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Spear Reit looking sharp as regional focus pays off

Spear Reit looking sharp as regional focus pays off

One South African property investment company controversially decided to put all its eggs in one basket and focus on just one city: Cape Town. How did that work out? Turns out, pretty well.

The view from Spear Reit Ltd on the 16th-floor office at its new premises at 2 Long Street paints a panoramic picture of the hustle and bustle which is inner-city development in the Mother City.

It is clear that Quintin Rossi, CEO of the listed property stock, knows every ventricle in the heart of Cape Town and what makes its blood pump as he unpacks the ownership and tenant composition of the surrounding real estate from the commercial high-rise it calls home.

Rossi says Spear has established itself as the only regionally focused property fund and the strategy has paid off in an industry where larger capital growth funds are struggling to meet expectations.

Its focus on owning high-quality Western Cape real estate allowed it to declare an interim distribution for the first half of the 2019 financial year of 41.73 cents per share (FY2018: 36.95 cents) amid ever increasing headwinds in the South African economy and a crippling water crisis.

The water crisis showed us that we cannot take anything for granted,” says Rossi.

Cape Town’s geography makes it a fantastic city to live in and we will continue to attract tourists, immigrants and new business, which put pressure on our space and resources. We need to work together and adopt innovative ideas to address the water, traffic and affordability issues we all face in the region.”

Rossi says it is crucial to have a long-term, disciplined approach to investing and owning property in the context of the challenges of the times or location.

In the short term, certain factors such as Eskom, rating agency decisions, political climates and cost of debt isn’t within our control — interests rates may rise, the economy may slow or a tenant may become insolvent, potentially affecting short term profits.

However, over the long term what matters is the underlying quality of a property and the tenants that occupy them, which is something we have control over.

If we manage, acquire and develop our properties with a disciplined and pragmatic approach we will continue to build a quality portfolio,” he says.

Rossi says a large part of the strategy involves acquiring properties, but it is a process that must be approached with sobriety so that growth is never for the sake of just that, but for improving the core portfolio and investment allure of Spear and consistently growing its cash flows.

That is why it is important to focus on areas we know, and are involved in, and are within close proximity to manage efficiently and with very quick response time.”

Having an intimate knowledge of our region, our investment team is equipped to quickly turn down deals we are not comfortable with (and) pursue deals we feel fit within our portfolio,” says Rossi.

Spear has been selective when issuing equity. He and his management team are mindful of placing equity at the right price to ensure existing shareholder value is not eroded in the process and existing shareholders who have supported Spear since inception are rewarded in the form of distribution per share growth.

Judging management against these criteria, it has performed well. In a tough economy, its ability to keep vacancies low is a testament that it knows what it is doing, its knowledge of the area is personal and its management approach is hands-on.

Anchor Stockbrokers swot analysis agrees, listing its strong points as: Its specialist offering on the JSE, with a niche geographical focus on the Western Cape; a close proximity to assets — 80% (by value) of properties are within a 25km radius of Spear’s head office – and an experienced management team with previous listed property experience.

They also believe that the company will benefit from an increase in tourism numbers as the rand weakens and visa requirements ease.

We continue with our long-term faith in the region and believe these attributes and strong property fundamentals will contribute to attracting demand for its properties,” says Rossi.

Concentration and focus are two attributes that generally pay dividends in investment. Specialised Reits are by their very nature focused investment companies. I believe that the next few years will determine which companies in the sector are successfully able to outperform the mean. In addition, I believe that the outperformers will come from specialised Reits.”

With regard to the question of which property sector will perform better, as Spear is diversified sectorally across the industrial, office, retail, hospitality and residential sectors, Rossi says that most sectors can show value and return as long as the focus is sought.

However, it is no secret that retail property faces strong headwinds given the ongoing growth of e-commerce. Shopping centre managers will have to work twice as hard to extract the same growth rates industrial property managers will get from their assets.”

The fundamentals of managing a property company don’t change much with changes in trading conditions. The basics are something that Spear always endeavours to do correctly — buy properties at a good value, lease to sustainable businesses at fair rentals and ensure that our buildings are always well maintained and that the tenants are always treated fairly, yet firmly. This applies to good and bad times.”

As Rossi reaches his first anniversary in the hot seat after taking over from Mike Flax in May 2018, he says the major highlight in his reign so far has been the extent to which the fund has excelled and flourished under the microscope of JSE and institutional investors, by increasing its stakes over the past year.

Spear had two successful capital raises in 2018, one of which was 1.89 times oversubscribed.

Another obvious highlight was the extent to which some major investment houses and institutions bought into the young Spear’s vision and supported its growth by increasing their stakes in the company.

Spear’s largest investors include Investec Wealth & Investment, Mazi Capital, Bridge Fund Managers, Prescient and Catalyst.

Anchor Stockbrokers says liquidity and interest from larger institutional investors should improve as the fund size grows, as it lists the lack of liquidity and a market cap (R1.65-billion) of less than R3-billion as a potential weakness.

In the meantime, the smaller asset base presents an opportunity to outperform its peers and target attractive assets that are too small for other funds to hold, Anchor says in its report. DM

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