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SPEAR REIT LIMITED - Voluntary Operational and Financial Update for Three Months Ending 30 November 2021

Release Date: 17/12/2021 16:50
Code(s): SEA     PDF:  
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Voluntary Operational and Financial Update for Three Months Ending 30 November 2021

(Incorporated in the Republic of South
(Registration number: 2015/407237/06)
Share code: SEA
ISIN: ZAE000228995
(Approved as a REIT by the JSE)
(“Spear” or “the Company”)



     We are pleased to provide a high-level update for the three months ending
     30 November 2021 (“Q3”) for the financial year ending 28 February 2022.

     Management has continued to successfully navigate Spear through the pandemic
     environment and continued executing its hands-on and active asset management
     approach. Spear’s Western Cape specialisation has been key to its financial and
     operational achievements for the year to date. Proximity to portfolio assets has been a
     strategic and competitive advantage during the year ensuring tenant and rental
     preservation. As announced on SENS the disposal of the Double Tree by Hilton, Cape
     Town is unconditional and will result in Spear having zero exposure to variable income
     producing assets by the financial year ending 28 February 2022, ahead of what was
     announced during the interim results presentation for the 6 month period ended 31 August

     Whilst the macro-economic conditions remain extremely challenging, management
     remains intently focussed on the execution of its strategic asset management objectives
     focussed on maintaining high levels of rental recoveries and occupancy percentages
     across the various asset types. Spear’s core portfolio remains of a high-quality, defensive,
     and positioned to take advantage of growth opportunities in the Western Cape.

     Operational performance across the portfolio has been robust and in line with
     management’s forecast and in certain instances exceeded management’s expectations,
     in particular in the letting up of vacant space within the portfolio. Renewal negotiations
     and finalisations have continued to remain in line with management’s expectations,
     limiting significant negative rental reversions at portfolio level. The trading environment
     has shown a noticeable improvement since Spear’s interim results announcement for the
     6 months ended 31 August 2021 irrespective of the 4th infection wave muting a growing
     hospitality and tourism recovery path.

     Management believes that the Western Cape, and Cape Town Metropole in particular,
     will lead the recovery of demand for rental & hospitality units compared to the rest of South
     Africa, given the pre-pandemic low vacancy levels across the real estate sector in the
     Western Cape, scarcity of supply and the pending business on the books for hotel
     accommodation once unrestricted travel recommences. Management welcomes the
     news that South Africa has once again been removed from travel red lists permitting
     international tourism to flow into South Africa.
     Both the balance sheet and income statement of Spear remain in a healthy state as trade
     receivables continue to reduce on a consistent basis and management’s loan to value
     (“LTV”) reduction roadmap starts to bear fruit together with the Company’s hospitality exit.
     Spear’s consistent and sustainable cashflows across the portfolio have continued to
     underpin the financial and operational performance of the business, as Spear navigates
     back towards pre-pandemic rental recovery rates, occupancy rates and financial


     Sectoral Update:


     Spear’s industrial portfolio has continued to show resilience with rental demand
     outstripping supply as portfolio assets are located in highly attractive nodes and rental
     levels are in line with market demand. The lion’s share of the industrial portfolio remained
     unaffected by the pandemic environment for the year to date. Lease renewals have
     remained robust for the year to date with limited rental reversions being absorbed.

     Convenience Retail:

     Spear’s convenience retail portfolio has met every milestone set by management for the
     year to date. None of Spear’s retail assets are reliant on any form of local or international
     tourism to support its trading success. 41% of the retail portfolio’s gross lettable area
     (“GLA”) is occupied by national tenants on long dated leases and have traded
     successfully for the year to date despite the variety of alert level adjustments. Spear’s
     open air convenience retail assets have reported month on month improvements in footfall
     and tenant turnovers.


     Spear’s commercial portfolio was negatively affected by the pandemic, giving rise to
     vacancy creep. Management deployed aggressive marketing strategies to mitigate
     against further vacancy creep since the interim results for the 6 months ended
     31 August 2021. Notable and very positive inroads have been made in letting up a variety
     of office units post 31 August 2021. Spear’s commercial assets remain attractively
     positioned in the market from a locality and overall value proposition perspective.
     Management remains confident that further inroads will be made in vacancy compression
     as more and more businesses commence return to office programs. Renewal activity has
     been positive during the period despite the current trading environment.


     Spear’s hospitality exit has commenced with the disposal of the Double Tree by Hilton,
     Cape Town. Trading conditions have improved both in the form of accommodation and
     events. The Capital, 15 on Orange, which is now under a fixed income lease has reported
     positive trading across all revenue centres since opening the hotel under the new brand.
     The Double Tree by Hilton, Cape Town has been the beneficiary of increased demand for
     business and travel accommodation together with improved food and beverage and
     conferencing business.

