Strategy pays off as Spear REIT navigates Covid-19 challenges with 93.25% collections

Posted On Friday, 18 September 2020 14:08 Published by
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Spear REIT Limited (SEA:SJ), the only regionally focused REIT on the JSE with exposure to high quality Western Cape-only assets, disclosed its group performance under the national lockdown in a pre-close investor presentation on Friday 28 August 2020.

Quintin_Rossi

In an environment where tenant cashflow remains constrained, Spear announced an impressive year to date rental collection of 93.25% of total rental billed. Of the 419 tenants within the portfolio, 196 were given Covid-19-related relief through rental deferments or rental credits to the value of R 15,5 million, with roughly R 5,1 million being repayable over a period of one to twelve months. Tenant arrears for the period were R 16,1 million and reducing.

“Spear’s has delivered on its short-term strategic objectives, which we announced in May 2020 as we set out a plan for navigating this unusual time, “says CEO Quintin Rossi. “Thanks to our high-quality portfolio, regional focus and hands-on asset management approach, we have achieved a 93,14% rental recovery rate for the period 01 March 2020 – 31 August 2020.”

The Spear portfolio consists of a diverse investment of 32 properties in the commercial, industrial, retail and hospitality industries. They are valued at R 4,5 billion, with a gross lettable area (GLA) of 453 319m2. Spear’s tenant retention rate remains at an impressive 91.4% with its in-force lease escalations at 7.23%.  

During the interim period, 130 000m2 of space came up for renewal, of which more than 93 000m2 has already been concluded.

 “Covid-19 has of course made an impact across sectors,” says Rossi, “but thanks to Spear’s resilient portfolio and our engaged asset and property management team, we have a year to date finalisation of 72% of FY2021 portfolio renewals.”

Performance: Retail, commercial and industrial assets

These assets have performed in line with management’s forecast under all levels of lockdown, with all three segments boasting above 90% occupancy rates and jointly a 93.40% collection rate. Portfolio vacancies have increased marginally but only partly due to the impact of Covid-19 along with natural vacancy churn within the portfolio.  

“Our diverse assets are located in highly attractive locations within the greater Cape Town area, underpinned by strong lease covenants. Spear only invests into convenience retails assets, which have performed consistently well over this time with all anchor tenants deemed essential services from the start of the lockdown,“ says Rossi.

Spear’s industrial portfolio makes up the most of portfolio GLA and has retained its strong performer status for the group during the interim period. The office portfolio has maintained a 92% occupancy rate as all Spear’s office assets are located in highly attractive and established nodes offering sound business continuity solutions during all stages of load shedding.

Performance: Hospitality assets

Spear’s hospitality assets have been the worst affected by Covid-19 and subsequent lockdowns. Management had forecast zero hospitality income for FY2021 since this sub-sector’s recovery is unknown. Spear owns two hotels –  Double Tree by Hilton, Cape Town and 15 on Orange by Marriott. The Double Tree by Hilton was able to generate R 2,5 million in revenue during May 2020 by offering repatriation services. Rossi says he is particularly proud of the entrepreneurial way that management unlocked revenue during this time.

Both hotels are open for accommodation, conferences, and food and beverage reservations, but the pace of recovery for the sector depends on when South Africa will open its borders again and how willingly business travellers will embrace and new health and safety protocols at hotels and airports.  

Managing liquidity during a global pandemic

Spear has demonstrated its ability to manage its balance sheet and liquidity during this long-tail event, ensuring there are no going-concern risks that emerge within the business, while still retaining in excess of R180 million in available liquidity.

During the presentation, Rossi further advised that Spear had disposed of or was in the process of disposing of four non-core assets (one of which has already been transferred) to the value of R 148.8 million. All proceeds from these disposals will be used to reduce the group’s overall debt (the disposal once completed will reduce group LTV by 2.5%). Spear’s medium-term strategy will be to operate within a 38% - 42% loan to value range. Spear’s ability to sell smaller assets in the current market environment places them in a advantageous position to reduce group debt in line with their strategy. 

“It is difficult to predict fully the economic outcomes of the pandemic on the real estate sector and on Spear, “says Rossi. “Spear has elected not to issue any FY2021 distribution guidance until latest November 2020. Management’s focus and energy will remain on tenant management, debtor management, balance sheet and income statement management, and rental collections in line with the percentages collected year to date. We anticipate that we will maintain our mid-high road collection scenario.

“All the evidence shows that Spear will emerge from this pandemic even stronger. Our core portfolio is defensive and is underpinned by strong lease covenants and high-quality tenants.”

Spear will prioritise its balance sheet over payout ratios during the interim period as the remainder of the financial year trends towards more stabilised income streams and stronger cash flows as tenants are back at work and able to honour their rental commitments.

 

Last modified on Friday, 18 September 2020 14:21

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