Property Flash


June 13 2023

Delta Property Fund, the Real Estate Investment Trust (Reit) disappointed its shareholders in the year to end-February 2023 as it losses were spurred by rising operating costs.

Delta’s portfolio consists predominantly of offices which are let out to government departments. The benefit is supposed to be that government tenants are reliable payers as the government cannot go out of business. The departments can get funds from senior agencies. Nevertheless, Delta has battled in recent years. Many government tenants have been hesitant to resign leases at longer terms. Delta has battled to gain financing from banks and to raise capital from fund managers.

The company reported that its rental income fell 11.49% in the reporting period from R1.39bn to R1.2bn. Its headline earnings per share fell 63% from 39.74c to 14.75c and its loss per share grew 402.32% from 20.30c to 101.97c.

The group was unable to declare a dividend given its losses. As a real estate investment trust (Reit), Delta is supposed to pay at least 75% of its distributable income as a dividend each financial year, unless it fails an insolvency test. Fund managers traditionally invest in Reits because they want to receive regular dividends.

Delta’s SA Reit Funds from operations per share amounted to 11.12c for the reporting period compared with the year to-end February 2022’s 36.91c per share.

“The reduction is mainly attributable to the reduced revenue following the reversions coupled with the significant increase in interest rates,” it said.

“In performing the solvency and liquidity test conducted in terms of section 46 of the Companies Act, which takes into consideration the working capital cash flow forecast, expected working capital requirements, capital expenditure requirements and contracted tenant installations relating to historic lease renewals, the Board resolved not to declare a dividend for the year ended 28 February 2023,” it said.

Delta did not declare a dividend in the 2022 financial year either.

“The year has seen significant geopolitical and economic headwinds. The war in Ukraine has exerted upward pressure on energy and food prices worldwide spurring global inflation and abruptly interrupting an already lacklustre post-Covid19 financial recovery. Global growth forecasts continue to revert downward, more so for emerging markets,” Delta said.

This was even though certain markets have weathered Covid-19 and weak economic conditions better, such as the US which currently has an unemployment rate of about 3.7%.

“Continued loadshedding, the high cost of energy, rising costs coupled with low economic growth, illiquid financial markets, and higher interest rates will continue to put the fund under pressure. This environment heightens the need to accelerate disposals,” Delta said.

Delta has said it is going through a turnaround process following the resignation of a former CEO and founder, Sandile Nomvete. Delta is selling numerous properties to strengthen its balance sheet.

“The group therefore continues to focus on achieving its strategic objectives. Portfolio optimisation through disposals is a key strategic focus to address the reduction of debt and the concomitant reduction of SA Reit loan to value (LTV).

The group disposed of seven assets with a combined gross lettable area of 47 025m² for a cumulative amount of R208.9m, net of selling costs. After the reporting date, Delta transferred an asset sized at 14 188m² for a purchase consideration of R42m, net of commission and received a positive vote from shareholders to dispose of Capital Towers for R57m. Sale agreements for a further five properties were agreed to the value of R71.8m.

“We are delighted to have achieved an average collection rate of 101.0% in a period that has proven challenging for tenants in these difficult economic circumstances,” Delta said.

Delta owns a diversified portfolio of 92 properties valued at R6.9bn. During the reporting period, its LTV rose from 57% to 61.4% after its portfolio suffered a staggering R833.6m reduction in its fair value.

The increase in interest rates meant the weighted average cost of funding increased from 7.4% in 2022 to 8.8%, negatively affecting the fund’s interest cover ratio (ICR) which has reduced from 1.9 times to 1.4 times, with finance costs were 11.3% higher rising from R411.5m to R457.9m.

Interim CEO Bongi Masinga said Delta needed a couple of years to be turned around.

“To address our liquidity and asset portfolio, ensuring an optimum gearing level, and covenants in line with agreed ratios, we have spent a lot of effort analysing the portfolio, identifying those assets that are more of a cash drain and have a negative ICR,” she said.

“The strategy is to have targeted disposals of properties with negative ICRs and those that are in regions we have previously highlighted as areas we wish to exit. These earmarked properties will be sold, and the net proceeds used to reduce the debt exposure of the fund. Delta Property Fund has widened its pool of potential buyers from the traditional purchasers to others who might have a different use for the assets,” she said.

Masinga even alluded to diversifying away from government offices which is a surprise for shareholders given the fund’s traditional strategy.

“There is a targeted time frame of a 24 months in which to align our LTV and ICR to covenant levels. Within this time frame the portfolio should be right sized, and the fund should be in a position to secure more capital and diversify their exposure,” she said.

Property Flash questions whether Delta will still be listed in two years’ time or if it would suit the fund to go private and save on listing and related costs.

Delta’s share price closed flat at 22c amid minimal trade on Tuesday. The price is down 97% on a five year basis.

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