• Spear REIT Limited's first quarter performance was consistent and met management expectations.
• The REIT successfully reduced vacancies across its portfolio, especially in the office segment, and achieved an average rental reversion rate of 4.17%.
• While Spear remains exposed to South Africa's weak economy, its focus on the Western Cape has provided some insulation, and its high-quality portfolio remains defensive in nature.

Sandton - Spear REIT Limited released an operational and financial update for the three months ended May 31, showing a stable performance across its property portfolio. Spear is the only diversified REIT with a sole focus on the Western Cape region of South Africa.

The Spear REIT said in a statement that its core property portfolio traded in line with management expectations during the first quarter of the 2024 financial year. A key focus for Spear during the quarter was reducing vacancies, especially in the office segment, and keeping costs under control.

Spear reduced vacancies across its portfolio by 1.02 percentage points to 6.80% of total lettable area, from 7.82% at the end of the 2023 financial year. The REIT attributed the lower vacancies to the successful execution of its leasing strategy, higher demand for office space and continued interest in its multi-let industrial properties.

“FY24 remains in its infancy, however, management is confident that the positive inroads made into the portfolio vacancy rates and the resultant improved revenue generation, bodes well for Spear throughout FY24,” Spear said.

Source:Spear Reit Financials/ Equity Axis

The REIT achieved an average rental reversion rate of 4.17% during the first quarter, up from 3.69% in the 2023 financial year. Its average annual rental escalation remained at 7.40%. Spear said trading conditions continue to be challenging but its focus on active asset management and hands-on property management has helped. The REIT has also been proactive in renewing leases ahead of expiration.

Spear cautioned that it remains exposed to South Africa’s weak economy, low growth, and high inflation and interest rates. However, its focus on the Western Cape has provided some insulation. The province and city of Cape Town continue to invest in infrastructure to support population growth. 

“Spear’s high-quality portfolio remains defensive in nature, positioning the Company to take advantage of growth opportunities in the Western Cape,” Spear said. 

Spear said its balance sheet and income statement remain in good shape, with receivables and cash collection steady. Sustainable cash flows across the portfolio should continue through the financial year, it said.

In terms of its property portfolio, Spear’s industrial segment continued to perform well, with demand supporting a 10% increase in rentals upon renewal during the quarter and vacancies declining to 1.5% from 2.23% previously. The retail portfolio was 99.47% occupied but achieved slightly negative rental reversion. The commercial portfolio showed signs of improving, with new lettings reducing vacancies at some office buildings. Spear took transfer of a new industrial property, The Island Urban Logistics Park, during the quarter.

Source:Spear Reit Financials/ Equity Axis 

Spear said it disposed of the Liberty Life Building in Century City to Capitec Bank, with the deal expected to close shortly following approval by competition authorities. Spear will use proceeds to pay down debt on the building and retain the balance. 

On the funding side, Spear's short-term debt facility of R375 million for the Liberty Life Building will be repaid on transfer of the property. The REIT is monitoring interest rate hedging options to increase its hedging to between 65-75% of debt. Cash collection remains strong, supporting Spear's intention to pay out 93-95% of distributable earnings. 

Looking ahead, Spear acknowledged that difficult conditions are likely to persist, with consumers under pressure and costs rising for tenants. However, with its focus on the Western Cape, active management and cost controls, the REIT expects to deliver consistent results for investors. Guidance will depend on factors like levels of power cuts, vacancies, renewals, tenant health, municipal costs and interest rates.

“Spear’s guidance once provided will be based upon, informed by and impacted by the following: loadshedding stages are mostly limited to between stage 1 and stage 4 in City of Cape Town for the remainder of FY24; vacancies are reduced in line with management’s forecast; lease renewals are concluded in line with management’s forecast; no major tenant failures occur during the year; tenants continue to successfully absorb rising costs associated with utility charges, municipal rates and diesel charges; mitigation of further SA Reserve Bank interest rate hikes; and no civil unrest within Cape Town, the Western Cape or South Africa,” the REIT said. 

Analyst comment:

Respect Gwenzi, Chief Analyst at Equity Axis, said Spear REIT’s first-quarter update showed a steady performance, with management executing on key priorities like reducing vacancies and controlling costs. 

“The focus on the defensive Western Cape property market and hands-on management of the portfolio should help Spear navigate difficult operating conditions, though the risks of consumer pressure, tenant failures and higher interest rates persist,” Gwenzi said. 

“With vacancies on a downward trend, especially in the office segment, Spear’s income streams look sustainable. And the disposal of Liberty Life Building at a good price will strengthen the balance sheet. Overall, this update provides confidence in management’s ability to steer Spear through choppy waters.”

Gwenzi said investors should continue to see Spear as a solid, well-managed REIT but monitor risks around tenants, the economy and interest rates in coming months.

- Equity Axis News