                      Industrial   Commercial       Retail         Hospitality     Total

      Total GLA       260 229       134 346         48 695         28 048          471 318
      Vacancy %       1.75          4.19            0.58           -               6.52
      of total
      Sector          3.17          14.70           5.65           -               -
      vacancy %
      Reversion       (2.98)        (6.26)          (1.17)         221.27          14.51*
      % YTD Nov
      WALE            21.37         27.15           27.08           49.66          25.76
      Average         6.74          6.27            6.22           5.00            6.37
      Revenue         46 462        64 525          21 412          8 406           141 043
      Billed Q3
      Revenue         136 344       192 165         63 158          19 846          411 750
      Billed YTD
      Nov 2021
      Collections     96.55         97.67           96.51          98.29           97.34
      YTD       Nov
      FY22 %

     *Reversions excluding hospitality is negative 5.85% for November 2021 across the


     Group funding

     R257 000 000 of variable group debt has been refinanced in Q3 for the financial year
     ending 28 February 2022. Fixed debt to the value of R225 000 000, expiring in the
     financial year ending 28 February 2023 was extended for a further 12 months to the
     financial year ending 29 February 2024 with 68 basis points saving on the current fixed
     rate at the extended date.

     A further R51 000 000 of variable debt expiring in FY23 is in final stages of being renewed
     and will be renewed on fix terms, effective during the first quarter of the financial year
     ending 28 February 2023.

     R100 000 000 of the refinanced debt relates to the disposal of Doubletree by Hilton, Cape
     Town, as announced on SENS 15 November 2021 and will effectively be settled through
     the share sale on the effective date of the transaction. The net proceed of the disposal
     will be used to settle variable debt to the value of R30 000 000.

     Post the implementation of the disposal of Doubletree by Hilton, Cape Town, the expected
     group LTV at the financial year ending 28 February 2022, before any year end valuations,
     will be 44.84% with a fixed debt ratio of 59.88% with a weighted average fix expiry of 31
                                                    As at November     As at 31 August
                                                    2021               2021
      Weighted average variable       Months        27                   31
      Weighted average fix expiry     Months        34                   34
      Weighted average interest       %             7.06                 7.01
      Weighted average variable       %             5.72                 5.62
      Weighted average fixed rate     %             8.34                 8.34


                                 As at November 2021             As at 31 August 2021
      Loan to value              46.56%*                         45.91%
      Interest cover ratio       2.16 times                      2.15 times

     *Group LTV increased post the payment of interim distributions from cash reserves as
      disclosed on page 28 on the interim results for the 6 months ended 31 August 2021 but
      is lower than the forecast per the LTV forecast provided in the interim results for the
      6 months ended 31 August 2021.

     Cash Collections and Cash Availability

     Spear group’s collections remain strong and post the distribution payment for the interim
     6 month period ended 31 August 2021, the group has R158 000 000 cash availability.
     The positives collections and the increasing cash availability will support the group pay-
     out ratio of between 85% and 95%.

     Group Expense Ratio

     As at 30 November 2021 the SA REIT – cost to income ratio was 43.55% (HY22 43.13%)
     and the SA REIT administrative cost to income ratio was 6.06% (HY22 6.86%).


     Shareholders are referred to the announcement released by Spear on SENS on
     27 May 2021, advising shareholders that Spear had concluded two sale of letting
     enterprise agreements (“Sale of Letting Enterprise Agreements”) with Inospace 5
     Proprietary Limited (“Purchaser”) in terms of which Spear agreed to dispose of the
     properties known as Island Business Park and Blackheath Park, respectively
     (“Properties”) to the Purchaser, for a combined disposal consideration of R160 000 000

     Shareholders are hereby advised that, notwithstanding the successful conclusion of the
     due diligence investigation, the Purchaser was unable to fulfil the conditions precedent
     relating to obtaining pre-sales of sectional title units to be created over the Properties,
     equal to 30% of the Purchaser’s projected sales value in respect of each Property. As
     such, all the conditions precedent to the Disposal have not been met and, accordingly,
     the Sale of Letting Enterprise Agreements have lapsed.


     Spear remains on track to achieve management’s guidance set out in the interim results
     of the 6 month period ended 31 August 2021. Management’s guidance remains a
     distribution per share growth of 6% – 8% for FY2022 based on an 80% pay-out ratio.
     Management will closely monitor the cash collections scenario closer to financial year end
     to determine the final pay out ratio for the FY22.

All forward looking statements in this announcement have been based on the following

        •   continuous recovery of the macroeconomic environment post- pandemic;

        •   no further extensive and deeply prohibitive lockdowns;

        •   lease renewals are concluded per the Company forecast;

        •   no major tenant failures occur for the balance of the financial year;

        •   tenants will maintain their ability to settle current rental, historical deferments
            together with rising cost of occupancy;

        •   South Africa remains off travel red lists resulting in inbound travel recovery;

        •   return-to-office momentum increases as vaccination percentages increase

        •   no significant periods of load shedding or national grid failures; and

        •   no major civil unrest within the Western Cape and South Africa.

Shareholders are advised that the information in this announcement has not been
audited, reviewed or otherwise reported on by the Company’s external auditors.

Any changes in the above assumptions may affect management’s expectations

Cape Town
17 December 2021

PSG Capital

Date: 17-12-2021 04:50:00
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