Spear Reit Limited (SEA) Earnings Call Transcript & Summary

Good morning from beautiful Cape Town. Thank you for taking the time to join us today for Spear's FY 2026 pre-close presentation. It's just on 11:00, and it is an absolutely stunning day here in the mother city. I would be remiss of me to say that sitting here in the Spear boardroom, just looking to my right across the mother city, I don't see but one, but actually, I see 10 tower cranes scattered across maybe a 2-kilometer radius as we continue to see strong real estate fundamentals manifesting across the region as well as the CBD. Just what I'm going to be covering in today's presentation. If you have any questions during the course of the presentation today, please send them through to [email protected], and we will answer them straight after the presentation. Just getting into the first part of the presentation, the environmental update. The second half of the year has firmly aligned with management's intended outcomes as we've continued to build on the momentum created in the first half of the year. On a year-to-date basis, Spear has delivered on a strategic priorities set out to the market in May 2025 with robust operational and financial performance. The aforementioned has also coincided with a very positive improvement in the general SA Inc. narrative as well as real estate investments globally and locally as an asset class. The portfolio on a year-to-date basis has delivered high-quality predictable income, strong occupancy levels, robust rental collection profiles and sustained leasing activity across all subsectors of the core portfolio. The metrics I'll be sharing with you today in this pre-close reinforces the focus and the quality of our portfolio and the strength and the diversity of our tenant base. Spear's year-to-date performance is further underpinned by our regional focus and definitive strategy as the only pure-play Western Cape-focused REIT listed on the JSE. Year-to-date, management has maintained a maniacal focus on top line revenue growth, cost controls and net operating income growth on a year-to-date basis, while successfully executing on our FY 2026 growth objectives. Spear's mission is to be the leading Western Cape-focused REIT to grow our distributions on an annualized basis and to operate within the top quartile of our peer group. As mentioned in the introduction, today's pre-close presentation will be reflective of the successful execution of our FY 2026 strategic objectives set out to the market in May 2025. These objectives are summarized as follows: portfolio growth and optimization. We are focused on maintaining income continuity and acquiring yield-enhancing assets within the Western Cape in line with Spear's investment strategy. Prudent capital management, we have maintained a disciplined capital allocation plan to ensure the financial stability and long-term value creation for all stakeholders. We've maintained shareholder alignment. We've upheld material inside ownership throughout the year and prior years that reinforces the alignment with shareholders' interests through transparent stewardship and personal investment of the underlying business, together with the introduction of the maiden minimum shareholding requirement by executives to further enhance alignment with shareholders' interests. We've maintained a sustainable growth strategy. We focused on strategic asset growth, debt management, human capital development and a continued rollout of Spear's ESG strategy. And also, probably most importantly, we've maintained a tenant-centric approach. We've continuously prioritized strong tenant relationships to support high retention rates and rent preservation as the health of our rental enterprise remains a top priority. Now these objectives have been successfully achieved during the year by a committed team that has taken ownership of their roles and their responsibilities, of which I am incredibly proud and grateful. I'm confident that these objectives will be replicated in our business beyond FY '26 as I see them as core strategies and values within our business. So having a look at the salient details and highlights on a year-to-date basis. From a distribution perspective, in January 2026, we put out an announcement to the market to advise that we are revising our DIPS guidance for the year from 4% to 6% growth previously advised in May to a 5% to 6% growth given the stronger performance of the portfolio. We're also pleased to say that on an updated basis that this DIPS trend is trending towards the upper end of our guidance as a result of