Spear Reit Limited (SEA) Earnings Call Transcript & Summary

[Audio Gap] financial year. And these were to ensure robust operational outcomes within the portfolio to consistently maintain a strong financial cadence during the period and to execute on our growth strategy for the period. Now despite the slower start for Spear in Q1, Q2 has added the momentum we anticipated to the half year despite ongoing volatility. As a management team, we are pleased that the objectives mentioned keep being met on a year-to-date basis. Globally and locally, the [ training ] environment has been volatile as geopolitical tensions, conflicts and inflationary pressures largely shaped the first 6 months of the financial year. Real SA economic growth remains evasive as interest rate creep manifests with a 25 basis point rate hike in May 2026. Now despite these challenges, we remain sanguine about the year ahead and confident that we have prudently navigated the changing fiscal landscape over the past 6 months. Now if there are any questions during the course of the presentation, please e-mail them through to [ info@sperprop.c ] and we'll answer them straight after the presentation. Just having a look at what I'm going to be talking about in the course of the presentation today, this presentation will also be available on our website during the course of the day. You can just go to [ www.speprop.ca ]. And under the Investor Center tab, you will find the presentation. Now getting into our update. But before we do that, just a reminder of our mission. Our mission is to be the leading [ Western Cape ] focused REIT to grow our distribution on an annualized basis and to operate within the top quartile of our peer group. Now despite all the local and global volatility, Spears regional [ and ] hands-on approach has ensured operational stability and resilience with our year-to-date summarized as follows. Our distributable income per share growth is tracking at the upper end of our FY 2027 guidance. Spears inclusion in the SA REIT and all property index on the 23rd of March has certainly been transformational for our business. unlocking major institutional demand and growth capital for our business. Liquidity ratios have equally been transformed with over ZAR 1.8 billion worth of stock traded on a year to July basis. Management embarked on a successful accelerated book build, raising ZAR 1 billion of new equity from our shareholders during April 2026. This resulted in the successful acquisition of over ZAR 1.4 billion of new accretive strategy aligned investment assets, which I'll talk about further in the presentation. We've printed positive revenue and NOI growth for the period, respectively, at 28.29% increase in revenue and a 29.41% positive NOI revenue. Cash collections have been strong at 99%. Our balance sheet remains robust and primed for growth with a loan to value as [ added ] July of 7.48% and an interest cover ratio of 6.02x. Portfolio occupancies remain extremely healthy at [ 96.37%]. And now typically had to the portfolio management team, our leasing team and our asset management team, positive reversions across renewals and relets for the period of 6.78%, well above inflation. And organically, we are growing the portfolio unlocking embedded bulk with over ZAR 140 million being deployed into new industrial developments in [ George and in Black Heath ]. All in all, a very positive summary of Spear's first half of FY 2027. Moving into a bit more granular detail from a highlights perspective, I've mentioned that we are tracking towards the upper end of our guidance. The guidance which was set to the market in May 2026 was a distributable income per share growth of 6% to 8% compared to the prior period, and we are set to maintain a 95% payout ratio. Operational performance has remained strong with our weighted average lease escalation at 6.92%. Occupancy rate, as mentioned, at over 96%, I would like to see that slightly higher. We do see that there is scope to get that occupancy rate a little bit higher, especially in the [ office ] portfolio. I'd like to see that closer to 97% by the half year results presentation in October. Our weighted unexpired lease term is 28 months by revenue. As mentioned, the rent reversions as a whole at [ 6.78 ], but also notably on a renewals-only basis we printed a positive 5.50% reversion on renewals. Cash collections remained strong despite tougher economic environments. And then the growth of our [ Western Cape ] portfolio continues. Spear acquired, as announced on [ Sense ], 2 high-quality assets, 1 in the commercial segments of the portfolio and 1 in the retail segments of the portfolio. adding in excess of 48,000 square meters of new GLA to the portfolio at an average yield of [ 8.9% ]. Both acquisitions are earnings enhancing from their respective transfer