Real estate investment trust (Reit) Delta Property Fund has reported lower rental income of R573-million in the six months ended August 31, largely owing to a decline in contractual rental income from rental reversions and a marginal increase in vacancies.

While rental income decreased by 9.2% compared with the corresponding six months of last year, property operating expenses contracted by 8.4% year-on-year, while administrative expenses increased by 1.8% – well below the inflation rate.

The prevailing high interest rate negatively increased the company’s weighted average cost of funding by 2% to 10.1% in the period under review, with finance costs on borrowings having increased by 13% year-on-year to R234-million.

The Reit generated R355-million of cash in the period under review from its R6.9-billion portfolio, the bulk of which consists of cash from operations, followed by interest income of R7.5-million and net proceeds from property disposals of R13.5-million.

Delta used the cash to settle finance costs of R221-million, tax of just under R50-million, net debt of R60-million and R19.6-million towards capital expenditure.

CEO Bongi Masinga says that, notwithstanding a deteriorating macroeconomic outlook and high interest rate environment during the reporting period, Delta’s consistent and unwavering focus on cost optimisation, debt reduction, lease renewal and asset recycling continued to gain traction, with an improved performance against key metrics of the financial year ended February 28.

“We have a clear path to a reduced loan-to-value (LTV) and an improved interest cover ratio, that will reposition Delta for growth and the restart of distributions,” he adds.

CFO Fikile Mhlontlo notes that, during the reporting six months, Delta continued to collect in excess of 100% of rentals, which provided a strong cashflow to the group. The company successfully renewed debt totalling R3.1-billion, which now has more favourable debt terms.

The lower debt terms, combined with a R37-million revolving credit facility having been secured in the period, will assist Delta with its working capital, capital expenditure and tenant installation endeavours.

Moreover, Delta’s weighted average lease expiry (WALE) increased to 15.8 months in the reporting period, compared with 13.2 months in the full 2023 financial year, on the back of 23 office leases with a total gross leasable area of 97 045 m² having been renewed and 5 526 m² of space having been newly leased.

The company reported an LTV ratio of 60% in the period under review, down from 61.4% at the end of the 2023 financial year. The interest cover ratio, however, contracted to 1.3 times cover, compared with 1.4 times cover previously, as a result of higher interest charges during the six months under review.

Delta’s funds from operations per share amounted to 8.1c in the six months under review, which, coupled with reduced revenue and increased interest rates, led the board not to declare an interim dividend.

OPTIMISATION STRATEGY

Explaining how the company will function following the conclusion of a portfolio optimisation strategy that is ongoing, Masinga says Delta will evolve into a smaller but more sustainable Reit with core properties of about R4.7-billion and strong headroom for growth.

The group aims to keep its LTV and interest cover ratios well within covenant levels of 44.2% and 2.5 times cover, respectively.

“Notably, disposals will impact on vacancies, with the current core portfolio occupancy rate sitting at a relatively healthy 89.6%. Net operating income from the core portfolio will amount to an estimated R296-million in today’s terms,” Masinga notes, adding that the group has earmarked 43 noncore assets valued at R2.2-billion for disposal.

Of these, 29 properties are at an advanced stage of negotiation, while five properties are expected to transfer in the next six months.

“Properties that are expected to transfer in the short term have all been disposed of at a minimal discount to book value, or, in some instances, at a slight premium to book value.

“This speaks to the fair valuation of the portfolio, as much as it demonstrates our resolve to engage with serious buyers at a market-related price,” Masinga states.

The portfolio currently comprises 91 properties, mostly offering office and retail space. The portfolio is concentrated in Gauteng, KwaZulu-Natal and the Free State.

The group strategy encompasses a deliberate focus on portfolio optimisation through the divestiture of selected properties, prudent debt management, rigorous cost control measures, lease renewal efforts, and a concerted reduction in property vacancies, all aimed at bolstering profitability.

Delta is implementing the strategy and is optimistic that it is on the right trajectory to achieve positive outcomes as demonstrated in the latest interim results.

The office sector, particularly in the B-grade segment, is anticipated to continue facing substantial challenges owing to oversupply, sluggish economic growth, and fierce competition in the office rental market.

Despite these market pressures, Delta is strategically positioning itself to meet industry benchmarks. This involves maintaining an agile, solution-focused approach, with a primary focus on divesting noncore properties and implementing various strategic initiatives to boost occupancy in vacant properties.

The Reit anticipates securing new leases for currently vacant properties and continuing lease renewals, which will result in an improvement of WALE and sustained positive cash generation.