Delta Property Fund has published its financial results for the year ended February 2023, highlighting its disposal and debt strategy which gained traction during the review period.
The REIT sold seven properties for an aggregate R208.9 million, net of selling costs, with debt totalling R352.9 million repaid. After the reporting date, Delta transferred an additional asset of 14 188m2 for a purchase consideration of R42 million (net of commission) and received shareholder approval to dispose of Capital Towers for R57 million. Sales agreements for an additional five properties to the value of R71.8 million were concluded.
“Our strategic focus on portfolio optimization through disposals has enabled us to reduce debt and optimize the portfolio. To address our liquidity constraints, we have identified assets that are a cash drain on the business, negatively impacting our interest cover ratio. Further disposals have subsequently been earmarked,” commented Delta CEO, Bongi Masinga.
Disposals during the year reduced vacancies by 29 143m2 while new lettings reduced vacancies by a further 13 312m2.
“The positive impact of the disposals and debt repayments was however diminished by substantial interest rate increases. Finance costs are 11.3% higher than in the prior financial year, as we felt the full impact of increasing interest rates. The prime lending rate increased by 4.25% since the beginning of the financial year, which had a similar impact on the JIBAR rate.”
“Going forward, we will continue to prioritize asset disposals, debt and vacancy reduction as well as satisfying covenant requirements.”
As a result of higher finance costs, the company reported a contraction in its interest cover ratio (ICR), from 1.9 times in the prior financial year to 1.4 times.
While Delta achieved an average rental collection rate of 101.0% its rental income decreased by R159.6 million from R1.39 billion to R1.23 billion primarily due to a decline in contractual rental income because of rental reversions relating to the rebasing of several government-tenanted properties to market related rentals. The weighted average rental across the portfolio decreased to R104.05 per m2 from R107.00 per m2 in the prior financial period.
Its overall vacancy rate increased from 31.3% in the prior reporting period to 32.9% by the end of the 2023 financial year, mainly because of lease terminations. Its SA REIT loan-to-value (LTV) also increased from 57% to 61.4% mainly as a function of the reduction in fair value of the portfolio by R833.6 million to R6.9 billion. However, the company expects its LTV to improve as the disposal programme continues to gain momentum.
Lettings and lease renewals remained its priority. The company renewed 81 leases totaling 194 545m², with the majority being government and state-owned entity tenants. 137 new leases, comprising a total gross lettable area of 13 312 m2, were concluded during the review period, primarily with private commercial tenants and state-owned entities.
Regarding funding, Delta has been engaging with its funders to extend debt facilities and improve debt portfolio tenure and pricing. Post year-end, Nedbank agreed to reduce the margin on their facility by 0.5% to 3%. Facilities with Standard Bank mature at the end of 2024, whilst the facilities with Investec are being finalized, with one facility extended for 18 months and the other for 24 months.
Its SA REIT funds from operations (FFO) amounted to 11.2 cents per share for the year ended February 2023, down from 36.91 cents per share in the comparative period, mainly attributable to reduced revenue following reversions, coupled with significantly higher interest rates.
Considering the reduced revenue and increased interest rates, Delta’s Board resolved not to declare a dividend for the year ended 28 February 2023.