W Cape focus has been a help in tough times

Finding a property stock that is still able to deliver dividend growth north of 10% is near-impossible. Most real estate counters have seen distribution growth slow to around 5%-6% as a depressed economy and dwindling consumer spending eat into earnings. In fact, shareholders of quite a few property stocks will have to be satisfied with zero or negative growth in dividend payouts this year.

Spear Reit, the Capefocused property play listed on the JSE two years ago by industry veteran Mike Flax, is an exception. The small-cap company delivered distribution growth of 12.9% for the six months ended August year on year. More impressive is that Spear expects to maintain growth of 9%-11% for the full year to February.

Spear hasn’t fared too badly on the share price performance front either, considering the huge sell-down of the sector as a whole year to date. The stock is down around 5% between January 2 and November 13, against a 25% decline in the SA listed property index over the same time.

Analysts say the company’s outperformance has been supported by its focus on the Western Cape, where it owns office, retail, industrial, residential and hospitality properties worth R3.37bn. Flagships include luxury Cape Town hotel 15 on Orange; DoubleTree by Hilton in Woodstock; Sable Square shopping centre in Milnerton; 2 Long Street, an office block in the Cape Town city centre; and Mega Park, a Bellville industrial park.

Kelly Ward, investment analyst at Metope Investment Managers, says the Western Cape property market appears to be faring somewhat better than the rest of SA. That’s despite Cape Town’s hospitality sector struggling due to the drop in tourism on the back of the water crisis. “Spear has tried to mitigate this risk as much as possible, as only 64% of the income from its hospitality properties is variable, meaning subject to the fluctuating tourist trade.”

Ward says management has done an admirable job by recycling capital from mature or low-growth assets into those which offer better opportunities. However, given that SA is possibly heading into a rising interest rate environment, Ward says a key risk to the business is the relatively low proportion of debt that is secured at fixed rates — only 42.13% compared to the sector average of around 82%.

“This could put some pressure on distribution growth, depending on the timing and severity of interest rates rises,” she says.

Speaking after the release of the company’s interim results, Spear CEO Quintin Rossi told IM that he expects some recovery in Cape Town’s hospitality sector over the next six months, which will boost company earnings “We are already seeing green shoots. However, meaningful recoveries will most likely only start to emerge towards the start of 2019.”

He estimated that overall demand for hotel rooms was down about 30% year to date. “Now that the Western Cape drought has broken, the focus is on rebuilding hospitality occupancies and room rates.”

However, he said the pace at which the recovery of the hospitality sector will take place remains uncertain due to the shift in interest by dominant markets to other destinations this year.

Though occupancies might initially return, the biggest challenge is to recover the lost strength in room rates experienced during the downturn.

At a forward yield of close to 9%, Spear is worth a second glance, especially if you are looking for a pure SA-focused property play with a simple, uncomplicated structure and a hands-on management team that knows the Western Cape property market like the back of its hand.