Delta Property Fund Limited (DLT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Data's results presentation for the year ended 28 February 2021. Thank you very much for joining us today. And if you don't mind, we will run through the presentation, and only at the end will we then allow questions to be posed. To begin our slides, I will move to the first slide, which is now our Slide #4, Introduction to Delta. The value of investment of our property, which we know has recently been done, is now currently pegged at ZAR 8.2 billion. We do have gross lettable area of 909,000 square meter, and our sovereign underpinned is 81.3%. The SA REIT NAV per share is ZAR 5.06. The average property value is ZAR 82.7 million. And we are still very dominant in Pretoria and Durban CBD. And just to give just a quick update in terms of time line of events, since last year, 24th of August, when the CFO and I, still as the interim CEO, took over. That happened on the 24th of August when the previous executives all decided to step down. On the 31st of August, we then had a new Chairman when JB Magwaza stepped down and did not put himself for reelection. Ms. P. Langeni was appointed then to the Board as Chairman as well. On the 3rd of November 2020, our first forensic report was presented to us, the final report. On the 9th of December, we had an update on the forensic investigation, which led to us withdrawing our financial year 2020 results. After a lot of discussions with the JSE, the shares then were suspended for trading on the 15th of December. On the 1st of January this year, Ms. de Lange was then appointed as a permanent CFO. And good to say at this point that the search for the permanent CEO had already been underway. On the 22nd of April, we then reissued our financial '20 year-end results. First of June 2021, we published our interim results. And on the 30th of June, yesterday, we then published our 2021 results, which, for us, this is quite a milestone because it does finally bring us up to date. So we can now finally focus on truly running this business. It's been quite a bit to have our financials restated and also trying to deal with the operations going forward. So for us, 30th of June is quite a big date, and I would like to congratulate the finance team and the rest of the individuals who've been part of this, for this achievement. We do not take it lightly. Now just to quickly address some of the governance and process challenges that we have encountered, but most importantly, have worked very hard to make sure that we overcome. We did reconstitute Board committees, and we have reestablished governance and oversight roles. I've got to say, we are now very thorough in terms of disclosures, in terms of conflicts of interest, in terms of related party, and we have, as a result of the second forensic report. And I think it's very important that the first thing to distinguish that the first one was as a result of a whistleblower. The second one was as a result of us as executives requesting to undertake that so we can be certain of our internal processes. So as a result of that, we have updated some of the internal procedures, processes, and most importantly, our procurement processes -- policies. The management, we're still stabilizing leadership. And I know this question will be asked, I must still say. So in terms of finance, we've reconstituted the whole team. Marelise is there as the permanent CFO, and of course, I speak to you today still as the interim CEO, and that process had gone a long way. In fact, the Board -- or the Nominations Committee and the Board had found an incumbent. They had negotiated the whole package. And somehow, I'm not quite sure what happened, but fair to say that I still sit today as an interim CEO, and another process is underway. And I think it's best then we all understand that. Let's give NomCo and the Board probably another 4 months to really undertake another vigorous process to find an incumbent. We didn't delve too long in terms of the reasons. We just accepted when we were told, and I was asked to continue in my interim position. We have bolstered key skills and competencies internally. We have restructured the way we work. There were many layers initially when we got there, a lot of hoops that we had to overcome to get a simple process being done. We flattened the structure, and got clear heads of divisions and their support. We have brought in, as you can imagine, a lot of people into the business and some, unfortunately, were casualties and had to depart. I've already spoken about the streamlining of operations. And I mean, ultimately, the successful delivery of our CapEx commitments, our focus on area management, our performance culture will lead us to what I'm sure there will be a question on when will we start to pay deliverables. But if I can just go on, CapEx, there is a slide where we do talk about some of our CapEx achievements. We've done a lot. We brought in a head of facilities 1st of January. And in the last 6 months, we have really done a lot in terms of ensuring that we deliver. Focus on arrears. We now meet weekly just to get our heads around and to make sure that what we do need to ultimately -- and some of them are legacy things that we finally closed out on our books. And that performance culture for us is key going forward. And in terms of operational excellence and some of our strategic pillars, I've already alluded to streamlining processes for better efficiencies. But part of that, as well, the CFO is very much involved in terms of what are we agreeing in terms of CapEx. And I get very involved in terms of the other processes, in terms of property management and in terms of other facilities management as well. We do speak to this team daily, to the heads, to the property managers, and ultimately, we'll get it right. But I think the trajectory in terms of movement is correct, and we're quite happy with it. I've alluded to having appointed suitable qualified incumbents. If you look at our structure now, which, if you go to the integrated report on our website, it is included there. We do show a slide on it. And a lot of the heads of the divisions are external people who have come in on a permanent basis. There's a lot that's still to be done. To try and have a change management, change culture, it takes a while. But we are, Marelise and I, are committed, and we are supporting the new leadership. When I say leadership, I mean, our next layer in terms of making sure that when we say we have a proper team, it actually works, and some of the learned things are not carried forward. We are very happy with our finance team. We have restructured that division. And in fact, if you look at it now, it is almost 100% new team and capacitated by CAs. So we're very happy with finance. And I think it has gotten us this far in terms of release of results. And of course, part of the -- I spoke about procurement is we are vetting, again, our supplier database. And if you remember, some of the issues, emphasis of matter that were raised by the auditors, dealt with shareholding in some of our suppliers. And we've just gone back. And I think there is a slide where we do state categorically that if some of our suppliers are not willing to share and to open up in terms of who the shareholders are, they will be excluded from our database. But we are also very careful because there are some of our suppliers that we've worked very well with, who saved us a lot of money in terms of some of our deliverables. So we're not going to be careless in terms of how we fulfill this function, but we are definitely very much committed in that. We're very conscious of Delta as a brand and the trust that we should enjoy from some of our tenants. So part of the focus is to reposition Delta as a partner of choice. I mean our portfolio is very much sovereign. We need to get this right. We need to have them, they're very big in our lives, and if we don't lose sleep on this. Having said that, though, we're not saying, therefore, the vacancies that we have we're looking just to fill exclusively with sovereign. So what we have done, and I'm hoping we are achieving, is to exceed tenant expectations. We are rebuilding this relationship. We speak, and we engage frequently. And probably, for the first half, we're listening to what it is that our tenants want and what our tenants are looking for. And as a result, their CapEx expectations will be achieved. We deliver consistently against our commitments. I think now there's a clear tone in terms of we do not drop the ball. Once