Spear goes all-out in Cape Town
CEO says continuing ‘semigration’ means Western Cape is not suffering the same property problems as the rest of SA
The market is clearly impressed by Spear Reit’s growth story, judging by the significantly oversubscribed capital raise concluded by the company last week.
Management, led by CEO Mike Flax, received bids for R528m, nearly double the R280m the company had hoped to raise.
That’s no easy feat, given fund managers’ renewed preference for offshore property stocks. The trend is underscored by the fact that most of the R11bn (Stanlib figures) raised by the listed property sector in the year to date through rights offers and private placements has gone to offshore counters.
Spear’s capital raise will help fund recent acquisitions worth about R1bn, which include two landmark properties in Cape Town’s CBD: the five-star 15 on Orange Hotel and 2 Long Street, a historic office block on the Foreshore. Spear’s bagging of 15 On Orange was quite a coup, considering it paid only R298m against the R750m it cost to build the hotel in 2008/2009.
Most of Spear’s other hotel, office, retail and industrial properties are located in and around Cape Town, though it recently expanded to the Garden Route when it bought the only Virgin Active gym in George.
Flax and Quintin Rossi, Spear co-founder and MD, have made impressive headway in delivering on their prelisting growth promises. When the small cap listed on the Altx on November 11, it owned 25 properties worth R1.46bn. Another six properties have since been added to the portfolio (some still to be transferred), which will result in the fund’s asset value increasing by a hefty 83% to R2.64bn.
Flax ascribes Spear’s successful capital raise to the company’s niche, geographical bias. “We are the only property stock on the JSE focused solely on the Western Cape,” he says. “Right now, fund managers like specialist offerings and we believe that’s the only space to be in if you’re an Sa-based property play.”
The market no doubt also has confidence in Flax’s ability to unlock value for shareholders, given his track record at the former Spearhead Property Holdings.
Flax listed Spearhead on the JSE in 1999 with an initial market cap of about R140m. Seven years later the company was sold to Redefine Properties in a deal worth more than R1bn.
Spear’s recent migration to the JSE’S main board probably also helped place the counter on the radars of investors who may not have a mandate to invest in Altx-listed companies.
In addition, the company last month surprised the market with a maiden dividend of 23.51c/share for the four months ending February, 16.75% ahead of the prelisting forecast.
Spear’s outperformance was supported by, among others, lower-than-expected debt funding costs and better-than-expected income from its Doubletree by Hilton hotel in Upper Eastside, Woodstock, on the back of Cape Town’s buoyant tourism industry.
However, the challenge for Spear is size and liquidity. Larger fund managers typically won’t invest in a counter with a market cap of only R1.3bn.
Liliane Barnard, CEO of Metope Investment Managers, says given that the stock is small and relatively illiquid at present, it is best for investors to take a longer-term outlook.
But she adds: “If Flax and his team deliver on promised double-digit income growth, Spear will be able to raise more capital and in so doing further add to the quality and diversification of the portfolio.”
Nesi Chetty, head of listed property at MMI Investments, agrees that size is currently an issue. “But we nevertheless like the Spear
story. Besides, the company is trading at an attractive forward yield of 8.2%.”
Flax is confident that liquidity will improve over time as the company continues on its growth path. He believes it could reach a market cap of about R4bn within three years. “There is no shortage of deals. Many private landlords with large portfolios in Cape Town are keen to swap some of their assets for shares in Jselisted Reits to qualify for the capital gains tax benefits provided by the structure.”
In future, Flax says, the focus will be on acquiring larger, quality properties worth more than R100m per transaction where value can be unlocked, either through rental upside or redevelopment opportunities.
He likes mixed-use developments in particular, as they provide portfolio diversification. About 100 residential units are set to be added to Spear’s Sable Square retail/office property near Cape Town’s Century City. That will take the portfolio of rental apartments to 240, with average rentals of about R15,000/month.
Flax says Spear’s geographic focus will remain on the Western Cape, which he believes has been insulated from the tough trading conditions experienced by landlords in other parts of SA because of ongoing “semigration” of people from elsewhere in the country to the province.
“Cape Town and the rest of SA are two completely different property markets. While the housing market has led the way with prices going through the roof, the secondary effects of the semigration trend are now starting to have a knock-on effect on demand for office and industrial space.”
Flax says the Cape’s commercial property market, both in terms of rentals and prices, is bound to catch up with the residential market.
“In Greenpoint on the Atlantic Seaboard for instance, you are now paying up to R100,000/m² to buy newly developed residential stock, while investors are paying only about R20,000/m² for new office space in the city.
“Cape Town’s commercial and residential rentals are similarly out of sync. It now costs R350/m²-r400/m² per month to rent an apartment in a prime residential area in the Mother City, while top-notch offices on the Foreshore command monthly rentals of only R200/m².”
[Spear is] the only property stock on the JSE focused solely on the Western Cape. Right now, fund managers like specialist offerings and we believe that’s the only space to be in if you’re an Sa-based property play Mike Flax