The Finance Ghost: The power of focus – story of two Reits and a wrong

Daily Maverick

25-05-2025

Two property funds – Shaftesbury and Spear – have done well through having highly focused portfolios. In contrast, Pick n Pay is paying the price for losing focus.
When corporates lose focus, they often lose money as well – or at the very least, lose value for shareholders. Diversification is great as a portfolio strategy, but it's often quite messy as a corporate strategy. The market's preference is for corporates to focus on what they are good at, with investors then having the option to diversify by choosing different corporates to invest in.
When management teams start trying to act like fund managers by diversifying too much at corporate level, it often ends in tears. We have far too many examples of this on the JSE, usually involving offshore deals along the way!
This week, there were two examples of property funds that have done well through having highly focused portfolios. Of course, they are both focused in lucrative areas – it certainly doesn't help to be focused in the wrong place! We begin with that duo, before looking at a retailer that is still dealing with the fallout of having lost its way in its core business.
London's West End: cool for the summer
Weather aside, London is an exciting and vibrant place. It attracts people from literally all over the world, with luxury properties (and associated shopping experiences) that have to be seen to be believed. London's West End is arguably the jewel in the crown, famous for its theatre and other attractions. This is where Shaftesbury has elected to focus its property fund and the outcome has been predictably strong.
In an update given at the company AGM, the company notes that momentum in recent leases has been strongly positive. They are 8% ahead of the estimated rental value (ERV) in December 2024, a metric that you don't really see in South African real estate investment trusts (Reits). The new leases are also 9% ahead of previous passing rents, which is analogous to local funds talking about positive lease reversions. Whichever way you cut it, there's clearly plenty of demand from tenants for the space, further evidenced by a decrease in vacancies from 2.6% to 1.7%.
My hope is that Shaftesbury continues with the focused strategy, particularly as it has sold a 25% stake in the Covent Garden estate to NBIM (the Norwegian sovereign wealth fund) for £570-million. This gives the company quite the war chest, with the loan-to-value ratio expected to be only 17% once this corporate activity is taken into account. Investors will want to see this capital deployed into more high-quality assets in the West End, otherwise Shaftesbury will start to deviate from what makes it special.
Spear Reit stays sharp in the Western Cape
Spear Reit is trading on a dividend yield of roughly 8.3%. This makes it a hot property, literally. The market sees this as a quality portfolio in the best region in South Africa, with Spear having passed the test of showing the market that it is capable of recycling capital (i.e. selling properties and reinvesting in new opportunities rather than always tapping the market for fresh equity capital).
The other test that it passed in the year ended February 2025 is the need for positive reversions. This is probably the best way to gauge the supply and demand forces in a property portfolio. With positive reversions of nearly 4.2% in that financial year, Spear has entered into new leases at higher rentals than the outgoing leases. They are also enjoying in-force escalations on those leases that are above inflation, coming in at roughly 7.3%. It's worth noting that property inflation has been somewhat higher than CPI, fuelled by the likes of energy and security costs, as well as municipal rates, so those escalations aren't as lucrative as they sound.
Spear also isn't sitting still, with a deal announced to acquire the Berg River Business Park in Paarl for around R182-million, excluding transaction costs. It is acquiring the asset on a purchase yield of 9.35%, and the deal comes with additional goodies such as the seller giving a guarantee for the rental on some occupied units for 18 months.
Onwards and upwards, then.
Pick n Pay: the price of losing focus in your core business
Pick n Pay is in turnaround mode and that will be the reality for a long time, all because it has lost its way in its core retail business over the course of many years. Like a balloon in the clutches of a hyperactive toddler, there's only so much pressure that a business can take before the thing pops. Pick n Pay is now dealing with the post-pop, or at least the first post-pop. The latest results show that it certainly isn't out of the woods yet, so investors should be cautious in assuming that the most recent capital injection was the last one that will be required.
For the 53 weeks to 2 March 2025, the core Pick n Pay segment made a loss after lease costs. It sounds ridiculous to have to specify that we are talking about profit (or loss) net of leases, but such is the nature of the current accounting standards. The loss is admittedly less severe than it used to be (the headline loss per share has reduced by between 55% and 75%), but it is still burning through the balance sheet.
Speaking of the balance sheet, part of the reason for the reduced losses is the recent injection of equity capital from shareholders that helped Pick n Pay get rid of a chunk of debt. The income statement may show the benefit of this in terms of lower finance costs, but the long-term truth of it is that equity capital is actually more 'expensive' than debt capital as equity holders demand a higher rate of return than debt providers. In simple terms, if Pick n Pay can't stem the bleeding and then start to achieve a reasonable return on equity, the prospects for successful future capital raising will diminish quickly.
The share price may be up 40% in the past year thanks to Sean Summers and his team having won the belief of many in the market, but the proof will be in the pudding aisle at your local Pick n Pay. The in-store experience needs to improve to the point where it is making profits again.
All of this would be much easier in a competitive vacuum, of course. Alas, grocery retail is an absolute bloodbath of competition, with Shoprite as the most fearsome shark in the water and Pick n Pay as the struggling swimmer with an open wound. DM