Gov­ern­ment ten­ants are not ev­ery­one’s cup of tea

Financial Mail - Investors Monthly - - Analysis - Alis­tair An­der­son

Gov­ern­ment ten­ant fo­cused Delta Prop­erty Fund, which fo­cuses on gov­ern­ment ten­ants, is un­der pres­sure. Its share price has lost about 21% since it listed in Novem­ber 2012.

Dur­ing this time it has re­mained a sov­er­eign-fo­cused com­pany which has not made it too pop­u­lar among in­vestors.

Many in­sti­tu­tional in­vestors have not liked gov­ern­ment ten­ants be­cause they have felt they pay too slowly and are not will­ing to pay rentals that are at a level pri­vate ten­ants may be will­ing to ac­cept.

Gov­ern­ment ten­ants pro­vide for about 74% of Delta’s rev­enue.

Delta has also op­er­ated in the paras­tatal of­fice mar­ket. It listed with a port­fo­lio worth R2.1bn.

It does have ex­po­sure to non-state ten­ants, own­ing small in­dus­trial and re­tail as­sets.

It now has a mar­ket cap­i­tal­i­sa­tion of about R4.6bn and as­sets worth about R8.5bn, of which the de­part­ment of pub­lic works gov­ern­ment port­fo­lio ac­counts for about R5bn.

Sars’ of­fices sit within the other R3bn, along with some re­tail and in­dus­trial as­sets. This may sug­gest steady growth over nearly four years but many in­vestors have wanted this port­fo­lio growth to be trans­lated into bet­ter share price and div­i­dend growth.

Delta man­aged to spin off a pan-African prop­erty fund called Delta In­ter­na­tional, which has sub­se­quently merged with Mara Diver­si­fied Prop­erty Hold­ings to form Mara Delta, a R1.83bn com­pany. Some in­vestors be­lieve Delta should have kept some African as­sets within its port­fo­lio, mak­ing it a more diver­si­fied fund with off­shore ex­po­sure.

Mara Delta owns as­sets in a num­ber of African coun­tries in­clud­ing Mozam­bique, Morocco, Zam­bia, Nige­ria, Kenya and Mau­ri­tius. Its Moroc­can as­sets in­clude its flag­ship in Casablanca, the 30,000 m2 Anfa Place shop­ping cen­tre. This is the coun­try’s sec­ond-largest mall. Morocco tends to be a less risky in­vest­ment des­ti­na­tion than var­i­ous other African coun­tries, given its close prox­im­ity to Euro­pean mar­kets.

Many Spa­niards work in Morocco but live in Spain and vice versa.

The fund grew its dis­tri­bu­tion per share 8% to 90.79c in its fi­nan­cial year to Fe­bru­ary, in line with the group’s growth fore­cast. It man­aged to re­new 80% of its 2015 ex­pir­ing leases. It is work­ing on re­duc­ing its loan-to-value ra­tio to 40% from about 43%.

CEO Sandile Nomvete says the com­pany needs to re­duce its gear­ing in a tough eco­nomic en­vi­ron­ment in which com­men­ta­tors ex­pect in­ter­est rates to rise fur­ther.

The pos­si­bil­ity of SA be­ing down­graded to junk sta­tus by ratings agen­cies still per­sists.

Stan­lib’s head of listed prop­erty funds, Keillen Ndlovu, says that Delta achiev­ing 8% dis­tri­bu­tion per unit is in line with the fund’s guid­ance and mar­ket con­sen­sus.

It was re­spectable given the mar­ket en­vi­ron­ment and the fact that cap­i­tal, both debt and eq­uity, had be­come in­creas­ingly ex­pen­sive to ac­quire.

“Oper­a­tionally, Delta seems to be man­ag­ing its port­fo­lio rel­a­tively well,” says Ndlovu.

“Va­can­cies have ticked up slightly due to the new prop­er­ties they have ac­quired, but over­all, the port­fo­lio has not had any neg­a­tive rental re­ver­sions.”

Nomvete be­lieves Delta is a safe in­vest­ment for pen­sion funds and other in­vestors seek­ing con­sis­tent re­turns.

“Our strat­egy to dis­pose of non­core as­sets fur­ther sup­ports our fo­cus on re­duc­ing gear­ing is gain­ing mo­men­tum,” he says.

Right now Delta is a hold un­til it man­ages to achieve some­thing which ex­cites in­vestors.

This could in­clude gain­ing off­shore ex­po­sure.

Many South African prop­erty funds have bought into Euro­pean prop­erty funds, grant­ing in­vestors ex­po­sure to bet­ter growth economies than SA’s.

They also act as cur­rency hedges against a volatile rand.

The fund may also do well to im­prove the qual­ity of its do­mes­tic port­fo­lio by sell­ing un­der­per­form­ing as­sets.

With the com­pany trad­ing at a for­ward yield of about 14%, Delta may come un­der at­tack from com­pa­nies which feel they can buy the com­pany at a bar­gain.

Many listed funds are looking to con­sol­i­date in a South African mar­ket where the cost of build­ing has been ris­ing.

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