Spear Reit Limited (SEA) Earnings Call Transcript & Summary

Good morning, and thank you for joining Spear's FY '25 pre-close presentation, greeting you from the beautiful mother city, Cape Town. It's just on 11:00 and we're going to kick off. FY '25 has truly been a transformative year for Spear. We saw a significant growth in our assets under ownership in addition to additional momentum coming through in portfolio occupancies, together with the achievement of key performance indicators across the core portfolio. All of this in the backdrop of what I've said previously definitely would turn out to be a year of 2 halves. South Africa had a free, fair and peaceful national election on the 29th of May 2024, which ushered in the formation of the Government of National Unity. I do believe that for the first time in many, many years, South Africa is on a far more positive footing than what it has been in years gone by. And we trust that this government would usher in a season of change for all South Africans. Following on from this positivity, as I mentioned in the half year interim results presentation, we certainly started to see a shift in momentum towards the positive from the half year that I'm pleased to report has continued from a portfolio performance perspective right through to the end of January. And we do anticipate that to continue all the way through to the end of the financial year. On a review of the year, I'm extremely proud of how our team has risen to the occasion to achieve mission statement aligned outcomes on the core portfolio in addition to the successful onboarding and stabilization of the new portfolio acquisitions made in October. As the only regionally-focused REIT listed on the JSE, Spear has historically and will continue to benefit from its regional-only focused investment strategy as property fundamentals continue to strengthen within the Western Cape. If there are any questions during the course of the presentation, please e-mail them through to [email protected]. And we'll answer them straight after the presentation. Just having a look at what I'm going to be covering during the course of the presentation this morning. We'll get into the environmental and operational update. Spear's mission is to be the leading Western Cape-focused REIT and to grow our distribution on an annualized basis and to operate within the top quartile of our peer groups. Now if I look at that mission statement, I can certainly say that historically and on a forward-looking basis, we will achieve on all 3 of those mission statement metrics. Looking on a year-to-date basis, as mentioned, the year has been a year of 2 halves. With the second half of the year certainly being driven by GNU positivity, tenant letting increasing across the board with improved escalation rates in particular within the new portfolio in addition to vacancy contraction. The declining interest rate environment has certainly bolstered sentiment and tenant commitments in terms of CapEx and expansions. We're taking up more GLA. And also importantly, the successful implementation of the acquisition of the Emira Western Cape portfolio as well as the active debt portfolio management, which saw Spear's overall cost of debt declining as well as our funding margins improved with our funders. We've maintained a strong cash collections profile throughout the year. And we see that continuing into the foreseeable future. There's been a material let-up in Spear vacancies reflective of the improved trading conditions, in particular from June 2024. With portfolio indicators delivering positively for the financial year as supply constraints continue to manifest themselves within the Cape Town property market. Despite the intermittent load shedding events in January, we have successfully enjoyed north of 230 days without load shedding, which has bolstered business sentiment. It is bolstered tenant commitments in addition to also generating a higher yield on the Spear PV solar portfolio, given the fact that these are all grid-tied systems. And finally, the city of Cape Town's winter electricity tariff was something that I lamented in the half year. And I'm pleased to report that the drag that it created in the first 6 months of the year has been successfully absorbed in the final 6 months of FY '25. What has kept us up at night has been the absorption of the higher for longer interest rate environment, which has slowed Spear's financial growth on a year-to-date basis. We do, however, welcome the 75 basis point cut initiated from September by the South African Reserve Bank, but do feel that the governor could have done more for us given the fact that we're operating in such a low inflation environment. The negative impact of severe weather conditions from July to August 2024 did see a spike in Spear's repairs and maintenance spend for the year, which did impact profitability slightly marginally to the tune of around ZAR 1.5 million. Insurance and SASRIA increases remained largely outside of our control as reinsurers shrink in South Africa and SASRIA is recapitalized. And then the risk of intermittent load shedding returning will place a little bit of pressure on Spear's operating costs as we have to fire up those generators and repurchase diesel on an ongoing basis in addition to potentially impacting the performance of the PV solar portfolio given that its grid tied. And then, finally, the management of cost of occupancies. We live in a world where tenants are highly informed and have become very sensitive to the cost of occupancy. So when we sit across the table negotiating lease renewals with our tenants. We're aware of the impact of Eskom tariff increases, water tariff increases and property rates and taxes increases and how that will affect the net property income line once we finalize those negotiations. Having a look at the portfolio indicators. On a year-to-date, portfolio occupancy rates have increased by a further 100 basis points from the half