Spear REIT is a JSE star - but it's not immune to SA issues

Spear REIT is a JSE star – but it’s not immune to SA issues

For years, the real estate money on the JSE has been obsessed with finding world class opportunities and making a steady return on the assumption that interest rates wouldn’t go up too much – if at all. This strategy did not work well.

In stark contrast, Spear REIT has decided to focus on the market it knows and loves: the Western Cape. With the exodus driven by everything from drilling to VIP protection thugs, Steinhoff bashed shareholders, this was a good strategy.

The trade-off between risk and reward is most evident in the real estate business. REITs, such as Spear (and Stor-Age for that matter), have traded relatively flat in terms of share price, but have returned double-digit dividend yields along the way. In other words, the market’s response to these stocks in a higher interest rate environment is to value them at a higher yield, which means that the yield goes up and the stock price remains flat.

The Spear is not immune to challenges. Although total vacancies decreased in the first quarter of this fiscal year and rental implications were positive, the vacancy rate remained high in the office portfolio at 15.42%. You can’t convince Capetonians to get back into the morning traffic once they’ve had a taste of the work-from-home life.

An interesting insight from this advert is that the business process outsourcing sector plays a fundamental role in reducing office vacancies in the Western Cape. I also found it interesting that the convenience retail portfolio had negative reversals of -5.6%, so rental rates are under pressure to keep the vacancy rate steady at just over 0.5%.

The biggest pressure of all is on the balance sheet, where loan-to-value has risen from 36.30% to 39.06%. The weighted average cost of debt increased from 8.66% to 9.16%. Although the sale of Century City’s Liberty Life building closed only after this quarter and will reduce debt, the reality is that not even Spear can escape its macroeconomic challenges.

Distributable income for the quarter was R43.15m, which indicates a year-over-year decline if you consider the quarterly run rate required to achieve R188.4m in the entire prior year.

It’s time to show the Attacq-GEPF deal

The deal is just an idea until there is a binding term paper. Even then, there are conditions that must be met before the transaction can proceed.

The good news for Attacq (and its shareholders like myself) is that the Government Employees’ Pension Fund (GEPF)’s acquisition of a 30% stake in the Waterfall Portfolio has reached commitment. This means shareholders have all the details to chew through, including a deal value calculation that’s based on adjusted net assets and a 15% discount.

The listed REIT has been trading at a greater discount to net asset value than this, which is why the investment has caused the share price to soar over the past year. Nearly every REIT trades at a discount to NAV, so this issue is not unique to Attack.

It’s one of the reasons real estate funds struggle to raise capital at a listed level, and Attacq took the incredibly smart approach of effectively raising capital one layer down.

Shareholders still need to approve the deal.

Bitter taste at RCL Foods

RCL Foods’ share price shows the market is watching much more than just Sens, a trading release that reflects an expected Heps decline for the year ending June of at least 30% was met with an increase in the share price. In fact, it’s up nearly 11% in the past five days! Year-to-date performance represents an increase of approximately 3%.

RCL Foods is doing its best to keep pot burning, despite a special sugar levy from the South African Sugar Association which was a direct result of Tongaat Hulett not paying its way in the industry while bailing out business.

It’s like having a few unit owners in the pool who refuse to pay the fee, so everyone suffers. Either the market was already aware of this, or the drop in Heps was less than what the market was expecting. The pre-tax impact on RCL Foods was R234 million.

Lawyers are certainly eating, with litigation under way over the legality of suspending commercial salvage practitioners for compliance with legal obligations in Tonga Howlett.

Other issues included the negative impacts of unloading and unrecovered feed costs at Rainbow, RCL Foods’ poultry business. DM

After years of investment banking by The Finance Ghost, his mother’s dire prediction came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168, available nationwide for R29.


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