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Failing retailers a headache for Liberty Two Degrees

Retail vacancies down and trading densities up as space vacated by Stuttafords is filled.
L2D CEO Amelia Beattie says the recovery strengthens the group’s vision of being SA’s leading precinct-focused, retail-centred Reit. Image: Moneyweb

JSE-listed mid-cap real estate investment trust (Reit) Liberty Two Degrees (L2D) turned around trading operations at its flagship Sandton City and Eastgate shopping centres during 2018, which helped it deliver distributions in line with its guidance for the full year.

The group on Monday morning declared total distributions for the year ending December 13, 2018, at 60 cents per share. This was in line with its 2017 financial year, however it was L2D’s operational performance in the face of a tough SA retail environment that pleased analysts.

Management slashed retail vacancies within its portfolio from 4.3% in 2017 to 1.2% last year. The largely retail-focused Reit gets over 80% of its income from its 523 000 square metre retail portfolio. Retail assets make up more than half of its overall R10.5 billion property portfolio. Vacancies within its overall portfolio decreased from 6.4% to 3.4%.

L2D was badly affected by the closure of Stuttafords, which saw vacancies at Sandton City and Eastgate hitting 4.8% and 7.8% at the end of 2017 respectively.

The space previously occupied by Stuttafords was fully let during 2018, with virtually no retail vacancies at Sandton City, while Eastgate sits at a low 1% vacancy.

“We have delivered strong operational performance despite tough local economic conditions,” Amelia Beattie, CEO of L2D, told analysts at the company’s results presentation at the JSE. “Besides bringing down vacancies significantly, the overall trading density within our portfolio is up 2.9% for the 2018 financial year. In 2017 trading densities declined 3.6%.

L2D share history

“This recovery speaks to the quality of our portfolio at L2D, which includes some of South Africa’s most iconic properties,” she added. “It also strengthens our vision of being SA’s leading precinct-focused, retail-centred Reit. We remain firmly SA-focused and are up for the challenge in a continuously changing and dynamic retail environment.”

End of speculation

That statement from Beattie ended any speculation as to whether L2D would follow other South African retail-focused Reits, such as Hyprop and Vukile Property Fund, in pursuing lucrative offshore growth opportunities.

While Beattie was bullish about L2D’s operational performance going forward, she did concede that distributions would still be under pressure due to tough local conditions and concerns around embattled retailer Edcon. She said the group is thus looking at dividend growth of zero to 2% for its 2019 financial year, which takes closures and restructuring at Edcon into account.

“At L2D we have survived Stuttafords and let out all their space. We bravely believe that if such an event occurs again, we will get through it … Everyone is asking about Edcon. We have about 5.3% of our retail space let to Edcon and we’ve agreed with them to reduce this to around 4.3%. We believe in Edcon’s turnaround plans and think it is on the right course.”

Office space

While L2D has recovered on the retail property front, its office properties in Sandton are still struggling with high vacancies. The group’s overall office vacancies have come down from 10.3% in 2017 to 8% at the end of 2018, but its Sandton City office towers still have vacancies of 25.5%. This asset did however have worse vacancies in 2017, at 30%.

L2D listed on the JSE in December 2016 as a property offshoot from insurance and financial services giant Liberty Group. It owns a 33% stake in Liberty Group’s flagship property assets, including Sandton City and its related properties like Nelson Mandela Square, Sandton Convention Centre and the adjacent Tsogo Sun-managed hotels; Eastgate Shopping Centre, Liberty Midlands Mall in Pietermariztburg; Standard Bank Centre in the Joburg CBD; Century City Office Park in Cape Town; and Liberty’s regional office building in Umhlanga Ridge.

Commenting on L2D’s performance, Nesi Chetty, head of property investments at Momentum, says it’s an “okay” set of results: “Key for L2D was to implement the corporate restructure last year into a Reit. They would have worked hard to get the vacancies down to 3%. The group’s balance sheet looks a lot stronger as well, with a loan-to-value ratio of 16%.”

He adds: “However, no offshore exposure means L2D is still exposed to a fairly weak consumer in SA and it also has some Edcon exposure. Growth will have to come from L2D’s standing portfolio, but with its low gearing, the group could look at small acquisitions.”

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