Wrap Text
Reissued audited annual financial statements for the
year ended 29 February 2020
DELTA PROPERTY FUND LIMITED
(Registration number 2002/005129/06)
(Incorporated in the Republic of South Africa)
Share code: DLT ISIN: ZAE000194049
("Delta" or "the Fund" or "the Group"
or "the Company") (REIT status approved)
Reissued audited annual financial statements for the
year ended 29 February 2020
COMMENTARY
Overview
Post the 2020 financial year, Delta Property Fund Limited ("Delta") has gone through significant changes, including the
appointment of new members to the board of directors ("the Board") to drive a step-change in the Group's performance.
The Board's primary objective is to stabilise leadership and ensure adherence to and enhancement of existing corporate
governance processes and improve internal control and compliance thereto.
The Board is cognisant of the fact that effective corporate governance ultimately relies on the gatekeepers' integrity
to uphold policies and procedures and to have subsequently implemented a range of corrective actions to effectively
resolve the reportable irregularities reported by the auditor and significantly strengthen its governance and financial
structures.
Irregularities investigated and withdrawal and reissue of annual financial statements
On 2 August 2019, the Chairman of the Board and the Chairman of the Audit and Risk Committee received an anonymous
tip-off from a whistleblower regarding irregularities being perpetrated by senior executives of Delta Property Fund.
A preliminary investigation was conducted and completed by Deloitte on 12 November 2019. After the initial investigation,
an in-depth investigation was conducted by Mazars Forensic Services ("the first forensic investigation") and a preliminary
report was issued on 13 August 2020. Following the receipt of the preliminary findings of the first forensic
investigation, the then Chief Executive Officer and Chief Financial Officer tendered their resignations with immediate effect
and the then Chief Operating Officer elected not to complete his notice period, as announced to the market through SENS on
24 August 2020. The Board subsequently engaged with the Company's auditor, BDO South Africa Incorporated ("BDO") in respect
of the preliminary findings and the circumstances surrounding the resignation of the relevant directors. The first
forensic report was finalised on 23 September 2020.
Following the Board's disclosure of the preliminary findings of the first forensic investigation to BDO, BDO issued a
letter to the Independent Regulatory Board of Auditors ("IRBA") in terms of section 45 of the Auditing Professions Act,
regarding reportable irregularities, and subsequently advised the Board accordingly. BDO undertook additional audit
procedures regarding the new information that came to their attention post sign-off of the 2020 audit opinion. A further
reportable irregularity was reported by BDO to IRBA relating to the non-compliance with section 30 of the Companies Act
in that, with the withdrawal of the financial statements by the Board and audit opinion by BDO, as a result of that Delta
did not prepare financial statements within six months from their financial year-end and have consequently also not prepared
an interim financial report within three months from the interim period close, thereby breaching paragraphs 3.19 and 3.15 of
the JSE Listings Requirements respectively.
Following the final report and findings issued by Mazars in the first forensic investigation, management concluded an
investigation of internal processes covering the period 01 March 2017 to 31 August 2020, with further emphasis on the
double payment of commission and improper procurement practices ("the second forensic investigation"). While the first
and second forensic reports (collectively "the Forensic Reports") are confidential and subject to legal privilege, and
without waving this legal privilege, the Board confirms the investigations found evidence that the previous executive
directors, in the execution of their duties, undermined the Company's governance practices, which resulted in
non-compliance with internal controls in the Company, including unsubstantiated payments, procurement irregularities
and other unethical business dealings.
The required reporting of these instances of wrongdoing have been made by the Company to the South African Police
Services and other relevant authorities for further investigation and the Board is taking legal advice based on the Forensic
Reports and an internal assessment as to any civil claims that may arise.
Some of the key issues identified in these Reports include:
- payment of commission by the Company totalling R42,8 million (for the three financial years ended February 2018,
2019, and 2020), on the basis of invalid, lapsed or no broker mandates;
- fraudulent payments amounting to R2,1 million; and
- non-disclosure of related/connected party transactions and apparent conflict of interest situations relating to
the then Board members.
Commission payments of R41.8 million were made to parties which the Board considered to be acquaintances due to the
nature of the relationship between some of the former executive directors and the parties receiving the commissions.
There were five companies who received commissions ranging from R0.2 million to R20.1 million in total.
Despite various requests to such entities and searching of public information, management has been unable to obtain the
shareholding information and thus establish whether such parties constitute related parties for IFRS disclosure
purposes.
