Delays at public works hit Delta
Company declares disappointing half-year results as change of ministers stalls implementation of new government policy on leasing
Delta Property Fund, which owns a big portfolio of government-tenanted buildings, has been hit by delays in the implementation of the new Department of Public Works leasing policy.
The company declared a disappointing set of results on Tuesday for the six months to August, with dividend payouts up only 1% year on year.
Although that was in line with market expectations after management downgraded growth forecasts earlier in 2017 for the 12 months to February 2018, it was well below the previous 5% growth forecast.
The department’s new policy framework was expected to be finalised in April, but in President Jacob Zuma’s cabinet reshuffle in March, former public works minister Thulas Nxesi was replaced with Nathi Nhleko, and that has delayed the process.
The department’s new leasing policy is expected to introduce more aggressive black ownership requirements for landlords tendering for government leases.
Delta CE Sandile Nomvete said on Tuesday that the company was waiting for clarity on how the department’s new leasing policy would affect contractual rental escalations and lease terms with government tenants.
He hoped that the new policy framework would be finalised before year’s end.
Delta generates 76% of its rental income in its R11bn portfolio from government tenants.
About a third of Delta’s government leases are now running on a month-to-month basis, whereas the government typically used to sign three-year leases with office landlords. Nomvete said that although the government continued to pay its rents, the contraction of Delta’s weighted average lease period had created refinancing risk for debt funders, which had placed pressure on the company’s cost of capital. Nomvete expressed confidence that Delta would be well placed to secure long-term leases of up to 10 years with the government once the new policy was in place as Delta was negotiating an empowerment transaction that would take direct black ownership from 24% to 51%.
"The transaction will also provide a R5bn capital injection into the company, which will significantly strengthen Delta’s balance sheet," Nomvete said.
The challenge for Delta, said Investec Asset Management portfolio manager Peter Clark, was that it was not clear how and when the government lease policy framework would be resolved. The process could take longer than expected, given the backlog of leases and busy political calendar for the rest of the year, he said.
Delta’s share price is 20% down from the highs of R9.30 it reached in March.
Kelly Hook, investment analyst at Metope Investment Managers, said that despite the uncertain Department of Public Works leasing environment, Delta still managed to achieve like-for-like net property growth of a decent 6.8%.