overall stronger core portfolio performance. We will also be maintaining a 95% payout ratio as approved by the Board. From a year-to-date operational performance perspective, our weighted average lease escalation is still above 7%, 7.05%. Our occupancy rate has improved materially by 225 basis points from the half year to 97.28%, which is the highest occupancy rate since coming out of COVID-19. Our weighted average lease expiry, now we report in line with the new SA REIT BPR, is 29.26 months based upon revenue and based upon GLA is 34 months. On a total rent reversion basis, we are just under flat at negative 0.39%. However, on the rent reversions based upon renewals only, we are well above inflation at positive 5.83%. As I say in the classics, cash is king. We've delivered strong cash flow outcomes for the business at a 99.13% collection rate year-to-date across the core portfolio, and we see this cadence being maintained throughout the end of this financial year and beyond. From a growth perspective, our Western Cape portfolio expansion has continued. On a year-to-date basis, we acquired and took transfer of 3 prime real estate assets in line with our strategy. These new acquisitions were in a value -- from a value perspective, just under ZAR 1.08 billion and also was aligned with the pipeline opportunities we set out to the market in May, advising that this is where we see the growth trajectory for the year. This translates into 137,000 square meters of new GLA added to the portfolio at an average acquisition yield of 9.54%. On a stand-alone basis, every single one of these assets was earnings enhancing. And also the -- from a portfolio perspective, they were accretive to the overall portfolio. I'm pleased to advise that all 3 of these assets have been fully stabilized into the core portfolio. From a balance sheet perspective, the balance sheet is primed for growth. Our loan-to-value at sub-25% at 24.62%. Our interest cover ratio well above our covenants at 4.39x. Cash availability net of any allocations already made ZAR 400 million, which gives us great optionality both on the equity side and on the debt side. From a solar perspective, Spear's PV strategy has been maintained. Every acquisition we look at, every opportunity we look at, we look at a solar strategy overlaying it over those assets, and this has also paid off. 28 of our assets will have now been fitted with solar infrastructure, which is just over 66% of the total portfolio. Two new systems are under construction, which are set to be completed between Q1 and Q2 FY '27. From a gross contribution perspective, PV solar has contributed ZAR 25.9 million to gross revenue on a year-to-date basis, generating ZAR 17.3 million NOI. Two points I'd like to make on that. One is that we have now successfully registered 12 of our properties to now undergo audits for carbon credits, and we look forward to updating the market on that front. And the second is that the year-to-date January 2026 NOI generated from the PV solar portfolio translates to about a ZAR 0.04 addition to the distribution pot. In terms of the portfolio at a glance, asset value as at Jan 2026, ZAR 6.8 billion, comprising of 42 high-quality Western Cape-only assets. Our GLA under ownership has increased to 627,133 square meters. Having a look at the cost-to-income ratios. And earlier on the presentation, I said one of the outcomes for the year and maniacal focus areas for us was cost control. Our total cost-to-income ratio was 44.86%. In the half year, it was 45.61%, so an improvement towards the end of the financial year. Our property cost-to-income ratio, 38.23% compared to the half year of 39.25%. Our admin cost-to-income ratio was slightly higher due to the onboarding of additional staff as well as Section 197 staff joining us post the acquisitions at 6.68% compared to the half year of 6.39%. In terms of our tangible net asset value at the January year-to-date, ZAR 4.99 billion translates to ZAR 11.99 per share. We raised ZAR 749 million of new equity from our shareholders in June 2025, in addition to placing ZAR 152 million worth of equity via the Section 42 regime in November 2025 for the acquisition of Berg River Business Park. This brought us to a gross shares in issue at year-to-date January of 430,542,543 shares. So having a look at the letting activity on a year-to-date basis. For the -- on a year-to-date basis, we had 148,452 square meters coming up for renewal and relet. That was a closing revenue of around ZAR 13.476 million. We concluded renewals and new lets of 151,856 square meters, which again was the