year, which already saw an increase of 200 basis points. So in total, Spear has seen a 300 basis point increase in portfolio occupancies on a year-to-date basis, reaching 96.02%. And I'm pleased to report that at the end of February, it will probably be closer to about 97%. On an occupied GLA basis, 467,494 square meters of gross lettable area is occupied within the Spear portfolio. Our portfolio in-force escalation is at 7.34%. We saw a slight dip in that escalation rate as a result of the onboarding of the new portfolio. However, we believe that's transitory. If I look at what leases are being renewed at and what escalation rates are coming through at the moment. I'm pleased to say that we've just renewed leases at between 8.5% and 9% on the newly acquired portfolio. So I believe that 7.34% would start to print upward within a very short space of time. In terms of our weighted average lease expiry, it's 24 months. We do expect this weighted average lease expiry to improve consistently into FY '26 and FY '27. Having a look at our rental reversions, on FY '25, core portfolio rent reversion showing consistent improvement being positive, 2.52% on a portfolio level. 86,359 square meters of renewals and new lets were concluded during the period, which was around 18.5% of the portfolio. Having a look at our collections, Spear's debtors book remains actively managed, collection of 96.78%, bearing in mind that our large power users do pay their electricity accounts at the end of the month and rentals at the beginning of the month. So naturally, there is a slight lag. But on a full year basis, that print should be stronger than 96.78%. The debtors' book remains under control with cash collections remaining consistent. Tenant profiles have also remained positive on a year-to-date basis despite some outliers, which we've been managing extremely closely. Having a look at the balance sheet, very strong and robust. Our FY '25 loan-to-value, 28.97%, our hedge ratio at 76.18%. And our interest cover ratio at 3.34x compared to the half year, which was around 3.01x, so a marked improvement coming through. On the acquisitive growth basis, as the market is aware, the successful acquisition of the ZAR 1.146 billion acquisition, which has been successfully implemented. We, as a management team, have already commenced yield-enhancing asset management interventions since November 2024, which is, amongst other things, a 1.5-megawatt solar PV system, new security contracts, which should generate approximately ZAR 6 million to ZAR 8 million saving over a 3-year period. In addition to renewals that were shorter-dated leases having already now been extended to longer terms at improved escalation rates which is significantly ahead of the budgets for those particular renewals. Having a look at our capital recycling, the conclusion of the sale of the Liberty Life Building was concluded in the first quarter of 2025. The sale of 142 Edward Street was concluded also in the first quarter of 2025. And the sale of 100 Fairways was concluded in November 2024 for FY '25, which generated a net proceeds of ZAR 160 million. Gross proceeds were around ZAR 320 million after settlement of debt relating to the Liberty Life Building. 50% was utilized to part fund the Emira acquisition and the other 50% was held for future growth acquisitions. I'm pleased to report that currently circa ZAR 1 billion of new acquisitive growth opportunities are currently under review by Spear. And we look forward to announcing some potential acquisitions in the short term. Having a look at sustainability, 1 new system and 2 site expansions were completed from a solar perspective on a year-to-date basis. 60% of the Spear portfolio assets are installed with solar PV infrastructure. 10 new systems will be installed on a newly acquired portfolio. All these systems will be grid tied, given the fact that the city of Cape Town does operate at 2 stages below the national load shedding schedule as well as the city's plans to make city customers load shedding free between Stage 1 and Stage 4 within the next 12 to 16 months. It's also worth noting that 97% of Spear's energy and electricity supply is supplied by the city of Cape Town, which does provide a very nice moat around energy security for the business. 25% of our total portfolio energy needs are generated by our solar PV portfolio. And our target is to produce 10.5 million kilowatt hours of power over this year. We are also in feasibility phases with looking at 3 wheeling projects at the moment within the city of Cape Town, which is also part of our -- the role that we can play within the city to fight towards energy security and energy resilience. Having a look at our development growth. From an industrial perspective, the development of GTX Park in George and update. We've concluded our Civils 1 internal roads and services for the property. The roundabout in terms of our second Civils is also completed as you exit the airport precinct. Phase 1 electrical is currently under construction. Our Phase 1 landscaping is completed. This is a tenant-driven development of between mid and medium-sized industrial warehousing, which will comprise 30,000 square meters of multi-let industrial, ranging from 400 square meter users up to 5,000-plus square meters users with a capital cost over a period of 5 to 7 years of ZAR 400 million. The second development growth opportunity that Spear is working on is the Phase 2 development of Bravo Park in Blackheath. We plan to expand on a new industrial build, 7,000 square meters of warehousing. We're currently awaiting our plan approval from the city of Cape Town. Marketing initiatives are well underway with strong tenant interest over the warehouses. The development yield that's being targeted would be ahead of Spear's average cost of capital. And we do anticipate a total capital cost, including a small provision for land, because the bulk of the land is vacant land that has historically been owned