SPEAR REIT LIMITED (JSE: SEA) marked its FY23 reporting period with an 11.31% growth in distribution per share (DPS), resulting in a DPS of 75.97 cents for the financial year and a final distribution per share of 38.84 cents for the 6 months ending 28 February 2023. Spear reported annual revenue of R 581,2 million for FY23, up from R 574,8 million in FY22. CEO, Quintin Rossi says that management has held firm on its key strategic objectives of being Western Cape-focused specialists in industrial, commercial, retail, and mixed-use property assets. The company’s strong focus on this strategy, coupled with the emphasis on hands-on asset management, has yielded fruitful results and has enabled it to navigate through a challenging and unpredictable trading environment, successfully.
Addressing shareholders at the FY23 annual results presentation, Rossi highlighted the company’s fundamental features, underpinned by a simple capital structure, and easy-to-understand business operating model. With no exposure to cross-currency interest rate swaps, Spear continues to maintain a robust financial position. A key strength of Spear is its acute understanding of the Western Cape real estate market and its by-design approach of being within close proximity to all of its assets.
Supported by a proven and positive track record, Spear has consistently generated positive net cash flows from its operations. The management team and board of directors are heavily invested in the business, showcasing a clear alignment of interests with shareholders. Spear’s revenue growth for the reporting period was 3.48%, complemented by a 5.43% net property operating profit growth.
Notably, expenses were prudently managed, with only a 1.15% increase in operating expenses and a 1.13% decrease in administrative expenses.
Rossi remarked, “These attributes, as simplistic as they may seem, continue to form the foundation of our core business. We remain dedicated to delivering value and driving growth in alignment with the interests of our shareholders.”
During the presentation, the company highlighted a 1.50% increase in Tangible Net Asset Value Per Share from FY2022 to R11.47. With a solid portfolio consisting of 28 assets valued at a total of R4.22 billion, Spear has achieved an impressive FY23 cash collection rate of 98.61%. The company has strategically reduced the size and value of its core portfolio through close to R500 million of assets sold. The disposals of non-core assets and assets in the hospitality sector bolstered the balance sheet and led to a reported Loan-to-Value (LTV) ratio of 36.30%. This bodes well for the outlook, as Rossi confirmed: “The proceeds from these disposals have been strategically reinvested to strengthen the balance sheet, positioning Spear for future growth as opportunities arise amidst shifting interest rate cycles.
Management reported improved in-force escalation metrics of 7.4% for FY2023, an uptick from 6.3% in FY22. A hallmark of Spear since its inception has been strong portfolio occupancy rates as management executes its early engagement strategy. For FY23, the reported portfolio occupancy rate was 92.18%.
Outlook
The projected performance of Spear remains directly linked to its regionally focused strategy of operating within the Western Cape economy as it maintains resilience across the real estate sector. The effects of semigration and general confidence in provincial infrastructure and administration remain key capital attraction points, placing Spear in a favourable position to expand its investment universe further across the Western Cape. Although the macroeconomic conditions within South Africa remain a major concern, exacerbated by the crippling energy crisis and high unemployment rate, Spear’s core portfolio remains defensive, underpinned by strong lease covenants in highly desirable locations within the Western Cape. Rossi accepts that the trading climate remains challenging, and the longer-term impact of the above factors is likely to affect cost creep, placing pressure on margins, cost of occupancies, and net property income.
Management will cautiously navigate and mitigate, as far as possible, the negative impact of interest rate increases and operating cost creep. Rossi noted that “We do expect our portfolio to generate some growth in the year ahead, but the extent of the growth is currently difficult to quantify given the myriad of headwinds South Africa is currently experiencing. But despite the headwinds already experienced and overcome, Spear’s FY23 financial performance has delivered impressive results, reflecting a focused, nimble, and consistent business approach. Spear remains a business that is acutely and actively managed to effectively counter negative market forces, and this strategy will continue moving forward,” said Rossi in closing.
Highlights
- Spear owns assets valued at R4.22BN, with a diversified portfolio consisting of 28 assets.
- Loan-to-Value (LTV) ratio stands at 36.30%.
- Distribution per Share (DPS) of 75.97 cents.
- Tangible Net Asset Value Per Share increased by 1.50% from FY2022, reaching R11.47.
- Cash collections at a 98.61% collection rate and net cash derived from operating activities amounting to R43M.
- In-force escalation of 7.4% for FY2023.
- 26 assets are directly supplied by the City of Cape Town’s electricity supply.
- SG’s performance is real and measurable, through its bursary programme, solar PV, and water augmentation solutions, all continuing its policy of sustainable returns.