contributor towards the 225 basis point increase in the portfolio occupancy at an opening revenue of ZAR 13.7 million. Now yes, on a consolidated basis, we are just under flat, but we believe that a vacancy that's let is far beneficial than a vacancy holding out for a slightly higher rental and having that vacancy just persist in the portfolio when you're already covering all of your operating costs. From a balance sheet perspective, incredibly strong, robust and primed for growth. Our strictest covenants with our banks from a loan-to-value perspective is 50%. As I've mentioned, we are at 24.62%. Interest cover ratio covenant 2x, where we're currently at 4.39%. And just on the right-hand side of the slide, also just tip of the hat to our CFO, who's done a lot of work in the last year on the debt portfolio. You can see improvement in every single line item. Our weighted average expiry of debt has increased to 31.20 months. Our weighted average fixed expiry has increased to 31.59 months. Our weighted average cost of debt has reduced to 8.64%. Our weighted average cost of variable debt has reduced to 8.27% and our weighted average cost of fixed debt has also reduced to 8.80%. Now yes, we can say that we do a lot of heavy lifting here in the business, but also a shout out must go to the South African Reserve Bank for the much welcomed 150 basis point reduction in the SA interest rate. So when we look at the LTV sensitivity, strategically, from a business perspective, we seek to operate between the 38% and 43% loan-to-value range. We are, as you can see, well below that in addition to having set aside capital to be deployed both in big CapEx projects, acquisitions, et cetera, et cetera. And from a current, we are 24.62%. And within the next 12 to 24 months, we'll probably push out to about 30.08%. This does not include any fair value adjustments and also does not include the -- any adjustments made for any possible disposals other than the one disposal that's listed on this list. Having a look at the sectoral performance. Now the segmentation gives us just a little bit more granular detail on operational performance from a retail perspective, making up 13% of the total portfolio, both in occupancy and collections, really strong. Occupancy at 96.68%, collections at 96.87%. Our retail reversions, negative 3.27%, given that we did have some vacates, which we relet in quite a short space of time, which mitigated that vacancy risk. On renewal reversions, we're positive 3.87%. In-force escalations did drop below 7% as a result of the Maynard Mall acquisition, where the average escalation rates were slightly below the Spear average. However, we're already making a lot of inroads because we have quite a few leases coming up for renewal at Maynard this year, and that's already successfully generating improved escalation rates. In terms of commercial, about 20% of total portfolio by GLA. Occupancies, as I've mentioned, have improved substantially to 92.4%. Collections very robust at 99.60%. Commercial reversions, negative 5.37%, reversions on renewals only, positive 4% with a strong in-force escalation of 7.56%. It's to be noted that there's been strong letting activity on a year-to-date basis for offices with an excess of 31,000 square meters let on a year-to-date basis, which saw this 337% increase -- basis point increase in occupancy levels for offices since the half year. From industrial, around 67% of total portfolio by GLA, occupancy is strong at 98.77%, collections at 98.85%, industrial reversions in total, positive 2.38% and reversions on renewals only at positive 3.87%, robust and the highest in-force escalation across the subsectors at 7.60%. In terms of some development updates, we are in the final stages of getting plan approval for our phase 1 top structure in George. I would estimate we're about 21 days away from that. Also pleased to advise that the Blackheath Bravo extension, we've received City of Cape Town plan approval for the new 7,000 square meter warehouse, and we are currently in leasing negotiations with 2 very strong prospects and the overall capital cost to be spent there is around ZAR 86 million. The sustainability-linked CapEx program at Mega Park is ongoing. There's been partial completion, and we do see that running through to around the fourth quarter of FY '27. However, as sectional completion takes place, we're able to start letting up and which obviously has also hang up activity from February. So you'll see that coming through in the May update when we report our results. Just having a look at the sectoral split of the portfolio. Spear