JSE-listed real estate investment trust (Reit) Delta Properties has declared a distribution of 97.24c a share for the financial year ended February 28, which represents a 7.1% year-on-year increase.
CEO Sandile Nomvete highlighted that this was testimony to the company’s ongoing efforts to focus on its strategy of long-term investment in quality, income-generating rental properties in strategic nodes that are attractive to sovereign entities and other tenants requiring empowered landlords.
“Given government’s implementation of radical economic transformation initiatives, the board is currently reviewing various strategies that will bolster our black ownership and impact positively on our ability to secure long-term sovereign leases.
“The successful conclusion of the ongoing corporate action will allow us to renew debt at favourable rates and lower our gearing to significantly below 40%.”
In the period under review, the Reit also successfully refinanced R1.2-billion in debt and achieved an operating margin of 71.2%.
At a presentation of the company’s results, in Sandton, Nomvete said the company delivered a “pretty solid set of results” given the economic environment.
“Over the last 18 months, we chose to rather focus inwardly on sweating our acquired assets, filling up vacancies and renewal of leases. It has been rather challenging. There has been noise for seven months about the ratings agencies and how that will impact our funding costs,” he pointed out.
Contractual rental income and property operating expenses increased by 32.1% and 44.1% respectively, largely influenced by the growth in the portfolio due to the transfer of previous acquisitions. The gross cost-to-income ratio increased to 28.8% and was impacted on by higher maintenance and repairs, while the net cost-to-income ratio remained unchanged at 12.4% owing to higher utility recoveries.
Administrative expenses for the period, excluding one-off items of R20-million recognised in the prior year, increased 8.7% while the weakening of the rand resulted in a R20.3-million foreign exchange gain on foreign loans.
Fair value adjustments of R34.9-million represents the net movement between the fair value loss on investment property of R43.8-million and gain on swap contracts of R8.9-million.
Finance costs increased 14% owing to prime interest rate increases of 100 basis points during the period coupled with prior year acquisitions funded by debt being in place for the full current year, while interest income increased marginally by 2.2%.
The share of profit in associate decreased to R1.5-million primarily owing to fair value adjustments by Mara Delta on its property portfolio. Delta continues to benefit from its 21.4% shareholding in Mara Delta, having received a dollar denominated distribution which translated into R38-million.
Delta’s R11.4-billion portfolio comprises 112 properties with a total gross lettable area (GLA) of 981 777 m2, which includes assets held-for-sale comprising 18 properties with a total GLA of 126 144m2 and a combined value of R1.3-billion.
During the period, Delta managed to renew 100 364 m2 of GLA, with its 9.1% vacancy rate below the South African Property Owners Association national average of 11.1%.
Nomvete added that the company had to “fight hard” to keep its vacancies down, as its Sunninghill node was being impacted on by the development of Waterfall Park.
He added that some of the company’s competitors were, in a bid to secure tenants, offering one or two years free on certain lease agreements.
Meanwhile, the Reit’s loan-to-value improved to 41.5% from 47.2%, mainly because of the acquisition of the R1.3-billion Redefine portfolio settled in shares, as well as the settlement of debt from disposals.
Eighty-five per cent of the fund’s debt is fixed through a combination of swap contracts and fixed rate loans over an average period of 2.2 years.
“Our weighted average all-in cost of funding is 9.2%. The potential downgrade of South Africa’s credit rating by Moody’s is expected to have an impact on interest rates and we are considering numerous alternatives to improve both gearing and debt expiry profiles.
“We believe the expected implementation of the Department of Public Works’ (DPW’s) leasing policy and concomitant longer lease terms will allow us to negotiate more favourable debt facilities,” said CFO Shaneel Maharaj.
Delta indicated that the much-anticipated new leasing framework by the National Treasury and the DPW for the procurement of leases is reaching finality.
“We have submitted a bulk proposal to renew 62 leases totalling 243 000 m2 and are bullish that the framework will be implemented shortly,” said COO Otis Tshabalala.
Disposals of noncurrent assets held for sale totalling 33 409 m2 for an aggregate R268.5-million were concluded during the year under review. In addition, disposals for a further seven assets with a combined GLA of 40 287 m2 and a fair value of R558.1-million were concluded at year-end and are in the process of being transferred.
The net proceeds from these disposals will be used to further reduce gearing, invested in yield-accretive capital expenditure or for the acquisition of higher yielding assets.
Looking ahead, Delta expects earnings to remain flat for the 2018 financial year primarily owing to one-off lease adjustments being traded for longer-term leases and the disposal of noncurrent assets held for sale.
Nomvete added that as 67% of Delta’s income was derived from State-owned enterprises, paired with the drying up of liquidity in the debt capital markets, the company expected to see further impacts on its future growth.
“We are very sensitive to any political noise. We believe that political risks will remain elevated this year and that policy shifts are likely. Despite the challenging economic outlook and the possibility of rising interest rates in the medium term, we believe the group’s portfolio is defensively positioned to weather the storm,” concluded Nomvete.