Release Date: October 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Spear REIT Ltd (JSE:SEA, Financial) successfully transferred ZAR1.146 billion worth of assets into its portfolio, setting the stage for future growth.
- The company achieved a significant reduction in vacancies, with over 9,000 square meters of GLA removed from the vacancy list.
- Spear REIT Ltd (JSE:SEA) reported a robust collection profile with a collection rate of just over 98%, indicating strong tenant payment performance.
- The company has a high occupancy rate of 95%, with a notable increase of 200 basis points from the end of the previous fiscal year.
- Spear REIT Ltd (JSE:SEA) has invested heavily in PV solar, covering approximately 60% of its portfolio, which enhances sustainability and reduces reliance on traditional energy sources.
Negative Points
- The company faces challenges from higher interest rates and consistent operating cost increases, impacting profitability.
- Severe weather conditions in the Western Cape have led to higher-than-normal repair and maintenance expenses.
- The dual tariff system in Cape Town results in higher costs during the winter months, affecting the company's financials.
- Insurance and SASRIA costs have increased more than expected, posing a challenge for cost management.
- The company experienced a decline in portfolio value by just under 9% due to asset disposals, impacting overall asset valuation.
Q & A Highlights
Q: Can you provide insights on the significant reduction in office vacancies and where you expect it to stabilize?
A: Quintin Rossi, CEO: We anticipate stabilizing office vacancies between 5% to 7%, allowing for some portfolio churn to generate upside. The previous high vacancy was due to structural timing issues related to asset disposal to a government organization, which has now been resolved.
Q: You mentioned positioning the portfolio for real growth in the 2026 financial year. Can you elaborate on this?
A: Quintin Rossi, CEO: We expect a declining inflationary environment, potentially leading to interest rate cuts, which would reduce finance costs. The team's post-half-year letting activity has further reduced vacancy rates, contributing directly to the bottom line.
Q: How have vacancies changed in the Emira portfolio since the last update?
A: Quintin Rossi, CEO: The Emira portfolio's vacancy rate was around 4.6% at acquisition. Strong letting activity has reduced this, with significant spaces re-tenanted, bringing the vacancy rate to approximately 1% as it integrates into the Spear portfolio.
Q: Can you discuss the impact of City of Cape Town's valuation increases on rates and taxes?
A: Kim Pfaff-Karg, CIO: The City of Cape Town revalued properties this year, increasing base values. We actively object to these valuations to minimize the rates burden. Tariff increases are typically 5%-6% annually, but this year saw a 16% rise.
Q: Are you seeing rental growth in Cape Town's office market, and how does it vary across regions?
A: Quintin Rossi, CEO: Rental growth is evident, particularly in P, AAA, and A-grade spaces, with new developments triggering higher rents. In Century City, rents are around ZAR285 per square meter, while southern suburbs see ZAR310. Overall, we expect 7%-8% rental growth.
Q: How do you plan to unlock the 150,000 square meters of unutilized bulk in your portfolio?
A: Quintin Rossi, CEO: We prioritize unlocking bulk with zero land cost to minimize income drag. For developments requiring demolition of income-producing assets, we consider partnerships to manage capital costs and risks.
Q: Is there potential for acquiring more properties from Emira, such as Market Square or Mitchells Plain?
A: Quintin Rossi, CEO: Market Square has been sold, and Mitchells Plain, being a sectional title scheme, does not align with our investment strategy.
Q: Would Spear consider expanding into other provinces or investing in hotels and leisure?
A: Quintin Rossi, CEO: We remain focused on the Western Cape, with no plans to expand into other provinces. We prefer to stick to commercial, industrial, retail, and mixed-use assets, avoiding the complexities of hospitality investments.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
