year, which we're very pleased about. Then looking at our administrative cost to expenses, was 7.3%, which is in line with the staff increase we provided, which was just slightly above inflation for the prior financial year. You will also note that in the current financial year, our interest bill was 20% down from the prior period. That is directly from settlement of gross debt after disposal of Liberty Life and 142 Edward again, anticipating the transfer of the Emira assets, strengthening our balance sheet. This is a snapshot of the SA REIT funds from operations. Again, I think this is testament to the fact that we are a clean property play. There's no strange of funding in these numbers. These are purely income generated from property operations. The only difference to the prior period to this period is the inclusion of antecedent dividend relating to the share for cash placement we did in August of 2024, which you will see there is ZAR 2.74 million. Quintin touched on the dividend growth. We had DIPS of ZAR 0.4161 per share, 2.05% growth. Interesting little fact, this number, we had a slight delay in concluding a transaction with the city of Cape Town 500 Fairways. If that was anticipated when we wanted, that number could have been upwards of 6% in terms of our growth. So, it's a fantastic sale for the business. We anticipated we are in a prior end of year, we had a structural vacancy, which we had to utilize because the city wants to occupy the building in full, which they now have post the signing of the sale agreement. After applying a 95% payout ratio, we are declaring a dividend of ZAR 0.3953, which is 3.14% increase from the prior corresponding period. The reason for the higher growth in DPS and DIPS is in the prior period, we had 94% payout. This period was 95% payout period. You will note that we had ZAR 111 million of funds from operations, and that is all sustained by free cash flow, and we can pay it without having to draw down any reserves or any undrawn facilities. That is purely from property operations. Again, our balance sheet looks like it was fairly static for the period, but it was in anticipation for acquisitions of ZAR 1 billion of assets. The only outline items here is investments into held for sale, which is 2 assets, 100 Fairways, which we announced as being unconditional earlier in the week, and up is our greater units, which has been lodged as of this morning and should transfer in the next few days out of the investment properties held for sale will be 0. Our noncontrolling interest did not change. It still relates to a small minority partnership in our George development. And then you will note, our current liabilities at ZAR 274 million is an item we already have worked on. It's only due for renewal in the next year, August 2025, and there's no refinancing risk and the number, by the year-end, that should be renewed and will be gone from the balance sheet and be under current. In the period, as Quintin mentioned, some of these numbers now, given the management's already at October. Some of these numbers do look old to us. Our shares in issue is already significantly more than this. But at this period end, we had ZAR 289 million of gross shares, ZAR 22 million of treasury shares and our net shares was ZAR 267 million. Our TNAV bridge was fairly static for the period. We started at ZAR 11.78, and we ended at ZAR 11.74. The only difference and the small difference in the prior periods, which we have reported is the share for cash issue, which had a small dilution number on our TNAV. But as management has shown in the past, we have the ability to asset manage and find value and increase our TNAV quickly back to the normal it previously was. So, we don't anticipate that would be a long drawdown in the future. LTV sensitivity is obviously the biggest topic of discussion post the Emira transaction. And in the year, we set out that the strategic events that in the next 12 months. Bearing in mind, this is the start of August, looking 12 months forward some of these transactions now actually occurred quicker than we anticipated like the Emira transaction. 23.93% as of 31 August, we concluded a ZAR 457 million vendor placement in September that will be utilized for the Emira transaction. The property disposal, which is 3.36% is the 100 Fairways transaction, which we anticipate to conclude within the next 2 to 3 months, depending on how quickly the transfer process goes through the City of Cape Town to its office. We have an interim dividend payment, which is coming up in November, and then the Emira asset acquisition, which increased the LTV purely for the fact that the vendor placement money was placed into cash reserves and will be drawn back out of cash reserves as well as taking up some new facilities for the bonds. The balance of the items is standard in prior financial years and a prospective disposal, we will announce as soon as the information is there for the market, but we are working on some small deals that will be disposed in the near future. After concluding all these transactions, we still anticipate our LTV to be only 31.26%, which is well below our strategic band of 38% to 43%. Given that we're still in a high interest rate environment, yes, the tapering cycle has started, but this is still a very good protection mechanism in terms of our ICR cover as well as giving us scope to grow in the future if we find suitable acquisitions in the market. Then just looking at total net debt at the end of the period was ZAR 1.01 billion, of which 90.45% is hedged. Our all-in cost of fixed debt is 9.08% with an average maturity of 20 months. Our variable debt is at 10.12% with an average maturity of 24 months. These numbers are prior to the cut in September. So, these all compressed slightly, specifically the variable debt that we provided the market with our maturity profile for our fixed debt with the majority of our fixed debt only expiring in FY '27. Again, 90.45% is above our strategic band of fixed debt of 65% to 75%. By the end of the year, that number would have normalized back within that region as we have done all this hedging in anticipation for the Emira transaction to make sure we take advantage as earlier in the year when the rate cut cycle took place, fixes, and swaps was very lucrative, and we actually entered into quite a few to make sure we are ready for the Emira transaction. Then we spoke about our LTV and our ICR, but maybe just some future in terms of what our covenant is 50% and 2x is our strictest covenants. Our LTV, we've spoke about, and we know this will settle around plus/minus 31%, which is still well below our strictest cover in terms of LTV. ICR is currently 3.01x for the past 6 months. But post the Emira transaction, we do anticipate that this will settle towards 2.7 to 2.8x, which is still, I think, a very strong ICR in the high-interest rate environment as well as being far above our covenants. So, we don't see any risk in this. And we have settled a significant amount of debt and the vendor placement we did was accretive to the fund, meaning we have to draw on less of our undrawn facilities, and we had to utilize those funds, which is accretive for the Emira transaction, meaning all of these numbers will just be supported in the next 6 months towards the end of the financial year. So, that was my brief representation.

