Government tenants are not everyone’s cup of tea

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.