by Spear of ZAR 82 million. Then, also excitingly, moving on to our mixed-use development in Marine Drive, Paarden Eiland. We anticipate to commence the development in and around October 2025, which will comprise residential, retail, light industrial and commercial. The total bulk right that we have available is 86,000 square meters. The development will be phased in between 2 and 3 phases. We do anticipate Phase 1 to commence in October, as mentioned, subject to final Board approval, which will be approximately 2,500 square meters of retail, 280 residential units, 56 inclusion rehousing units and approximately 1,000 square meters of light industrial units. Phase 1 is anticipated to have a capital cost of around ZAR 500 million. Phase 1 to 3 in totality is anticipated to have a capital cost of around ZAR 1.5 billion. All residential units are to be sold on a sectional title basis, excluding the inclusionary housing units. And that will offset against the non-residential development costs. More about this project will be shared with the market in due course. Having a look at our salient details. Post the implementation of the new portfolio acquisition, Spear owns 39 high-quality Western Cape assets with a portfolio value of ZAR 5.26 billion. The portfolio value has increased by 13.58% post all acquisitions and disposals for the financial year. Our average property valuation is ZAR 133 million per property. Our average property value per square meter is ZAR 10,655 a square meter. Our average in-force escalation is 7.34%. Our portfolio GLA is 486,890 square meters. Occupancy rate, as mentioned, is at 96%, our WALE at 24 months. Again, I reiterate, we are a glorified leasing operation. Our mandate is to push out this WALE as long as possible, but also to ensure rent and tenant preservation. Strategically, our focus from an asset management perspective is to increase this WALE over the next 2 financial periods to between 36 and 45 months. Our average portfolio rental rate per square meter is ZAR 117 per square meter gross. In terms of collections for the financial year to Jan, 96.78%, bearing in mind my comment about the large power users paying at month end. So we do anticipate this to continue to creep up. And that number would be better reflective closer to 97.5% at year-end when we release our results on the 22nd of May 2025, industrial collections at 98%, commercial at 95% and retail collections at 96%. Having a look at the financial snapshot. The payout ratio for FY '25 is proposed to be at 95%. Spear REIT's SA cost-to-income ratio for FY '25 is at 44.31%. Spear's SA REIT administrative cost-to-income ratio is at 6.58%. Our tangible net asset value per share is ZAR 11.30, which is a decrease of 4.16%. In my view, this is also a short-term decrease as a result of the capital raise was concluded in 2024 to part fund the Emira acquisition. And this is also before any fair value adjustments have been made for the FY '24 year. Loan-to-value, robust at 28.97%. We have an internal band to operate between 38% and 43% depends on where we find ourselves in the interest rate cycle. We are well below this band and prime for growth. Our fixed debt ratio is at 76.18%. Again, our internal band is to operate between 65% and 75% of our debt hedged at any given time for between 24 and 36 months, currently operating slightly above the 75% level. Our average debt expiry at 24 months, our average cost of debt is at 9.10%. Our average cost of fixed debt at 9.01% and our average cost of variable debt at 9.36%. Moving along to the letting activity. On a year-to-date basis, 84,620 square meters came up for renewal and re-let during the period at a closing revenue of ZAR 9.1 million. We are very pleased to report that we concluded 86,359 square meters of renewals and relets during the period with an opening revenue on that stat of ZAR 9.54 million, which is a positive core portfolio reversionary print of 2.52%. Notably, there has been some additional letting that falls outside of this financial year reporting period. But they have already been signed and secured under lease agreements of just under 10,000 square meters, which is reflected just below the letting activity schedule, which, as a result, would push our industrial vacancies to approximately 1%. And also would add additional impetus to that 93% occupancy rate within the commercial office portfolio. Having a look at the balance sheet. Spear's strictest covenants with our funders from a loan-to-value basis is 50%. We are well below that covenant at 28.97%. Our ICR covenant is 2x. We're currently operating at a 3.34x interest cover ratio. On the right of the slide is another example of how actively we manage not just the core portfolio, but also the debt portfolio within Spear. We've seen notable improvement of our average cost of funding from 9.48% to 9.10%. Our weighted average variable rate has declined from 10.16% to 9.36%. Our weighted average fixed rate has marginally moved up, but 10 years have been extended from 8.55% to 9.01%. Just having a look through to the sectorial performance. Spear's portfolio has continued to display resilience across the board. The segmented portfolio performance provides a look into the more operational detail and environmental conditions and how each subsector within the portfolio has performed. From a retail perspective, occupancy is at 97.30%, which is an improved occupancy by about 49 basis points from the half year, collections at 96%, a strong positive rent reversion print of 9.30%, in-force escalation of 7.34%. And we're pleased to report that our retail centers, the convenience retail centers, the destination retail assets have continued to perform consistently right through the financial year. 40% of our retail portfolio tenants are nationals, which does mitigate credit risk for us and just underpins the defensive nature of the retail portfolio. And we're constantly engaging with our retailers looking to see where they can grow