Delta Property Fund Limited (Delta) is a black-managed and substantially black-owned specialist government-focused real estate investment trust (REIT), which listed on the JSE’s Main Board in November 2012. At listing, the portfolio consisted of 20 properties valued at R2.6 billion. Today the portfolio consists of 101 assets with an average value of R102 million per property, comprising a total gross lettable area of 703 103 m².

Although predominantly invested in government and SARS-tenanted office buildings in Durban and Pretoria, Delta is represented in every province across SA. Most of its assets are single-tenanted under long leases with exceptionally low vacancy rates. The fund’s overall investment portfolio, including its investment in Delta International, totals R8.9 billion, representing a 23% growth from the R7.2 billion reported for the year ended 28 February 2014.

The fund’s strategy is to leverage its government expertise and maintain its exposure to sovereign underpinned assets at 60%. The balance of the fund will be diversified by its investments into other property sectors and geographies, such as the Africa-focused and dollar-underpinned Delta International. Global expansion could potentially include sovereign underpinned assets.

Specialist government-focused REIT
With its Level 2 BEE rating (the best in the listed property sector) Delta’s primary niche and springboard to success has been the ability to strategically identify and secure government and SARS-leased properties, with the aim of outperforming the market within the context of global volatility.

Delta has an impressive track record of executing yield-enhancing tenant installations and redevelopments/refurbishments. To this end it has succeeded in acquiring C/D-grade buildings and upgrading buildings to grades A/B within a combined period of 18 months from transfer.

The fund has an unprecedented track record that has created an ideal platform for long-term lease renewals and market comparative escalation rates, as tenants’ requirements and demands are proactively met and exceeded.

Large assets are easier to manage
Considerable, single-tenanted assets are generally located in strategic nodes across the country, especially in those attractive to national government and increasingly fewer are coming to market. These large assets are defensive as they cannot easily be replaced.

Government and other empowerment-sensitive tenants are particular with regards to the nodes they are located in as well as what they require from a single-tenanted building.

Changes in socio-economic dynamics as a result of transport upgrades, accommodation and the general revival of the central business districts – in Durban, Johannesburg and Pretoria especially – create unique opportunities to extract value.

Due to the relatively long leases negotiated and because of its single tenant status, these assets are generally easier to manage, allowing Delta to maintain high service levels and properly plan for and execute capital-expenditure programmes, resulting in lower-than-average cost-to-income ratios.

Keeping a finger on the pulse
In June this year, Delta announced that it received shareholder approval to appoint a new asset management company. In an industry first, the new asset management company will be wholly-owned by a trust to be established for the benefit of its black employees. The new asset management company (named Delta Property Asset Management Proprietary Limited) also employs the staff of the previous incumbent.

It was very important to the board that the new asset manager retains the corporate memory required to manage Delta’s growing asset portfolio, and to provide job certainty for staff while simultaneously supporting the fund’s vision of being a leader as far as empowerment and transformation in the property sector are concerned.

Since none of the existing shareholders of the current service provider will be beneficiaries of the trust, Delta has engaged with the Department of Public Works to ensure that the new asset-management company trust complies with the department’s requirements for purposes of its leases with the fund.

Inner-city focus
Delta is committed to investing in major CBDs and contributing to urban renewal through partnerships with developers, tenants, property owners and government to improve and maintain attractive and safe nodes.

During its 2015 financial year, Delta committed in excess of R240 million on capex projects, the majority of which are expected to be yield enhancing and supportive of long-lease renewals.

The flagship of Delta’s capex programme is the CMH Parking Facility Development in Durban’s central business district. This redevelopment, on the back of strong tenant demand, comprises the building of new showrooms and parking for the anchor tenant CMH as well as creating an extra three parking levels in the building with 494 bays at an overall cost of R141.79 million.

The development is on the back of a 15-year lease on completion of the project with a further five-year option and is expected to be completed in September 2015.

This redevelopment is in line with Delta’s initiative of revitalising the Durban CBD node as the additional parking bays created will also address some of the challenges in this regard for adjacent tenants of Delta owned buildings.

Delta furthermore committed R40 million for the refurbishment of 88 Field Street. This project is the second-largest capital expenditure after the CMH redevelopment and is expected to be completed in July 2015. Refurbishment to the iconic building in the Durban CBD includes an overhaul of the lifts and air conditioning, as well as general interior and exterior renovations.

The 21 092 m² building is multi-tenanted, with the National Prosecution Authority and Department of Water Affairs as anchor tenants.

Remaining in Durban, Delta recently completed refurbishments to the landmark Embassy building, including phase one of a lift-overhaul project as well as some façade repairs with a total capex value of R14.5 million.

The building is anchor tenanted by Sanlam and the Road Accident Fund, with a number of other tenants.

Other yield-enhancing refurbishments include the NPA building at 115 Buitengracht Street, Cape Town, tenanted by the Department of Justice (National Prosecuting Authority).

The cost of the refurbishment, which was concluded in December 2014, totalled R28 million and partially supported Delta’s continued efforts in reducing its overall energy consumption and associated costs through the installation of solar panels.

Significant pipeline supports node sustainability
Delta remains positive on having government as a tenant and continues to engage with Treasury.

The fund’s empowerment status and expertise in managing government assets provides it with access to a significant pipeline for further parastatal exposure and yield enhancing acquisitions.

Delta further consolidated its position as a significant landlord of reference in the Durban CBD with the acquisition of two additional assets in the node. This strategy enables it to make a tangible impact on the sustainability of the node, as demonstrated by its collaboration with CMH in the parking facility development and the positive impact it will have on adjacent tenants’ parking constraints.

The Old Mutual Centre Durban (OMC Durban) – comprising Old Mutual Centre, Westguard House, 300 Smith Street and the 400-bay carpark situated on the former Gardiner House/Mutual Building sites – was acquired for a total purchase consideration of R291 million. Vacancies within the portfolio were zero-based, providing some re-letting upside. The acquisition is underpinned by a rental guarantee from the seller for a period of two years.

Delta also acquired the property known as The Marine and The Marine Parking for a purchase consideration of R196.2 million from the same vendor. As with OMC Durban, vacancies within the portfolio were excluded from the selling price, providing leasing opportunities.

Looking ahead
The impact of higher office vacancies, weaker retail spending and speculative developments will have a negative impact on supply and demand within the sector, increasing the need for consolidation within the listed property sector.

Quality properties will remain more expensive, resulting in less buildings being available to acquire at the investment considerations set by Delta’s investment committee.

With higher funding costs and increasing yields, financing will be more expensive, although Delta has good access to debt funding and solid relationships in place. The fund’s focus will, however, continue to manage gearing very carefully.

During this turbulent time, Delta’s focus as a sovereign-underpinned property fund provided a beachhead for the affirmation of its initial credit rating assigned by Global Credit Ratings. In August 2014, it affirmed Delta’s rating of BBB+(ZA) and A2(ZA) in the long and short term respectively,  and accorded a stable outlook to the fund.

Delta has a unique business case that it has continuously been developing since listing, which will continue to serve it well in the future, including:

• BEE status (attractive to sovereign and empowerment-sensitive tenants).
• A diverse shareholder base that has demonstrated continued support.
• Strong partnerships and relationships.
• Aggressive yield.
• Established debt capital markets programme and multi-bank approach to funding.
• Management track record and alignment with shareholders’ interests.
• Sovereign attributes – long term, low risk, low vacancies.

Silver Stream Office Park
10 Muswell Road South,
Bryanston, Sandton
Johannesburg
Tel: 08780 DELTA/33582
www.deltafund.co.za