Spear REIT Limited has recently disclosed its group performance under the national lockdown in a pre-close investor presentation.
Spear announced an impressive year to date with rental collection of 93.25% of total rental billed. Of the 419 tenants within the portfolio, 196 were given Covid-19 related relief through rental deferments or rental credits to the value of R15.5 million with approximately R5.1 million being repayable over a period of one to twelve months. Tenant arrears for the period were R16.1 million and reducing.
CEO Quintin Rossi says that Spear has delivered on its short-term strategic objectives which were announce in May 2020: “Thanks to our high-quality portfolio, regional focus and hands-on asset management approach, we have achieved a 93.14% rental recovery rate for the period 1st of March 2020 to the 31st of August 2020.”
The listed company’s portfolio consists of a diverse investment of 32 properties in the commercial, industrial, retail and hospitality sectors valued at R4.5 billion with a gross lettable area (GLA) of 453 319m2. Spear’s tenant retention rate remains at 91.4% with its in-force lease escalations at 7.23%.
During the interim period, 130 000m2 of space came up for renewal of which more than 93 000m2 has already been concluded. “Covid-19 has made an impact across sectors” says Rossi. “but thanks to Spear’s resilient portfolio and our engaged asset and property management team, we have a year to date finalisation of 72% of FY2021 portfolio renewals.”
Spear’s retail, commercial and industrial assets have performed in line with management’s forecast under all levels of lockdown with all three segments boasting above 90% occupancy rates and jointly, a 93.40% collection rate. Portfolio vacancies have increased marginally but only partly due to the impact of the pandemic along with natural vacancy churn within the portfolio.
Rossi says Spear’s diverse assets are located in highly attractive locations within the greater Cape Town area, underpinned by strong lease covenants: “Spear only invests in convenience retails assets which have performed consistently well over this time with all anchor tenants deemed essential services from the start of the lockdown” he says.
The industrial portfolio makes up most of the portfolio’s GLA and it has retained its strong performer status during the interim period with the office portfolio maintaining a 92% occupancy rate.
Spear’s hospitality assets have been the worst affected. Management had forecasted zero hospitality income for FY2021. Spear owns two hotels – Double Tree by Hilton, Cape Town and 15 on Orange by Marriott. The Double Tree by Hilton generated R2.5 million in revenue during May 2020 by offering repatriation services. Rossi says he is particularly proud of the entrepreneurial way that management unlocked this revenue.
Spear has ensured there are no going-concern risks within the business, while retaining more than R180 million in available liquidity.
During the recent presentation, Rossi further advised that Spear had disposed of or was in the process of disposing of four non-core assets (one of which has already been transferred) to the value of R148.8 million. All proceeds from these disposals will be used to reduce the group’s overall debt. Once the disposal has been completed, this will reduce the group’s loan-to-value (LTV) by 2.5%. The company’s medium-term strategy will be to operate within a 38% – 42% loan to value range. Spear’s ability to sell smaller assets in the current market environment places the company in an advantageous position to reduce group debt in line with their strategy.
“It is difficult to predict fully the economic outcomes of the pandemic on the real estate sector and on Spear, “says Rossi. “Spear has elected not to issue any FY2021 distribution guidance until latest November 2020. Management’s focus and energy will remain on tenant management, debtor management, balance sheet and income statement management, and rental collections in line with the percentages collected year to date. We anticipate that we will maintain our mid-high road collection scenario”.
“All the evidence shows that Spear will emerge from this pandemic even stronger. Our core portfolio is defensive and is underpinned by strong lease covenants and high-quality tenants.”
Spear will prioritise its balance sheet over pay-out ratios during the interim period as the remainder of the financial year trends towards more stabilised income streams and stronger cash flows as tenants are back at work and able to honour their rental commitments.