we have promised any of our tenants, we deliver. And do we take time to earn their trust? It does take time to reposition a brand, but it is something that you work on daily. So therefore, our key performance areas were the conclusion of the DPWI leases. We still have, and it's no secret, a lot of the month-to-month leases on our books. And some of the leases that were never signed, understandably, were because of a 3-month exit clause. Our funders are not happy with this profile. This is being led from the top in terms of achieving it and in terms of ensuring that it speaks. Conclusion of these leases speaks to a lot of what we need to achieve: our LTV, our short-term data funding. So we can't get this wrong, and our property people also understand this is what we'll live and breathe. Successful collection of arrears. We are meeting weekly, as I've already said. Filling of vacancies. Now I know we say filling of vacancies, we're working on it. We've got teams who are working on it. We've got an external -- we are speaking to external people. And it's easy to always say, "Why don't you speak to someone, so let them help you?" That comes with costs because part of it, that kitty, is not finite on our side. So we are looking to fill vacancies. We are looking at options. We're doing what we can internally, and ultimately, it is a key performance area for us. And that is something that, every time we speak to shareholders, we must report on because I suppose you also would like to see movement and traction in terms of that. Extension of debt. I've already alluded to that. It's costing us quite a bit to renew and extend on a short-term basis. And I'm sure the CFO, for her, this is what gives us sleepless nights. And then the other tied to it is the completion of our disposal of noncore assets. And all our assets, I mean, we are in the business of buildings, in the building of property. When we say noncore, really, it's more regional. Some of our properties are just too far from where we are. We need to sit and -- after this last round of meetings. The Board has said, and that's going to be the next round of meetings, our strategy session, "Where are we going?" 100 buildings, and now 99 with the sale of Domus and the transfer of Domus, is that where we want to be? So that's part of our key performance area. And we will come back at a reasonable time to report to yourselves on that. And in terms of business updates, we're very proud that, at least, we have signed new leases of 15,000 square meters, and we have renewed 74,900 square meters. Rental reversions have been in line with market rentals. And post year-end, we have signed -- so the team has been working hard. I know I talk about renewals, et cetera, but we are taking it, build and building at a time, and the team has worked very hard. In Polokwane, we have renewed 2 leases: a 5-year and a 9, 11. And of course, the 9, 11 for us is a lot to celebrate. There are other offers that we're looking at for 9, 11, but we'll only come to you once we have signed and we know it's finalized on the dotted line. We have 59 total number of tenants that we have retained despite tough trading conditions, and of course, increased competition. And I think we must speak to that. We're not naive in terms of -- and we are arrogant, thinking that we can just retain DPW because of our structure and the fact that we are a sovereign REIT, therefore, they should. We are working very hard in terms of that retention and understand that we do have increased competition. However, we will continue on this trajectory, which, hopefully, will extend and should extend our portfolio WALE. Capital recycling. Disposals is one of the mechanisms that we will employ to reduce our LTV. The transfer of Broadcast House and Pretoria (sic) [ Protea Coin ] Cape Town occurred on the 31st of May 2020 and on the 6th of August 2020, respectively. The proceeds for that, ZAR 40 million, went 100% to settlement of debt or towards the settlement of debt. Post year-end, we've already said, and we did sense on it, that Domus was sold. It was transferred on the 23rd of May 2021. On the debt funding, interest-bearing borrowings decreased by 6%. And during the period, the Bank of China facility was restructured for a period of 6 years. And the loan denomination is now in rands, no longer U.S. dollars. And the rate is now -- the applicable rate is now JIBAR, no longer LIBOR. And the lowering of the prime rate supported a reduction in the weighted average cost of capital. Capital allocation. We alluded about CapEx. And I suppose, here, we give you a bit more meat and flavor in terms of what we've done. And CapEx does still remain a major focal point in terms of everything else that we do with cash. And approximately ZAR 183 million has been committed for projects in this new financial year. And what's been underway? Poyntons is one of our biggest building in terms of GLA. And it is currently letted with defense, correctional service and a small bit police, who are using some of that space as storage. So 76,000 square meters is very big. What we have done, we've put a lot of CapEx into Poyntons, Phase 1 of 3 of the lift upgrades, which commenced in (sic) [ completed by ] December 2021 at a cost of approximately ZAR 22 million. The fire compliance project, which was originally started in 2019, not completed, was completed in September 2021 at a cost of about ZAR 5 million. The ground floor of façade has been upgraded and completed. Actually, if you go to Poyntons, it does look very pleasing. And the total spend on this project amounts now to ZAR 27 million. Veritas, we've done lifts, air-con. We are looking to do flooring. And as part of the air-conditioning, we also did the electrical upgrades, which will lend us well for the compliance certificate, and all that at ZAR 10 million. The next, Nelspruit portfolio, air-conditionings have been upgraded at a cost of ZAR 9 million. Isivuno, we've done lifts and air-conditioning, ZAR 13 million. SARS Bellville, air-conditioning upgrades, security fencing, ZAR 1.5 million. 88 Field Street, we've done HVAC upgrade. And I mean, to just say façade, and then we quote ZAR 10.8 million seems like much. But what we've done is -- I mean, that's a beautiful building in Durban. We have replaced that whole silicone on the windows, and we've done waterproofing. So to say façade seems like we've just maybe cleaned the windows and made it look pretty. We've actually done structural things on the building. SARS Kimberley, we've replaced totally the whole roof, air-conditioning replacement, and they have renewed their lease. So we needed to put in, and we've done as well, the façade for ZAR 4.2 million. Beaconsfield, also, waterproofing, installation of turbo fans for cooling for air-cons at a cost of ZAR 1.2 million. WB Center we've included because of Kimberley and issues with water. We have put in a water tanks, and we all know, with electricity and installed a generator. Commissioner House in Belville, we currently, underway, have started some internal upgrades and also the façade. 2 Devonshire, air-conditioning, and on one of the floors, we have done 100% upgrade, new flooring, new -- it looks absolutely stunning. Servamus, we've installed chillers at a cost of ZAR 4 million. Just to continue and to finish up on capital. With our constrained cash headroom and, of course, limited access to resources, financial resources, funding to date has been on working capital. Marelise has done exceptionally well on that front. Having said that, though, Poyntons, we did get, in the past, debt to do that. So all these lift -- sorry, these lift upgrades are done from debt from Nedbank. COVID-19, very minimal impact due to our sovereign nature. We did come in approximately -- we did budget for about ZAR 11 million to support some of our retail tenants, and it's all on a case-by-case basis. And having very strong conversations with some of our retail tenants, that if you were owing prior, please don't blame COVID. Let's see how we get this right. And so far, we have paid out ZAR 6.2 million. And we will continue to support our retail tenants. And though we're sovereign, at the bottom of each and every building, we do have retail. And we can't also allow to have that so vacant. So we are looking after tenants. We are speaking to them. We're talking, and we are allowing them even post this to come through if there are still challenges. Thank you very much. That brings to end the first part of my presentation. And I would like to then call the CFO, Marelise, to continue. Thank you.

