Wrap Text
Reviewed provisional condensed consolidated results for the year ended 29 February 2020
Delta Property Fund Limited
(Incorporated in the Republic of South Africa)
(Registration number 2002/005129/06)
Share code: DLT ISIN: ZAE000194049
("Delta" or "the Fund" or "the Group")
(REIT status approved)
Reviewed provisional condensed consolidated results
for the year ended 29 February 2020
- Full year distributable earnings of 45.69 cents per share
- Cash generated from operations of R452.7 million
- Disposal of non-core assets totalling R153.5 million
- Extended R3.8 billion in expiring debt facilities
- Renewed 211 764m2 expiring leases
- Concluded 17 344m2 new leases
Commentary
Financial results
Delta's full year distributable earnings declined 38.1% to 45.69 cents per share (2019: 73.84 cents per share),
primarily due to rental reversions on leases renewed, increased vacancies within a challenging economy and corporate
tax payable on earnings retained. Net asset value per share declined 11% to R8.28 (2019: R9.30) and was negatively
affected by the fair value adjustment to investment properties.
The Board of directors of Delta ("the Board") have taken a decision not to declare a final dividend for the six months
ended 29 February 2020 after carefully considering the forecast solvency and liquidity requirements of the Group in
light of market uncertainty as a result of the COVID-19 pandemic and the contractual capital expenditure.
Net property income decreased by 9.6%, largely as a result of rental reversions on leases renewed and increased
vacancies. On a like-for-like basis this translated into net property income declining 8.5% compared to the prior year.
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 34.8% and 20.7% respectively.
Administrative expenses decreased by 6.8%, primarily due to lower asset management fees based on Delta's reduced share
price. On a normalised basis, administrative expenses decreased 9.9%, which excludes the expected credit loss allowance
raised on loans receivable. The Group's total cost to income ratio including administration costs increased to 39.8%.
Finance costs increased by 3.9% mainly due to higher interest rates during the year under review and debt structuring
fees on facilities that were extended. The combined 250 basis points reduction in interest rates between March and May
this year will translate into a significant reduction in finance costs on the unhedged portion of the Group's
interest-bearing borrowings of R3 billion.
Interest income decreased by 11.6% due to the settlement of loans owing to the Group. Dividend income from Grit Real
Estate Income Group Limited ("Grit") remained flat primarily due to the weakening of the rand during the year.
Property portfolio
Delta's property portfolio is valued at R10.6 billion and consists of 102 properties with a total GLA of 928 531m2.
The full portfolio was valued by external independent valuers of which 42% were formal valuations and 58% were desktop
valuations.
Acquisitions and disposals
Delta did not conclude any acquisitions during the year under review. Significant effort was focused on renewing
leases. The disposal of Classic Corner and Top Trailers Site 1 was completed during the period for a total consideration
of R49.1 million, with proceeds utilised to settle debt. Protea Coin Cape Town, with a total GLA of 5 700m2 and a fair
value of R10 million is expected to transfer by June 2020. Broadcast House transferred post the reporting date in
March 2020.
Despite the current and future market uncertainty and a challenging economic environment, management will continue
with its disposal programme relating to the existing R1.3 billion non-current assets held for sale.
Major capital projects
In response to low economic growth forecasts tenants are increasingly reviewing their real estate needs. Industry
trends show large corporates, banks and state-owned enterprises are giving back space or opting to negotiate for rental
reductions and space consolidation on reduced escalations and no onward charges of rates and taxes, with landlords
obligated to fully service the leased premises.
Key to Delta's bulk lease renewal programme was the contractual commitment to tenant installations and capital
expenditure on outstanding compliance matters in the portfolio.
To fulfil its contractual obligations, the Group has committed an investment of approximately R200 million per annum
in defensive capex and regulatory health and safety upgrades over the next three financial years. The successful
completion of this capex programme will coincide with the commencement of lease renewals on almost 40% of the bulk
lease portfolio and is expected to support negotiations.
Letting and vacancies
The lease expiry profile of the portfolio at 29 February 2020 was as follows:
Month- Beyond
Segment to- 29 February 28 February 28 February 29 February 28 February 28 February
(GLA per m2) Vacant month 2021 2022 2023 2024 2025 2025 Total
National
government 128 427 47 091 17 967 40 784 21 268 56 706 - 312 243
Provincial
government 52 573 26 822 2 102 1 876 - 11 795 - 95 168
Local
government 25 131 16 323 - 13 828 - - - 55 282
State-owned
enterprise 2 065 50 135 23 038 7 824 2 834 18 956 - 104 852
Office -
sovereign 208 196 140 371 43 107 64 312 24 102 87 457 - 567 545
Office - other 23 953 35 985 14 156 14 015 410 3 984 9 194 101 697
Retail 9 324 6 278 16 476 9 579 2 279 2 447 13 404 59 787
Industrial - 4 265 - - - - - 4 265
Vacant
buildings 195 237 195 237
195 237 241 473 186 899 73 739 87 906 26 791 93 888 22 598 928 531
Vacancies in the Group's dominant nodes in the Pretoria and eThekwini CBDs are 10.4% (2019: 8.5%) and 17.6% (2019:
16.9%) respectively. The portfolio vacancies decreased to 19.8% post financial year-end due to the re-tenanting of three
new provincial leases in Capital Towers. Ninety percent of our tenant base was retained despite tough trading conditions
and increased competition in the sovereign leasing space.