dates. Looking at the balance sheet, over and above what I have shared already, spear has ZAR 800 million of liquidity availability net of acquisition allocations, therefore, putting us in a very strong position to be opportunistic and also to be -- have a first-mover advantage on acquisition opportunities, given the fact that we have capital to deploy into [ Western Cape ] opportunities. Our [ solar ] portfolio has continued to perform extremely well. As at July 2026, our portfolio 28 -- of our assets have got [ solar ] infrastructure, which is around 70% of the total portfolio. It has got solar infrastructure installed. We generated over 5.1 million kilowatt hours of solar power from on a year to July basis, which is approximately 2.2 million kilowatt hours more than the prior corresponding period, which just talks to how we've really scaled the solar portfolio. From a penetration perspective, our solar penetration on a comparative period to comparative period has increased by over 6% with a 20.20% penetration year to July 2026. Now from a financial perspective, our solar portfolio is certainly making a significant contribution to the revenue pool of the business with ZAR 17.46 million contributed in terms of revenue from the solar portfolio at very strong margins with an NOI year-to-date of ZAR 14.79 million. So having a look at the portfolio at a glance, it's a slightly backward looking picture, and I'll get to the current picture slightly later on in the presentation. As of July 2026, [ 7 ] billion in assets across 40 high-quality Western Cape real estate assets. Our [ Glander ] ownership, 625,610 square meters. We've also worked very hard to rein in some of the cost-to-income ratios. Obviously, operating cost pressures are real. And especially in Cape Town, we've had significant increases in rates and taxes, which we had to absorb -- so you'll see our total cost-to-income ratio has contracted a little bit to 44.49%, our property cost-to-income ratio at 37.65% and our admin cost-to-income ratio, 6.94%. From a net asset value perspective, the tangible asset value of the business is ZAR 6.43 billion. That translates into a ZAR 12.4 per share NAV. We successfully raised ZAR 1 billion in April, which we did a significant share issue. But also shareholders supported our dividend reinvestment program, which allowed us to retain another ZAR 108 million worth cash to deploy into the portfolio through a very successful [ GRIP ]. That brought us to a final gross shares and issue of 517,589,651 shares. So having a look at our letting activity. In terms of our renewals and relets, you'll see across every subsector printing positive reversion prints; commercial, 4.26%; industrial, 14.32%, we've got some very nice rental uplifts in that portfolio; and in retail, 7.88%. On renewals only, you'll see on commercial, industrial and retail all positive, with retail being slightly lower than what we'd like it to be. But we all understand and appreciate that retail is slightly under pressure, and we would [ fall ] rather ensure that we renew leases as opposed to running the risk of vacancies, which end up costing us significantly more. But all in all, a very positive above inflationary print, and we don't see this coming back with any shocks in the interim period -- reporting period or in the full year. But it's also important for us to remain close to our assets and close to our tenants at this time because certain tenants are taking a little bit more strain than others. And for us, as I mentioned earlier, at a 99% cash collection rate, it's really important for us to keep the cash flow strong and sustainable within the portfolio. And when you look at the balance sheet, extremely strong and well managed by our CFO. We are well within both our strictest covenants. Our strictest covenant from an LTV perspective is 50% and need I say it's 7.48% as of July. We'll see in the sensitivity analysis now that does move out, but still remains well below our strategic band. Interest cover ratio of 2x in the covenant. We had 6.0x, so extremely healthy. The breakdown of our debt compares to the FY 2026, you've seen a slight creep in the weighted average cost of debt as a result of that interest rate hike that came through in May. But we are consistently benefiting from improved cost of finance from our funders, which will kind of cascade through to the cost of finance as the year progresses. Then just having a look at the LTV sensitivity analysis, what the flight path looks like, you'll see as at July 7.48% LTV. The acquisition of the [ Watergate Center and the Santam Precinct ] will push that LTV up to around 23%. And then marginally, there will be a slight uptick over the next 12 to 24 months, which takes us to about 26.74%, which is still well below the 38% to 43% strategic band within which we