W Cape fo­cus has been a help in tough times

Financial Mail - Investors Monthly - - Analysis - Joan Muller

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.

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