Our opinion on the current state of SEA

Dec 18, 2023

Spear (SEA) is a real estate investment trust (REIT) which specialises in properties in and around Cape Town. It was started by Mike Flax and the CEO is Quintin Rossi. Both of these men have a very good understanding of property in the Cape area. At listing in November 2016, the company had a portfolio worth R1,5bn and that has grown to 32 properties worth about 4,5bn now - but the company's market capitalisation has remained well below that at around R1,416bn. Property in Cape Town has generally done better than in the rest of the country and this REIT benefits from being very focused. On 31st January 2022 the company announced that it had received commitments for R253,9m for a placement of 30,2m new shares at R8.40 per share. The money will be used to settle debt and fund the acquisition of the 27 Junction Road property. On 13th February 2023 the company announced that it had sold its Century City office block to Capitec for R400m. In its results for the six months to 31st August 2023 the company reported distributable income per share down 1,19% and occupancy at 94,19%. The company's loan-to-value (LTV) was 39,58% and headline earnings per share (HEPS) increased by 3,91%. The company said, "At period end the total provision for bad debt was R2.65 million, being 16.29% of total tenant arrears. Management is actively reviewing tenant arrears and at the end of the reporting period a total of R1.05 million of bad debt was written off and the provision utilised." In an operational update for the 3 months to 30th November 2023 the company reported, "Spear's portfolio rental reversion rate for FY24 year to date was -1.12% (HY24: 3.57% and FY23: -3.69%) and the average portfolio in-force escalation rate was 7.44% for the FY24 year to date (FY23: 7.40%)." The company has a strong balance sheet and cash collections were at 97,76%. The company's LTV was 40,7% and it had a tangible net asset value (NA) of 1146c per share. In our view, this is one of the better REIT's on the JSE and it has substantial upside potential. We see this as a good value investment at 790c - about 69% of its NAV.