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Liberty Two Degrees eyes acquisitive growth

Listed property fund’s strong balance sheet and low loan-to-value ratio give it room to grow.

With one of the lowest loan-to-value (LTV) ratios in South Africa’s listed property sector, precinct and retail focused Liberty Two Degrees (L2D) is looking at acquisitions to grow the fund, but it wants quality assets that are in line with its portfolio.

Speaking on Monday at the group’s interim results presentation for the six months to June 30, L2D financial director José Snyders said the group has a very conservative LTV of 16% but is looking to increase this to around 35% over the long term.

“Our low LTV presents us with an opportunity to buy assets that match our business and strategy of investing in South African retail-focused properties. Our targeted long-term LTV level of 35% leaves ample headroom for acquisitive growth and we are evaluating a number of opportunities,” he said.

José Snyders, financial director at Liberty Two Degrees, speaking at the group’s interim results presentation on Monday. Image: Moneyweb

Snyders added that L2D is also looking at capital investments within its current portfolio so that it is well positioned once the South African economy returns to better growth.

L2D currently has a property portfolio valued at R10.2 billion that is made up of its 33.3% stake in the Liberty Property Portfolio (LPP), which includes super-regional shopping centres such as Sandton City and Eastgate. Liberty Holdings Limited owns the balance of LPP, however the portfolio is managed by L2D.

Despite owning stakes in flagship South African properties, L2D is comparatively smaller to some of its other retail-focused peers such as Hyprop and Vukile Property Fund. It is regarded as a mid-cap real estate investment trust (Reit) and has chosen to focus purely on the South African market.

Speaking to Moneyweb, L2D CEO Amelia Beattie would not comment on the properties the group is looking at acquiring. “We will buy quality assets at the right price and will not overpay for properties just to grow the size of the fund. Our property acquisitions will be evaluated on a case-by-case basis and we are not looking to take over another fund.”

Amelia Beattie, CEO of Liberty Two Degrees. Image: Moneyweb

Asked whether L2D is looking at incorporating residential into its mixed-use property precincts at Sandton City and Eastgate in the same vein as Melrose Arch, Beattie was non-committal. “We will have to look at each asset and whether increasing the mix to include residential will work. It will need to complement the precinct and needs to be demand-driven,” she said.

Net property income up nearly 24%

For its half-year L2D declared distribution of 29.31 cents per share, which was in line with its guidance. The fund’s net property income for the period was up 23.81% to R337.8 million, compared to R272.8 million in the prior corresponding period. Most of the increase in net property income was as a result of its acquisition of a further R1.4 billion stake in the Liberty portfolio in November. Excluding the acquisition, or on a like-for-like basis, net property income grew by 6.1%.

L2D used the net property income measure to report its interim results as opposed to the industry standard of distribution per share (DPS). This is because it only converted to a Reit last year. It is expected to report in the DPS measure in its 2020 financial year. On a net property income measure, it is forecasting growth of 6% to 7% for its 2019 full year.

Commenting on L2D’s interim results and considering existing market conditions, Beattie said the group’s performance is a testimony of portfolio quality and “solid fundamentals supporting our asset base”.

“We believe in the future of SA and remain true to our strategic direction of being an SA-focused fund.”

She says Sandton City delivered strong trading density growth of 6.8% for the period despite anchor tenant Checkers remaining closed for revamp and reconfiguration. Trading density growth across the L2D portfolio averaged 2.9%.

Vacancies up, but at a lower rate

On the retail side, vacancies were up from 1.2% as at end-December 2018 to 2.4% at end-June 2019. However, vacancies are still lower than the 4.3% retail vacancy rate in the corresponding six-month period ending June 2018.

Read: Failing retailers a headache for Liberty Two Degrees

Craig Smith, head of research and property at Anchor Stockbrokers, says L2D posted “fair” interim results given the tough trading environment.

“L2D is a focused fund and has spent capex to maintain and enhance assets. Trading density growth [tenant sales growth] was relatively strong in a weak market at 2.9%. L2D is on track to deliver on its full-year guidance of around 60 cents per share.”

Smith adds that with L2D’s gearing remaining low at a LTV of 16%, it is well positioned to make further acquisitions.

“In this environment having access to debt and headroom is a big advantage. L2D is in a relatively strong position given the fact that it has a strong balance sheet [low LTV]. Besides acquisitions, L2D may look at expanding its exposure to Melrose Arch and investing in residential at Sandton City, together with enhancement at some of its other properties,” he notes.

 

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Reading between the lines, Liberty will bleed assets to L2D to help them and L2D has no option but to grow through acquisition.

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