PRE-CLOSE INVESTORS’ PRESENTATION AND ......Industrial 73 565 2 901 840 39.45 55 676 2 142 064...

PRE-CLOSE INVESTORS’ PRESENTATION AND TRADING UPDATE

INTERIM PERIOD 31 AUGUST 2020

/ 28 AUGUST 2020

/ Pre-Close Investors’ Presentation and Trading Update / Interim Period 31 August 2020 / 2

TABLE OF CONTENTS

INTRODUCTION AND ENVIRONMENTAL UPDATE

IMPACT OF COVID-19 ON SPEAR

PORTFOLIO UPDATE

SECTORAL PERFORMANCE

3.

4.

OUTLOOK AND PROSPECTS

QUESTIONS

5.

6.

1 .

2 .


1 / INTRODUCTION AND ENVIRONMENTAL UPDATE

EMAIL QUESTIONS TO [email protected]


1 / INTRODUCTION AND ENVIRONMENTAL UPDATE / MISSION STATEMENT AND STRATEGY

To be the leading Western Cape-focused REIT and to consistently grow our distribution per share ahead of inflation and within the top quartile of our peer group.

MISSION STATEMENT

STRATEGY

Adapted to Covid-19 operating environmentCapital preservation and liquidity managementMaintained income statement consistency and strong rental collections to dateLetting of vacant space and quick turnaround timesHigh level of tenant retention through active asset managementReduce controllable expensesDisposal of non-core assets

SHORT TERM

Narrow asset ownership to commercial, convenience retail and industrialMaintain distribution payment strategyPrudent recycling of capitalReduce gearing ratio in line with strategyConservative debt hedged profileMaintain high portfolio occupancy levels

MEDIUM TO LONG TERM


2 / IMPACT OF COVID-19 ON SPEAR


2 / IMPACT OF COVID-19 ON SPEAR / LOCKDOWN OPERATING PERCENTAGES – REVENUE BASED ON RENTABLE AREA

LOCKDOWN OPERATING PERCENTAGES – REVENUE-BASED ON RENTABLE AREA

LEVEL 5 LEVEL 4LEVEL 3LEVEL 2 LEVEL 1

20% 50% 86% 91%

100%

20% 50% 93% 99%

100%

The percentages below illustrate the monthly revenue contributed to the group under the various lockdown levels:

* The above levels are based on tenants allowed on premises per regulations and do not take into account tenants that could operate from home

August 2020May 2020


FY2021 OPERATING SCENARIOS – UPDATED TO AUGUST 2020 FROM MAY 2020

LOW ROAD 60% of FY2021 budget collected Spear breakeven point

MIDDLE ROAD 61% - 71% of total budget collected Spear moving towards profit and accumulation of cash reserves

2 / IMPACT OF COVID-19 ON SPEAR / FY2021 OPERATING SCENARIOS – UPDATED TO AUGUST 2020 FROM MAY 2020

85% of total budget collected*Spear profitable and on track to stabilise income generationBalance sheet and income statement remain robust and meeting covenants**Liquidity availability has remained sufficient to absorb various rental credits and deferrals and in addition to covering operating expenditure and interest: • no going-concern risk identified • R180 million in cash availability • zero funders assistance measures initiatedFunders remain aligned with Spear strategiesSpear sufficiently capitalised to meet short- and long-term commitments

HIGH ROAD

* Zero hospitality income included in various scenario plans** Strictest covenant 50% LTV and 2 times ICR and being met


3 / PORTFOLIO UPDATE


3 / PORTFOLIO UPDATE / PORTFOLIO SNAPSHOT

WESTERN CAPE

100%NUMBER OF PROPERTIES

32

ASSETS

R4.5BNASSET VALUE

AVERAGE IN-FORCE

ESCALATIONS

7.23%

LETTING

453 319M2

GLA

91.40%OCCUPANCY

28 MONTHSWALE

R91.10/M2/PMAVERAGE RENTAL INCLUDING RATES


March April May June July Aug* Total

MTD

Original budget (including utilities and hotels) (Rands) 44 653 849 44 001 509 44 320 065 44 601 273 46 676 767 48 408 522 272 661 985

Billed (including utilities, excluding hotels) (Rands) 41 333 448 39 524 308 37 026 221 35 231 057 41 510 667 44 192 574 238 818 275

Collected vs original budget (%) 91.60 87.87 81.58 75.26 80.15 74.34 81.67

Collected vs billings (%) 98.95 97.83 97.65 95.28 90.12 81.43 93.25

3 / PORTFOLIO UPDATE / COLLECTIONS

Trading environment remains extremely challenging Spear’s hands-on approach and regional focus paying offYTD collections under the circumstances have been satisfactory and inline with management’s planning scenarios Billing reflects revenue after all credits and deferments including recoveriesOriginal budget reflects pre-Covid-19 operating revenue including hotels and recoveries (set in December 2019)Zero hospitality income in billings recovered (factored into various scenario plans) Tenant arrears as at 26 August 2020 = R16.1 million (and reducing)Below excludes VAT

August 2020 included utility recoveries billed that are only due month-end and considered collectable and will increase collected vs billed and original budget for August to 85.55% and 78.10% respectively and increasing year to date to 94.01% and 82.34% respectively.