owns 9 retail assets, making up ZAR 1.4 billion. It's about 21% of our value, GLA about 80,469 square meters. On a GLA basis makes about 13%. Currently on a GLA basis, about 20%, 9,300 square meters vacant, of which we do have currently around 4,000 square meters under negotiation. And on a revenue component, it generates about 38% of portfolio revenue. Industrial, both on GLA value and revenue, the largest contributor, 42% by value, just under ZAR 2.87 billion. In terms of GLA, 67% of our GLA and in terms of revenue contribution, 40% of our revenue, which makes up the 42 high-quality assets and the 627,000 square meters of GLA. Just having a quick look at the acquisitive growth assets we acquired in order of the transfer date, Berg River Business Park was acquired for ZAR 182 million at an initial yield of 9.35%. Maynard Mall was acquired for ZAR 455 million at an initial yield of 9.55% and Consani Industrial Park was acquired for ZAR 437 million, which was at a 9.71% acquisition yield in December. If there are any questions regarding this, we're happy to obviously talk them through in the Q&A session. But also notably, in line with our strategy, we took a view in this financial year to grow our retail portfolio and our patience paid off with the acquisition of Maynard Mall and also to consistently grow our industrial portfolio, just given the demand for multi-let industrial within the Western Cape, both in the Drakenstein Municipality as well as the City of Cape Town Metro, both Berg River Business Park and Consani Industrial Park have added incredible value to the industrial portfolio as has Maynard Mall to the retail portfolio. Just wrapping up the pre-close. Management is pleased to report that Spear will achieve a mission statement aligned outcome for FY '26, resulting in management increasing DIPS guidance in January to 5% to 6% higher compared to the DIPS reported for FY '25, subject to the following assumptions below. Now despite the tougher trading environment, active asset management initiatives have been successfully implemented across the portfolio during the year, which has delivered on management's operational and financial objectives. In summary, some of the key outcomes for FY '26, the DIPS tracking at the upper end of management's guidance of 6%, DIPS growth compared to FY '25. The success in active vacancy mitigation, specifically in the office sector, driving NOI enhancements across the portfolio. The strong cash collections of 99.13%. Our solar PV portfolio has grown with 9 new installations and 3 additional systems post transfer, which all 3 systems were Consani, Berg River and Maynard, which has taken our solar portfolio to 28 assets with PV solar installed. We've seen an improvement in the overall cost of debt, which has compressed our cost of capital, giving us more optionality in terms of deal opportunities. The successful cap raise in June this year also -- and last year also underscored the investment appetite that our shareholders have to see our business grow. Our loan-to-value has been maintained at under 25% with a strong interest cover ratio. And our accretive acquisition-led growth strategy is paying off with the successful acquisition of Berg River Business Park, Consani Industrial Park and Maynard Mall. Now like all things in life, these guidances are subject to qualifications. We do set -- as per the presentation, we set out that we are looking to maintain a 95% payout ratio and the following assumptions will apply. No load shedding occurs for the remainder of FY '26. Our vacancies continue to be reduced in line with management's forecast. Our lease renewals are concluded successfully as per our projections. There are no major tenant failures occur over the balance of FY '26, and our tenants are able to successfully absorb the rising costs associated with utility charges, municipal rates and taxes and other expenses and no civil unrest in Cape Town, the Western Cape or South Africa. If there are any deviations from these assumptions, this may affect our guidance, but we also believe that we are on a very strong and stable footing, both in the Western Cape and South Africa, and we don't believe that will be the case. This brings us to the end of our pre-close presentation. We'll be back in a couple of minutes. I'll be joined by Spear CFO, Christiaan Barnard, to take any questions that may have come through during the course of the presentation. Thank you very much. And we're back again with the Q&A session for the Spear FY '26 pre-close presentation. I'm joined here by Spear CFO, Christiaan Barnard.