The Board initiated, and the interim management appointed by the Board ("Interim Management") oversaw a comprehensive
internal accounting review process that revealed a failure to recognise commission and other property-related expenses
(such as insurance, valuation fees and property management fees) as well as off-market assumptions used in certain of
the property valuations for the years ended February 2018, 2019 and 2020, the correction of which has now resulted
in a decrease in the valuation of Investment Property (including investment property held-for-sale) from R10.6 billion
(2019: R11.3 billion and 2018: R11.5 billion) to R8.8 billion (2019: R9.8 billion and 2018: R10.6 billion) in the
financial statements for the year ended February 2020 ("2020 Financial Statements"). Of the total decrease of
R1.8 billion (2019: R1.5 billion and 2018: R0.9 billion), R0.6 billion (2019: R0.8 billion) related to a prior year
error resulting from the exclusion of the property-related expenses from the valuations and R1.2 billion
(2019: R0.8 billion and 2018: R0.9 billion) resulting from a difference in assumptions that were not aligned to
property specific and market information available at the date of the fair value determination.
In light of the circumstances described above, in December 2020, the Board resolved to withdraw the 2020 Financial
Statements as continued reliance on the 2020 Financial Statements as previously issued was no longer appropriate.
The Company was advised by BDO, that BDO had withdrawn its audit opinion in respect of the 2020 Financial Statements.
In addition, the accounting review revealed:
- Unsubstantiated rental revenue from contractors in vacant properties which was capitalised to the respective
investment properties amounting to R36.6 million in 2019 and R27.5 million in 2018.
- Properties classified as non-current assets held for sale that did not meet the required criteria and required to be
reclassified to investment properties amounting to R1.4 billion in 2019 and R0.9 billion in 2018.
- Understatement of the impairment allowance on receivables from related parties of R19.5 million. There were no
increases to the impairment allowance for 2018 and 2019.
- The requirement to recognise a guarantee liability in accordance with IFRS 9 Financial Instruments for the guarantee
provided to Investec Bank in favour of Grit Real Estate Income Group of R6.3 million (2019: R3.9 million and
2018: R4.0 million).
- The requirement to consolidate DPAM in accordance with IFRS 10 resulting in a decrease in Group net asset value
(NAV) of R5.1 million (2019: R0.7 million and 2018: R5.5 million increase in NAV).
- The requirement to expense debt structuring fees on short-term facilities to finance costs in the amount of
R11.9 million that were previously incorrectly amortised over a three-year period. There were no adjustments of debt
structuring fee amortisation affecting prior periods.
- The need to recognise expected credit loss impairments on loans to subsidiaries following updated property valuations
resulting in a cumulative impairment allowance of R131.9 million (2019: R98.6 million, 2018: R74.4 million).
As the 2020 Financial Statements have a bearing on, and are used as a comparative basis for, the Company's interim
financial results for the six months ended 31 August 2020 ("Interim Results"), the Company was not in a position to
release the Interim Results as previously indicated to stakeholders.
As a consequence of the withdrawal of the 2020 Financial Statements, the JSE suspended trading in the shares of
Delta. The Board initiated, and the interim management oversaw, a comprehensive internal accounting review that
led to the reissue of the previously withdrawn financial statements for the year ended 29 February 2020.
The correction of the accounting errors in the financial year ended 29 February 2020 have been summarised as follows
in the interest of transparency and to illustrate the financial effects of the irregularities and accounting errors.
Financial impact year ended
29 February 2020
Equity
Asset Liability Profit Equity
increase/ (increase)/ increase/ increase/
(decrease) decrease (decrease) (decrease)
Categories of restatement R'000 R'000 R'000 R'000
Commissions (42 808) - (19 062) (23 746)
Contractor rental - 10 947 - 10 947
Property valuations (1 800 268) - (271 005) (1 529 263)
Write off related party receivable (19 513) - (19 513) -
and interest revenueA
Recognition of guarantee liability - (6 273) (2 353) (3 921)
Consolidation of DPAM 14 223 (19 371) (4 488) (660)
Amortisation of debt structuring
feesB - (11 960) (11 960) -
TaxationC - (17 599) (17 599) -
Property accrual correctionD - (5 895) (5 895) -
ReclassificationsE (7 260) 7 260 - -
Total (1 855 626) (42 891) (351 875) (1 546 642)
A Relates to the write-down of the Somnipoint loan (refer note 13 in the annual financial statements).
B Write-off of debt structuring fees incorrectly amortised over a three-year period.
C An adjustment to the tax computation was detected and corrected.
D Reversal of property accrual.
E Reclassifications relate to corrections between cash and cash equivalents, bank overdraft, trade and other
receivables and trade and other payables.
The correction of the accounting errors and the effect on previously reported financial results for the year ended
28 February 2019 and the cumulative impact on the financial position of the Group as at 28 February 2018 is reflected
below. The reissued financial statements have been fully disclosed and explained in note 3 to the Group annual
financial statements.