*


3 / PORTFOLIO UPDATE / EXCLUSIONS, CREDITS AND DEFERRALS (EXCLUDING UTILITIES)

Classification YTD amount% of YTD budget

(rentable area only)

Hospitality (12 314 291) * 5.95

Credit (10 397 333) ** 5.02

Deferral (5 129 657) *** 2.48

Stopped billing (1 152 532) **** 0.56

Variance to budget (28 803 742) 14.00

* Per May 2020 results presentation zero income forecast for hospitality** Internal assumptions are that this number will not increase significantly over balance of FY2021*** R1.3 million of deferrals already billed and collected in August 2020**** Worst-case scenario this amount increases to R2.4 million for FY2021

Spear has 419 tenants with 196 tenants provided with Covid-19 related relief.

COLLECTIONS VS. BILLED

93.25%


Expiries andcancellations

GLA

Gross rental

at expiry

Average gross expiry rental

R/m²

Renewals/new lets

GLA

Gross rental at renewals/

new lets

Average gross new rental

R/m²

Average rental reversion

%

Commercial 13 899 1 895 882 136.41 9 170 1 448 829 158.00 15.83Industrial 73 565 2 901 840 39.45 55 676 2 142 064 38.47 -2.46Retail 5 697 669 805 117.58 5 156 474 608 92.05 -21.71

93 160 5 467 527 97.81 70 002 4 065 502 96.17 -1.67*

130 000m² coming up for renewal in FY2021, with a total of 93 160m² which has either been renewed or relet30 000m² under negotiation with two existing blue-chip listed tenants Commercial positive reversion is due to No.1 Waterhouse relet at 30% above rental guarantee which expired June 2020

3 / PORTFOLIO UPDATE / TENANT LETTING ACTIVITY

* Relates to two retail tenants. In line with management’s expectations and budgets.


3 / PORTFOLIO UPDATE / NON-CORE DISPOSALS

PropertyValue Net

R’000Yield

% Status

10 Mill Street 55 800 9.5 Sold and transferred

PropertyValue Net

R’000 Yield Status

12 Pickwick 30 000 9.57 Under DD

142 Edward 42 000 9.50 Under DD

Island Business Park 21 000 10.00 Under negotiation

93 000

In line with management’s less-is-more strategy to focus on assets valued at R100 million and above the following non-core asset disposal updates are listed below:

* Once all disposals have been concluded and transferred net proceeds of R148.8 million will be available. * All proceeds from non-core disposals to be deployed into Spear’s debt facilities.

R148.8 MILLION OF DISPOSALS

CONCLUDED OR UNDERWAY


4 / SECTORAL PERFORMANCE

Sector-wide the impact of Covid-19 has been felt in varying degrees. The resilience of the Spear portfolio has been displayed in the level of collections set out earlier in the presentation along with the following sectoral performance update.


4 / SECTORAL PERFORMANCE RETAIL

Spear has only ever invested into convenience retail assets as opposed to large regional or super regional shopping centres

Retail portfolio occupancy: 91%

Collections have been 87.86% versus revenue billed for the period to date

Spear provided credits and deferments to retail tenants to the following values: R4m (credits) and R0.5m (deferments)

May – August 2020 credits / deferments have reduced significantly due to tenants reopening under Level 4 onwards

During all levels of lockdown our retail assets have performed in line with expectations with all anchor tenants operating under Level 5 lockdown

Letting activity in line with expectations with the bulk of renewals being concluded per management’s budgets for the period

No significant retail tenant failures occurred during the interim period, however, Spear has elected to not raise rental on gyms of which there are two within the retail portfolio

764m2 could be considered a Covid-19-related casualty created in the interim period

Spear has no exposure to Edcon or Massmart

RETAIL (42 229M 2 GLA)

Lower level of income risk as close to 100% of tenants are trading and paying rent

Gyms taking longer to recover to pre-lockdown levels requiring longer-term lease restructures

Sharper drop in consumer spending as SA recession deepens, impacting convenience retail sector and tenants’ rental obligations

RISKS


4 / SECTORAL PERFORMANCE COMMERCIAL

All Spear’s commercial assets are located in highly attractive and established office nodes in Cape Town

Office portfolio occupancy: 92%


Spear provided credits and deferments to office tenants to the following values: R3.5m (credits) and R2.9m (deferments)


Spear’s portfolio is attractively positioned to offer expansion and / or contraction space to third-party tenants due to its attractive lease terms and generally below-market asking rentals

In certain parts of the portfolio tenants have needed to increase their premises to comply with Covid-19 social distancing requirements

In other parts of the portfolio headwinds have emerged as kneejerk reactions to cut overheads led to non-renewal of certain office premises within the portfolio (the space in reference has been relet at a higher rental)

The impact of loadshedding has caused tenants to rethink their decisions to work from home