within our portfolio. And as this aspect of the portfolio, in particular, the retail portfolio continues to grow within the Spear ecosystem. We do anticipate that we will get greater exposure to national tenants, which would further underpin the defensive quality of the convenience retail portfolio. In terms of commercial, for 26% of our total portfolio, we've seen a 300 basis point increase in commercial occupancies from the half year, which was at 90% to 93.05%, collections at 95%. There was a negative reversion during the period, but that was within our forecast of negative 4.14%, in-force escalation at 7.24%. And we continue to see strong letting activity on a year-to-date basis with letting momentum in excess of 39,000 square meters renewed and re-let during the period. Without a shadow of a doubt, there's a strong return to office momentum happening within the Cape Town office market. And this has resulted in vacancies reducing significantly, which does pave the way for stronger rental growth over the next year. All of Spear's large occupier spaces are fully let. And we've seen not just the BPO market underpinning that. But we've seen small to medium occupiers also coming back into the market and resulting in the mopping up of smaller vacant spaces from 300 square meters to 1,000 square meters. And as it's being said, there's very little vacant space available in the P grade, AAA and A-grade space within Cape Town. From an industrial perspective; forming the lion's share of the portfolio at 62% of portfolio GLA, occupancy at 97.02%. This is prior to the 7,500 square meters that was let and will become implemented on the 1st of March. It's a 38 basis point increase from the half year. Collections at 98%. Reversions were positive, 0.54%. Our robust in-force escalation at 7.48% really underpins the strength of this industrial portfolio as you have 62% of your gross lettable area escalating at 7.48% on an annualized basis. We continue to see the strong performance of our well-located industrial assets as well as the demand for our multi-let industrial parks. The bulk of our single-tenanted large warehouses and industrial assets are let on long-term leases. From a development growth perspective, approximately 39,000 square meters of organic development growth is planned within the Spear core industrial portfolio over the next 18 to 60 months with a cumulative capital value of ZAR 425 million. Those are broken up into our George development of 30,000 square meters, our Bravo Park extension of 7,000 and the 2,000 of total industrial light industrial that we developed in Paarden Eiland as part of the Paarden Eiland mixed-use development. Moving on to our general business update. Despite the challenging operating environment that we are operating within, we are continuing to see improvements which does create positive momentum across our operating business. The GNU despite the odd disagreement and the odd temper tantrum has been good for business. The core portfolio is trading well with key operational milestones being achieved, vacancy contraction, improved escalations and a clear focus on WALE increase and cost of funding reduction coming through for the business. Office leasing momentum has been very strong on a year-to-date basis as Cape Town runs out of high-quality office accommodation. On a year-to-date basis, we've seen vacancy rates contract consistently across all asset types. The ongoing implementation of Spear's PV solar and water augmentation initiatives will see the additional ZAR 20 million invested into our PV solar strategy. Rental collections are in line with our forecast. Receivables have been consistently at acceptable levels with a little bit of stress coming through on the SME tenancies, but we've managed that. And we do believe that the interest rate tapering cycle will also bring a bit of relief and increased economic activity, which will mitigate some of those pressures on tenants. And then we continue to assess and enhance and take advantage of portfolio enhancement opportunities being to unlock embedded growth within the Spear portfolio. In conclusion, Spear's operational and financial strategies for FY '25 have aligned during the year. The new assets have been successfully integrated into the core portfolio and are already making positive contributions to the overall portfolio health and performance. A clear sense of optimism is evident in the Western Cape real estate market despite the macroeconomic headwinds that face other regions within South Africa. At scale, investments into and the demand for Western Cape real estate remains strong across all asset types, boding well for asset valuations and economic growth within the Western Cape. Spear's FY '25 can be summarized as follows: the successful conclusion of a ZAR 1.15 billion transformative transaction for Spear, asset values that have increased by 13% compared to the prior period. Spear's market cap has grown by ZAR 1.5 billion compared to the prior period. Notable success in occupancy rate growth to 96% and improving across the portfolio; load shedding REPREVE boosting PV solar portfolio performance, positive rent reversion prints year-to-date on a portfolio level, a strong balance sheet that's primed for growth with a 28% loan-to-value and an interest cover ratio of 3.34x. The above reflects strategy aligned outcomes for FY '25, in line with management's communication to the market to not only to grow the portfolio, but also to execute on our hands-on and property management strategy successfully. Management remains firm in its full year guidance provided to the market at the half year interim results presentation in October that FY '25 DIPS growth would be between 2% and 4% higher than the FY '24 DIPS. The payout ratio is set to be maintained at 95% by the Board of Directors of Spear. This brings us to the end of our presentation. Thank you all for logging on. And we'll be back shortly for a Q&A session. Thank you very much.