Excellent, as always. Thank you, Christiaan. Great. So we'll just delve into the portfolio overview. I think just something that really stood out for me when preparing for this presentation was that, as a management team, we set out about 24 months ago, where we wanted to start creating an equalization effect between commercial value and industrial value as well as commercial revenue and industrial revenue as another kind of risk mitigant with regard to having too much of our eggs in one particular basket. So, maybe this slide just depicts the work that we've done in creating that equalization effect between industrial and retail. Of the ZAR 4.2 billion worth of assets, 42% in valuation form part of the office portfolio, 39% the industrial portfolio, 18% our retail portfolio, and 1%, which is the development land that we own. Now we are within the context of our investment strategy, slightly below where we'd like to be in terms of retail, but we are value investors, so we don't like to overpay. And in the current environment, retail opportunities are slightly on the expensive side. In terms of revenue contribution for the period, of the ZAR 307 million of revenue, the contribution was split between 43% of commercial, 41% industrial. Again, just talking about the equalization and 16% retail. In terms of our GLA, 26% of our GLA is commercial offices, 62% industrial, which has been the cornerstone of our portfolio. And the great thing about having a multi-let and multi-asset type industrial portfolio is that the lords only made so much land. And given the demand within the Cape, in particular, for industrial, we've really been able to offer a solution for almost every type of industrial user from logistics to warehousing to urban logistics to small, medium, and large plus manufacturing operators. In terms of the portfolio breakdown in terms of assets, 27 assets in the half year, 12 office assets, 9 industrial assets, and 6 retail assets. And then talking about occupancy, 95% and really the standout because we've always had really good stability on high occupancy rates in industrial and retail. But the office portfolio as the return to office momentum just continues to accelerate at 91%, which was around 84% at the end of FY '24, which we are very pleased with our letting team how well they've done. And just granularizing that, industrial portfolio makes about ZAR 1.6 billion of the Spear total valuation, 252,000 square meters, 97% occupancy, and contributed ZAR 124 million of revenue. And, as I said, that's made up and logistics, urban logistics, and manufacturing. There are a couple of other subsectors that fall beneath those, call it, headings, as I've mentioned a few seconds ago. Then in terms of commercial, one thing to point out here on the ZAR 1.7 billion of assets is that if you have a look at the nodal location of the vast majority of Spear's assets, they're all in well-established nodes, which have all benefited from the return to office momentum. As you can see from an occupancy perspective, 90%, 85%, 100%. We have seen a slower take-up in wood stock, but we do believe that should start to also rising tides will lift all ships, and we think that will start to also take care of itself over the near term, in terms of revenue contribution, about ZAR 132 million of contribution to revenue for the period. In terms of retail, it is still a small part of our business in relative terms. We'd like to grow this, as I've mentioned. And we're also just biding our time for the right entry point in terms of valuation metrics and also not having a dilutionary effect on the overall portfolio. Valuation at ZAR 740 million contributed almost ZAR 51 million to the revenue for the period but also has maintained very strong occupancy rates as Spear only invests predominantly in convenience retail, which has been in both the bull and the bear market, a really strong performer. One of my favorite slides really does show what we are. We're a glorified leasing operation. That's really what we are. We let space for a living. And as long as we can let space and get the growth out of that reletting, we'll continue to do well. And if you can have a look at this in the period end, just 61,000 square meters came up for renewal and relet. We created a net gain. We let 63,164 square meters, which created a core portfolio positive rental reversion of 5.35%. Yes, we have got some laggards in the office segment of the portfolio but in my experience, this is effectively a picture of a space in time. One has to look at it on an annualized basis to really get a good feel but we've seen gains being made in the office sector. Industrial, that slight reversion was driven by one vacancy, which is on the cusp of being filled in Blackheath Park. And