Delta Property Fund reports 10.34% increase in net operating income amid turnaround of strategy

Delta Property Fund, a specialist black-managed and substantially black-owned REIT with a significant sovereign underpin, is progressing well with turnaround: net operating income increased by 10.34% to R721.4 million for the year ended February 28.

Cash inflow from operations remained strong at R565.4 million, which was mainly used to repay finance costs of R446.4m, taxation of R27.2m, net capital expenditure of R44.6m, lease liability settlements of R3.9m, and net debt repayments of R92.9m.

“Our turnaround strategy continues to gain momentum, notwithstanding the macro-economic pressures. It is pleasing to see the impact of our disposal strategy, prudent debt management, rigorous cost control measures, lease renewals, and concerned efforts to reduce office vacancies,” said CEO Bongi Masinga.

Group chief financial officer Fikile Mhlontlo noted that revenue remained relatively stable, tracking 2% down at R1.14 billion, mainly due to rental reversions and a single vacancy of 16 005 square metres from the third quarter of the year under review.

He said in an interview that new leases and disposals supported a reduction in the overall portfolio vacancy rate to 31.9% from 33.4%, but when the non-core portfolio was excluded, the vacancy rate fell to 18.4% from 24.2%.

Mhlontlo said that proceeds from the sale of non-core properties were being used to reduce debt, and the resultant lower financing costs would position the group to pay dividends to shareholders once the turnaround process was concluded.

He added that at the end of the disposal process, the group would be significantly smaller but with a healthier balance sheet, ideally reducing its current portfolio from 83 properties to 46.

Delta disposed of and transferred six properties with a combined fair value of R154.9m for a total gross consideration of R15m. After year-end, a further four properties with a fair value of R32.2m were transferred for a gross consideration of R33.1m. Additionally, a further eight properties with a combined fair value of R264.3m were also been disposed of for a total gross consideration of R214.8m and are pending transfer.

Non-cash fair value adjustment losses of R222.2m (up from R217.2m), higher expected credit losses of R25.5m (up from R2.5m), and taxation of R33.3m (up from R3m) contributed to the group reporting a net loss of R104.2m, an increase from a net loss of R77.6m the prior financial year.

The fair value adjustment includes a decline of R43.5m (up from R30.3m) in the valuation of the group’s investment in Grit Real Estate Income Group, reflecting sustained share price pressure driven by weak emerging market sentiment and currency volatility.

Property operating expenses were reduced by 12.8% year-on-year to R422m due to cost optimisation benefits. This was mainly due to lower assessment rates following the successful challenge of municipal property valuations, a process that was not yet fully concluded, said Mhlontlo.

Further savings came from cost containment measures, including supplier changes, contract renegotiations, and the disposal of non-core properties.

During the period, Delta renewed 79 leases covering 110,723 square metres of gross lettable area, with a weighted average lease term of 2.4 years. Mhlontlo said the pace of lease renewal by government departments had slowed somewhat, possibly due to a review of policies with the formation of the Government of National Unity.

“Looking ahead, Delta will transform into a more streamlined and sustainable REIT, with a core portfolio valued at just over R4bn, providing ample room for future growth,” Masinga said.

B-grade office space is expected to remain under pressure in the short term, but overall macroeconomic growth will be supported by increased investor confidence, a more stable power grid, and further decreases in the interest rate, Masinga added.

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