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Western Cape-focused Spear to exit hotels portfolio

Covid-19 has forced the group ‘to forecast no income’ from its hospitality assets for the current financial year.
The DoubleTree by Hilton Upper Eastside Hotel in Woodstock, Cape Town. Image: Supplied

Spear REIT Limited will exit the remainder of its hospitality assets “in an orderly manner over the next 12-24 months” it said on Friday in a results statement for the half-year to 31 August 2020.

The listed property fund, which has a regional focus solely on the Western Cape, added that all disposal proceeds will be used to settle debt and support management’s loan-to-value (LTV) reduction roadmap to achieve a targeted LTV band of between 38% and 43%.

This comes as Spear announced that it has accepted a cash offer to dispose of its 5-star 15 on Orange Hotel in Cape Town for a sum of R280 million. However, the proposed disposal is subject to a due diligence period and Competition Commission approval.

Spear also owns the 4-star DoubleTree by Hilton Upper Eastside Hotel in the Mother City, among more than 30 other property assets, covering around 453 016m2 of a GLA (gross lettable area). It has a current market cap of just over R1 billion.

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“The hospitality portfolio has been most severely impacted year-to-date as a result of Covid-19, associated lockdowns and travel restrictions,” the group noted.

“No income has been forecast from any hospitality assets during FY21 [to the end of February] irrespective of low levels of revenue being generated post the interim period,” it added.

Despite the impact of Covid-19 on both its hospitality assets and retail portfolio, Spear declared an interim distribution out of income reserves of 29.34 cents per share for its half-year. Its results notice on the JSE said that distributions per share decreased by 34.27% and is based on an 80% payout ratio.

The group paid out its full interim dividend for the corresponding period last year, which came in at 44.64 cents per share.

Executives at many larger listed property funds have decided to withhold or defer interim dividend pay-outs to financial year ends. Several counters have also elected to introduce payout ratios. These moves come in the wake of the Covid-19 economic crash, with property funds opting to retain dividends in order to boost liquidity.

“Operating in one of the most challenging modern-day trading environments, Spear has successfully executed on its short-term Covid-19 strategic objectives. Income statement consistency has been maintained with strong rental collections during the period of 96.9% of revenue billed,” said CEO Quintin Rossi.

Quintin Rossi, CEO of Spear REIT. Image: Supplied

He added that during the interim period, the group’s core portfolio “remained resilient underscoring the deep value proposition that the Spear portfolio presents”.

Spear’s Sens announcement noted that the group’s investment property value increased 13.76% to R4.46 billion, from R3.92 billion in the prior corresponding period.

However, its LTV increased by 5.73% to 45.36%, from 39.63% reported as at February 29, 2020.

“Spear remains sufficiently capitalised with no going concern risks as solvency and liquidity ratio tests remained positive. Regular cashflow analysis is conducted to stress test cashflow on a rolling 12-month basis. This includes a range of scenarios of tenant collections and creditor requirements,” the group noted in its media statement.

“Management remains optimistic that it can maintain its robust collection momentum for the remainder of FY21, in the absence of any significant tenant failure, as 100% of Spear’s tenants are legally able to operate from their premises and the lion’s shares of economic activity has recommenced across South Africa,” it added.

During the interim period Spear provided 192 of its 442 tenants with Covid-19 related relief.

Spear’s share price was up just over 1.7% on Friday, closing at R5.19. However, the stock has lost more than 46% of its value for the year to date.

* In early morning trade on Monday, the fund’s share price was just over 3.5% weaker at R5.

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Looks to me like a well-run, undervalued company. There is plenty of value here for the patient investor. Might take a while for the market to recognize this, though.

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