Our opinion on the current state of Delta Property (DLT) Delta Property (DLT) was a level 2 black empowered real estate investment trust (REIT) with a portfolio valued at R11.3bn and a loan-to-value ratio of 44.3%. Roughly 80% of its rental income came from the government or state-owned enterprises such as Eskom. The company specialized in renting buildings to government and quasi-government organizations in major South African cities. During COVID-19, the company's exposure to government leases proved beneficial because those leases continued to be paid while commercial leases came under extreme pressure.
On 24th August 2020, the company announced that both the CEO and the CFO had resigned, clearing the way for a new board appointed by the women’s BEE consortium, Cornwall Crescent, which owns 26% of Delprop. On 9th December 2020, the company reported on the results of a forensic investigation as follows:
"Some of the key issues identified in the Forensic Report include:
- Payment of commission by the Company totaling R43.9 million (for the three financial years ended February 2018, 2019, and 2020), resulting from invalid, lapsed, or no broker mandates;
- Fraud resulting from unethical dealings amounting to R2.1 million;
- Non-disclosure of related/connected party transactions to the Board."
On 10th December 2020, the company withdrew its February 2020 financial statements and audit opinion and delayed the publication of its August 2020 interims. This caused the share price to fall by one third. On 15th December 2020, trading in the share was suspended by the JSE. On 22nd April 2021, the company re-issued its financials with a 10% drop in the value of its portfolio of properties at the end of February 2020. Its liabilities exceeded its assets by more than R4bn, and its status as a going concern was in question. The JSE suspension was finally lifted on 30th July 2021, and the share has been climbing strongly since then.
In its results for the year to 29th February 2024, the company reported rental income down 5.4% and headline earnings per share (HEPS) up 7.4%. The company said, "Weighted average lease expiry 15.3 months (February 2023: 13.2 months). Profit from operations R399.2m (February 2023: R226.1m loss from operations). Covenant loan to value 59.4% (February 2023: 59.9%)." Notably, the share is still trading at a fraction of its NAV, which suggests that a takeover might be in the offing.
In our view, this share remains a risky penny stock despite the recent results. We think the loan-to-value (LTV) is still far too high. On 16th February 2024, the JSE censured Delta and gave it a R7.5m fine for accounting irregularities, which might prevent the investing public from making sound investment decisions.
Given these factors, Delta Property presents significant risks. The high LTV, ongoing operational challenges, and recent accounting irregularities all contribute to its risk profile. Potential investors should be cautious and thoroughly evaluate the company's financial health and governance before making any investment decisions.
