The trophy property asset in the Liberty Two Degrees portfolio – Sandton City – has yet again been the star performer for the JSE-listed real estate investment trust (Reit).
Despite competition from its nearest super-regional peers – Mall of Africa and Fourways Mall (now SA’s largest shopping centre) – Sandton City is holding on to its title as Joburg’s busiest mega mall.
Liberty Two Degrees (L2D) revealed in its full-year results ending December 31 2019 on Monday that trading densities at Sandton City had increased 9% last year.
Amelia Beattie, CEO of L2D, told Moneyweb following the release of the group’s results that Sandton City continues to outperform its newer super-regional competitors in the Joburg market.
Watch: Sandton City – L2D’s star performer
“Despite the overall tough economic and retail conditions in South Africa, Sandton City has outperformed the market by effectively more than doubling its trading density growth from 4% in 2018 to 9% in 2019. This was a very strong performance for our flagship retail property,” she said.
“Sandton City’s retail density growth boosted the over trading density growth of L2D’s retail portfolio to 3.6%. We have almost reached the R5 000-a-square metre milestone at Sandton City and its vacancies stand at a nominal 0.4%.
“The centre also saw impressive growth in footfall for Black Friday and continues to attract around 24 million shoppers and visitors annually,” she added.
Beattie noted that Sandton City had benefited from several new and upgraded stores including Checkers and a TFG’s flagship SportScene outlet.
L2D, which has a 100% South African property portfolio valued at R10.27 billion, reported total distribution per share (DPS) for the year at 60.43 cents per share, which was slightly ahead of its guidance.
It noted that overall portfolio valuations remained flat in comparison to the prior year, which reflected the “weak fundamentals” in the South African economy.
Despite delivering on its DPS target, the group’s profit before tax decreased to R534.7 million for its 2019 financial year (2018: R646.8 million). Headline earnings per share decreased slightly to 57.76 cents (2018: 59.86 cents).
The group noted that the decreases were expected as a result of the full-year interest expense related to around R1.5 billion in debt raised in 2018. The debt was used to buy out its external management company and for further property acquisitions from Liberty Group.
With L2D’s Loan-to-Value (LTV) ratio remaining conservative at 16%, the group pointed out that it will consider acquisitions that fall in line with its “precinct focused and retail-centred REIT” strategy. It noted that 75% of its interest rate exposure was hedged as at December 31 2019, while the group achieved an interest cover ratio at 4.68 times for the period.
“Our targeted long-term LTV level of 35% leaves headroom for considered acquisitive growth whilst mitigating risk in a strained economic cycle,” said José Snyders, L2D’s Financial Director.
“Costs were well managed across the portfolio during the period, however municipal and utility costs increased substantially ahead of inflation and remain a challenge,” he added.
Besides stakes in Sandton City, Nelson Mandela Square, Melrose Arch and Eastgate Shopping Centre in Joburg, L2D’s other retail properties which are largely owned with Liberty Group, include Liberty Midlands Mall in Pietermaritzburg and Liberty Promenade in Mitchells Plain in Cape Town. The group also owns stakes in several office properties and landmark hotels in SA.
Commenting on L2D’s performance, Anchor Stockbrokers real estate analyst Pranita Daya notes that the group’s 2019 results were broadly in line with expectations.
“The results are reflective of the tough South African macroeconomics [increasing vacancies, deteriorating reversions]. However L2D have managed to deliver sound results given their sole exposure to SA, with no offshore relief as some other counters enjoy.
“In our view, it is still a high-quality portfolio which has performed relatively well given the tough retail trading environment,” she says.
“Sandton City continues to be an extremely strong performer, having sustained 9% trading density growth with contained vacancies at marginal levels…. L2D still has the benefit of a low LTV ratio in a sector with elevated gearing levels, however acquisitions of any quality low-yielding assets would be dilutive to earnings.”
Daya points out that the fund’s office portfolio “remains a detractor” to growth. “This is aligned to other SA peers with office being the most challenged sector at present, mainly as a result of an extreme oversupply in the market – especially in Sandton.”