obviously, retail performed strongly at a positive 6.98% positive reversion. Now, the 7,300 square meters, which was taken up by the city of Cape Town once the sale agreement was signed was effective from July. So, the contribution would be mostly felt in the second 6 months of the year. So, having a look at the vacancy profile. Another really standout for me here was this particular augmentation of the portfolio vacancies. We've seen in terms of commercial, a 10,000 square meter reduction in commercial vacancies from end of FY '24 to the reporting period. We have a 4.92% vacancy rate, just under 20,000 square meters of GLA. We also boast a really strong composition of good quality tenants, large nationals, smaller national tenants, listed international tenants, and vacancy rate of just, we've rounded the number, but it's under 5%. I prefer the lower number. Then just to have a look on a more granular basis, how each subsector has performed. We're very happy with just the overall performance. I think on the retail front, we'll continue to see strong performance out of our convenience retail and destination retail portfolio. Convenience retail will be boosted by the introduction of the 2-part system because typically, the ZAR 20-odd billion that's been withdrawn already would find its way into the retail segment. The portfolio is underpinned by 41% nationals, which does also reduce the credit risk. But on an occupancy basis, on a collection basis, all kind of mid-90 percentile and growing. And in-force escalations also continue to maintain a lot of strength. Within the commercial portfolio, as I mentioned, occupancies have increased to just on 91%. Collections have been strong at 98%, reversions slightly negative by 2%, but in-force escalations equally across the board remaining strong. The letting activity has not just been seen within our portfolio. Many of our peers have equally reported a rise in demand for Cape Town office space. There's many corporates that have instructed their staff to return back to the office. So, we do anticipate that demand or trend of growth to be maintained. All of our large occupier spaces have been let. We do not have any large occupier spaces at all available in our portfolio. 100 Fairways is fully let and #2 Long Street at FY '24 year-end had a 78% occupancy rate. Today, it's got a 91% occupancy rate after some stellar letting initiatives by our leasing team. And on the industrial, always a strong performer. We own great assets in great locations that really are versatile assets that coupled with the type of assets we own are park-like assets. So, all of our large industrial assets have got a spear representative based on site, and there's that quick hands-on active asset management approach that really comes through on every level of our business. The strongest in-force escalation rate that we have in the portfolio is within industrial, and we're looking forward to adding the George development and the expansion of Bravo Park to the industrial portfolio. Then just to look at the general business update. The environment does remain challenging. There are quite a few headwinds that still face South Africa. We have challenges from unemployment perspective, service delivery. However, the Western Cape is slightly insulated from that. The GNU will be a great thing for business going forward. We trust and pray that they can hold it together and really deliver on the objectives that they've set out. But as I stand here today, I'm very pleased to report that the core portfolio is performing exceptionally well. We are very blessed with great staff and people that really have taken ownership over their roles within our business, and that really will also propel the business going forward. As I said, office leasing momentum continues to be strong. And we will continue to implement our PV solar strategy. We think that the business case from a return perspective does justify really kind of going long on PV solar. We'll see another ZAR 20 million invested into PV solar within the Emira portfolio, which should generate mid-teen returns for Spear. And we believe that there are still within the portfolio embedded bulk opportunities where we can unlock development growth, NAV growth for shareholders as we continue on our journey. From our Lease Expiry Profile perspective, you'll recall earlier on in the presentation, I mentioned that we achieved about 16% of our renewals and relets done already for the year. This chart just shows you that we have a very stable 18% of the portfolio is coming up for renewal and relet on an annualized basis. And we don't see any risk in the near term of any major tenants not renewing their leases. On that front, I'll hand over to Kim to take us through the investment components.

