Delta Property Fund, a specialist black-managed and substantially black-owned REIT with a significant sovereign underpin, today published its interim results for the six months ended 31 August 2024. The Group reported ongoing momentum across key metrics, despite a high interest rate environment during the reporting period. 

CEO Ms Bongi Masinga commented: “The pleasing performance, notwithstanding prevailing high interest rates, is attributable to the successful implementation of the Board’s strategic initiatives, which include portfolio optimisation through the disposal of non-core assets, prudent debt management, rigorous cost control measures, lease renewals and concerted efforts to reduce property vacancies.” 

Net operating income as a result of these initiatives, increased by 4.3% to R365.8 million from R350.8 million in the comparative reporting period, and revenue, excluding straight-line rental income accrual, was up 1.7% at R583.7 million, mainly due to higher utility recoveries and rent escalations, which were offset by rent reversions. 

Profit for the period was however lower at R29.5 million (HY24: R56.4 million), due to a fair value adjustment loss of R31.0m (HY24: R12.5 million gain) driven mainly by the decline in the share price of Delta’s investment in Grit.

As a result of the Group’s ongoing cost optimisation efforts, administrative expenses were reduced by 2.8% year-on-year, while property operating costs increased marginally by 0.5% to R220.5 million as a result of the annual tariff increase on utilities.

The Group continued to generate strong cash inflow from operations of R298.0 million. The cash was predominantly utilised to repay finance costs of R230.9 during the period, as well as taxation of R23.7 million.

Delta successfully renewed matured debt facilities with Nedbank and State Bank of India to 7 April 2025 and 7 June 2027 respectively and is currently engaging Standard Bank, Investec and Bank of China regarding renewal of facilities due to expire before the end of the financial year.

Mr Fikile Mhlontlo, Group CFO commented: “The weighted average cost of debt increased to 11.4% from 10.1% as at end August 2023, reflecting the high interest rate environment during the reporting period. Notwithstanding these headwinds, our interest cover ratio improved to 1.4 times cover. “

“Both the SA REIT LTV and covenant LTVs are tracking in the right direction, albeit very slightly, with the SA REIT LTV improving to 60.0% from 60.9% at the February 2024 year-end, and the Covenant LTV improving to 58.5% from 59.4% over the same period.”

“It is expected that the disposals expected to transfer later this year, as well as the lower interest rate cycle, will further support our efforts in remedying both LTV and ICR covenant levels.”

During the reporting period, Delta successfully renewed 43 leases covering a total Gross Lettable Area (GLA) of 62,907 m², with a weighted average lease term of 3.7 years. In addition, the Group signed new leases for 14,864 m² of space, with a weighted average lease term of 2.9 years.

As a result of the sale of three properties with a vacant GLA totalling 19,626 m² and the conclusion of new leases, the portfolio vacancy rate decreased from 33.4% in FY24 to 30.9% in the current period.

The weighted average lease expiry (WALE) improved from 15.3 months to 16.3 months, reflecting the impact of long-term lease renewals and new lease agreements. The Group remains confident in

its ability to secure additional long-term leases in the near to medium term, supported by its stakeholder engagement strategy.

The weighted average rental rate across the portfolio saw a slight decrease from R114.60 per m² to R113.82 per m², primarily due to rental reversions. The Group anticipates further adjustment of lease income, with month-to-month and shorter-term leases transitioning to longer terms at market-related rates.

Despite a challenging market, Delta disposed of and transferred three properties with a total GLA of 29 759m² during the reporting period for a gross consideration of R106.2 million. A further two properties with a total GLA of 8 669m² were transferred post the reporting period for a gross consideration of R19.3 million.

11 Properties held for sale with a combined fair value of R319.1m were disposed of for a gross consideration of R178.7 million and are expected to transfer before the end of the financial year. The majority of these properties were disposed of via auction, most of which were vacant.

The fair value adjustment loss from these post-period disposals primarily arose from the sale of properties through an auction. The auction method was elected to facilitate an efficient disposal of underperforming properties within the portfolio, particularly those with high vacancy rates and limited prospects for improvement.

“Looking ahead to the medium term, Delta will transform into a more streamlined and sustainable REIT, with a core portfolio valued just over R4 billion, providing ample room for future growth.

“Although demand for B-grade office space is anticipated to remain under pressure in the short-term, further improvements in the macro-economic landscape, fuelled by increased investor confidence, a stable power grid, and expected further gradual decreases in the prime lending rate, are likely to enhance business sentiment and support macro-economic growth in the medium term.

Delta is committed to executing its strategy, and remains confident of its trajectory, which it believes could be accelerated through an improved macro-economic outlook, especially regarding disposals, with an increased interest from potential buyers,” Ms Masinga concluded.