Retail centred REIT, Liberty Two Degrees (L2D) has released its interim results for the period ended June 2021, declaring a full pay-out of the mid-year distributable income of 15.79c per share.
The comparative half year results must be seen within the context of strong trading during the first quarter of 2020 followed by the impact of the first lockdown which severely affected trading and led to rental rebates and discounts which continued during the remainder of the year and into 2021.
“Taking the uncertain and tough environment into account, we understand that recovery is a progressive endeavour and that it will take time. We are however encouraged, despite the climate of uncertainty, by the resilient demand for space in our environments as well as the recovery in the trading levels, as evidenced in the first half of the year” comments Amelia Beattie, L2D Chief Executive.
“The focus of our capital and risk management strategies will be to protect and preserve our balance sheet and control costs, while we carefully pursue the operational growth opportunities aligned with our strategic value drivers. We have a clear and focused strategy, grounded in property fundamentals, and we remain committed to executing our business in a sustainable manner, remaining adaptive as we rebuild for growth.”
The first six months of 2021 showed promise, buoyed by the easing of lockdown restrictions from March 2021 which resulted in sustained improvement in foot count and turnover at L2D’s malls. This also contributed to better occupancy rates and good leasing activity during the period, with demand for space remaining strong.
L2D’s retail portfolio achieved an occupancy of 96.7% which remains ahead of the MSCI Q1 2021 occupancy benchmark of 93.2%. This was largely driven by the experiential store openings such as Sandton City officially opening the new Adidas Halo flagship store complemented by the opening of the Gap store within a few weeks. Eastgate Shopping Centre’s Value Co tenant took beneficial occupation during the period and Nelson Mandela Square has also made strides with tenant openings including Tang, Style Loft, and Luxity.
The office portfolio has marginally declined from 86.8% in March 2021 to 86.6% in June 2021 (Dec 2020: 87.6%, June 2020: 89.9%). The overall decline equates to an additional net vacancy of 361m2. However, this remains above the SAPOA Q2 office benchmark of 85%.
L2D’s overall portfolio occupancy sits at 93.7% compared to 93.3% in December 2020. The company’s leasing strategy has delivered good results as tenancies continue to enhance the customer experience, providing an interactive and unique product offering that aligns to shoppers’ needs. Reversions remain negative during the period.
79 renewals have been concluded in the first six months of 2021 with 69 in the retail space and 10 office deals which equates to 23 803m2 of the total gross leasable area (GLA). An additional 35 new deals were secured across the portfolio since March 2021, taking the total new deals to 54 (20 303m2) which is made up of 44 retail and 10 office deals.
A steady improvement in trading was experienced across the assets, showing a positive trend in monthly turnover and foot count for the first time in 2021 versus pre-Covid-19 levels. L2D recorded a positive trend in monthly turnover of 3.7% and 88.1% compared to May 2019 and May 2020 respectively.
For the first time in 2021, growth was generated compared to pre-Covid-19 comparative levels at 3.7% in May 2021. The portfolio foot count continued in a similar recovery trend to turnover with foot count for May and June 2021 up by 106% and 55% compared to May and June 2020 respectively. When comparing the foot count to 2019, May 2021 was down by 1.6% while June was more impacted by the third wave and subsequent adjusted level 4 lockdown resulting in a decrease of 11.7%.
The REIT reported net property income growth of 19% compared to the prior year buoyed by a relative improvement in credit loss provisions between the two periods. L2D continues to experience pressure on rentals especially for income streams related to hospitality, entertainment, and restaurants.
“Our balance sheet capacity remains a key differentiator in enabling our ability to support our tenants through this volatile time. With a loan-to-value (LTV) of 23.97%, our conservative gearing provides a buffer in navigating the impact of the current economic climate” adds José Snyders, L2D Finance Director.
Liquidity in the business has been supported by improved rental collections based on the full amounts due and before any rental relief which continued to show monthly increases, reaching 112% in June 2021. Tenant support and sustainability remains a critical focus for L2D, and the company continues to work with the tenant categories most impacted.
“In lease renewals over the period, we have remained focused on creating a sustainable rental base to grow from as the economy recovers “We have developed several lead indicators to assist with understanding the risk of tenant failures and we will remain close to our tenants to ensure we get the best outcome for the portfolio” Snyders adds.
The property valuations are reflective of the current environment with property investment being inherently cyclical in nature. As of the 30th of June 2021, L2D’s independent valuers valued L2D’s 100% South African property portfolio at R8.5 billion (30 June 2020: R8.7 billion), a marginal increase from the December 2020 valuation, following the significant write down of the property portfolio valuation by R1.7 billion in 2020. Net asset value per share decreased from R7.72 in June 2020 to R7.62 in June 2021 due to the payment of the interim distribution as well as the distributable income for the interim period. Expense growth outside of municipal charges remained well contained, it remains concerning however that rates and municipal charges continue to track ahead of inflation.
“Looking ahead, the outlook for the industry remains very uncertain as we grapple the continuing risks from the Covid-19 pandemic. Given this context, we remain cautious and realistic, and the board has therefore resolved not to provide earnings and distribution guidance for the remainder of the 2021 financial year”.
“It also remains a difficult time with the ongoing impact of Covid-19 on the lives and livelihood of people and our deepest thoughts are with everyone that lost loved ones and colleagues during this time”.
“We do however believe there will a better tomorrow in time as more of the vaccines against the Covid-19 pandemic are administered – but the positive impact on the portfolio will not be seen immediately and will take time. We remain committed to executing our business in a sustainable manner with the ability to adapt where required as we rebuild for growth” Beattie concludes.