Spear REIT (SEA: SJ), the only regionally focused REIT listed on the JSE, announced its FY2024 results. Since listing on the JSE, as a specialist REIT eight years ago, Spear has steadily grown its asset value to R4.62 billion, with a diversified portfolio of industrial, commercial, retail, and mixed-use assets totalling 426 542m² of gross lettable area (GLA). In FY2024, Spear has achieved a significant milestone as it marked the first year in which its annual gross revenue surpassed R600 million, driven by a 5.92% increase in group revenue for the year.
Spear announced a full year distributable income per share (DIPS) of 82.99 cents and a total distribution per share (DPS) of 78.86 cents, which represents a growth of 1.04% and 3.80% respectively from the prior financial year. With cash collections remaining consistent and robust at 98.92% for FY2024, the board approved and declared a final DPS of 40.53 cents based on a payout ratio for the final six months of the year, amounting to 96% of DIPS, equating to an annualised average payout ratio of 95% for FY2024.
Sticking firm to their Western Cape-only strategy, Spear’s results indicate an against-the- trend, weathering of the storm. The listed property sector continues to face challenges due to South Africa’s sluggish economic climate, persistent loadshedding, albeit in a hiatus, higher-for-longer interest rate environment and the more gradual return-to-office trend.
During the presentation of the results, CEO Quintin Rossi emphasised the importance of Spear’s Western Cape specialisation, stating:
“This has been one of the key enablers in achieving our strong financial performance during FY2024. Our highly motivated and focused asset and property management team has also played a significant role, generating value across our core portfolio by following the hallmark of Spear’s active management approach.”
Highlights
Highlighting the company’s achievements for FY2024, Rossi pointed out the strategic objectives reached.
The acquisition of The Island Urban Logistics Park on the 9th of May 2023, for R 185 million at an initial yield of 9,75% which is aligned with Spear’s strategic objectives to continuously increase portfolio exposure to high-quality industrial real estate with a focus on logistics, urban logistics and bulk warehousing within the Cape Town Metropole. Since acquisition, the property has yielded 10.17% for FY2024 again demonstrating Spear’s active asset management style and ability to find value. The Island acquisition bolstered Spear’s already high-quality industrial portfolio and will meaningfully contribute to the sustainable cashflows generated across the balance of the 100% Western Cape portfolio.
During Q4 of FY2024, two new PV solar installations were completed: an extension of Mega Park and Sable Square, which added 2MW to Spear’s PV solar portfolio. Management has adopted a three-pronged approach to Spear’s PV Solar rollout, including a combination of capital expenditure installations, roof rental installations with long-dated lease agreements, and instalment sale installations.
To date, more than 55% of the current Spear portfolio has PV solar installed. The commissioned capacity generated 7.4MW in FY2024 and is forecast to generate just under 8MW of electrical supply, providing up to 24% of Spear’s total future energy demands.
Spear initiated Phase 1 bulk infrastructure works on GTX Park in George. GTX Park is located within the greater 1,2 ha Airport Business Park precinct of George, neighbouring the George Airport.
February 2024 Capital Raise: On the 7th of February 2024, Spear announced the completion of a private placement and raised R313,5 million worth of new equity.
On the 28th of March 2024, Spear entered into acquisition agreements with Emira Property Fund Limited to acquire 13 Western Cape fund-quality real estate assets. The acquisition of this portfolio aligns with Spear’s investment strategy providing an opportunity to meaningfully increase its market share within the Western Cape, with a complementary high quality diversified property portfolio comprising industrial, retail, mixed-use and commercial assets, enhancing its value to R 5.4 billion and expanding its gross leasable area (GLA) to 502,000m².
Spear’s tangible net asset value (TNAV) per share increased by 2.79% to R11.79 (compared to R 11.47 in FY2023) for FY2024. This increase is primarily attributed to upwards portfolio fair value adjustments at year-end. The core portfolio has shown welcomed asset value growth from growing cashflows and improvements in general real estate fundamentals in the Western Cape, with a like-for-like total of R 153 million increase in portfolio fair value adjustments in FY2024.
Another notable highlight is that Spear exhibits one of the most favourable rental reversion profiles among listed property companies in terms of operational performance with a negative 0.37% rental reversion profile for the diversified portfolio during FY2024.
Sectoral performance
Commenting on the portfolio diversification, Rossi said, “Real estate is the business of local markets, and we believe that a concentrated and localised approach provides relief from several of the headwinds being faced in the real estate sector in South Africa. In our focused regional approach, we have the ability and skill set to continue to invest, develop, and redevelop across four key asset types: industrial, retail, commercial, and mixed-use.
In FY2024, Spear’s industrial portfolio demonstrated resilience and growth, with robust occupancy rates of 97.03% and strategic acquisitions like The Island Urban Logistics Park, driving expansion. Similarly, high occupancy rates of 95.54% and positive rental reversion rates in the retail sector underscored stable performance, supported by a defensive positioning strategy and a significant proportion of long-term national tenants. Despite challenges, the commercial sector saw post-period improvements, with occupancy levels at 84.37% and successful relets signalling positive momentum for Spear’s office portfolio.
While the Western Cape demonstrates resilience within a challenging macroeconomic climate, the upcoming general elections on the 29th of May 2024 marks a significant juncture in South Africa’s political landscape. As many business leaders navigate through economic uncertainties, including muted growth and persistent challenges, Spear’s focus remains on mitigating negative impacts and fostering growth opportunities. “Despite the hurdles, we anticipate our portfolio to chart a growth path in the year ahead, driven by strategic resilience and prudent management.” said Rossi.
Outlook
In the upcoming fiscal year, while the trading environment is expected to pose challenges, particularly with consumers facing heightened living costs, the potential onset of an interest rate tapering cycle in the latter half of 2024 brings a glimmer of optimism for both the South African economy and the real estate sector. Lower financing expenses, coupled with stronger portfolio escalations, are poised to bolster Spear’s profitability. Management expects there to be net operating income (NOI) growth at property level in the year ahead, the extent of distributable income growth in the form of a forecast compared to FY2024 at this point in time is difficult to quantify given in particular the higher-for-longer interest rate environment, operating cost creep, and the impact of load-shedding in South Africa in the year ahead. Management will endeavour to provide an update on its FY2025 DIPS guidance at HY2025.
Rossi concluded that a strategic and cost-conscious approach would be key in FY2025, “To navigate market pressures and counteract the absence of real growth stimuli, Spear remains committed to maximising value in the current subdued trading climate. While mindful of the challenges ahead, we maintain cautious optimism that FY2025 will align with our mission statement, delivering favourable outcomes for our stakeholders. We are perfectly positioned to seize growth opportunities as they arise and remain confident in our ability to adapt and thrive in an evolving economic landscape.”