Thank you, Bongi. Good morning, ladies and gentlemen, and thank you for joining us for this presentation this morning. And I'd also like to take this opportunity just to echo Bongi's sentiment on the tremendous work that the team has done so far to get us to this point and for the leadership that we've been given by our Board as well. Thank you. So going to our financial performance for 2021. Our loan to value have increased to 56.5% from 55.7%. So that is due to the reduction in our valuations. And that's been offset slightly by our reduction in our debt, which we do through amortizations and through the process of disposals. Our average cost of debt decreased, which is a nice metric for us, from -- sorry, from 10.3% to 8.2% and, again, mainly due to the lower interest rate environment, following the decrease in the repo rate during the COVID pandemic, as well as some of our amortizations that we've done during the year. Our next metric is a rather new metric, it's called the SA REIT funds from operations. That is in terms of the REIT best practice, and it was previously known as the distributable earnings per share. So we do have ZAR 223.7 million as the distributable earnings. And in the previous period, it was ZAR 249.8 million. So although we are not distributing a dividend due to our CapEx requirements that we have for our buildings, it gives a good indication of where we will be going in the future periods. Our interest cover ratio, currently at 1.9x, and that came up from a previous period of 1.75x. And we would certainly, in the future, look to increase our 1.9 to above the 2 level. That is also in line in -- or would be in line with our covenants with our bank. When we go to our financial overview, I'd like to highlight a few items on this slide. Our rental income decreased from ZAR 1.48 billion to ZAR 1.445 billion. It's 2.7% decrease, and it's mainly due to reversions that we've experienced as well as increased vacancies in our portfolio. Our net property income is a rather large number in terms of 13.1% decrease. And I think, just to highlight, specifically, the reason why it decreased is because of our increased property operating expenses. Our property operating expenses increased as a result of bad debt provisions. We made quite a bit of bad debt provision. And our policy on our bad debt provision is to provide for all legal tenants as well as all of our tenants in the 90-day-and-over bucket. And then we do not provide for the sovereign tenants. However, that if we do have a specific dispute between ourselves and the sovereign tenants, then we do make a provision if we feel that it is required. So that would lead to the decrease then of 13.1% in the net operating -- net property income. Our net finance costs decreased quite significantly on -- with 24.9% from ZAR 551 million to ZAR 413 million. And again, as I said previously, the reason for that is the decrease in the repo rate during the pandemic period. Our cost-to-income ratio increased from 32% to 37% on a gross basis and 18.7% to 25% on a net basis. And the main reason for those increases is as a result of our vacancies. The investment in our listed security decreased due to the disposal of 14% of our shares in Grit that we hold. We now have a holding of 4.5% in Grit, and we came down from ZAR 277 million to ZAR 157 million. When we look at our -- I have spoken about our weighted average interest rate decreasing from 10.3% to 8.2%, and as well as our loan to value from 55.7% to 56.5%. Then our REIT net asset value still shows that there's quite value in our share in terms of what is our net asset value on our balance sheet, and that went from ZAR 5.62 to ZAR 5.06 for the period. So when we come to our statement of profit and loss and other comprehensive income, to highlight a few items on this income statement, we've spoken about the revenue, spoken about our property operating expenses. I think it's just good to highlight our dividend income side. We previously have received ZAR 42.8 million from Grit, that came down to ZAR 13.8 million. And I guess, when one look at where we are in terms of the environment, one can understand the decrease in the dividend there. Loss or gain on foreign exchange movements, it's mainly due to our Bank of China facility, which has been converted from a U.S. dollar facility into a ZAR facility. It's much, much less than what it was in the prior period. Our administration expenses increased quite significantly from ZAR 93 million to ZAR 116 million. The reason for that is that we have incurred a tax penalty because of the nonpayment of dividends, which we now had to bring into consideration in our accounts. Our fair value adjustment, that came down significantly from ZAR 1.1 billion down to ZAR 636 million. And the reason for our decrease this time around in our investment property is also, again, a result from a shorter leasing profile as well as increased vacancies. We certainly do see this number increasing going -- or not increasing negatively, but increasing our valuations going forward because we certainly are working quite hard on trying to get our leases signed, together with filling of our vacancies. And this also goes hand-in-hand then with our finance cost, which, at the moment, we do increase our weighted average lease expiry, together with filling up our vacancies, we certainly will be having an increased tenor on our funding. The other item I'd just like to highlight is the taxation. In the prior year, we had ZAR 93 million as taxation that had to be paid compared to this current year of ZAR 152 million, and it's as a result of not being -- or not paying a dividend. Then just going on to our SA REIT's funds from operation. As indicated, this was previously the distributable earnings calculation. It goes from our loss on our IFRS statement of ZAR 454 million, and previously, ZAR 935.8 million negative. Going then, making the normal adjustments that we would have made on our distributable earnings calculation of the fair value for investment property, our gains and losses on the disposal of debt and equity instruments as well as foreign exchange and hedging items, that then takes us to our distributable earnings of ZAR 223 million for this financial year, which will give you earnings per share of ZAR 0.3133 per share. On this slide, what we have done is it's -- what we've spoken about now on the funds from operations, it's just a graphical representation of how we moved from ZAR 2.50 to where we are at this point in time. Our statement of financial position, it is a bridge statement. We start with our investment property. As I indicated previously, we went from ZAR 8.8 billion to ZAR 8.2 billion. That's a ZAR 517 million decrease in our investment property. And again, that goes to the shorter WALE that we have as well as the increased vacancies. We talk about investment in listed securities. That is our investment in Grit, which I have spoken to you about. And then our current assets are mainly made up of our trade and other trade debtors. When we get our noncurrent liabilities, as well as our current liabilities, I'm going to group our interest-bearing borrowings together. So we currently have our current liabilities exceeding our current assets. And the reason for that exceeding is because our facility is being on a short tenor, and we certainly will be working on increasing that tenor to a longer period in order to make sure that we don't have a current liability situation exceeding our current assets. We do talk to our funders on a weekly basis in order to make sure that we are comfortable. And that will certainly -- the focus from our perspective is to make sure that debt facilities are increased in tenor. Then our other current liabilities that is made up mainly of our trade and other payables, our creditors. Going to our valuations slide. I think what is important, although we've come down in our valuations to ZAR 8.2 billion, what we have done is we've now increased our panel of valuers. We've added JLL to our panel of valuers. And we've also added Real Insight to our panel of valuers. What we've also done is that our valuations are split pretty much equally with all valuers. And I think that gives us a good sense of, firstly, the independence of our valuers as well as the manner in which it gives us comfort that it's been done on a rotational basis as well. So at this point in time, for this year, we've done a full portfolio valuation like we have done for 2020 as well, and we will return again to our policy of doing 1/3 of our portfolio every year. When we get to our debt summary, we've got floating bank facilities of ZAR 1.2 billion, revolving bank facilities of ZAR 535 million, getting us total borrowings of ZAR 4.734 billion. Including -- when we include our accrued interest, which we do for month end as well as our debt structuring fee amortization, we then get to our total borrowings of ZAR 4.755 billion, which you'll see on the face of the balance sheet. Our interest rate swaps that we have is ZAR 1.8 billion, and that gets us then to a fixed portion of our facilities of 40% compared to 45% for the prior period. It also shows that our weighted average rate is at 8.2% for our floating facilities. Our SA REIT NAV per share bridge, again, showing as to how this kind of moves in order to get us from a ZAR 5.54 to our ZAR 5.07. And it does take into account our admin expenses, basically, are moved into our income statement and the items that we have spoken to just prior to this. I would like to hand back to Bongi. Thank you.

