Spear REIT no longer has any direct real estate exposure to the hospitality sector with the recent conclusion of its disposal of the Cape Town hotel, 15 on Orange, for R246 million.
“It has been our strategy, as announced in 2019, to exist the hospitality sector and our disciplined approach to stay on course has been achieved with the successful sale of this property,” commented Spear REIT CEO, Quintin Rossi.
The company’s portfolio composition will now be fully aligned with management’s strategic objectives of owning only fixed income producing Western Cape assets, comprising of industrial, retail, commercial, and mixed-use properties.
The disposal consideration represented a 7% discount to the call option price of R265 million, as agreed in terms of the option agreement. The discount was acceptable to Spear’s board of directors, given the fact that the sale would be implemented prior to the expiry of the period within which the call option could have been exercised. Management also considered the cost of not concluding the disposal under the current macro-economic environment, considering rising interest rates and the forfeiture of alternative investment opportunities available to Spear which support its investment and capital allocation strategy.
There is no related debt to be settled as a result of the sale and the full disposal consideration will be received by and be available to Spear. The disposal yield on the asset is 8.1% and with management’s proven ability to redeploy capital through sound and strategic capital allocation, the proceeds will be put to work in the balance sheet.
The disposal consideration will be utilised to grow Spear’s portfolio in a strategy-aligned manner, following a value investment approach. Whilst strategic investment and growth opportunities are being pursued and finalised, the disposal consideration will be applied to settle certain of the existing debt facilities permanently, and the remaining portion will be held in Spear’s existing debt facilities.
This strategy will reduce interest costs, in line with Spear’s strategic growth objectives. The application of the disposal consideration will reduce the group loan-to-value (LTV) by 335 basis points and the forecasted Spear group LTV, following the sale, will be 36.8% firmly positioning the balance sheet to take advantage of growth opportunities as and when they present themselves.