We continue to make significant progress on our national government bulk lease renewals with 83 134m2 of the expiries
consisting of three major leases in two buildings that are at an advanced stage of being concluded. The remaining
45 293m2 largely comprises default leases that have exit clauses which essentially renders them three-month leases.
We are engaging with the National Department of Public Works to remove this clause so that we can finalise the
lease renewals.
The provincial government leases are concentrated in the Bloemfontein and Polokwane nodes. Three Polokwane-based
leases accounting for 34 401m2 are at an advanced stage of being concluded. Although vacancies have stemmed, the
Bloemfontein node remains a challenge and we continue to engage with the respective departments. On the local government
portfolio we have re-tendered to the existing tenant for 21 339m2 and remain confident that this will be successfully
finalised by August 2020.
Funding
Interest-bearing borrowings decreased by 4.5% due to settlement of debt from the disposal of non-core properties and
investments amounting to R153.5 million and amortisation of bank facilities of R129.8 million. The Group has no current
exposure to the debt capital markets and has made significant progress in respect of extending and refinancing its
expiring debt facilities, with negotiations as follows:
- Restructuring Investec Bank's property facilities into a portfolio A and B facility of R380.8 million and
R352.9 million respectively, effective from June 2020. Portfolio A comprises assets with shorter-term leases and
higher vacancies for a 12-month period and amortised to a residual of R333 million. Portfolio B has a longer
weighted average lease profile with a maturity term of 36 months and no amortisation.
- Extending R2.3 billion in expiring facilities with Nedbank for a period of three months to 31 August 2020 on the
existing terms and conditions. This allows the Group the opportunity to conclude the remaining bulk lease renewals,
thereby placing the Fund in a stronger position for longer-term debt and more competitive pricing.
- Refinancing of R464 million in expiring facilities with Standard Bank for a 12-month period from June 2020 and
extending a R300 million facility to October 2020.
The conclusion of longer-dated facilities will term-out the current average debt expiry period of 0.5 years which has
declined from prior years due to the passage of time and short-term extensions. The weighted average cost of debt
increased marginally from 10.2% to 10.3%, with an interest cover ratio ("ICR") of 1.9. The ICR is below the contractually
agreed cover of two times and have been condoned by lenders, as the Company expects its position to normalise in the
2021 financial year.
Prospects
At the time of writing, the world economy is in the precarious position of trying to find a "new normal" in the
aftermath of COVID-19 pandemic with volatility impacting on stock markets globally.
The efforts by South Africa's government to curb the spread of the virus and the quantum of the stimulus package
announced to support economic recovery is highly commendable, although the fluid nature of the pandemic may yet continue
to lead to uncertainty and further lockdowns as the infection rate from the virus is currently expected to peak only in
September 2020.
It remains too early to quantify the full impact of COVID-19 on the Group's portfolio, however, collections have
remained robust. The Group has collected more than 80% of its monthly billings for April and May this year and expects to
collect a further 10% once its sovereign tenants return to work after the lockdown. There is a risk associated with our
retail and non-government tenants of approximately 10% of monthly billings, and we continue to engage on an individual
basis with these tenants to assist were possible to ensure their sustainability.
Delta's successful renegotiation of leases during exceptionally challenging times have secured longer lease terms and
higher quality of earnings. The long-term leases will improve the Group's credit profile and enable the conclusion of
longer-term facilities at reduced pricing, which will improve both the cash flows of the business and the health of the
balance sheet.
The reduction in interest rates between March and May this year will translate into a significant reduction in finance
costs on the unhedged portion of our interest-bearing borrowings, however, it is anticipated that the reversions on
rentals to secure long-term leases and the impact of COVID-19 on the Fund's retail and non-government portfolio will
negate the positive impact of lower interest rates.
Our focus remains on managing the sustainability of the business through balance sheet optimisation, tenant retention
and the execution of contractual capex commitments, within the context of a severely constrained economy and the
fluidity of the potential impacts as a result of COVID-19.
This information has not been reviewed or reported on by Delta's auditors.
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. Shareholders
are advised that the Board has applied the solvency and liquidity test and has resolved not to declare a final dividend
for the six months ended 29 February 2020 after concluding that although the solvency requirements have been met, the
liquidity requirements post the payment of a dividend and the planned capital expenditure programme cannot be met.
Short form announcement
This announcement is a condensed version of the full announcement in respect of the year-end results announcement for
the full year ended 29 February 2020 and as such it does not contain the full or complete details pertaining to the
Group's results. Any investment decisions should be made based on the full announcement. The full announcement has been
published on the JSE News Service (SENS) at https://senspdf.jse.co.za/documents/2020/jse/isse/DLT/ye2020.pdf and can be
found on the Group's website (www.deltafund.co.za).
This condensed announcement is the responsibility of the Board of directors of Delta and has been approved by the
Board of directors. 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.
By order of the Board
JB Magwaza SH Nomvete
(Chairman) (Chief Executive Officer)
12 June 2020
Directors: JB Magwaza^ (Chairman), SH Nomvete* (CEO), S Maharaj* (CFO), ON Tshabalala* (COO), N Khan~, DN Motau^,
ID Macleod^, MJN Njeke ^#, NN Afolayan^, MCR Rampheri^, M de Lange^
*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
www.deltafund.co.za
15 June 2020
Date: 15-06-2020 08:00:00
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