Welcome back to the FY '25 pre-close presentation Q&A session. I'm joined here by Spear CFO, Christiaan Barnard. And we have received some questions coming through to Info at Spear Property. And we'll deal with those questions now. Christian?

Good morning, everyone. The first question is requested to stay anonymous. It's quite a lengthy question, so just bear with me as I read it. There's recent speculation in the media that Spear might be a takeover target by larger players looking for added exposure to the Western Cape property market. As an investor, once long-term exposure to Spear's focus on the Western Cape and management expertise, I would find that such activities unwelcome. Please comment on the management attitude towards the strategies in place with such approaches, especially hostile ones.

Thank you for the question. As a management team, we're in place to run and grow the business and to focus on delivering on our mission, which is to grow the business, to grow distributions. I can guarantee you that to date there's been a lot of speculation, but very little substance to that speculation. Our investors have invested into our business, as you say to get 100% Western Cape exposure. M&A activity within the sector has been hotting up. But at the end of the day, as a management team, in the event of there being an approach to our business, we follow the governance processes. And at this point in time, I can assure you that there's nothing that we're aware of that even signals us being a takeover target. I think possibly, just given the fact that the Western Cape has performed as well as it has, which obviously makes us attractive. Fortunately, as one of the founders of this business, together with the other co-founders and large shareholders that are deemed insiders. We do also have enough skin in the game to ensure that we don't have any unwelcomed approaches.

Thank you. The next question is from Trent from Anchor. Relative to the other nodes in the City of Cape Town, Spear appears to have limited office exposure to Bellville, which is the best-performing node in the city of Cape Town, excluding Waterfront according to the fourth quarter '24 so far office update. Do you have ambitions to expand or diversify away from the CBD into this node granted its outstanding performance?