COMMERCIAL (139 842M 2 GLA)

Asking rentals to soften as vacancies may rise higher than normal

Increased vacancy equals increased competition for tenants

Generally, the potential is high for negative rental reversions across the office sector

Cost of installation of tenants will increase

RISKS


4 / SECTORAL PERFORMANCE INDUSTRIAL

Spear’s industrial portfolio has been exceptionally resilient during the interim period with a number of new lets and relets taking place in a very challenging market

Industrial portfolio occupancy: 90%* (6.5% of vacancy relates to the No.1 Beacon Way redevelopment)


Spear provided credits and deferments to industrial tenants to the following values: R2.5m (credits) and R1.2m (deferments)


The vast majority of Spear’s industrial tenants were able to operate from Level 4 lockdown onwards

INDUSTRIAL (243 158M 2 GLA)

Loadshedding may have a negative impact on manufacturing tenants Labour relations / Trade unions Increased capital requirements to maintain quality of industrial assets Major market or tenant failures

RISKS


4 / SECTORAL PERFORMANCE HOSPITALITY

Sector hardest hit by the impact of Covid-19

Management has eliminated hospitality income from its FY2021 forecasts

FY2020 hospitality comprised ±7% of group revenue (Total group revenue FY2020 = R503m)

HOSPITALITY (28 090M 2 GLA)

15 on Orange Hotel under lease to Marriott will reopen on 1 September 2020

Spear has zero exposure to 15 on Orange Hotel property-related expenses

Spear accrues rental on all hotel revenue generated on property

Marriott remains responsible for all sales and marketing of the hotel with numerous accommodation and conference enquiries already being received for periods from November 2020 onwards

15 ON ORANGE HOTEL, CAPE TOWN

Generated R2.5m during Level 4 lockdown through repatriation services

Prepared and distributed 50 000 meals to the needy and homeless in Woodstock, Salt River and Cape Town CBD

Since 1 August 2020 corporate travel accommodation and conference bookings for September 2020 onwards have been received

Post aggressive cost-cutting hotel breakeven achieved at 48% occupancy

Operating summary on occupancy forecast:

November 2020 – forecast 47% occupancy December 2020 – forecast 49% occupancy January 2021 – forecast 49% occupancy February 2021 – forecast 55% occupancy Average daily rate (ADR) forecast for the above period: R860 – R1 050

Rooms forecast to be sold from November 2020 – February 2021 = 11 109 (average monthly rooms sold = 2 800)

DOUBLETREE BY HILTON, CAPE TOWN

Business travel market recovers slower than expected

SA borders remain closed for international travel market

MICE market becomes reluctant to meet in larger groups

Geopolitical risks increase

Safety and security concerns

Prolonged finalisation of Covid-19 vaccine and global rollout

RISKS


l

4 / SECTORAL PERFORMANCE ALL SECTORS

Tenant cost of occupancy continues (local authority charges) to rise well ahead of inflation

Any new government restrictions that may limit tenant operations

Major market or tenant failures

Civil disobedience and property-related threats

SA borders remain closed longer than expected

GENERAL BUSINESS CONTINUITY RISKS (ALL SECTORS)


5 / OUTLOOK AND PROSPECTS


5 / OUTLOOK AND PROSPECTS OUTLOOK

Spear’s portfolio remains of a high quality, defensive in nature and underpinned by strong lease covenants

Maintain our hands-on non-bureaucratic approach

Implementation of required health and safety measures

Fewer unknowns in the year ahead as general economic activity returns and travel slowly returns

Rental recovery collections continue and are aligned with management’s scenario plans – the mid- to high-road scenario is the current status quo

Good momentum on non-core disposals

Spear remains well capitalised with sufficient liquidity and headroom facilities circa R180 million

The leasing and asset management team will as always remain close to the market and our tenants

Fewer tenant failures than initially expected

Good quality tenants with strong balance sheets

Filling of vacant space with the right type of tenants in the current market. Positive progress made during the interim period

Our regional focus and proximity to our assets remain a competitive advantage

LTV range at interim reporting period expected to be between 43% and 46%

No major valuations decline expected at interim period


PROSPECTS

5 / OUTLOOK AND PROSPECTS PROSPECTS

It is difficult to predict fully the economic outcomes of the pandemic on the real estate sector and on Spear.

Spear will not be issuing any FY2021 distribution guidance until latest November 2020.

Our various scenarios have not forecast any rental income to be generated on the hospitality portfolio for FY2021.

Regular cash flow analysis is performed to stress test the cash flows on a rolling 12-month basis. This includes a range of scenarios of tenant collections and creditor requirements. Management is positive that the company has sufficient cash resources available for the foreseeable future to meet all obligations as they become due

Management’s focus and energy are on rental preservations throughout this pandemic, lockdown and beyond. Our portfolio remains resilient and it continues to perform within our mid-high road scenario plan (Spear = profitable)


QUESTIONS?

THANK YOU

EMAIL QUESTIONS TO [email protected]

LIVE Q&A WITH CEO AFTER PRESENTATION

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