prefer to operate, meaning there's still sufficient headroom, both on the balance sheet side and the liquidity availability side for us to scale the portfolio in line with our investment strategy. Then just having a look at the sectoral performance. Obviously, the segmented subsector operational performance does give us more of a granular reflection of the strength of the diversification of the portfolio and provides a look into how [ subset ] has performed on a year to July basis. If we look at retail, it's about 82,233 square meters of the portfolio, which does not yet include the [ Watergate center]. Occupancy at 97.17%, collections at 98.07% and our retail positive rent reversion, 7.88%; renewals at 3.10; [ in-force ] escalations at 6.69%; gross cost to income, [ 37.54 ] compared to the prior period, which are 37.94% Net cost to income, [ 14.08 ] compared to the prior period, we're at 14.93%. All in all, the retail portfolio is performing extremely well, and we are starting to see some real traction in some of the negotiations we have with our nationals, where they do take up additional space and are looking to increase their market share. In terms of our commercial portfolio, 121,378 square meters, which excludes the [ Santam precinct ] for the avoidance of any doubt, Occupancy is at 90.24%, collections at 100%, reversions positive at 4.26%, renewals only at 5.87%, [ in-force ] escalations at 6.18%. And the gross cost-to-income ratio also contracting with 37.69% on the year to July, corresponding period for the half year HY 2026 was 36.87%; net cost-to-income ratio at 24.25% compared to the prior corresponding period of 21.81%, a slight creep there. And as I mentioned, operating costs creep pressures certainly are manifesting a lot more prevalent within the commercial portfolio, given the fact that you have a lot more costs running through your commercial assets as what you would have in the course of an industrial asset or a retail asset. Then in terms of our industrial portfolio, across the 422,000 square meters of gross lettable area, 97.98% occupancy, collection is just under 10%, very strong rent reversion of 14.32%, just given the fact that there's such high demand for our multi-tenanted offices and large occupier spaces in the industrial portfolio that we're able to really leverage that position to improve the reversionary percentages within the portfolio. On renewals, just under 6%, which we see as highly acceptable, robust in-force escalation of 6.83%. And it's notable that this is over 60% of the portfolio is GLA that's pushing out these numbers, and that's really fantastic from a performance perspective. Gross cost-to-income ratio 37.94%, in the prior period, 39.18%. The net cost to income ratio has contracted significantly at 2.90% compared to the prior corresponding period of 8.10%. And this is largely also as a result of the notable contribution that our solar portfolio in the industrial subsector is making to the -- to contracting that net cost to income ratio. Then just having a look at a general business update from a macro perspective, the portfolio has displayed incredible resilience during the half year. despite the volatility shocks that came through, which drove up inflation, which impacted interest rates and fuel costs. The [ Western Cape ] remains the strongest performing real estate market across the subsectors in South Africa. Now some people have criticized me for saying that the [ Western Cape ] will continue to outperform the rest of Africa. I stand by that position. If I compare the amount of money that the province and the city and the metro and all the other local authorities are putting into infrastructure, into investments, into attracting investment, coupled with the lowest unemployment rate in the country at around 18.1%; I do not see how any other region will outperform the [ Western Cape ] in the medium to long term. But we do hope that the rest of Africa can pick up steam. We've seen consistent renewal and leasing activity generated across the portfolio during the half year. Operating cost pressures are prevalent, but are being managed as best possible. As mentioned, we see that most prevalent within the office portfolio. We've done some accretive and strategy-aligned acquisitions secured during the half year, being the acquisition of [ Watergate and the Santam Precinct ], which are accretive to the portfolio from the respective transfer dates. We've also ensured that we've unlocked shareholder value with the disposal of [ Hamilton House and Cherine house in Devartacant ] at a premium to the original purchase price and our book value. There's been consistent progress on our renewable energy strategy, contributing to the NOI growth of the overall portfolio. We've organically unlocked additional value through the growth of our