Thank you very much, Marelise, for that. Just to conclude quickly some of the highlights and some of the things that we've mentioned. The first one is we are still engaging with the JSE regarding, obviously, the lifting of our suspension. There is a lot of questions that they're asking, as you can imagine. They want to be certain in terms of where we are on a lot of the issues that we raised, some of the emphasis of matter -- issues that were raised by BDO, our auditors. And -- but one of the precursors of all this was we needed to publish, by yesterday, which we did. The appointment of the permanent CEO is still ongoing. And that process has started again, and we will report the minutes that NomCo and the Board tells us a candidate is signed. We are still very much committed, very much so. These are some of our key pressure points. And it is the remediation of our LTV and how we will get there is a valuation uplift, which could be as a result of conclusion of leases, a reduction of vacancies and conclusion in some of our CapEx projects. Now this is, for us, a very top of mind. This is, for us, a very key deliverable that we do need to achieve. The other is, as Marelise has spoken about, reduction of debt. And we are looking at a lot of -- or a few mechanisms, and part of it is including disposals, noncore assets and these Grit shares -- or sorry, the Grit shares. Extension of debt terms, I think I did say, first part of my presentation, we are not sitting in a good space with our banks having to renew every 3 months. And it just does not help us in terms of our capital structure. So those conversations we're having, and Marelise did say we meet them weekly, which we do. Nedbank is very big in our lives. So conversations that we are having with them are constant, but very targeted as well in terms of what we are trying to achieve with that. We are looking for long-term funding, and we've been very clear. But we understand what they need us to achieve to get there, and that's what we're working hard and aiming at on a weekly basis. I've alluded already to a reduction of arrears. And of course, the very big one is return to distribution of payments. So there's a lot that we still need to do. But before we complete, I actually realize that there's one aspect that I should have mentioned in my CFO's report and that I -- I'm sorry, I omitted. And part of that is some of our legal, I would say, battles. It's some just of the legal things that we have to do, where we've actually sourced counsel. One of the big one is MPI PAM, which everyone, I'm sure, is aware in a lot of the headlines that the previous CEO put out and what that agreement, at the time, allowed forward arbitration. So we are at that stage, we are defending that. And probably the other one that you'd be keen to know about is Somnipoint. And you will read in the integrated report that the previous Chairman, Mr. Magwaza, did come through and settle his part. So we are going ahead with that. And then the others that we're always going in is Orthotouch. Though, for us, Orthotouch is a done deal, it's almost concluded. Hopefully, in the next quarter or before the end of this financial year, it will not be even a subject that we then speak to. The one other, which the Board overseas, is [indiscernible] Property Fund. And we are trying to recover some big monies, but were never paid over to us as the landlord, where an agent was put in place at [indiscernible] Property Fund and decided to collect rent on our behalf and kept it for himself. Those are probably the big ones that the Board looks at. And I just thought it's proper that, as shareholders, we also, at this point, share with you. With that, thank you very much. That brings an end to our presentation. And if you allow me, can we just take a few seconds before we have the Q&A. Thank you, everyone. So maybe 5 minutes, and then we'll come back to Q&A. Thank you. [Break]

