Spear CFO Christiaan Barnard and the art of keeping calm

This Visionary CFO Series interview is proudly brought to you by A2X.

The Covid-19 pandemic has disrupted many industries, and while some benefited largely from the shift in the way we work, it posed a significant challenge for the property industry. Spear REIT was no exception.

“Initially when Covid-19 hit, there was so much uncertainty about where we were going, how long it would last and the extent of the impact,” CFO Christiaan Barnard says. “We sat down and came up with three scenarios: a low road, a mid road and a high road scenario.”

He explains that, for the low road scenario, they anticipated about 60 percent of tenants would fail to pay rent and that they wouldn’t get a cent of hotel income for almost 18 months. “In this scenario, we would be operating at the lowest possible income without breaching any covenants.”

Christiaan then went to the banks and asked them to relax Spear’s covenants in the case that the low road scenario would materialise. “We played open cards with the banks, explained the three scenarios to them and what help we would need from them in each case. They were all willing and able to assist.”

In 2020 alone, Spear provided up to R40 million in credit to tenants, and lost another R30 million of projected hotel revenue.

Luckily, despite the hotel scenario becoming a reality, most of Spear’s tenants were able to continue paying rent after they had restructured the lease agreements. “We had a couple of tenants that were unable to pay, particularly in the tourism industry, but we helped many other tenants by providing them with credits,” he says.

Christiaan explains that, “Initially no one knew how to react to having to work from home, and then they overreacted and wanted to give up all their office space with the hopes that they would work from home forever.”

But while some tenants were giving up their spaces, other organisations, like call centres, were taking more space in order to comply with social distancing. Additionally, industrial buildings and manufacturing facilities were never impacted by Covid-19 restrictions and were able to continue paying their rent.

Not long after the hard lockdown was lifted, however, people started returning to their offices and wanted their spaces back. “I think it’s still going to take some time for companies to figure out which spaces work for them, as it’s not a one-size-fits-all situation,” Christiaan adds.

Spear ended up in the high-road scenario, and remained a dividend paying company throughout the pandemic. “We’re very proud that we were able to achieve strong results throughout the pandemic that allowed us to continue paying dividends, because that’s why people invest in us – for the long-term and annuity income.”

Keeping calm in the face of challenge
Despite achieving the best possible outcome from the pandemic, Christiaan explains that it was not without its challenges. Tenants took advantage of the markets and many of them tried to withhold rent. “We had to explain to them that they couldn’t just withhold their rent because we still had to pay for the maintenance, security and cleaning staff, and tried to convince them to at least pay a portion of their rent.”

What was surprising, he says, was that the smaller businesses who weren’t able to afford their rent were more accommodating to rent negotiations than the larger companies who could afford it.

In addition to the pandemic, Spear had to navigate loadshedding. “Every time the power trips, every tenant wants to know what the landlord is going to do about it, which is difficult and frustrating because there’s only so much we can do,” Christiaan explains.

While the real estate company has installed solar power for some of its buildings, it’s too expensive to do it for everyone. “We have installed diesel generators where we can, but given the current diesel prices, running those generators is extremely expensive too,” he adds.

Then there are also the additional concerns around health and safety regulations. “When we install new generators, we have to build extractor fans to let the fumes out of the buildings. So there are a lot of additional costs involved as well,” Christiaan says.

“Even if we can recover some of the costs from tenants, we are mandated by the City of Cape Town to charge them per kWh they use. But at the current diesel prices, generating a kWh’s worth of power through the generator costs a lot more than what we’re allowed to recover. So we lose money whenever there’s loadshedding.”

The use of generators is also having a negative impact on Spear’s ESG scores, and almost cancels out all the good work it has done so far with solar installations and water-saving initiatives. “We have to explain to investors that it’s not something we want to do, but for the sake of business continuity we have to. If we don’t have these generators, tenants won’t be able to operate and pay their rent, and that’s an even bigger problem.”