industrial portfolio through development in [ George and in Black Heath ], Notably, also a milestone for us in the half year was the conclusion of a new 10-year development lease for the development of the new [ Mambas distribution center in Black eat ]. And equally today, probably for the first time, we [ tell ] share with the market that we've acquired the commercial land next to our head office building in [ Century City ] for an organic commercial development, which will probably cost around ZAR 950 million across 25,000 square meters of land with the bulk of 1. And more of that detail will be spoken about in the interim results presentation. But I do speak about it also in the development acquisition and disposals portion of this presentation, but really an exciting growth opportunity for spear in addition to having really bought well, which should unlock value for us in the long term. Then just having a look at our sectoral split, so you'll see that during the period, as I mentioned at the beginning of the presentation, a very active period for Spear with the acquisition of a ZAR 442 million retail asset, a ZAR 960 million commercial asset and ZAR 107 million disposal of the [ Hamilton and Shipin ] properties, giving us a net growth of around just under ZAR 1.3 billion and a net gain of around 43,701 square meters of GLA. If you look at the consolidated new acquisitions and disposals position from a -- where the portfolio stands as at today, being the 31st of August, we still -- we've netted off the 2 assets we sold versus the 2 assets we bought, so we still on 40 high-quality [ Western cap ] assets ended at just under ZAR 8.4 billion. From a value split, you'll see that commercial industrial are effectively 50-50, both 38% of the portfolio, with retail at 23% of the portfolio. Retail GLA has increased to 101,914 square meters, and office GLA has increased to 145,398 square meters. And you'll see the point I made earlier, why it's important for us to have the industrial portfolio as a cornerstone, 63% of our gross [ table ] area within industrial is given that the operational metrics being the in-force escalations, the rent reversions and the occupancy rates are at their strongest across -- within that subsector and will continue to drive top line revenue for the business, bringing us to an occupancy rate of 96.6%. Then just moving on to the acquisitive growth disposals and development growth for the period. As mentioned on [ SENS ] and announced on [ Sense ], we acquired the [ Santam Precinct in Tiger Valley ]. That property successfully transferred into the Spear portfolio on the 26th of August 2026 to ZAR 960 million acquisition across 28,488 square meters of prime commercial GLA and one of the key primary office nodes in [ Cape time ]. It's got a passing growth rental of around ZAR 272 a square meter across the GLA of the property. We have a blue-chip [ covenant ] and an incumbent that recognizes the strategic location of the assets and its long-term usage thereof. The acquisition yield to shareholders was 9.67%, the weighted unexpired lease term of 28 months with an in-force escalation of 6.50%. We are exploring some PV solar opportunities on this site at the moment, and we'll update shareholders in that regard at the interim presentation. Just also to just speak to what's happening in the [ Tiger Valley ] area. According to the [ Super office ] vacancy survey for the second quarter 2026, the [ Northern Sabes ] office market comprises approximately 547,187 square meters of office space, of which approximately 73% comprises [ P-grade ] and AAA grade office accommodation. Now vacancy rates within those specific grades of office accommodation remain extremely low with P-grade vacancies at 0% and AAA-grade vacancies contracting in Q1 from 1.5% to Q2 to 0.8%, underscoring the strength of the occupier demand and supporting positive long-term rental growth fundamentals for Spear. We certainly see this asset as a high-quality institutional fit for our business. Then on the 27th of August, [ Watergate in Santen Michels Plain ] transferred into the Spear portfolio. which was ZAR 442 million acquisition cost across 19,681 square meters of GLA, which translates to about a ZAR 22,458 per square meter. We have an exceptionally strong tenant mix anchored by [ Shoprite, Capitec, Mister Price, Zone Fitness, Hungry Line and Steers ]. Around [ 77.3% ] of our tenants are nationals Therefore, it does give us a strong credit risk mitigation. The average trading density on this property ranges between [ 3,400 ] square meter per month with the anchors reaching [ Shoprite ] and the other large anchors reaching around ZAR 6,000 a square meter and our food trading net around ZAR [ 6,965 ] per square meter. The effort ratio remains in a low single digits at around 6.18% for the center, which