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SIMON BROWN: I’m chatting with Quintin Rossi, CEO of Spear Reit. Results for year-end February saw revenue up 3.48%, distributions per share up at 11.31%. NAV is R1 148, and loan to value down at 36.3%, down from just over 39%.
Quintin, I appreciate the time today. Let’s start with cost inflation. You must be experiencing some inflation. Obviously there’s Eskom. We have chatted about your plans to sort of de-risk that. How are you finding the inflation in your environment, in your operating space?
QUINTIN ROSSI: Trading is tough. Cost creep is a factor of the operating environment and we’ve just had to be exceptionally surgical with our cost management. We have seen an improved cost-to-income ratio across the portfolio, as well as our admin cost-to-income ratios, and that’s because we were very front-footed in negotiating service level agreements with our various suppliers, also just cutting costs as much as possible where we could.
SIMON BROWN: Moving on more directly to the business, rent reversions are still negative but improving, and in some cases looking like they’re going to be positive perhaps in this financial year.
QUINTIN ROSSI: Yes, we are optimistic. I think that there’s a variety of factors that influence the tenants’ cost of occupancy. But, as you say, the rent reversions have improved from a negative 5.5% to 5.7% in the prior financial year to a negative 3% in this financial year we are reporting on. And retail, for example, has moved towards positive reversions and we are almost at a flat reversionary profile for industrial. Offices will continue to lag slightly for the next, I would say, 12 to 18 months, but we are, as you say, moving in the right direction.
SIMON BROWN: Retail occupancy is 96%, collections 98%. You also mentioned that national brands are looking to increase market share with new brands, and that’s almost driving demand for retail space from the big nationals.
QUINTIN ROSSI: Correct. We’ve seen a lot of M&A [merger and acquisition] activity taking place within the Pepkor space, within the TFG space, within the Mr Price space. With that have come additional capex allocations for these retailers and we’re starting to see that taking place.
In addition to retailers looking at stocks….or alternatives to retail where they can optimise their omnichannel approach to the retail market.
SIMON BROWN: You sold off the Liberty Life building. It’s not in these numbers. It does reduce your exposure to office. In your presentation you mentioned that you’re actually starting to see some green shoots in the office space.
QUINTIN ROSSI: Yes, that’s quite right. With the effects of load shedding and the effects of semigration we are starting to see some return to office, momentum increasing a lot faster than what we’re seeing across the rest of the country. That will bode well for our vacancies because we own assets in highly desirable locations and well-established nodes, particularly in the office sector which has the deepest vacancy. We are starting to see that vacancy reduce on an ongoing basis.
SIMON BROWN: You – and I imagine all Reits – say they do this, but you really do seem to walk that talk where you talk around nodes, you who talk around the Western Cape where you’re only in the Western Cape and you focus on the nodes. That is a big part of the Spear philosophy. It’s almost the core of the philosophy in many senses.
QUINTIN ROSSI: One hundred percent. It’s one of the cornerstone principles of our business. The furthest offshore we’ll go is Robben Island, and the furthest inland we’ll go is George, the Southern Cape. For us it’s fundamental. The further away we offer our assets, the less control we have. We believe that keeping our finger on the pulse has resulted in the type of metrics that we’re putting out to the market from an income growth perspective, from an opcost management perspective, because we fundamentally don’t believe in outsourcing the responsibility of property management and asset management within our business.
SIMON BROWN: There was a point made at the presentation where you’re an hour away from every one of your buildings. George is an hour flight. Nonetheless, [there’s] the Paarden Island acquisition, again post period end, R185 million, yield at 79.75%. When you buy an asset like that do you look to get more yield to upgrade it, to improve it, or are you saying this is a great yield, we can almost let it run itself?
QUINTIN ROSSI: Well, the initial step is to get it stabilised. We do still have approximately 2 500 to 3 000 square metres of developable space we can add on to the asset that hasn’t been factored into any of the metrics. We are also going to be looking to install quite a large solar PV plant on the roof, which should also generate some yield accretion for us in the medium to long term. We’re still working with the City of Cape Town to try and get a bit of a better commitment or a longer commitment on the incentive tariff out of them.
But all in all, our view is we acquire. We are value investors so we look to acquire assets and then implement asset management initiatives to get the yield up and get the income more and more sustainable.
SIMON BROWN: The solar PV on the roof – that’s obviously for the tenants in the building. But you’re also talking about, in the case of the City of Cape Town, selling back to the city and actually generating income from it.
QUINTIN ROSSI: Quite right. So take a building, the Paarden Island property as an example, the on-site consumption will probably only be about 21% of what the PV solar system can generate. The balance we will then wheel back into the city’s grid. Otherwise we’ll just build a smaller system if we can’t get the commercials to work from a wheeling perspective.
SIMON BROWN: We’ll leave it there. Quintin Rossi, CEO Spear Reit, I appreciate the time.
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