Delta delivers against guidance despite shorter lease terms

  • Total distribution for FY18 97.24 cents per share.
  • Successfully refinanced R941 million in debt.
  • Distributable earnings for FY18 R691.6 million (up 2.1%).
  • Debtors days at 18.0 days.
  • Renewed 93 144 m2 of existing leases.
  • Concluded 53 774 m2 of new leases.
  • Concluded stage 1 of 227 550 m2 bulk lease renewal.

Delta Property Fund has reported flat annual financial results for the year ended 28th of February 2018.

Delta declared distributable earnings of R691.6 million, an increase of 2.1% over the prior year comparative period. This was despite a significant impact on the company’s weighted average lease term, policy uncertainty during the period and resultant higher cost of finance. This equates into a second half dividend of 50.84 cents per share and a full-year distribution of 97.24 cents per share.

Sandile Nomvete, Delta Chief Executive comments:

“It was a very challenging past six months. Our continued focus on property fundamentals paid dividends as we renewed 93 144 m2 of existing leases and signed 53 774 m2 new leases. Costs were well maintained, we reduced our loan-to-value slightly and refinanced almost R1 billion in debt. Importantly, we successful negotiated the approval of 59 leases for 227 550m2 with the National Department of Public Works as part of our bulk lease renewal programme. 

This means that we are now progressing to stage 2 and stage 3 of the finalisation process for renewal. The DPW is currently engaging user departments to confirm budgets and tenant requirements for their approval (stage 2) before the National Bid Adjudication Committee finalises (stage 3) and recommends the signing of the leases.

 We are very encouraged by Minister Nxesis commitment last week Thursday to the market to have this process finalised by 31 December 2018. Given the quantum of leases on a month-to-month to be renewed in the sector, this will be a highly commendable achievement.

The weighted average in-force escalation at year-end is 6.0% with a weighted average rental of R110.58/m2.

Debtors’ days remain well managed at 18.0 days, which the group says provides a strong indication of its ability to continue achieving contractual escalations and higher than budgeted for rental income until the full implementation of the DPW’s Leasing Policy.

Delta’s property portfolio as at 31 August 2017 is valued at R11.5 billion (including eleven assets held for sale) and consists of 105 properties with a total gross lettable area of  952 428m2. During the prior financial year, Delta concluded sale agreements and disposed of seven non-core properties for an aggregate R316 million. Sale agreements for a further four assets totalling R328.5 million were concluded and are in the process of transferring.

No new acquisitions were made during the year under review.

The proceeds from the disposals will be utilised to reduce gearing, supplement capital expenses and invest in higher yielding assets.

In the current constrained economic environment, there is a noticeable trend where corporates re-occupy the Durban CBD for their call-centre and back-office operations, given the lower rentals vis-a-vis prime areas, as well as the CBD’s proximity to key public transport nodes frequented by the bulk of their employees … During the year, we completed several long-term leases in the node, including a 10-year lease with Mr Price,” adds Nomvete.

During the six-month period, Delta’s cost of debt increased marginally from 9% to 9.2%. It should however be noted that the expiring interest rate swap contracts were originally concluded at a historically low base. The company expects further sovereign credit ratings downgrades and its current month-to-month lease profile to temporarily neutralise distribution growth, until the Leasing Policy is implemented, and the empowerment transaction is concluded.

“We have renewed bank facilities totalling R941 million at a blended margin of 2.6% above the 3-mnth JIBAR rate, and R125 million commercial paper was settled during the year.

“On the completion of longer team lease contracts, we expect a significant reduction in finance costs, the benefit if which will likely be included in the 2020 financial year, all factors remaining equal,”comments Nomvete.

Going forward, the fund guided a 2-4% reversion in earnings, in line with its peer group, for the 2019 financial year, mainly due to a once-off impact of lease adjustments in lieu of longer-term leases (on the DPW bulk lease renewals), the disposal of assets held for sale and the issue of shares to settle the acquisition of the Free State portfolio.