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The Finance Ghost: Spear REIT a JSE star — but not immune to SA issues

The Finance Ghost: Spear REIT a JSE star — but not immune to SA issues
The Finance Ghost
By The Finance Ghost
9 Jul 2023
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Although the sale of the Liberty Life building in Century City only closed after this quarter and will reduce debt, the reality is that even Spear can’t escape the macro­economic challenges.

For years, property funds on the JSE were obsessed with finding global opportunities and locking in a steady yield on the assumption that interest rates wouldn’t go up by much — if at all. That strategy didn’t work out so well.

In stark contrast, Spear REIT decided to focus on a market that it knows and loves: the Western Cape. With semigration being driven by everything from potholes to VIP protection thugs klapping people on the side of the road harder than Steinhoff whacked its shareholders, that’s been a good strategy.

The risk-reward trade-off is at its most visible in the property sector. REITs, like 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. Put differently, the market response to these stocks in a higher interest rate environment is to value them on a higher yield, which means the yield goes up and the share price stays flat.

Spear isn’t immune to challenges. Although overall vacancies decreased in the first quarter of this financial year and rental reversions were positive, the vacancy rate remained high in the office portfolio at 15.42%. You just can’t convince Capetonians to get back into morning traffic once they’ve tasted the work-from-home life.

One of the interesting insights in this announcement is that the business process outsourcing sector is playing a substantial role in reducing office vacancies in the Western Cape. I also found it interesting that the convenience retail portfolio has negative reversions of -5.6%, so rental rates are under pressure to keep the vacancy rate constant at just over 0.5%.

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

Distributable income for the quarter was R43.15-million, which suggests a year-on-year drop if you consider the quarterly run rate needed to achieve R188.4-million in the prior full year. 

It’s showtime for the Attacq-GEPF deal


A deal is just an idea until there’s a binding term sheet. Even then, there are conditions that need to be met before a transaction goes ahead.

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

The listed REIT has been trading at a larger discount to NAV than this, which is why the investment caused a major run in the share price over the past year. Almost every property fund trades at a discount to NAV, so this issue isn’t unique to Attacq.

It’s one of the reasons property funds struggle to raise equity at listed level, and Attacq has taken the incredibly smart approach of effectively raising equity one layer down.

Shareholders still need to approve the deal. 

A bitter taste at RCL Foods


The RCL Foods share price shows that the market keeps an eye on far more than just Sens. The trading statement that re­flects an expected drop in Heps for the year ended June of at least 30% was met with an increase in the share price. In fact, it’s up by nearly 11% in the past five days! The year-to-date performance is an increase of roughly 3%.

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

This is like having a few unit owners in a complex who refuse to pay levies, so everyone suffers. Either the market knew about this already, or the drop in Heps was lower than the market was expecting. The pretax impact of the levy on RCL Foods was R234-million.

The lawyers are certainly eating, with litigation under way on the lawfulness of the business rescue practitioners’ suspension of compliance with statutory obligations at Tongaat Hulett.

Other issues included the ad­­verse effects of load shedding and unrecovered feed costs at Rainbow, the poultry subsidiary of RCL Foods. DM

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

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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