Spear does have and always has had exposure to the Belleville/Tiger Valley office market. Of the 130-odd thousand square meters of gross lettable area that Spear owns, approximately 10% to 12% of that GLA is in the Belleville Tiger Valley area. And we're pleased to report that they are 100% let. So quite rightfully, we do look for additional growth opportunities within the northern suburbs. And for us, it's critical to invest into the right locations. So from an investment perspective, we would look to continue to invest into the northern suburbs, the southern suburbs, Century City and the Cape Town CBD.

And then one last question is a so far from Daniel Raymond. I see you've guided a ZAR 1 billion investment opportunities. May you please share some further details, if willing and able?

Yes. So we're always looking at opportunities at a 28% loan-to-value. As I mentioned, we are primed for growth. The core focus of our investment strategy is to acquire assets north of ZAR 100 million per property to acquire assets that are yield enhancing for the portfolio. And right now, we are not at Liberty to disclose more detail of what that, circa ZAR 1 billion worth of growth opportunities look like. But we can certainly say that it's diversified assets, both in the retail space and in the industrial space. And we look forward to providing further details and updates to the market as and when the timing is right.

There is just one more. Kopanu, he has some late questions. Thank you for presentation. Where do you guys anticipate your LTV to settle post the Emira transaction? I think just off the cuff, that's one for me. As we guided in our Category 1 transaction, we believe it will be circa a plus/minus 30%. And we have further indications after the implementation. We have remained in that target. And that doesn't take into account any fair value adjustments we would see at year-end, which we are currently busy with. And so we do believe that the 30% mark is still a very accurate estimation we would be at our year-end financial results. And another one from Kopanu. You mentioned ZAR 1 billion of potential acquisitions. What subsector would these be in? And how do you anticipate to fund them?

So as I mentioned, the subsector is predominantly retail and industrial. We do have sufficient headroom on our balance sheet from a debt perspective. The band which we like to operate is between 38% and 43%. Strategically, we wouldn't want to push it to above 40%. We do, as mentioned in the presentation, 50% of the ZAR 320 million of disposal proceeds were utilized for the Emira transaction. And the other 50% we have kept aside as capital reserves to deploy into these growth opportunities. In addition to some of these opportunities that we are exploring at the moment will actually result in a Section 42 assets for share swap, which means that the vendor or the seller would potentially also take equity within the business as partial settlement for the purchase price consideration.

And one final question, which I think we can answer maybe dually. You already have capital committed to the development pipeline? So it's a little bit of differentiating approach in terms of, for example, the Paarden Eiland development. There we only have a professional fee development as the feasibility, are still being investigated to further down. So other than those costs, nothing has been committed. In terms of George, we've committed the acquisition of the land and all the civil infrastructure. And what we needed to do to the tune of the total value of about ZAR 60 million. There's still some minor works to be done, which we will do. And then for the other developments, we are waiting plan approvals, which will then determine the feasibilities to commit further capital. But we do have, as the industry likes to use firepower to utilize on our balance sheet and we have cash reserves. So we don't -- for any of the current works we are undergoing, we don't need further debt, we can use our cash reserves. But we can go and do some better loan deals to fund if so required. This is double check. There's one more question from Timothy. Could you kindly provide some light on the recent Manus Capital Property Limited transaction?

Sure. In terms of the Competition Commission approval of the Emira acquisition, the approval was granted by the competition authority subject to certain qualifications. And one of those qualifications was that Spear would have to, over a period of time, increase its black equity ownership or HDP ownership, historically disadvantaged persons ownership within the company. This was already part of our strategy. So for us, it was not an inhibitor. And effectively, one way for Spear to do that was to enter into a broad-based black economic empowerment transaction with Manus Capital through the ordinary course of business. And hence, that would increase our Black ownership from an equity perspective, given the fact that Manus is a 100% Black-owned entity. In addition to the fact that, yes, Spear is providing a guarantee for a portion of the acquisition of the shares, no cash from Spear was paid out, first point to make. And the second point is that the Manus Capital shareholding is also locked in for a minimum period of 36 months in order for us to ensure that alignment from a shareholder and broad-based Black economic empowerment perspective.

That's all for now.

Thank you very much. That brings us to the end of our pre-close FY '25 presentation. Thank you all for logging on. As you know, we always remain accessible to the market and to our investors and analysts. So if there are any further questions, please feel free to reach out on the channels that you have at your disposal, alternatively, [email protected]. Thank you very much.

Thank you.