Financial impact year ended Financial impact
28 February 2019 28 February 2018
Equity
Asset Liability Profit Equity Asset Liability
increase/ (increase)/ increase/ increase/ increase/ (increase)/
Categories of (decrease) decrease (decrease) (decrease) (decrease) decrease
restatement R'000 R'000 R'000 R'000 R'000 R'000
Commissions (23 746) - 12 614 (36 359) (36 359) -
Contractor
rental - 10 947 10 947 - - -
Property
valuations (1 529 263) - (577 163) (952 100) (952 100) -
Recognition of
guarantee - (3 921) 39 (3 959) - (3 959)
liability
Consolidation
of DPAM 8 974 (9 634) (6 202) 5 542 (5 847) 11 389
Error in
classifications (16 513) 16 513 - - - -
Total (1 560 548) 13 906 (559 765) (986 877) (994 306) 7 430
The Board is putting in place measures to enhance the financial reporting, operating and compliance internal controls
of the Group to avoid a reoccurrence of the irregularities and financial reporting misstatements that occurred.
The Board will further endeavour to recover damages from the responsible parties, including recovery of receivables
from related parties together with interest thereon. The Board is also looking to remedy all regulatory breaches
caused by the irregular activities of previous executives and will co-operate with the relevant authorities in any
criminal prosecution of individuals suspected of committing criminal acts.
Financial results
Based on the re-issued results, Delta's full year distributable earnings declined 48.7% to 34.6 cents per share
(2019: 67.4 cents per share), primarily due to rental reversions on leases renewed, increased vacancies within a
challenging economy and corporate tax payable on earnings retained. NAV per share declined 22.3% to R5.54
(2019: R7.13) and was mainly negatively affected by the fair value adjustment to investment properties.
Revenue decreased marginally from R1.54 billion to R1.49 billion and operating profit decreased from R993 million to
R912 million mainly as a result of rental reversions on leases. Net property income decreased by 10% to R979 million
(2019: R1.09 billion), largely as a result of increased vacancies and rental reversions. The increased vacancies
contributed to certain fixed costs not being recoverable, thereby increasing the gross cost to income and net cost
to income ratio to 32.0% and 17.3% respectively (2019: 31.1% and 16.6% respectively).
Administrative expenses decreased by 10%, to R93 million (2019: R102 million), primarily as a result of a R6.89 million
decrease in director emoluments due to no bonus payments in the 2020 financial year and lower professional fees.
Finance costs increased by 6.4% mainly due to higher interest rates during the year under review, and R11.9 million
amortisation of debt structuring fees as per restatement note 3 in the Annual Financial Statements.
Debt covenants
The Group and Company had a loan to value ratio of 55.7% and 54.9% respectively in comparison to 51.7% and 51.4% in
the prior reporting period. These ratios have exceeded the covenants set by the lenders of 50%. The Group and Company had
an interest cover ratio of 1.75 and 1.79 times respectively in comparison to 1.92 and 2.00 times in the prior reporting
period. These ratios have exceeded the covenants set by the lenders of 2 times. The Board has engaged with lenders and
various actions have been agreed. The funders remain supportive of the business.
Directorate
On 14 June 2020, the Board advised shareholders of the untimely passing of Mr Ian Macleod, an Independent
Non-executive Director. Ms Phumzile Langeni was appointed as the Non-executive Deputy Chairman of the Board and
Ms Bongi Masinga as a Non-executive Director with effect from 6 July 2020. Mr JB Magwaza elected not to make himself
available for re-election to the Board at the Annual General Meeting held 31 August 2020 and retired from the Board with
effect from 31 August 2020. Ms Langeni was formally appointed by the Board, following the Annual General Meeting
as the Chairman of the Board on 31 August 2020.
On 24 August 2020, Mr Sandile Nomvete, CEO, and Mr Shaneel Maharaj, CFO, resigned from the Company with immediate
effect and Mr Otis Tshabalala, COO, elected not to complete his notice period (following his resignation on 1 July 2020).
On 24 August 2020, Ms Bongi Masinga was appointed as the Interim CEO and Ms Marelise de Lange as the Interim CFO.
With Ms de Lange assuming an executive role, she stepped down as a member of the Audit, Risk and Compliance
Committee and Mr Caswell Rampheri was appointed as a member of the committee. Following the retirement of
Mr Magwaza, Ms Langeni was appointed as the Chairman of the Nomination Committee. The Remuneration and Nomination
Committee was split into two separate committees.
On 3 November 2020, Mr JJ Njeke tendered his resignation from the Board with effect from 31 December 2020.