Despite the costs and ESG implications, Spear continues to invest in generators for their buildings, including upgrading them and increasing the size and quantity of generators.

In navigating all of these challenges, Christiaan has learnt the art of keeping calm. “I am a hothead, and I’ve learned in the last two years to keep calm, think things through and not just say whatever comes to mind when I’m frustrated.”

He relies on a technique one of his audit seniors had taught him while he was an article clerk, where he opens a blank email, types out what he really wanted to say, deletes it, and then writes the appropriate email to the other party.

The power of strong relationships
Christiaan explains that Covid-19 strengthened his view that if you have good relationships, you will get the right results. “I’ve learned a lot from our CEO about the benefit of personal relationships with our tenants. He would call them personally to find solutions to the challenges we were facing, together. In doing that, we were able to find common ground with most of our tenants who had taken a hard stance against paying their rent initially.”

He adds that he also has a strong relationship with the Spear staff, and that they are like a family. “Our CEO is very good at creating WhatsApp groups, and during the pandemic we would often check in with everyone on the groups and ask them how they are doing.”

They would ask each other what was frustrating them about working from home, whether it was a dog barking or loud neighbours, and what they were enjoying from it. “Through that, we created a safe space where people could feel comfortable to share and unpack what they were going through.”

Christiaan explains that, in the first week of the hard lockdown, he lost both his grandmother and father, and the outpouring of support and help from colleagues during that time was heartwarming.

“When we started working from home, my wife, who is a pharmacist and had to work long hours throughout the lockdown, left a package of ingredients for me in the kitchen one night and asked me to make dinner. I had no idea what I was doing and couldn’t ask her for help, so I called our COO in a panic asking him how to make these ingredients into something. He immediately calmed me down and started giving me instructions. That just speaks to the relationship we’ve built with our coworkers.”

He adds that they also leveraged these relationships when the hotel businesses were suffering from the impact of Covid-19. “Our CEO sent out an email one day asking everyone to help in the hotels. He and two of the Spear founders donated money to get the kitchen of one of the hotels up and running again, and started making food for the homeless.”

The Spear staff all took turns to help the hotel kitchen staff, and Christiaan remembers cutting and peeling more than 100kg of butternut and vegetables. “Now I hate butternut,” he laughs.

Getting back on track
Spear’s profits are still down from pre-Covid levels, but they have taken various steps to try and get back on track. “At the moment, we are about 10 to 15 percent away from reaching pre-Covid levels again, but it will take some time to get there,” Christiaan explains. “Not only has our revenue declined from leases being renegotiated, but the cost of operations has increased.”

He adds that they are currently battling inflationary pressures, which will only increase over the next couple of months. “South Africa is still lagging behind the first world, and we will soon see the same inflation rates that the United States and United Kingdom are currently experiencing.”

To mitigate this, the company has fixed its debt at 70 percent. “Most companies prefer to have 90 percent of their debt fixed, but our strategy has been to identify assets that we want to dispose of, and will use the proceeds to settle the variable debt, which will mitigate a lot of that risk. We’re intentionally leaving the remainder on a variable rate because we want to settle without the penalty,” Christiaan says.

He explains that Spear is disposing of a list of assets which are below R100 million in value that the company has already extracted the maximum value it can get from and is deemed non-core investments.

“We’ve disposed of one very small commercial office asset, which was valued at about R22 million, as well as an industrial asset with a five year lease. We took the money from those assets and redeployed it into another industrial asset with a ten year lease, backed by Pepkor holdings,” he says. “So it’s not just about disposing of the assets and settling the debt, but also to recycle the assets and protect our balance sheet while enhancing our earnings.”

Finding calm amidst chaos
Christiaan was an avid golf player during his school and university years, but when he started working he gradually stopped playing. However, after being cooped up at home for months, when the Covid-19 restrictions were eased one, the first thing he did was head back to the golf course. “Even though I’m not as good as I used to be, having those couple of hours of personal time or enjoying a round with friends is a great stress relief.”