Delta: Black property operator braves the volatile stock market

It’s been 12 months since Sandile Nomvete, JB Magwaza, Ipeleng Mkhari, Bronwyn Cobertt and the rest of ‘Team Delta’, sprung out of the black economic empowerment (BEE) cocoon to brave the volatile stock market.

They could not have chosen the worst period to list the R2.1bn commercial property portfolio under the name Delta Property Fund. The JSE property sector has experienced what should rank as one of the worst turbulences in its history.

But then, another view will be that it was the best time for such a listing. If it pulls through this virulent wave, Delta Property Fund which remains a BEE play of sort will be made forever. Delta is a black managed Real Estate Investment Trust (REIT), one of three on the JSE.

The balance of possibilities is pointing to an impressive pull through. Reporting financial results for the six months ended August, Delta Property Fund CEO Sandile Nomvete notes: “In the year since listing, we have managed to deliver on the high-growth mandate from our unitholders and we are pleased with the underlying performance of the portfolio over the past six months.”

Delta has received baptism of fire. Shortly after listing, the JSE property sector was visited by the devil himself. To be sure, the global markets in general became highly volatile. The main trigger was nothing new but a hangover from the global financial crisis.

Markets had somewhat stabilised before the mid 2013 and largely on the back of US money printing exercise, the so-called quantitative easing. Suddenly US Federal Reserve head Ben Bernanke announced an intention to taper on the 19th of June 2013. The markets went crazy.

This is because tapering would have caused havoc from flight of capital into safe havens. South African assets; equities, bonds and the rand itself, being emerging market assets, took a serious beating. Bond yields rose and took with them, as they have traditionally done, listed property yields.

Delta Property Fund - 255 Paul Kruger Pretoria 1

One Delta Property Fund assets – 255 Paul Kruger Pretoria

Listed property tracks the bond yields because more like gilts, listed property is seen more as an income play even though the asset class has a capital play element. As such when the rand slipped past the R10 mark and local bond yields rose in mid 2013, listed property prices were hammered. The JSE listed property sector retired about 20% between the middle of May and the middle of June 2013. The sector recovered slightly but was hammered again during the third quarter. It has since regained some lost ground.

However the year to date performance is an unimpressive 0.6% gain against the 9.5% registered by the all share index. It is important to note that a longer term view shows listed property outperforming equities. But then this may not be helpful where our exercise is concerned, charting Delta’s in the past 12 months.

Delta’s debut on the JSE in November last year was at R8.31 per linked unit. The fund’s unit price has yoyo-ed between R7.50 and R9.50 over the past twelve months. Delta’s units were trading around R930 this week leaving the property fund with a market cap of R3.4bn.

As in the words of Nomvete, the underlying performance is relatively strong. The size of the property portfolio has more than doubled from the listing mark of R2.1bn to R4.8bn at the end of August and features 49 properties with a total GLA of 477 680 sqm. This was largely achieved via the acquisitions avenue.

Post the interim period, six months to August, Delta took transfer of a further five properties for a combined purchase consideration of R548m. Delta’s portfolio is now valued around R5.3bn. That makes for about 150% growth since listing twelve months ago. Nomvete says the fund is on course to achieve its 2017 target of growing its portfolio to R7bn.

The interim revenue came in at R218m. With property operating expenses of R51.2m, net property rental stood at R191.6m while profit before interest and tax was at R131.9m.  Gearing was quoted at 41%. Distributable earnings stood at R116.7 million.

At the end of August, the occupancy rate in the Delta portfolio was quoted at 94%. That is impressive given the fact that the portfolio is 90% office property. Elsewhere office property portfolios generally show much higher vacancies. There in, lies Delta’s competitive edge. The fund has a 65% exposure to office property tenanted by public entities such as government departments and the South African Revenue Service (SARS). Office property tenants don’t get bluer than a government department or SARS. Such tenants, if you can have them, sign long term leases and you can be assured that you will not wake up to find your tenant bankrupt. Delta can have public sector deals because of its relatively sound BEE credentials.

The competitive edge and the challenges thereof are well captured by in the first chairperson annual statement by JB Magwaza.  “Despite strong backing by the market, negative perceptions around government as a tenant remain, with comments by industry players on late payment and instances of dubious transactions involving individuals well documented”.

One Delta Property Fund assets: NPA Building Cape Town

One Delta Property Fund assets: NPA Building Cape Town

Added Magwaza “Experience by ourselves and other specialists within the sector has proven the contrary however. Solid relationships with tenants, including government, combined with customised systems and procedures ensures timeous payments. Granted, it is not an easy process and takes resources and skills – but this is what makes us experts at it after all”.

Nomvete says “Our strategy to grow a sustainable, yield enhancing, portfolio with a sovereign underpin remains unchanged and we will continue to focus on remaining a landlord of choice for both SARS and government through market related rentals and quality buildings.”

When Delta came to the market last year, its march caused a mini debate in the BEE space. Is the listing path, the Delta way, the Dipula Income Fund way, the Rebosis way, an efficient BEE path? The question came amid concerns that the listing black owned commercial property portfolios incubated under the BEE theme will come to dilute empowerment. This is because when they list they dilute black ownership while earning financial muscle to secure public sector deals. Some say this is at the expense of 100% landlords.

The other side of the argument is black operators, were never going to grow at a significant pace, if they obsess about remaining 100% black. Delta’s numbers, capital raising activity, for the six months ended August make this point.

Bronwyn Corbett, CFO and COO of Delta Property Fund said “The successful bond issue and the additional funding facilities secured during the period have enhanced Delta’s financial position and although it is not the primary focus in the short term, we continue to manage opportunities and have a solid pipeline of quality prospects to enhance and bulk up our portfolio.”

During the six months Delta secured an additional R1.3 billion and also tapped into the debt capital markets to issue a R2 billion unsecured domestic medium term note programme. A total of R190 million was issued under the programme.

As Magwaza noted “Growing a portfolio by more than 30% per year for five consecutive years is no mean feat, regardless of the base from which you start”.

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