L2D’s Sandton City generates the “highest-ever” annual turnover during FY21

Sandton City

Retail-focused Liberty Two Degrees (L2D) has reported an improvement in its financial and operational metrics for the year ended December 2021 but recovery across its portfolio remains uneven with differing outcomes for certain sub-sectors.

2021 was a challenging year for the property industry. The retail sector has had to reassess its ability to address customer needs and to keep up with the evolving nature of their demands. Workplace practices have been reshaped with a focus on flexibility and safety yet with a requirement for ongoing collaboration. With cautious optimism, we remain purposeful in creating value for all stakeholders in our business”, says Amelia Beattie, Chief Executive of Liberty Two Degrees.

The primarily retail focused REIT continued to experience strong demand with occupancy across its portfolio which stabilised at 93.7% at yearend (June 2021: 93.7%, December 2020: 93.3%). Its retail portfolio saw a marginal improvement in occupancy to 96.8% (June 2021: 96.7%, December 2020: 95.3%), above the MSCI Q3 2021 retail occupancy benchmark of 94%. Over the year, Sandton City and Eastgate Shopping Centre improved their occupancies from 97.9% and 92.9% to 98.3% and 94.6% respectively.

L2D’s experiential retail offerings across its malls along with the easing of restrictions and the return of workers to offices in retail nodes, saw 22.9% more customers visiting its centres in Q4 2021 than in Q4 2020. Comparatively, this was only 3.4% below Q4 2019. The REIT’s analysis of foot count data indicates a shift in shopping patterns, with consumers spending more money over fewer visits to their malls with longer dwell times which translates into higher turnover.

Trading levels in its retail portfolio recovered well, and in some cases, to levels exceeding those experienced in 2019. Annual turnover for this sub-sector was 24.5% higher than in the comparable period, with turnover in Q4 up by 15.8% on Q4 2020 and 5.1% on Q4 2019. Sandton City and Midlands Mall recorded the largest increases in turnover in rand terms. Sandton City, which outpaced 2020 and 2019 annual turnover by 31.3% and 4.3% respectively, has generated the highest-ever annual turnover of c.R7.4 billion. Luxury brands, technology, and grocery categories, continued to show an exceptional recovery.

Serving a different catchment area, Eastgate’s recovery was slower which continues to apply pressure to achievable rentals. Various initiatives are in place to drive up turnover and dwell time at the centre.

The net property income contribution from the retail portfolio improved by 27.3%, an increase of R100 million when compared to 2020, but still below 2019 levels.

Beattie cautioned that “while retail shows promising recovery, sectors such as hospitality, food services, and offices, continue to bear the brunt of Covid-19 related restrictions and weak economic activity. The hospitality sector, which was impacted by the lack of business travel and conferences, remained under severe pressure thus constraining income from those properties. While it positions us for the upside as occupancies recover in line with the opening of business and travel sectors, our outlook for the sector remains guarded”.

The hospitality sector’s contribution to net property income was c.R65 million less than 2019 and R17 million less than 2020.

Property rates and utility cost hikes above inflation and rental growth rates remain a concern. Apart from greening and other initiatives to lower consumption, L2D is engaging alongside industry peers with the relevant authorities. L2D continues its discussions with the City of Johannesburg in respect of the finalisation of the valuation of Sandton City, against which an appeal has been lodged.

The rate of decline in the occupancy rate of the office portfolio slowed at 86.2% (June 2021: 86.6%, December 2020: 87.6%). While its occupancy remains above the MSCI Q4 2021 office occupancy benchmark, which fell to an all-time low of 84%, the outlook for the office rental market remains a concern due to oversupply and the change in usage patterns. L2D is working with management at Melrose Arch to find solutions for its high office vacancies.

During the year, 291 renewals and new leases were concluded, equating to 147 507m2 or 15.6% or total portfolio gross lettable area (GLA) (December 2020: 148 725m2 or 15.7%).

Financial overview

Speaking on the company’s financial review, Financial Director, José Snyders, highlighted that net property income improved by 19% on the prior period, benefitting from lower rental discounts, good containment of cost increases, and an improvement in credit loss provisions.

He cited the decline in the hospitality portfolio and negative lease reversions and utility cost increases that significantly outpace inflation and rental growth, will continue to add pressure on the outlook for income recovery.

Fair value adjustments include the positive R41.9 million mark to market on the interest rate hedges in place at the end of December 2021, and the property valuation write-down of R108.5 million. L2D’s property portfolio was valued at R8.4 billion at 31 December 2021. This is marginally down from the December 2020 valuation, following the significant write down of R1.7 billion in 2020. Values are based on independent property valuations.

Snyders highlights the group’s focus on its capital allocation and risk management strategy:”We continue to be prudent in allocating balance sheet capacity. With sufficient liquidity and remaining well within bank covenants, we have reported a loan-to-value of 23.87% (31 December 2020: 20.51%). Our interest cover ratio is healthy at 3.09 times, with 75.8% of the interest rate exposure being hedged.”.

Snyders says the company has successfully refinanced R500 million of term debt, which expired at the end of October 2021, for a further five-year term adding an additional R100 million term debt to fund any long-term capital commitments. A further R850million in term debt is up for refinancing in the third quarter of 2022.

Our Board is satisfied with our capital management efforts and that L2D will remain solvent and liquid, with a core business that is sustainable. With that, the L2D Board has declared a final dividend of 18.31 cents for the second half of the 2021 financial year, bringing the total distribution declared to 34.10 cents per share for the year ended 31 December 2021“.

The operational performance of the retail portfolio is encouraging, supported by quality assets which have shown their resilience which should underpin strong demand for L2D space and further improvement in turnover. However, uncertainty in the trading environment as well as the fragility of the South African socioeconomic environment is likely to continue to put pressure on certain categories of tenants. The strain in the office rental and hospitality sectors, together with negative rental reversions, is likely to slow our return to pre-pandemic levels of distributable income“, he concluded.