Good morning all.

And we'll be just taking a couple of questions that have come through after the presentation.

Thank you, Quintin. The first question is from Trinity from Anchor Stockbrokers. Can you give an update on the performance of the newly acquired assets? How has the footfall trended at Maynard Mall since acquisition?

Yes. So from an asset management perspective, we have initiated 1 or 2 asset management initiatives on all 3 of the assets already. And those are starting to now kind of be activated, both from a CapEx perspective, also from a non-GLA revenue perspective. Specifically on Maynard, we've seen an improvement in footfall. As an example, from December year-on-year, we saw about a 6.38% increase in footfall. Tenants have all reported a very acceptable and strong trading period for the festive season, and we are now starting to see that coming through as we initiate our renewal cycle within the property. We're extremely positive. We're also starting to be approached by more and more nationals that see the value in that commuter convenience retail segment of the retail market.

Then a question from Christian Hansen from Knight Capital. Are you able to give us an update on the anchorage development in terms of progress being made?

Yes. So our site development plans have been approved. We are now in the detailed design process of the superstructure, all the whilst being blissfully aware of the fact that development is not as straightforward as owning a straight income-producing asset. So we are making sure that we are methodical and very conservative in terms of market factors. We do note that there is a strong demand for residential in the general Cape Town environment. We are very encouraged by the level of retail interest we've received on the proposed retail component of the development as well as the industrial component of the development. We'll be providing -- we'll be in a position to probably provide a bit more color on where we're at with the development initiation in the May results presentation as we are still in a process of design, development and value engineering. But positively, I'm extremely excited about the prospect of the development and seeing it come through not just out of the ground, but forming part of an iconic part of the Paarden Eiland skyline.

Then Trinity is busy, he's sending some more questions. Industrial portfolio performance was very strong, evidenced by strong in-force escalations versus CPI print and reversions. Is this partially a function of constrained supply in the Western Cape? More color in this regard would be appreciated.

Okay. So I'll take that question. So if you have a look at the composition of the Spear industrial portfolio, what you'll see is it's a subsector that offers multi-let industrial, large warehousing, distribution, urban logistics, et cetera. So we get an opportunity to play across the market segment. We're not niched into just one specific type of asset, subsector or asset type within the industrial space, which also gives us strong optionality in the kind of rental spread. So if I look at the industrial rentals that we are achieving, they go from the very basic kind of ZAR 57 a square meter all the way to ZAR 120 a square meter. And given the fact that we have these tenant solutions available, not that we have a lot of vacant space, but because we have the right assets in the right locations, servicing the right market, we are able to see not just growth in rental, but also increased demand for longer-term, so that does put us in a very strong position. Also, the cost of land is extremely expensive. The cost of construction of industrial is also very high. So tenants are rent sensitive and not everybody can afford to pay a blue-chip logistics style property rental, and we are happy to play in the market that offers something for every industrial type of user. And because of that constraint in supply and probably a lack of development of new stock, you'll start to see stronger top line revenue growth, improved escalations and improved tenures.

Another question from Trinity, I shall answer. Besides potential interest rate cuts, do you foresee the cost of debt trending down going into FY '27? So yes, other than the 2 forecasted interest rate cuts by various institutions, we do believe we could achieve further benefit from refinancing. We're also now entering the first -- the stage of ZARONIA, which Spear is proud to announce that today, actually, our very first ZARONIA loan is paying out. And the sensation of ZARONIA will start in March and with all new debt moving to ZARONIA by the December '27. So there will be a bit of a change where we come into a play of a credit adjustment spreads and the likes of that throughout the move from JIBAR to ZARONIA. But as we refinance debt as fixed long-term swaps and fixes come up for refinancing, we do see benefit that there will actually be a margin benefit for Spear in this instance. It will definitely not be as in the prior financial years where we will see the likes of massive 50% to 60% benefit, but there is definitely margin benefit other than the interest rate cuts as we continue to refinance into the future of our debt. And at this point in time, there is no further questions.

Okay. So we'll just give it maybe another 10 seconds, and then we'll sign off. Okay. Great. Well, ladies and gentlemen, thank you so much for taking the time to join us today. As you know, that we are accessible via the respective channels. So if there was something that wasn't asked or we may have missed, please feel free to reach out to us, and we're happy to discuss any particular item relating to our business. Thank you for your ongoing support, and God bless.

Thank you.