Thank you, everyone. We've now reached the Q&A section. And I would like to introduce you all to Morné Reinders, who will facilitate this Q&A section. Thank you, Morné.

Thank you very much, Bongi. The first question we have is from Mr. [ Leo Naidu ], a private investor. He's saying, good day. Investors bought Delta shares for the income stream, some of us as pensioners. Why can Delta not pay a reduced dividend, even if a greatly reduced dividend, rather than 0? COVID has not impacted Delta as much as other REITs. Can we, as shareholders, not see a benefit from this? Thank you. Bongi, would you like to take that one?

So -- and I do feel for you, Mr. [ Naidu ]. But the reason why, at this moment, we're not in a position to give a distribution is because of our CapEx requirements. The CEO did allude to at least about ZAR 200 million a year. And for our prepared distribution, we'll just eat into that. And at the end of the day, it will just not support. And as part of it as well, there is monies that we are using to actually amortize some of our debt. So understanding that, top of mind for us, it is to give a distribution. We just don't see it happening in the next financial year. But in the coming financial year 2023, we are hoping to be ready to distribute.

And then maybe just to address Mr. [ Virgil Francis' ] question, which is in line with that. With the anticipated dividend payments happening in 2023 only, this means 2 years of tax penalties going to [ surge ] instead of shareholders. How do you rationalize that?

Marelise?

Thank you, Bongi. I think maybe, just to clarify, it's certainly not tax penalties, it's [ dividend payable ], but it is as a result of the fact that we are taking the CapEx and spending the money on the buildings. And as Bongi alluded, it certainly is not intended to be for a long protracted period and that we do want to return back to 2023 in terms of paying dividends.

Thanks. Thank you very much, Marelise. Anton de Goede from Carnation asks, how do you intend to balance the capital requirements from tenants and lowering of the LTV in a market where office disposals are difficult to achieve at current book values?

So I can take that question. So Anton, thank you for the question. I think we -- so what we've done on our side is we do -- we have budgeted for our capital expenditure of approximately ZAR 200 million for this financial year, ZAR 183 million of that is already committed. And yes, we do pay amortization. And ultimately, our aim is that we get back to distributing rather our dividends to our shareholders. And I think spending this capital -- or CapEx that we are doing at this moment will certainly get our buildings in a better state so that we can have happy tenants and certainly paying tenants so that we can make sure that, going forward, we can produce that. And I do take your point on the lowering of the LTV. We pay approximately ZAR 200 million to ZAR 250 million a year in terms of our capital reduction for facilities. And that will certainly start helping us getting our LTV down. And then it is a very difficult, tough economic climate at the moment, but we'll certainly not sell buildings that is not in the best interest of shareholders and the fund.

Thank you very much, Marelise. [ Lukman Amit ] from [ 91 ] asks, could you -- sorry, could you provide some more insight into the status of the 300,000 square meters of leases currently on a month-to-month structure?

Sorry, Morné, please read that again, sir?

Could you provide some insight into the status of the 300,000 square meters of leases currently on a month-to-month structure?

Okay. So on that, we are engaging DPWI on a weekly basis. So what we've done with the month-on-month is we've sent them our proposal and how we'd like to move forward with these ones. And we're just waiting for a reply from them. So we are definitely engaging. And we have definitely articulated to them that, for us, we cannot continue on a month-on-month, which is something that they are now alive to. It's -- I suppose, also going back to understand how did we get here to be on month-on-month from 2017. So it is -- for us, it's top of mind, and we are engaging with DPW on a weekly basis.

Thanks. Thank you very much, Bongi. Marelise, this next question is probably for yourself. Anton de Goede from Coronation asked, why did you pay a penalty to SARS? Was it due to late payment of tax?

