Spear REIT

Spear REIT: Strong Asset Management Strategies and Favourable Market Position Support Growth Prospects

Jul 5, 2023 | News

Anchor Stockbrokers Initiate Coverage on Western Cape- Focussed Spear REIT

Spear REIT Limited (SEA on JSE), a prominent South African real estate investment trust (REIT), is gaining attention for its robust asset management strategies and favourable market position. Anchor Stockbrokers, a leading equity research firm, has initiated coverage on Spear, recognising its focus on the Cape Town Metropole and its strong financial performance as key factors that make it an attractive investment opportunity in the current market.

Lwando Ngubentombi, an equity research analyst at Anchor Stockbrokers, highlighted Spear’s appealing focus on the Cape Town Metropole, stating, “We find Spear REIT’s focus on the Cape Town Metropole attractive given the population, employment and economic growth, the scarcity of land, low supply of new commercial property, and vacancy/reversion trends. Even though half of the portfolio’s rent has come from the office sector, it has outperformed every diversified REIT we cover in SA since its listing. We like the focus on affordable properties where the land value provides a meaningful underpin and has supported rental growth.”

Key Highlights from the Report:

1. SPEAR’S Background:

Spear REIT Limited is a Western Cape-only – focused REIT with a diversified portfolio of industrial, retail and commercial properties. The company’s emphasis on affordable properties with significant land value underpinning has supported attractive rental growth. The expected rental growth trend, along with potential improvements in vacancies, position Spear for continued success.

2. City of Cape Town Real Estate Market Analysis:

The report underscores the robust increase in jobs in the finance, insurance, and business services sectors, reflecting the accelerating semigration to Cape Town. This compensates for the lag in employment levels in the tourism, catering, and accommodation sectors. The weak rand is expected to aid the recovery of the tourism industry, further driving demand for commercial real estate in Cape Town. With limited new supply and bottomed-out office vacancies; according to the analytical team at Anchor, the market is poised for rental growth.

3. Strong Balance Sheet:

Spear REIT has demonstrated superior rental growth and demonstrates a focus on value-for-money properties. The company maintains a low loan-to-value ratio (LTV) and high asset yields, ensuring a strong interest cover ratio (ICR). The completion of the Liberty Life office disposal is anticipated to further enhance the LTV.

4. Distributable Income (DI):

The report forecasts a net rent of R333 million, distributable income of R176 million, and distributable income per share (DIPS) of ZAc83.20 for FY24. The expected DPS for FY24 is ZAc79.87.

5. Valuation and Target Price:

In the comprehensive analysis, the sum-of-the-parts (SoTP) approach was used to assess the value of Spear REIT. As a result, a target price range of ZAc830 to ZAc880 was determined. It is noteworthy that despite Spear REIT’s impressive rental growth, the company’s trading reflects a 12% Funds From Operation (FFO) yield, suggesting significant potential for further growth in the future. FFO yield is a financial metric used in the real estate industry to measure the profitability and investment potential of a REIT.

Spear REIT Limited, listed on the Johannesburg Stock Exchange (JSE), focuses on acquiring and managing commercial properties in the Western Cape. The company’s portfolio consists of 28 strategically located properties across Cape Town’s key commercial nodes. At the company’s recent year-end results presentation, Quintin Rossi, CEO commented, “Our diligent efforts have yielded strong results. With a 1.5% increase in tangible net asset value per share in the reporting period, we continue to deliver sustainable growth and value to our shareholders. Spear has demonstrated that our active and acute asset management strategy has resulted in continued growth, as shown in an 11.31% increase in dividends per share for FY23. We remain resolute in our mission to provide consistent results and maximise long-term shareholder value.”

Commenting on the report, which can be found on the Spear website, Nesi Chetty, Head of Property at Stanlib, said that investors appreciate the appeal of a niche-focused retail and industrial fund in the Western Cape. Chetty noted that vacancies are low across the portfolio, with ongoing evidence of strong leasing activity in the current operating environment. “The current management team at Spear has done an excellent job of growing assets and delivering consistent distribution growth since listing. They have been very active in the market, utilising asset disposals and share buybacks to unlock value. Additionally, they have a strong balance sheet, with a loan-to-value ratio (LTV) at 36%, and minimal refinancing requirements this year, thanks to their robust debt maturity profile.”

Chetty added that valuations on Spear’s properties appear conservative compared to current cap rates. While real estate fundamentals in their market continue to shift, they are experiencing strong growth in net operating income (NOI). Spear also exhibits strategic optionality in both current developments and future opportunities. “We maintain that it remains an attractive investment for shareholders seeking long-term income yield and growth,” he concluded.

Ngubentombi agrees, saying “We believe that Spear REIT’s strategic focus on the Western Cape, coupled with its track record of strong performance, positions it well to deliver long-term value to shareholders.

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