Spear to dispose of hospitality assets to achieve targeted LTV band

Quintin Rossi, CEO of Spear REIT Limited.
Quintin Rossi, CEO of Spear REIT Limited.

Spear REIT Limited has declared an interim distribution of 29.34 cents per share for the six months ending on the 31st of August 2020 in the company’s recent interim financial results.

Operating in one of the most challenging modern-day trading environments, Spear has successfully executed on its short-term Covid-19 strategic objectives says Quintin Rossi, CEO of Spear.

Income statement consistency has been maintained with strong rental collections during the period of 96.9% of revenue billed” he says.

The leasing and property management team have achieved good results on renewals and relets for the period, resulting in a 91.2% tenant retention rate. Spear’s regional focus and hands-on asset management approach has remained one of our competitive advantages as management’s proximity to its assets and tenants have allowed for speed engagements and crisis resolution in a mutually acceptable manner. During the interim period, the core portfolio has remained resilient underscoring the deep value proposition that the Spear portfolio represents.”

Rossi further notes that Spear’s team has focused 100% of their attention and resources solely on the Western Cape with a real estate portfolio that consists of thirty-two properties with a gross lettable area (GLA) of 453 016sqm. The average property value has increasing to R138 million compared to the previous reporting period of R130 million. Spear began the FY21 with 130 000sqm due for renewal or relet during the year, excellent progress has been made with 101 125sqm finalized during the interim period. Spear’s lease profile remains defensive with a weighted average lease expiry (WALE) of twenty-eight months.

Year to date rental collections under the circumstances have been satisfactory and in line with the high road scenario plan set out to the market in May 2020. The company has reported the following FY2021 year to date rental collection percentages:

  • Rental collections versus revenue billed – 96.90%.
  • Rental collections versus original budget (set in December 2019 and assumes no pandemic) – 86.13%.

Spear’s management remains optimistic that it can maintain its robust collection momentum for the remainder of FY21 (in the absence of any significant tenant failure) as 100% of its tenants are legally able to operate from their premises and the lions shares of economic activity has recommenced nationally. During the interim period, management has provided 192 of its 442 tenants with Covid-19 related relief.

The hospitality portfolio has been the most severely impacted. Zero income has been forecasted from any hospitality assets during FY21 irrespective of low levels of revenue being generated post the interim period. The company has further announced that it has accepted a cash offer to dispose of 15 on Orange Hotel in Cape Town for the sum of R280 million. The proposed disposal is subject to a due diligence period and Competition Commission approval. Management has advised that it will exit the remainder of its hospitality assets in an orderly manner over the next twelve to twenty-four months and all disposal proceeds will be utilised to settle debt and to support management’s loan to value (LTV) reduction roadmap to achieve a targeted LTV band of 38% – 43%.

The company remains sufficiently capitalised with no going concern risks as solvency and liquidity ratio tests remained positive. Regular cashflow analysis is conducted to stress test cashflow on a rolling twelve-month basis which includes a range of scenarios of tenant collections and creditor requirements.

Spear’s management’s focus and energy remains on rental preservation and business continuity throughout the pandemic, associated lockdowns and beyond. The company will not be issuing any distribution guidance for the second half of FY21 and management will provide a trading update and guidance of a final distribution per share in a pre-close presentation prior to year-end.

It remains difficult to fully predict the economic outcomes of the pandemic on the real estate sector and on Spear as a South Africa navigates its way through the aftermath of the Covid-19 pandemic and the severely negative economic consequences left in its wake. With the exception of a second wave of Covid-19 infections, significant market or tenant failure or another government-imposed lockdown, management is confident that cashflow generation will be maintained and that Spear will continue to operate within its high road scenario set out to the marking during its May 2020 presentation” concludes Rossi.