Thank you, Morné. So Anton, note, it was not as a result of a late payment of tax to SARS. In the 2020 financial year, there was obviously an initial indication that there would be a dividend payable at the end of that financial year. And with the withdrawal of the results, it was certainly not a dividend payable. And as a result, there was an underestimation of the tax that was due to the receiver, and that was the reason for the penalty. We are talking to SARS about that, and we will keep the shareholders updated around that.

Thanks. Thank you very much. And a follow-up question from Nazeem Samsodien at Investec and also by [ Shipley Klamini ] from Regis Capital.Nazeem is asking, could you provide more clarity on the month-to-month leases, which estimates are 53% of income? His first question is, is there a concentration risk with regards to these? Are any of these -- have any of these indicated an intention to reduce space or to vacate? And what is the CapEx cost to retain these leases? And is that included in the ZAR 183 million CapEx spend on Slide 10? Or will it be more?

So definitely, it has been included in the ZAR 183 million. They could be at the end of the financial year just a residual amount, but this is for the total portfolio now. On the month-on-month, the tenants are still there and the tenants are still paying. So hence, I said, we are addressing why we found ourselves month-on-month in 2017, and in 2021, we're still here. We haven't -- let me say this categorically, we have not, in the bulk of our month-on-month, we received letters or notifications to exit or to vacate. So it's just a matter of finally getting over the line with DPW, and we are addressing the issues. I mean, obviously, there are issues. We are addressing the issues. But I mean, having said that, though, we're very fortunate that part of our portfolio includes Department of Home Affairs. They're not going to just pick up and go after being there forever. And especially when the public knows or some of other departments were to move effectively means downtime in terms of IT. And that does not mean we are arrogant, hence, we are engaging with them. We do need to retain them. It's just what we just need to work through, unfortunately.

Thanks. Thank you, Bongi. And then the follow-up question from [ Shipley ] is, why are the arrears so high compared to other government landlords?

If I can take that question. I think what we have found in our debtors book is that there were many outstanding legal cases in the past. We are working through those, and that's why we have made such a big provision this year. And we are taking it case by case and working through it to make sure that we can get the best for our shareholders. And we certainly are taking a zero tolerance to this, and that we really are intending to sort this out in the short term.

Thanks. Thank you, Marelise. Back on to the CapEx, Nazeem Samsodien read a couple of questions related to CapEx. Nazeem Samsodien from Investec asks, how much CapEx is required to get the portfolio compliant and to sign new leases? What is your ballpark estimate on this? And then Liliane Barnard from Metope Investment Managers asks, please, can you speak to where the balance of the CapEx spend mentioned in the presentation will be spent? She said, it's a number of about ZAR 100 million. Slide 10 mentions ZAR 183 million and the projects mentions a total of -- or the projects that you've mentioned totals ZAR 82 million. Also, can you please elaborate on the quantum of any remaining CapEx envisaged being spent in the years to come? Please describe the process in place to approve such CapEx spend. If you want...

So Bongi, if you...

Yes, you could [ do ] this.

So you're quite right, Liliane. When we look at what we have listed in our presentation, it is projects that are near completion. So we have spent quite a bit already to try and get our projects to near completion. Our lifts take longer simply because we first have to order them. They take time to get into the country, and then the installation of those lifts take a lot of time. So we do expect our lift project that we have mentioned to be in place by the end of this calendar year. Having said that, our estimation so far is ZAR 183 million. We've also indicated in our integrated annual report how we're spending that money. And the rest of it, in essence, is what we have budgeted for this year was ZAR 200 million. And we do have a lot of occupational health and safety items that we are working on. And that is certainly where the balance of that will be going as well as TI spend that we spend on our tenants that have signed leases with us. And you're quite right that we have indicated then for the year to come approximately another ZAR 100 million. And I do think that, that will take us quite a long way into getting where we need to be.

And could you elaborate on the process in place to improve the CapEx spend?

Absolutely. We've been going through quite a proper process in terms of making sure that we use the correct suppliers. If I can just elaborate on our procurement, our process is now to -- every one of our suppliers are vetted. And we go through a proper process to make sure that they have the credentials to do the work that they -- that we are allocating to them, and that they can do that work that we are allocating to them. So we're very careful about who we utilize in our properties and that we get value for money. I think Bongi also alluded to some of the savings we got so far, and that is because we are able to negotiate on bulk.

If I can add and just finish off, Marelise, for you. The process is -- it goes to AlCo, which is Asset, Liabilities and Investment Committee, and then it gets presented at the Board.

Thanks. Thank you very much, Bongi. Amanda de Wet from Plexus Wealth asks, please, can you elaborate further on the vacancies? Where were they at August 2020 versus February 2021 for both sovereign and non-sovereign office? In addition, what were the reversions on the renewals? What is the range of rentals that you are concluding new leases on for sovereign and non-sovereign office properties?

So that slide that I had -- that I spoke to in terms of the lease, it's signed. The new leases, a lot of them were private companies, if I can call it that, in other words, not sovereign, and if you were state-owned entities. So there is a bit of a -- there is a mix in terms of what we are signing. And I think, if we bear in mind, we also still -- we are very overweight in terms of sovereign. So whatever else comes up, we do look to either. We're not saying all our vacancies will be filled by sovereign. We are looking also at other type of tenants.

I think, Bongi, if I can just add to that. Our vacancy as of the end of Feb 2020 was 21.8%, and that increased to 23.6%.

Andrew Russell from African Equity asks, disposal of Protea Coin in Cape Town was at ZAR 1,228 per square meter, which is well below Cape Town's land prices. It feels that costs are too high on every metric, and there needs to be a benchmark. And some of the functions need to be internalized for arguments, like the net operating costs, it feels, is double of what it should be. Would you care to respond to that?

