Contractual rental income and like-for-like net property income increased by 1.6% and 0.8% respectively, impacted by the disposal of non-current assets held for sale and an increase in vacancies.

A continued protraction in the renewal of user department leases through the National Department of Public Works (DPW) weighed on the Company’s ability to refinance debt at competitive rates. Temporary refinance costs increased by 5.7% due to higher restructuring fees and also delayed the bulk of the much anticipated R600 million capex programme that the Company has communicated to the market.

Net property income decreased by 8.8% mainly due to a once-off R30 million provision raised against a gross lettable area (GLA) dispute on the Forum building. Delta is currently in discussion with the DPW and remains confident of a positive conclusion.

As a result of the provision, property operating expenses increased by 23.8% during the period.

Delta Chief Executive, Sandile Nomvete comments: “It was a very challenging past six months, mainly as a result of the continued protraction in the bulk lease renewal programme. At our last set of results, we communicated to the market that we have progressed to stage 2 and stage 3 of the bulk lease finalisation programme.“Subsequently, we have received indication from the DPW that they are working with the user departments to approve the largest landlords’ submissions and they remain confident that most of these will be done by the end of the year. This includes Delta’s 59 leases for 227 550m2.

“The DPW is currently engaging user departments to confirm budgets and tenant requirements for their approval (stage 2) before the National Bid Adjudication Committee (“NBAC”) finalises (stage 3) and recommends the signing of the leases.

“Some user departments, making up just less than 100 000m2 have concluded stages 1 and 2 and have progressed to the final stage.”

Delta’s weighted average rental across the portfolio is R115.48m2 with lease renewals totaling 52 422m2 concluded during the period. New leases with an aggregate GLA of 9 613m2 were also concluded.

Vacancies creeped up to 13.3% (GLA of 126 330m2) mainly as a result of continued challenges in the Bloemfontein portfolio. Portfolio vacancy in the Durban CBD of 16.0% and in the Pretoria CBD of 6.9% compares favourably with the SAPOA second quarter average for B-grade office space of 17.9% and 7.7% respectively. The bulk of Delta’s portfolio is concentrated in these two nodes.

Loan to value increased to 43% (2018:41.3%) mainly as a result of more expensive new bank facilities concluded.

“Our weighted average all-in cost of funding increased to 9.3% against 9.2% previously due to higher rates on both new and renewed facilities. Interest rate exposure remains hedged with 81.9% of borrowings fixed for the next 1.1 years. Our average debt expiry facility is 1.1 years with the interest rate cover ratio at 2.2 against 2.4 previously.

“On the completion of longer team lease contracts, we expect a significant reduction in finance costs, the benefit of which will likely be included in the 2020 financial year, all factors remaining equal,” comments Nomvete.

“The guidance communicated to stakeholders was impacted by a once-off R30 million provision raised. We see the provision as a prudent approach in our ongoing negotiations with the tenant department,” commented Delta’s Chief Financial Officer, Shaneel Maharaj.

Going forward, the Fund guided a 2-6% reversion in earnings, in line with its peer group, for the 2019 financial year, mainly due to a once-off impact of lease adjustments in lieu of longer-term leases (on the DPW bulk lease renewals), the disposal of assets held for sale and the issue of shares to settle the acquisition of the Free State portfolio.

PROTRACTED DELAY IN BULK LEASE RENEWALS; R30 MILLION PROVISION IMPACTS DELTA’S INTERIM PERFORMANCE

• Interim distribution of 39.40 cents per share (down 15.1% on prior period)
• Successfully renewed 52 422m2 of leases
• Concluded new leases totalling 9 613m2
• Bulk lease renewals in stages 2 and 3 of renewal process
• R30 million once-off provision raised against GLA dispute