Thanks very much, Quintin. Good morning, everyone. As Quintin mentioned, I am Kim Pfaff-Karg. I'm the Chief Investment Officer at Spear. However, before I begin, I'm going to briefly reiterate our investment strategy. Firstly, we only invest in the Western Cape. This is a strategy that has worked well for us, and it's something that we will continue to do. We are a diversified fund comprising industrial, retail, and office assets. However, we aim to consistently have an industrial and a retail bias, both in terms of gross lettable area and in terms of value. Our minimum asset size is R100 million, unless an acquisition is particularly strategic or where we see immediate upside or development potential. Our emphasis will always be on quality over quantity. We will only grow the fund with assets that meet our strict investment criteria. For us, less is more. Across the portfolio, we currently have around 150,000 square meters of unutilized bulk, which we plan to unlock as and when market conditions are conducive. And finally, we intend to patiently grow our fund, which is presently at around ZAR 5.3 billion after the Emira portfolio has transferred to a meaningful mid-cap sized fund in the region of ZAR 15 billion. And that is essentially our investment strategy in a nutshell. Moving on to our development growth. The first property is GTX Park in George. We have made significant progress on this greenfield development opportunity in George, which is located directly opposite the airport. As you can see from the slides on either side, bulk infrastructure works are currently underway and almost complete. We spent approximately to date, ZAR 14 million on servicing the site and to various road upgrades. We will be ready to commence with construction in the first quarter of 2025. Our total rights over the site is approximately 30,000 square meters where we can develop modern light industrial warehousing, and we will be developing this park in phases. The unit sizes can vary between 300 square meters up to 10,000 square meters for a single user if needed. We are now in a much better position to conclude our leasing inquiries now that potential tenants can visualize the park-like environment. The full development cost, including the land, is estimated to be around ZAR 400 million. Bravo Park, Blackheath, this is the extension that Quintin was talking about, at one of our existing industrial facilities known as Blackheath Park or Bravo Park, there's a vacant piece of land where we can develop for a 7,000 square meter industrial user. This development will be tenant-driven and is estimated to cost around ZAR 66.5 million. We will be targeting an initial yield of around 10% on this development, which is fairly attractive, but that is given that the land cost is effectively in at a nil cost to company for us. Given the strong demand for industrial accommodation in the Western Cape and particularly in industrial or well-located industrial areas, we believe it will not be long before we secure a suitable user. Marine Place, Paarden Eiland. Marine Place is a substantial development opportunity for Spear. It comprises 3 of our assets that are contiguously located in Marine Drive, Paarden Eiland being 28 to 32 Marine Drive. The sites are ideal for mixed-use development, and they benefit, as you can see on the slides, from uninterrupted ocean views. Across these 3 sites, we have approved rights for around 52,000 square meters and the envisaged design will have a strong residential bias comprising 3 residential towers above an extended retail ground floor component with light modern industrial units to the rear along Shropshire Road. The estimated total development cost for the entire development is about ZAR 1.4 billion, which we will develop in phases, most likely with a partner or partners. With the recent success of the Rawson Residential development known as Maritime Place, very similar name to ours, we may have to look for a new name, but that is very close to our site just down the road, and we believe now the timing is right to launch our scheme. And as such, we are in