Yes. Thank you, Morné . When it comes to the disposal of Protea Coin Cape Town, unfortunately, now that Bongi are involved in the disposal of that asset. And we, unfortunately, can't comment on whether it's below the Cape Town land prices or not. I mean, when I do take your point on ZAR 1,228 per square meter, it does seem below that. But unfortunately, we can't comment on that. When I do go to the net operating cost, as indicated, our property operating expenses is quite high, and that's as a result of our bad debt provision that we made. We do take your point in terms of the metrics, that cost-to-income ratios and net cost-to-income ratio also need to decrease, and we certainly are working on that. I do think it's going to take a year or 2 of just really kind of getting to the bottom of where we need to so that we can kind of start stabilizing on those metrics.

Fantastic. He also feels that the retail ZAR 85 per square meter is too low, asking what the leasing benchmarks are and feeling that the escalations is too low. Would you like to comment on that?

So sorry, Morné, we [ lost you ]. Just repeat that, if you don't mind?

So he's feeling that the ZAR 85 per square meter for the retail portfolio is too low in terms of rentals, and that escalations are too low as well. He's asking what the leasing benchmarks are.

I think so when we talk about our retail portfolio, I think it's necessary to understand that our retail portfolio is a city center retail portfolio. It is certainly not a national or superregional-type retail portfolio. It is a very different tenant that we have in retail. And it might feel that the ZAR 85 per square meter is too low, and we will be working on our retail tenants. But at this point in time, that is factual. And then, whether our escalations are too low, I think, from our retail tenants, we get a decent escalation. It's more on our sovereign tenants that the escalations are lower, and maybe that is what Mr. Russell was referring to in terms of the overall escalation.

But I think, in comment to Marelise, what's important to state is our retail tenants are just at the bottom of our office. It's not a whole -- just 3,000 square meters of retail. It's not -- it's just the mom-and-pop shops at the bottom. And with some of them, we're likely to have pep, but it's not retail the way we generally refer to retail.

Agreed.

And then last question from Mr. Russell is -- and you have touched on it in the presentation, but for clarity's sake, when is the new CEO to be announced? And when do you anticipate trading again?

Look, I would love to trade tomorrow. And we signed some documents and sent as late as yesterday to the JSE. And so we have been engaging with the JSE from as far back as December 2020. So we're hoping tomorrow, but they haven't given us an indication. They've just been asking questions. We've been fulfilling those questions. And on the CEO, I have said a process has just -- has started, and we will wait until that process is finished, understanding, of course, that this is urgent.

Thanks. Thank you very much, Bongi. Mahir Hamdulay from Absa Capital asks, due to the balance sheet and liquidity concerns, have you considered the possibility of de-rating the company?

So if I can take that, Mahir. What we're doing is we certainly are looking at all options from our side. We have not made a decision as a Board. But we do -- we are looking at what is our possibilities that we should explore or are options that we do need to explore. We have not made a decision on that.

Thanks. Thank you. Then Trevor Matthews, a private investor asks, please clarify the 59 tenants referred to as being retained. Are these in Polokwane? And he also asked if you could please elaborate on -- at a high level, on the status of the Nelspruit leases, considering the large capital expenditure on these assets.

So the 59 tenants is of our total portfolio that we have retained. And we -- our Nelspruit portfolio is almost fully let. If I can just give a general reply, that out of 13 buildings that we have in Nelspruit, pockets of [ vacancies ], but it's not more than 2 buildings. So it's a well-run and a well-let portfolio. And of course, we are driving -- we are looking to have it 100%. And work has been done. That portfolio is being managed by [indiscernible], and it is well-run.

And could you elaborate on the Nelspruit leases?

So Bongi, if I can maybe take that? On the Nelspruit leases, the majority of our Nelspruit leases only mature towards 2024. So as Bongi indicated, about 2 buildings have some pockets of vacancies in them, but the majority of our Nelspruit portfolio is fully let.

Thanks. Thank you. And Bandile Zondo from Standard Bank asks, on the month-to-month leases, do you expect this to be finalized by the time you next report? And what is the main delay or concern from the tenant side? And second question is on the forthcoming expiries, is it fair to say that CapEx requirements won't delay the renewal process? And thirdly, have you had any offers, given the large discount to net asset value?

So I'd love to have the month-on-month leases to be resolved by tomorrow or yesterday. But we have sent all those leases to DPW. And I mean, one of the big -- and we haven't -- we have not been shy in articulating the reasons as DPW felt or the users have felt. As Delta, we have remained when those leases were signed way back, some of them in 2015, some in 2017. And they we're not keen to sign long-term leases again, not sure whether we will fulfill our part of the promise. So we've gone a long way to show them that we are committed, and that's all that we can do, and then just engage them. What was the last part of the question?

Have you had any offers, given the large discount to net asset value?

Offers on some of our portfolio buildings? Some of our buildings is that...

I assume this would be on the company.

I mean, we are reviewing -- Marelise and I are on a call on a daily basis. Everyone has an offer, if you are speaking on disposals. So we do have offers, and it's just, ultimately, someone must prove that they've got, first, the ability to conclude. We've got to be happy with what's been offered. And I mean, we're not having a fire sale, but we do understand that some disposals must be done. So some of them are way below, way below.

And I think, maybe, Bongi, just to comment on that is, when it is way below, we certainly are not necessarily considering that. And looking at an offer for the entire company, we certainly have not had offers for the entire company.

Thank you, Marelise. And in line with that, Brent Geddes from Geddes Capital is asking, what is the value of properties identified for sale?

So if I can maybe talk to that, Brent. So we -- you'll see in our financial statements that we do not have a noncurrent assets held for sale category, and that is because we haven't identified a portfolio for sale. At this point in time, we do receive offers, and we do consider the offers coming our way. But as we said, we're very careful about that. And we certainly do not want to disclose anything that does not make sense for the fund or the shareholder.

