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Liberty Two Degrees to write off remaining R17.5m Edcon stake

Full impairment comes after it initially pumped in around R25m as part of rescue effort.
Edcon's flagship 12 000sqm Edgars store at Sandton City. Image: Supplied

JSE-listed real estate investment trust (Reit) Liberty Two Degrees (L2D), which is part owner of major shopping centres like Sandton City and Eastgate, plans to effectively write off its remaining R17.5 million equity stake in embattled Edgars owner Edcon.

The group, which has a comparatively higher exposure to Edcon among South Africa’s Reits, on Friday confirmed the move in a pre-close statement. It comes after Edcon filed for voluntary business rescue in April, after the Covid-19 lockdown and initial restrictions to trade dealt a major blow to Edcon’s turnaround plans.

Read:
Edcon to file for voluntary business rescue
Major malls will still be hit hard if Edcon business rescue fails

“The investment in Edcon as part of the restructuring in 2019 is carried at a fair value of R17.5 million as at 31 December 2019. We are currently engaging with the business rescue practitioners but given information available at this time the investment will be fully impaired at mid-year,” L2D said in its JSE Sens pre-close statement.

As part of Edcon’s R2.7 billion rescue and restructuring agreement in March last year, L2D was one of the landlords to support the retail giant and initially invested around R25 million. However, by June last year, L2D wrote down the stake by 30%.

Now it plans to fully impair the equity stake – a move that L2D CEO Amelia Beattie tells Moneyweb she believes is “the right thing to do”.

“Edcon is currently in arrears for both March and April rentals [to L2D]…. And, considering that it is now in business rescue, we believe that the most prudent thing to do is to fully impair our stake in the group,” she says.

Beattie notes that the Reit has reduced its exposure to Edcon over the last year, from just over 4% of L2D’s total gross lettable area, to occupying 3.5% of its portfolio as at March 31 2020.

One of Edcon’s biggest store “downsizings” for instance has taken place at Eastgate Mall, where it has reduced the space of its Edgars outlet from two levels to one. However, at L2D’s landmark Sandton City shopping centre, Edcon still occupies around 12 000sqm of space for its flagship three-level Edgars store – its biggest store in the country.

Eastgate Shopping Centre, the super-regional mall owned jointly by Liberty Holdings and Liberty Two Degrees. Picture: Supplied

Lawrence Koikoi, portfolio manager at Momentum Investments, says L2D’s decision to fully impair its equity stake in Edcon “makes sense” given the financial position of Edcon. “I agree that it is a prudent move, especially in light of uncertainty around Covid-19 and Edcon’s future.”

He adds that the write down by L2D is small compared with the group’s overall strong balance sheet, with its loan-to-value (LTV) around 18%.

“L2D has one of the lowest LTVs in the South African Reit sector, which places it in a strong position to absorb some of the Covid-19 effects on the sector, including devaluations in commercial property values,” Koikoi points out.

Meanwhile, Beattie says the group’s low LTV will “serve L2D well in times like these”, referring to the economic uncertainty caused by the Covid-19 pandemic and lockdowns. She adds that L2D is “well capitalised” and the company is satisfied it has enough cash reserves and unutilised debt facilities to cover its commitments.

On the rental collections front, which has been a sticking point between the SA Reit sector and major clothing retailers, Beattie says negotiations via the Property Industry Group forum are still underway.

L2D has only collected 38% of rentals due for April, while it has received 45% of May rentals as of 25 May 2020.

Read: Property industry wants government mediation in retail rent dispute

“We expect this to increase based on the rental relief measures and with tenants now able to trade since the easing of the lockdown. Collection rates can be better assessed at [the group’s] half year, once we have processed the rental adjustments in June,” it points out in its pre-close statement.

“The rental collection rates are impacted by L2D’s large retail exposure of 84%, which has been the worst impacted sector during the lockdown, along with hotels and conventions centres. The collection rate is expected to improve in the second half of the year once tenants’ trading starts to normalise,” it adds.

Despite the gradual easing of lockdown restrictions, the group anticipates that the Covid-19 pandemic will impact its performance for the remainder of the 2020 financial year. Due to related uncertainty, the group withdrew its distribution guidance for the year in later March.

As of today, June 1, L2D is in a closed period. The Reit is anticipated to release its financial results for the six months ending June 30 2020 on July 27.

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