Liberty Two Degrees (L2D), the JSE-listed South African retail centre focused real estate investment trust (Reit), improved occupancies in its retail portfolio to 96.7% in the six months to June despite the negative impact of the Covid-19 pandemic lockdowns.
However, L2D experienced negative rental reversions in its retail and office portfolios.
L2D CEO Amelia Beattie said on Monday that 79 renewals were concluded in the first six months of 2021, with 69 in the retail space and 10 office deals, equating to 23 803m2 of the total gross lettable area.
The office portfolio occupancy has declined marginally to 86.6% (from 86.8% in March 2021 and 89.9% in June 2020) but remained above the SA Property Owners Association (Sapoa) office benchmark of 85% in the second quarter of 2021.
The occupancy rate of L2D’s overall portfolio improved to 93.7% from 93.3% in December 2020.
Beattie said fortunately none of L2D’s properties were damaged in the recent unrest and looting.
“We closed Midlands Mall for four days just as a precaution but other than that did not have any specific damage,” she said.
Beattie said there were 26% negative reversions on the about 14 000m2 of retail space renewals, driven largely by the about 5 000m2 that was renewed at Sandton City and Eastgate.
She said the negative rental reversion was only 3% at the Promenade Shopping Centre in the Western Cape while a 9.5% positive rental reversion was achieved at the Botshabelo Mall.
“It just depends on what the trading environment looks like, who the actual tenants are, what type of impact the Covid-19 lockdowns had on their businesses over the last while and what the outlook is for them in time,” she said.
Office space outlook
Beattie said the negative rental reversions were smaller in the office portfolio than in the retail environment and believes people will eventually return to offices following the Covid-19 pandemic, but on a more flexible basis.
“Our biggest reversions are happening at Melrose Arch [and] at the Atrium On 5th where we had 2 500m2 renewed and it was only 4% lower than we had previously,” she said.
L2D chief operations officer Jonathan Sinden said the Reit’s larger retailers indicated during a recent L2D retail roadshow with its 10 biggest retailers and a few other important tenants that they are looking to expand their space in good retail environments.
Sinden said these tenants are opportunistically using the Covid-19 pandemic and the fact that there is a lack of demand for space to get more space in retail environments.
“From the discussions we have had with them, be it Pepkor, Mr Price, Clicks, Dis-Chem or Truworths, they are all very positive and it shows that our environment has a certain level of quality that they need to be resident in,” he said.
L2D financial director José Snyders said there has been a slight improvement in L2D’s rental arrears book in terms of its age, and the actual loss provisions for debt outstanding has marginally improved.
Snyders said there was a release of R5 million in those provisions on the income statement compared to December 2020 but L2D subsequently made additional provisions in light of the most recent lockdown and the impact that will have on restaurant trading in the last month.
He said the overall bad debt provision at end-June was R62 million.
Tenants in business rescue
Beattie said its two biggest tenants in business rescue at the moment are Ster-Kinekor and CNA, while there are also a few other smaller tenants in business rescue, including Pringle and House of Busby.
Sinden said House of Busby had been rescued by FrontierCo and L2D is negotiating deals with it.
“They have taken over Queenspark, Pringle and I think its Destinations and a few other travel stores that have been rescued. That is fine and we are on track there.
“We have demand for CNAs and most of their premises will be taken over by PNA.
“Ster-Kinekor is in business rescue. There are two other players in the industry that can take over that particular brand, Avalon and NuMetro.
“NuMetro is in dire straits. But Avalon is waiting in the wings and we will pick the best of the best if it goes down that route or Ster-Kinekor will take that over as a new business entity,” he said.
L2D’s reported net property income grew 19% to R240.7 million in the six months to June from R201.8 million in the prior period.
The property valuations are reflective of the current environment with property investment being inherently cyclical in nature. At June 30, L2D’s independent valuers valued L2D’s 100% South African property portfolio at R8.5 billion compared to R8.7 billion in June 2020, following the significant write-down of the property portfolio valuation by R1.7 billion in 2020.
A distribution of 15.79 cents per share was declared.
Beattie said the outlook for the industry remains very uncertain as it grapples with the continuing risks from the Covid-19 pandemic and, given this context, L2D remain cautious and realistic, and its board has therefore decided against providing earnings and distribution guidance for the remainder of the 2021 financial year.
However, Beattie said L2D’s quality assets have continued to deliver good operational performance and even when it is among the hardest hit by the pandemic “it comes back”.
“One of the most important messages for me today is that with a vacancy level of less than 3% in our overall retail portfolio at a time like this, we don’t have to think about whether retail is good or not or whether super regionals [malls] are dead or not.
“The fact is that we have filled the space and new tenants are continuing to want to be in these environments,” said Beattie.
“That Chanel has just opened in Sandton [and] Adidas spent about R40 million on their store in Sandton point to the fact that good quality environments that are looked after and are in good locations will be the place that retailers will want to continue to showcase their brands in.”
Listen to Suren Naidoo’s interview with L2D CEO Amelia Beattie (or read the transcript here):
Pranita Daya, a real estate analyst at Anchor Stockbrokers, said L2D’s financial results were broadly aligned to expectations.
Daya said negative reversions are likely to persist in certain assets as leases expire and rebase, although they expect the magnitude of the negative reversions to taper off over the next 12 months.
“The recent civil unrest may result in increased short-term footfall in urban retail centres, which may be perceived as a safer shopping environment versus peri-urban township retail centres, which were the most impacted.
“These centres would also have less interruption to trading from damaged stores and reconstruction, which may bolster short-term footfall,” she said.
Shares in L2D rose 2.92% on Monday to close at R4.94.