we deem to be extremely good. The initial yield on this acquisition was 8.37% to shareholders. with a 24-month weighted unexpired lease term. The in-force escalation is at 6.7%. The asset also comes with a 1.2-megawatt PV solar installation, which will take our solar assets to [ 29 ] as at the 27th of August, which means that now 73% of the total portfolio is installed with PV solar. [ Watergate ] Center is the dominant convenience retail center in [ Mitchells plan ]. And we see the center as a growth asset over the long term, given the trading density is being printed and also a strategic location within [ Mitchell's Plan ]. Then having a look at some disposals. We, as a business, always critically look at when assets have achieved what we deem to be its best and optimal use. We successfully disposed of [ Hamilton and Cherine House ] for ZAR 107 million. The disposal yield was around 7.5%. The premium to the original acquisition price in 2024 was around 33%. And the unlock of NAV to shareholders with this disposal was around [ $0.05 ] per share. The proceeds of this disposal we deployed into accretive acquisitions and developments as we go through the year. Then on the development growth side, our development in [ George ] is progressing very well. I'm also pleased to announce that we've concluded around 1,000 square meters of letting activity on the first, call it, portion [ 165 ], which is around 5,500 square meters. Currently, you can see this is the picture of the current construction that's happening on the first parcel of the 30,000 square meters of GLA that we are unlocking over a period of time. This is tenant driven. But the [ portion 165 ] being multi-tenanted, ranging from 500 square meters to, say, 5,500 square meters, typically that you have to build slightly before the letting takes place because tenants that move within that space [ break ] don't generally move -- make decisions 2 or 3 years in advance. They make decisions to move between 3 and 9 months prior to their leases coming up. So we want to be active in that market. And just basically vindicating our decision to go on this first development was -- has resulted in the first lease being signed at our feasibility rentals and is on track to deliver Q1 FY -- sorry, Q4 FY '2027. Then as announced to the market, we've concluded a 10-year lease with [ Mambo, home and storage ] and their construction has commenced. And we will deliver the final modern warehouse to [ members ] in August 2027, 7,150 square meters. And this is, again, unlocking embedded bulk within the portfolio in [ Blackheath in our BrabaPark ] at an initial yield to shareholders of 8.6% and a capital cost of around ZAR 89 million. Then just having -- taking a forward-looking approach. For those shareholders that have been shareholders with Spear for a long time, you've seen our [ Pardon Island ] development feature on an ongoing basis. And I assure you that work is or in progress. And further announcements regarding this development will be forthcoming in the not-too-distant future. Then having a look at the parcel of land that we acquired from the city of Cape Town at their most recent auction in February '26, it's -- the building to your left is our [ Waterhouse building in Century City]. And the land, you're right, that's 2.5 hectares that we have the rights to develop, the rights are already in place. and we can develop 25,000 square meters of high-quality office GLA. The bulk rate is important because it's not a typo. It certainly is the bulk rate that we paid, and we think we can be bringing a very high-quality premium product to the market at very competitive rentals in the not-too-distant future. Then just having a look at the outlook. We remain resolved in our strategy to achieve a mission statement aligned outcome in FY 2027, as Spear's key performance indicators continue to deliver in line with our operational and financial strategy. Our outlook for the financial year remains positive, and the half year is summarized as follows. Our dips cadence is tracking at the upper end of our guidance. Our reversions were positive. Our cash collection is strong at 99%. Our solar PV portfolio is contributing material NII to the portfolio of ZAR 14.5 million. We've seen an improvement in our overall cost-to-income ratios as growth assets are stabilized, and we start to benefit from the economies of scale, which again is another manner we're trying to absorb that operating cost creep. Our successful capital raise has given us the courage of our conviction that our business is going in the right direction. We have invested and shareholder support in terms of our strategy. Our loan to value remains extremely robust and really primed for growth. Our acquisition led growth strategy is paying off with the implementation of our recent acquisition