advanced discussions with a best-in-class residential developer to JV with us on the first phase of this project. Moving on to our property valuations. When comparing the interim results to that of 6 months prior, the total value of our portfolio, excluding land on a like-for-like basis has increased by R17 million, representing a marginal uplift of 0.41%. At our interim reporting period, all of the properties are valued by me and qualified by our Executive Committee. For those of you who do not know, I am a registered qualified professional valuer. We do not have too much to report in terms of our valuations this reporting period other than the number of assets, which has declined from 29 to 27. And as Quintin mentioned and Christiaan, that is because we have sold 2 of our office assets. Looking at the average rate per value and the average value per property of the office sector, you will notice that it has declined slightly. That is because of the sale of the Liberty Life Building, which is one of our larger or was one of our larger and higher value assets, office assets. However, in absolute terms, each of the sectors being industrial, office and retail, they have all increased with industrial sector continuing to lead the way. It is also the second reporting period where we have seen an uplift, albeit marginal in the office sector with a notable improvement in the office occupancy rate. Having a look at the average rate per square meter, you'll see industrial is at around ZAR 6,500 a square meter, offices at almost ZAR 17,000 a square meter and retail at ZAR 15,500 a square meter. All of these values remain conservative. They're within market-related parameters for similar quality assets in the Western Cape. What is important to note in our valuations, and I mentioned this every reporting period, is that unlike many or the majority of REITs, we do not value any additional bulk. And, as we mentioned, we have around 150,000 square meters of bulk in the portfolio, which represents considerable upside for us as and when we choose to develop this bulk. Acquisitions and disposals, Quintin did touch on this. I'll just go through it very briefly. We sold the Liberty Life Building for ZAR 400 million to Capitec Bank, which was an owner-occupier and then the 142 Edward Street, which is a small noncore commercial assets in Tiger Valley, which we sold for ZAR 43 million to a private investor. Further, we sold 100 Fairways, but it has not as yet transferred. As Quintin said, we got Com-Com approval this week, and we expect this property to transfer in January this year. Anecdotally speaking, this is very much a trend that we are seeing in the office industry where financially strong businesses are choosing rather to buy their own assets as opposed to rent them, which is really positive for the office sector. Last but not least is the acquisitions. As Quintin mentioned, we scaled up significantly this week, taking transfer of the 13 Emira Property Fund assets, which are all in Cape Town in the Western Cape. The total portfolio purchase price is ZAR 1.146 billion, and we anticipate an effective initial yield of 10% for the first year. The total gross lettable area of the portfolio is 93,500 square meters. This portfolio of properties is well aligned with Spear's core portfolio, having a similar composition and comprising well-located, good quality assets. The last slide for me is the post-balance sheet activity. The intention of this slide is to show what our portfolio will look like post the implementation of the Emira portfolio and the disposal of the Fairways closed property in Para. So, as you can see, our portfolio will sit at around ZAR 5.2 billion, of which 42% of that will be offices, 39% industrial, 18% retail and 1% development, very much moving to what we would like the portfolio to look like in terms of the composition, having a retail and industrial bias. And, in terms of the gross lettable area, we'll just be shy of 0.5 billion square meters, of which, as you can see, the lion's share, 61% being industrial, 25% offices and 14% retail. Thank you very much.

