Not a match made in heaven
A long held idea is that SA needs a large black-owned and managed property company that can compete with the likes of industry giants Growthpoint and Redefine. This is why the marriage of the first majority blackowned and managed fund that listed in 2011, Rebosis, and government lease specialist Delta, which came to market in 2012, looked romantic on paper when it was mooted in 2019.
Along-held idea is that SA needs a large blackowned and managed property firm that can compete with the likes of industry giants Growthpoint and Redefine. Its existence would help transform a part of the economy that has underperformed in this regard since 1994.
This is why the marriage of the first majority black-owned and managed fund that listed in 2011, Rebosis, and government lease specialist Delta, which came to market in 2012, looked romantic on paper when it was mooted last year.
Rebosis founder and CEO Sisa Ngebulana and Delta founder and CEO Sandile Nomvete said on August 6 2019 that they intended to merge. They had tried years before to do a triple merger with Ascension Properties, but couldn’t get a capital structure that worked. Rebosis now owns Ascension.
Last year, the funds’ management teams struggled to make a case for their union. A lack of sound economic reasons and a credible plan for a merger dealt a blow to the credibility of both.
The idea that the two groups should merge just because they would own R29bn in combined assets and because they both have black management teams is superficial.
There was a lack of obvious synergies and a lack of clarity about who would be the CEO.
This is notably because Delta is predominantly a landlord to government tenants, while Ngebulana said in 2017 and 2018 he wanted Rebosis to own retail property only.
Critics also felt that Delta just wasn’t facing problems as severe as those of Rebosis.
Delta is this country’s largest government-focused landlord. The company listed in 2012 and built up a portfolio of offices rented to state departments while other listed funds moaned that these tenants were just too unreliable and slow in negotiating and paying rent.
About 80% of Delta’s revenue comes from these tenants now, which should make the fund an easy sell as sovereign tenants are unlikely to default because the government can bail them out. The rest of the revenue comes from retail and other property types.
But government tenants can be inefficient and this is what
Delta’ Delta s has state used tenants as an were excuse reluctant for its underperformance.
Between 2016 and 2019, to sign new leases, and when they did, they did so at terms shorter than a year, Nomvete said. This cost the government about R3bn as they would have got the new leases at lower rentals because of market averages.
But Nomvete said earlier in June that, in recent months, the department of public works, in particular, had managed to up its game and in the year to endFebruary 2020, Delta had a record year for the number of leases signed.
MALL MALADIES
He said his company would rise again once it got through the Covid-19 pandemic.
Rebosis, meanwhile, saw its fortunes turn sour after it wrote off its investment in New Frontier Properties, a British mall owner, making a R2bn loss. The company tried to sell its office assets to reduce its relative debt levels, or loan-to-value, which sat at more than 60%. But it also had to sell some of its malls.
In the end, the merger was called off in March this year. Delta’s share price shot up by a third following the announcement, suggesting shareholders didn’t want to see it making its balance sheet more complex.
Delta and Rebosis now need to regain their credibility among investors and shift from trading as penny stocks.
Delta’s share price was unchanged at 42c on Wednesday, and is down 24% in 2020. It has lost more than 93% of its value over the past five years. Rebosis’s ordinary shares were up 4.55% to 46c, and are now up 43.75% for the year. It has, however, lost more than 95% of its value over the past five years.
This is while the R350bn listed-property sector is trading at about a 45% discount to its overall net asset value and investors in the sector are focused on a few stocks that each own assets worth at least R25bn.
The sector has been held back by a weak economy and the pandemic.
However, it has been resurgent in June as the lockdown restrictions have eased.
Meago Asset Managers executive director Jay Padayatchi says Delta had potential to be an investment in the past, but recent problems have caused fund managers to lose interest in the stock.
“Their lease profile whittled away and bank funding became a challenge because of this — so a little bit too risky given the lack of commitment from the department of public works.”