Property sales continue at Delta (JSE: DLT)

Two sales have been completed and new ones have been announced

Delta Property Fund has been trying to sell off properties as part of a need to urgently bring down the loan-to-value ratio in the fund. The deals don’t always close due to various conditions attached to the transactions, so it’s good to see that the deals for Anchor House and Thuto House (both in Bloemfontein) have now concluded and properties have been transferred.

A new deal has been announced in the form of 88 Field Street in Durban for R76 million. The non-refundable deposit is R3.8 million, so there’s still a long way to go from there. Guarantees for the remaining R72.2 million are due within 90 days from signature of the transfer agreements.

The property has a vacancy rate of 34.9% and net operating income of R6.5 million. It was valued at the end of February 2024 at R135.9 million, although achieving that number would require a huge improvement in the vacancy rate. The selling price of R76 million and the current net operating income implies a yield of 8.6%, so it feels like Delta is actually getting a decent price here considering the underlying performance of the building.

As Delta’s market cap is just R185 million because of the level of debt in the fund, this is a Category 1 deal that requires a circular to be issued to shareholders. It’s hard enough bringing the balance sheet in line. It’s even harder when the cost of doing each deal is so high due to the regulatory requirements. Such is life as a listed company though – if you want to step into that arena, you need to play by the rules.

The pressure was too much for Gemfields (JSE: GML)

They need to raise more capital from shareholders

Over the past year, when I’ve written on Gemfields, I’ve pointed out that the company has been busy with a high-risk capex programme at around the same time that market dynamics weren’t looking favourable. The share price is has lost nearly 60% of its value in the past year and this is a prime example of a dip that I avoided buying, as I felt that the underlying risks were just too great.

I’m glad I stayed out of the way. The share price dropped 23% on Friday to R1.16 in response to the release of poor results and the announcement of a rights issue to raise $30 million. The market cap is R1.35 billion, so that’s meaningful dilution for shareholders who don’t follow their rights.

The rights offer is priced at R1.07 per share, so the share is still trading above the rights offer price. The rights offer was set at a decent discount to the price before this drop, but much of the discount has now closed. This might be good news for the underwriters, as rights offers with smaller discounts tend to leave some crumbs on the table for the underwriters to pick up. Sure enough, there are two underwriters who have put their hands up: Assore International Holdings (AIH) and Rational Expectations, who are currently the largest shareholders in the company. Between them, the offer is fully underwritten.

Gemfields certainly needs the money. In fact, they need it so urgently that those two shareholders have put loans into the company for a total of $13.4 million. In case you’re wondering how that number was calculated, it’s the pro-rata share of the rights offer attributable to those two shareholders. Essentially, they are pre-paying their portion of the rights offer as a loan that will be set off against the rights offer proceeds later on. Then, if any of the rights aren’t taken up in the market, they are happy to take up more than their pro-rata allocation, which would mean a further cash injection.

To help you understand how Gemfields got into this kind of trouble, we can refer to the results for the year ended December 2024. Revenue fell by around 19% and although they did bring operating costs down slightly, it was nowhere near enough to save the EBITDA story. EBITDA margin was down sharply from 31.7% to 19.2%. By the time you reach the bottom of the income statement, you’re dealing with a headline loss per share of 2.1 US cents.

Perhaps most importantly, they’ve swung from net cash of $11 million as at the end of December 2023 to net debt of $80.4 million by the end of 2024. You can see why they need to raise cash, as relying on things like a potential sale of Faberge just isn’t certain enough. At this stage, they’ve only received non-binding offers for that business. The balance sheet is going to get worse before it gets better, with the circular for the rights issue noting that Gemfields expects to be in a net debt position of over $100 million once they’ve fully drawn down on their debt to meet ongoing capex requirements.

They certainly took the high-risk approach with this capex programme, leaving little margin for error or bad luck. Sadly, they’ve had plenty of difficulties that pushed them over the edge, ranging from an oversupply of Zambian emeralds through to fewer premium rough rubies in Mozambique and other issues.

Is it guaranteed that things will improve? No, definitely not. All you need to do is look at the diamond market to realise that products like emeralds and rubies aren’t immune to disruption or major changes to market dynamics. I would recommend referring to the detailed circular for the full picture of the risks and how the company is responding to them.

Vukile pulls the trigger on Forum Madeira in Portugal (JSE: VKN)

This is firmly part of the broader Iberian Peninsula strategy

If you’ve been following Vukile Property Fund, you’ll know that they have a 99.5% holding in Castellana Properties, their Spanish property investment vehicle. It’s a bit broader than just Spain actually, as Portugal has also caught the eye of South African property funds.

Vukile was an early adopter of the Iberian Peninsula trend, with more REITs now looking for opportunities in that region for much the same reasons that make Eastern Europe popular: these countries offer higher growth opportunities within the broader European safety net.

The latest such example is the acquisition of Forum Madeira in Portugal, a shopping centre on the island that features an open-air cinema. As you can guess, there’s a strong tourist element to this business model. The GDP of Madeira has grown at pretty epic levels and unemployment is down at 5.9%. They are loving the tourism story in Madeira and it sounds like a solid place to invest.

The property is being acquired for €63.3 million, so that’s a meaty price tag. The initial net operating income yield is 9.5%, reminding us once more than you can own a prime shopping centre in Madeira on a similar yield to the average buy-to-let residential property in South Africa. This is why I far prefer owning REITs to having direct property ownership. The property was independently valued in November 2024 at €72.8 million, so either they’ve gotten it at a discount or the valuation assumptions have deteriorated since then based on macroeconomic risks. It’s probably a bit of both.

It’s worth noting that Vukile isn’t going to have 100% of the earnings. Castellana is doing the deal through its 70%-owned subsidiary Caminho Propicio. This means that Vukile will control the centre through the structure, but will only enjoy 69.65% of the earnings (remember that there’s a tiny minority interest in Castellana as well). In case you’re wondering, the other 30% shareholder in Caminho Propicio is RMB, so Vukile is strongly in bed with its bankers.

The deal will be funded by in-country debt of €28 million, with the rest coming from existing cash resources. The loan-to-value ratio for the deal is therefore 38.5%. It’s interesting that they calculate the ratio based on the independent value of the property, not what they are actually paying for it.

Nibbles:

• Director dealings:
  • Des de Beer bought another R14.2 million worth of shares in Lighthouse Properties (JSE: LTE), so this has been another strong buying season for him.
  • A non-executive director of BHP Group (JSE: BHG) bought shares worth R4.1 million.
  • The CEO of Santam (JSE: SNT) bought shares worth R613k.

• Montauk Renewables (JSE: MKR) broke ground on a renewable natural gas landfill gas project in Oklahoma. They expect to invest between $25 million and $35 million in this project, with a target commissioning date in the first quarter of 2027.

• Due to the ongoing liquidation process and the fact that financials for the year ended June 2023 are still outstanding, Conduit Capital (JSE: CND) has renewed its cautionary announcement.