On 14 December 2020, Mr Njeke withdrew his resignation, which was accepted by the Board. Mr Njeke continues to serve
on the Board as the lead independent director, and Chairman of the Audit and Risk Committee.
Ms de Lange has since been appointed as the permanent CFO with effect from 1 January 2021.
As at the date of this announcement, the Board composition is as follows:
Executive directors
- Bongi Masinga - Interim CEO
- Marelise de Lange - CFO
Non-executive directors
- Phumzile Langeni - Chairman
- Nooraya Khan
- Dumo Motau*
- Nombuso Afolayan*
- JJ Njeke - Lead independent
- Caswell Rampheri*
* Independent.
Resumption of trading of Delta's shares on the JSE Limited
Subsequent to the publication of the reissued 2020 Financial Statements and the publication of the interim financial
statements for the six months ended 30 August 2020 and the full year February 2021 financial statements, on or about
31 May 2021, the Board will approach the JSE Limited to reinstate the trading of Delta's shares on the main board of the
exchange.
Final dividend ("the cash dividend")
Delta is a listed REIT and is required to pay at least 75% of its distributable earnings to shareholders, subject to
the relevant solvency and liquidity requirements set out in Section 46 of the Companies Act No. 71 of 2008.
A final dividend for the year ended 29 February 2020 was not declared (2019: 15.989 cents), based on the forecast
solvency and liquidity requirements of the Group in light of market uncertainty due to Covid-19 and significant
contractual capital expenditure commitments.
Auditor's report
BDO, the Company's auditors, have issued a qualified audit report on the 2020 Financial Statements which audit report
contains key audit matters and is available, together with the annual financial statements, on Delta's website
at http://www.deltafund.co.za.
The Board noted the following qualification and key audit matters set out in the independent auditor's report, which
were carefully considered by the Board:
- The qualification pertains to the inability of the Company to ascertain the shareholding of entities implicated in
the forensic report as receiving non-market-related commissions from the Company in order to establish
the completeness of related party disclosures pertaining to such transactions. Despite various requests to such
entities and searches of public information, management has been unable to obtain the shareholding information.
- The matters pertaining to the key audit matter relating to the findings of forensic investigations has been fully
dealt with in the Director's report and in note 3 to the annual financial statements.
- The matters pertaining to the key audit matter relating to valuation of investment properties has been dealt with
in the internal assessments carried out and fully described in the Director's report, note 3 and note 6 in the
annual financial statements.
- The material uncertainty relating to going concern emphasis of matter has been fully dealt with in the going
concern commentary in the Directors' report and note 5 in the annual financial statements.
Two reportable irregularities were raised with IRBA by BDO. The first reportable irregularities relate to the items
identified in the forensic report by Mazars Forensic Services, more fully described in the restatement note
(refer note 3) of the Financial Statements. The second reportable irregularity relates to the non-compliance
with section 30 of the Companies Act in that, with the withdrawal of the financial statements by the Board and the
audit opinion by BDO, Delta has not prepared annual financial statements within six months after its financial year
end and has consequently also not prepared an interim financial report within three months from its interim period
close, thereby breaching paragraph 3.15 of the JSE Listings Requirements.
Short form announcement
This short form announcement is a condensed version of the full announcement in respect of the reissued 2020 Financial
Statements and as such does not contain the full or complete details pertaining to the Group's reissued results. The
full announcement is available on the JSE website at https://senspdf.jse.co.za/documents/2021/jse/isse/DLT/ye2020r.pdf
and can be found on the Group's website https://www.deltafund.co.za/financials
This short form announcement is the responsibility of the Board and has been approved by the Board. The full
announcement is available for inspection at the registered office, during business hours, at no charge and any requests
to the Company Secretary for copies will be dealt with by referring the requester to the appropriate link on the Company's
public website under the Investor Relations tab.
The information contained in this short form announcement has not been reviewed or reported on by Delta's auditors.
By order of the Board
P Langeni B Masinga
(Chairman) (Interim CEO)
22 April 2021
Directors: P Langeni~ (Chairman), S Masinga* (Interim CEO), M de Lange* (CFO), N Khan~, DN Motau^, MJN Njeke^#,
NN Afolayan^, MCR Rampheri^, *Executive, ^Independent non-executive, ~Non-executive, #Lead independent director
Registered office: Silver Stream Office Park, 10 Muswell Road South, Bryanston (Postnet Suite 210,
Private Bag X21, Bryanston, 2021)
Transfer secretaries: Computershare Investor Services Proprietary Limited
Sponsor: Nedbank Corporate and Investment Banking, a division of Nedbank Limited
http://www.deltafund.co.za
Date: 22-04-2021 05:16:00
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