of [ Watergate and Sanlam]. And also just for the avoidance of doubt, just talking about these 2 new acquisitions. The [ DPS ] guidance that we talk about today has not yet considered the accretive contribution that [ Watergate Center and Santam Precinct ]will have on FY 2027 earnings. Management will provide an update on this [ DIPS ] guidance for the year at our half year results presentation in October. Now the above displays strong key performance indicators for HY 2027. We're confident we can continue to build on this momentum created in the half year, and we will endeavor to consistently update the market as new things emerge within our business. So for the half year, we will reaffirm our guidance at 6% to 8% growth, subject to the guidance assumptions set out below, we'll maintain a 95% payout ratio as approved by our Board of Directors. As always, our guidance assumptions have to be read in conjunction with our guidance that there'll be no load shedding for the remainder of FY '27, vacancies are reduced in accordance with management's forecast, lease renewals have successfully concluded as per management's projections, no major tenant failures occur over the balance of FY 2027 and we also don't anticipate any, tenants continue to successfully absorb rising costs associated with utility card charges, [ metal ] rates and other local authority charges, any further shifts in monetary policy are absorbed during the year and no civil unrest in Cape Town in the Western Cape or South Africa. Any deviation from these assumptions may have an impact on our forecast, which for the year ending February 2027. This now brings us to the end of the pre-close presentation. I want to thank you all for joining us and being in attendance by our YouTube channel today. I'll be back shortly joined by our CFO, Christian Barnard, to take any questions they may have come through and will host the Q&A. Thank you very much.

Welcome back to the HY 2027 pre-close Q&A session. I want to just also extend a warm welcome back to our CFO, Christiaan Barnard and also congratulate Christian and his beautiful wife, [ Jon ], on the arrival of their beautiful boy, the sun Christian Junior. And yes, first step back on the job. So welcome back straight into the spotlight. We haven't received. We've only received one question, and that is from [ Trinity at anchor capital ]. Could you shed some light on why guidance was not upgraded, given earlier transfer the [ tag ] offices and a few interest rate hikes then forecasted? So I think, [ Trent ], I think the what we've always prided ourselves in is that we want to make sure that we have all the information at our disposal. The transfers have occurred slightly earlier than anticipated. But these assets are still being stabilized into the portfolio. When we have absolute certainty as to what the financial effects will be, we know that they will be accretive, and they will contribute. And also once the CFOs see to slightly [ warmer ] than what it was for the past 2 or so months, we certainly will update the market. And we'll also give a far more detailed guidance presentation at the interim results presentation in October. We do have another [ SAB ] meeting coming up now in September. Yes, the inflation print was slightly lower than what market expectations were. But we also are experiencing, as I mentioned in the presentation, a period of incredible volatility. We're seeing fuel prices continue to increase. It may force the [ subs ] hand. And all of these factors flow into why we decided to not update the guidance yet, and we'll update the market once we've also run the process from a governance perspective through our Board at the interim results presentation in October.

Yes. Maybe if I can just add, we also -- the guidance will also be very much driven to the fullness of [ HY ] '27. I mean we still have to conclude August, which is still a winter month. I guess we're at the end of it. We still have to include those numbers. together is we also have to consider what any possible indication will be in terms of our possible [ DRIP ] happening in November, which our Board wants us to consider once again. So all of these things will be discussed and reviewed in the next month or 2 now [ done ] back, and we will then provide full guidance when we know for certain what the numbers would look like towards the end of the financial year. And current be, there's no other questions, but come in, but please do send them, and we will answer them by e-mail or are you happy to call or Whatsapp you always do.

Excellent. Well, thank you very much. That seems to bring us to the end of the Q&A session, and we thank you for tuning in today, and thank you for your ongoing support. And look forward to reporting back on our HY 2027 results in October. Thank you very much.

Thanks.