"Our philosophy has always been earnings growth first and asset growth second," says CEO Mike Flax.

Though it’s a decision that has left Spearhead’s R337m property portfolio far behind in the size race, it’s also one that unit holders can be thankful for as tough market conditions bring income distribution growth of far larger funds spluttering to a halt.

Bucking this trend, Spearhead’s income distribution increased 4,8% at the December 2002 interim stage, building on a 14,6% increase in total distributions during the previous two financial years. Flax adds to this bright picture by promising "a positive trading update shortly".

Spearhead got off to a good start by being ahead of most of the pack when it listed in 1999. The bulk of its early properties came out of the Seeff Trust.

The group has capitalised on this head start by following an active portfolio upgrading policy that has seen purchases and sales equal to more than a third of the total portfolio over the past year.

Another important factor in Spearhead’s ability to ride out the market downturn was that, unlike many other property groups, it did not fall into the Sandton office trap. "Our focus is on properties within 30 minutes of Cape Town’s CBD," says Flax.

Gauteng properties will be disposed of, with the second largest - the Sammy Marks shopping centre in Pretoria - having just been sold to Shops for Africa for R37m. This leaves 24 out of 28 properties in the Western Cape making up almost 90% of Spearhead’s 160 000sq m total portfolio.

At 45%, retail space forms the biggest exposure, followed by offices (30%) and industrial parks (25%), says Flax. No single tenant accounts for more than 5% of total rental income. This, plus an even spread of annual rental renewals over the next few years, should result in little difficulty being encountered in maintaining vacancies at modest levels, he says. Vacancies, currently at 7% (down from 8% in December 2002), have been held at between 5% and 8% since listing.

Says Flax: "Our target is to grow market capitalisation from the present R210m to about R500m in three years, through a combination of organic earnings growth and acquisitions."

However, he says that Spearhead’s expansion will not follow the bulk, multi-property acquisition or merger strategies, which have become common. "We’ll continue with our strategy of acquiring one property at a time and ensuring that unit holders’ income growth requirements always receive priority."

Flax says that unlike many other property funds, Spearhead’s management is not tempted to increase portfolio size to achieve management fee growth. "All management functions are internal - there are no outside management contracts."

Advantage will be taken of expected lower interest rates in the months ahead, says Flax.
This should make a total income distribution of 132c/unit to 135c/unit feasible for the full year, placing Spearhead on an attractive yield of about 12% at its current R11/unit.