Then [ Shipley Klamini ] from Regis is asking a follow-up question, whether you are aware of government's plan to build a new precinct for most of the government departments, and how will this affect Delta going forward? He also asked whether you can elaborate on the reasons for spending so much CapEx on Poyntons when you're on the risk of losing that tenant as the tenant has gone out to tender for office accommodation in 2020?

I think it's important to state and start with the last part of the question. It's important to state that they had gone out to tender already in 2017, and they found nothing. They've gone out to tender in 2020, and they're still nowhere. So for them to find, maybe, let's say, best 63,000 square meters of building, I'm not sure. But having said that, we're not going to be arrogant. We are engaging with them. They are still there. And some of the property, what do you call them, the people in charge of the building from the user point of view, do tell us, "This is what you need to fix." This is what you need to fix, and that's what we're fixing. Hence, the CapEx at Poyntons. So if they had already made up their mind, they wouldn't be telling us what we do need to fix and get right. In terms of the precinct, I'm not aware of government having a precinct for all government departments in one. I'm not aware of that. I do know that there is talk for some of the users to be all under one roof. And whether that building, that sometimes gets mentioned, can accommodate all those particular users, it can't. So -- and we'll take it a day at a time. What we don't want to do is to stop engaging DPW because of maybe that building, a precinct maybe, et cetera. So no, we're still steaming ahead with Poyntons. And if they do ultimately move, those are things that we will need take into account. But none of our people on the ground have reported this to us.

Thanks. Thank you very much, Bongi. Then [ Luanda Bellis ] from -- is a private investor and asks, we read in the news that the organization was looking for private investors because of debt. This has not been mentioned in the presentation. How true is this going into the future?

We -- I don't know, Marelise, maybe they come to you directly as a CFO? But fortunately, I haven't had -- and it's not even in my mandate to look at that. So I don't know. Marelise?

Certainly not, Bongi.

Thanks. Thank you. Then [ Thomas Moyenkott ], independent investor, is asking, Bongi, what are the key requirements Nedbank has outlined in order for them to improve longer-term and lower-cost funding?

Okay. So we must remember that the lower cost funding, where the cost of the funding is as low as it can be because of our low interest rate environment. But what they have spoken to is the issues that you are all asking about, where are we in terms of the month-on-month leases? Our WALE, it doesn't look -- or the direction is not going correctly. Our LTV has got to come in and has got to be in line. So those are the things that they're looking for. And also, bearing in mind that we are month-on-month, they need to then get a sense of how do we calculate this income? How can we peg it? So that's what we're looking at, and that's what -- so it's not insurmountable, but it does need to work on our side, and that's what we are busy with.

Thank you very much, Bongi. James Dutton asks 2 questions. Can you please give more details around some of the risks around the business? I think you've touched on this in the presentation, specifically an update on the Orthotouch matter and the report -- reported NPI asset management claim of ZAR 400 million reported on this during the half year, but he's asking whether this has been resolved as there's no information in any of the year-end documents.

So Bongi, if I can maybe just talk to the risk. So we certainly have updated our risk register in our integrated annual report, and you will see that we have made -- what is very topical for us is it's reputational risk is a going concern. It is short-term leases, those kind of things. We certainly have touched on that, and I think we've given a lot of detail in our integrated annual report. And we have given detail as well regarding the Orthotouch matter in our integrated annual report on the financials. And Bongi, I don't know if you just maybe want to elaborate again on the NPI PAM Asset Management.

So sorry,Morné. What was the question? What's the status of that?

That's great, it is.

As I said before, remember, there was an article saying we, potentially, as Delta, of ZAR 400 million. One part is for asset management, and the second part was it was for property management or facilities management. And as part of the agreements that were signed way back then, it allowed for arbitration. And since the article in the press, we have sought the use of counsel. And there has been a few meetings, but it hasn't moved too far. A lot of it has been collating source documents, understanding this claim, but it's still at arbitration. -- which has been allowed. So we haven't provided for this yet because our lawyers are sure is that, at this stage, we should not -- and there's nothing to provide for. So we will keep everyone updated on this NPI PAM issue. However, it has not moved much since the headline that everyone saw. And -- okay.

Thanks. Thank you, Bongi. James is also asking what the total expense incurred on the litigation as well as the various forensic matters amounted to.

So if I can talk to that. So we have spent quite a bit of money on that. I can always get the exact amount that we spent. I think what is critical for us, though, is to understand that where we are at this point in time and what we're being faced with, there is going to be a bit of spend on legal expenses. And I think we certainly are spending the money because we are not going to leave any stone unturned. And I think it's critical for us to give our shareholders comfort that we are doing as much as we can in order to resolve those matters.

Thank you, Marelise. Then the last question is from Andrew Chen. He's asking -- have you looked at solar before as an alternative? And with 24 months paybacks, this should be explored, if you haven't done so.

Yes. Marelise, take that [ question ].

100%. Thank you. So yes, we have looked at solar. I think one thing that we maybe just need to understand about our portfolio is we have pretty much city center buildings -- We have some buildings outlying, and we had a look at specifically those outlying buildings, and we will be considering something there. But the majority of our buildings are rather large buildings that are not -- does not have -- it's a narrow building, so it doesn't have a very large foot plate. And as such, it doesn't give us sufficient generation from solar in order for us to really get a benefit from implementing solar.

Thanks. Thank you very much, Marelise. So that concludes our questions for this webcast.

Thank you, Morné.

Thank you, Morné. Thank you, everyone.