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Delta Property Fund gains traction in key metrics despite higher interest rates

Bongi Masinga

Delta Property Fund has published its financial results for the six months ended August 2023, reporting an improved performance due to its implementation of strategic initiatives.

Notwithstanding a deteriorating macro-economic outlook and high interest rate environment during the reporting period, our consistent and unwavering focus on cost optimisation, debt reduction, lease renewal and asset recycling continued to gain traction, with an improved performance against FY23 key metrics,” says CEO, Bongi Masinga.

We have a clear flight path to reduced loan-to-value and an improved interest cover ratio, that will reposition Delta for growth and the recommencement of distributions.”

The company’s rental income decreased by 9.2% from R631.7 million to R573.8 million, largely driven by a decline in contractual rental income due to rental reversions and a marginal increase in vacancies.

Property operating expenses contracted by 8.4% while administrative expenses increased by 1.8%, well below the inflation rate. The containment of costs is due to the cost optimisation strategy of the Group.

Delta reported a R12.5 million fair value gain, mainly on its investment in Grit Real Estate Income Group. Dividend income of R5.8 million was received from its investment in Grit.

Finance costs on borrowings increased by 13.0% from R207.1 million to R234.4 million due to prevailing high interest rates which negatively increased the weighted average cost of funding by 2% to 10.1%.

Cash generated for the period amounted to R355.2 million, consisting of cash from operations of R334.2 million, interest income of R7.5 million and net proceeds from property disposal of R13.5 million. The cash was utilised to settle finance costs of R221.6 million, taxation of R49.7 million, net capex of R19.6 million and net debt of R60.4 million.

“During the reporting period, we continued to collect more than 100% of rentals, providing a strong cashflow underpin to the Group. We successfully renewed debt totalling R3.1 billion which was mainly on a month-to-month basis on more favourable debt terms with our largest funders and extended our weighted average debt maturity by 73%, in addition to concluding a R37.5-million revolving credit facility,” addsGroup CFO, Fikile Mhlontlo.

The revolving credit facility, together with the additional headroom created by the lower debt terms, will be utilised for working capital, capital expenditure and tenant installations, which will further assist in retaining current and attracting new tenants.”

The group’s weighted average lease expiry (WALE) increased to 15.8 months (FY23: 13.2 months) on the back of 23 office leases with an aggregate gross lettable area (GLA) of 97 045m2 renewed and new leases totalling 5 526m2 of gross lettable area (GLA) and 100 parking bays concluded.

89 452m2 of the renewed leases were with Delta’s largest tenant, the DPWI, over an average term of between eight and 60 months. 24 retail leases, mostly in Durban region with a GLA of 1 934m² were concluded for an average 3-year period.

28 new leases with a combined GLA of 2 635m2 were signed in KwaZulu-Natal. In Kimberley, the IEC signed a 7-year lease for 1 459m2 of space.

Delta reported a loan-to-value of 60%, down from 61.4% at the end of the 2023 financial year. The interest cover ratio, however contracted to 1.3 times cover (FY23: 1.4 times cover) because of higher interest charges during the period.

Investors often ask what Delta will look like post the conclusion of our portfolio optimisation strategy.

“Over the medium term, we will evolve into a smaller, but much more sustainable REIT with core properties of around R4.7 billion and strong headroom for growth. Key ratios such as loan to value and interest cover will be well within covenant levels, at a projected 44.2% and 2.5 times cover respectively.

Important to note is the impact that disposals will have on vacancies, with the current core portfolio occupancy rate sitting at a relatively healthy 89.6%. Net operating income from the core portfolio will amount to an estimated R296 million in today’s terms,” adds Masinga.  

The company has earmarked 43 non-core assets valued at R2.2 billion for disposal, of which 29 properties with a combined GLA of 277 349m2 are at advanced stages of negotiation. Five properties valued at R124.5 million are expected to transfer in the next six months.

“It’s a common misperception in the market that we are forced sellers of our assets. This is evident from the number of opportunistic offers received or offers on assets that are not for sale. Properties that are expected to transfer in the short term have all been disposed of at a minimal discount to book value, or, in some instances, at a slight premium to book value. This speaks to the fair valuation of the portfolio as much as it demonstrates our resolve to engage with serious buyers at a market-related price.”

Delta’s SA REIT Funds from operations (FFO) per share amounted to 8.1 cents for the six months ended 31 August 2023 (HY22: 9.2 cents per share). Considering the reduced revenue and increased interest rates, Delta’s Board resolved not to declare an interim dividend for the year ending 28 February 2024.