Thank you so much, Kim. All right. Just to go through our ESG strategy and where we're at. As I mentioned, we adopt a people, planet profit approach. And we started our PV solar journey in 2018 with a 297-kilowatt peak system and have significantly on an annualized basis, seen the benefit both from a placing less reliance on fossil fuel generated supply, but also on the mitigation of the NERSA tariffs that would increase on a higher than what the general consumer could absorb. And we saw the opportunity to obviously monetize roof area within our portfolio going forward. As I mentioned, we've adopted a 3-pronged approach, a CapEx model where we'll invest into the full system and we'll own the system. And we have a roof rental model where we'll sign 25-year roof rental agreements, which will create an additional income statement opportunity for Spear. The roof rental tenant effectively takes care of all the CapEx, all the installation, all the insurance, and we effectively unlock that additional cash flow into our portfolio. And the third option is the finance option where we then couple an infrastructure fund type of investment partner to fund the installment sales structure as we've done on a few of our properties. Currently, we have around 60% of our portfolio covered in PV panels, PV solar. As of yesterday, the 2 expansion sites, so we have 16 properties with PV solar, 2 of which we've recently expanded. Those were actually completed yesterday. So, effectively, we're generating around almost 8 megawatts of power generation capacity within our portfolio. And also, as I mentioned earlier, 25% of our power is currently being supplied by the PV solar portfolio. So, we can see there's a strong investment case. There's a social and environmental case to be made. And also, we've partnered with the right partners that we paddle the same Canoe. They deliver on time. And we believe that every investment we make, there is a PV solar opportunity. We'll obviously bring that in similar to what we're doing on the Emira portfolio. These stats obviously exclude the impact of the Emira portfolio. As I mentioned, that 7.9 megawatt will effectively increase by another 1.5 megawatt, and that also excludes the wheeling feasibilities we're looking at in addition to 2 new projects, 1 in Black Heath and actually 2 in Black Heath, the 2 properties right next to each other. So, we'll continue to do that. And I think also just topical right now is obviously the water challenges in Gauteng. We did learn from day 0 in 2019. And just for the avoidance of doubt, we have got a variety of our sites that have got water augmentation solutions, bulk storage facilities as well as gray water systems that do have a bit of a mechanism to provide water in the event of Cape Town ever suffering again under the pressure that we did in day 0. Then just having a look at the outlook. I do believe that our future will be better than our past. And I think that I've said this a few times today, but I really am a patriot, and I believe that we have to do our part to support the government of National Unity, the Western Cape provincial government. I do think that all of these things will continue to be good for business as the public and the private partnership really comes full circle. We do remain as a business well placed to benefit from the consistent geographical shift in property fundamentals that have taken place in South Africa. I think that we can see that in the contraction of the unemployment rate within the province. We can see that in terms of the semigration numbers as well as the good governance, the clean audits coming through. And it's important because, as Kim mentioned, we strategically don't have a target to get to a specific fund size. But we want to become a meaningful investor and continue to be a meaningful investor within the province and with the concentration within the metro. And that means when we're doing new developments, we need to be able to rely on the fact that the city of Cape Town will deliver the bulk infrastructure that we pay for, the sewer services, et cetera, et cetera. And I think that the Western Cape from a governance perspective, has certainly shown that they can cut the mustard on that front. I do believe that cost creep will still remain somewhat of a growth inhibitor. There are factors that are really outside of our control in terms of costs. Nothing in real estate is passive. Things break, things need to be replaced. We do budget very carefully from a CapEx and capital replacement perspective. But we do think that there will be a little bit of inhibited in the short term as finance costs start to ease off but the insurance and SA challenges do still remain a bit of a challenge. I think just the load shedding story is really positive. It allows our PV solar systems to really perform well, and it just gives people a greater sense of optimism. Where will we focus? We'll still, as Kim mentioned, we'll focus on owning high-quality assets in great locations. We'll still focus only on the Western Cape with a bias towards industrial and retail. And we'll maintain our kind of focus on high occupancy rates. For us, losing a tenant, we take it quite personally, and we do what we can to retain them into the long term. Then just having a look at our guidance, given what's available at this point in time, we do anticipate to grow our distributable income per share on an annualized basis by between 2% and 4% versus the prior financial period. There is a couple of, I wouldn't say get our gel-free cards, but there are qualifications to that, which are pretty self-explanatory, but we do think that they are very low-risk qualifications. We'll maintain a 95% payout ratio. We believe that, that optimally does service the needs of the portfolio. As you would have seen in Christiaan FFO reconciliation, we don't add back amortization or depreciation to our distributions. So, that provides an additional buffer of margin of safety within that 95% payout ratio. Any changes to these assumptions would obviously potentially impact our forecast, but we believe that it is achievable. And we are, as I mentioned, in a season of growth for the underlying business. Other than that, this brings us to the end of the presentation. We are grateful that you made the time to be with us today, and thank you for your ongoing support. We'll take some questions straight afterwards. Thank you. Assuming there are questions.

Okay. Anything online? No, I think we can go straight, go for it.

Just a quick one on the offices. Obviously, it's a big change in the vacancy, sub-10% now. Can you underwrite that to be sort of stable vacancy? Where do you think that stabilizes considering the big move from the previous results?

Yes. So I think on a kind of average basis, anything from 5% to 7% is something that you typically want to kind of have a bit of churn in the portfolio to be able to generate a bit of upside every now and then. But typically, we'd love even lower vacancy rate. But that is typically where we think it would probably end up kind of stabilizing. As Christiaan mentioned, the high vacancy rate was a structural event that timing with regard to disposing any asset to a government organization or quasi-government organization. Unfortunately, their timelines are very different to the private sector, and we needed to make sure that we complied with all of their requirements, which obviously had a short-term impact.

Just another question. Just in your opening remarks, you said that you positioned the portfolio now well for real growth in 2026 financial year. Can you give us any more information around that or some clarity or some?

Well, listen, I think we are seeing a kind of declining inflationary environment, which should bode well for potential interest rate cuts coming through in November, which means that finance costs would obviously contract. If we look at the letting activity that the team has done post half year, that vacancy rate has now dropped between 4.3% and 4.5%, which, again, all of that just drops to the bottom line because effectively, every square meter that we let, we've covered all the op costs. We've covered all the finance costs is effectively net profit that we're leaving on the table. So, I think if you refer to the most recent anchor as elicit property outlook, I think that obviously the forecast there it's a tall order for us as a team, but we don't back off from a challenge. So, maybe have a look at that. I'm reluctant to give anything concrete now, but I think we'll focus on delivering the growth objectives for this particular financial year, and the plan is always to build on it from there.

Just one, maybe if you can give a bit of an update on the Emira portfolio in terms of how vacancies have changed since the last time you gave us any information on that portfolio. And then I think, Kim, you've done the valuations for the half year. Like-for-like rental growth has been strong. Vacancies came down quite sharply, but you didn't change the valuations much. Maybe if you can give us some color on that and what do you think will happen at the full year to valuations? And also just put that in context with City of Cape Town pushing up valuation 16%, I think you mentioned. Okay. And that's not based on valuations. That's their own valuations. And what sort of pushback or impact you can have at the City of Cape Town on those valuations and therefore, on rates and taxes.

Yes. So maybe just when we announced the Emira transaction, the vacancy rate was approximately 4.6% the pickup in letting activity was very strong across the asset types. The studios as an example, we managed to retenant a vacancy prior to transfer. We did play a bit of an interim management kind of oversight role in conjunction with Simon and his team. And another property North point had a 3,000 square meter vacancy that has subsequently been filled by a fruit export packaging company. So, we've seen that kind of contraction come through. And obviously, that's going to bode well. So that portfolio vacancy, as I mentioned, is probably coming in between probably about 1% into the Spear portfolio as of yesterday. And then maybe just, do you want to chat about the valuations?

Sure. So, when I value the properties, all of the properties together, at least they compared all on one baseline. So generally, what I did see this around or this interim period is that the income is growing about 2%, 3% really depends. That's quite general. It depends on the sector and it depends on the property. But what I do in my calculations is going forward with the market rentals, I'm very conservative. So, I allow for a little bit, so you generally do see at our full year where we have a third-party value, you do see the growth coming through there. So, I'd rather be more conservative at this reporting period.

And maybe just a bit more nuance to the Emira portfolio. I think when acquiring a portfolio of assets, there's kind of ups and downs in terms of the valuation. And both ourselves and Emira obviously wanted the transaction to take place for 2 very different reasons, but we were both committed to making it happen. And it would have been very difficult for Emira to exit piecemeal assets, particular office assets because the trading environment was a little bit more tougher when we started the negotiation through the due diligence. Times have changed a little bit up to now. But in those overs and unders, acquiring the portfolio at about 9.5% portfolio yield, there are pockets of value that we believe that we've created and that's been created as an acquisition. So, we don't always believe that you create value when you sell an asset. We've gone into this transaction believing that we can create the value in the way that we've purchased the assets. And we do think that there are some future fair value upsides based upon the cash flows that are kind of generated out of that portfolio.

And can I just clarify on the municipal valuations. So, every 4 years, the municipalities, the actual valuation of the asset is revalued. So, Cape Town was revalued this year. So, you would have seen even if you own houses or any properties in the city of Cape Town, the actual base value changed. Then what we can do and what we do, do actively is we object to those valuations as best as we can through a third-party valuer just so that we ensure that the rates burden on the tenant and us potentially depends how the lease is structured is as low as possible. Then the tariff increases every single year. And generally, we see that tariff, which is applied to the base valuation rate increase at between 5% or 6% per annum. But as Christiaan mentioned, it increased 16% this year. And there unfortunately was nothing we could do about that.