Sandton City mall owner Liberty Two Degrees released its half-year numbers before the opening bell this morning, with the landlord showing improved performance against the prior period, despite revenue being lower. The commentary provides insight into the tough operating landscape amongst all South African property owners, with significant negative rental reversions in the retail (26%) and office (21%) space. The prospects, however, look encouraging. Operating indicators such as foot count seems to be rapidly increasing, allowing for better trading conditions for tenants. Payment holidays and rental relief seem to be slowly coming to an end. The sign posts are encouraging but there is still a lot of uncertainty – and a lack of business and consumer confidence given the events of a fortnight ago. – Justin Rowe-Roberts
Liberty2Degrees SENS statement:
Summarised group results for the six months ended 30 June 2021
- Providing safe spaces our people, customers, tenants and shareholders remains a priority;
- Retail occupancy rate improved to 96.7%;
- Material leases concluded 20 303 m2 in new deals and 23 803 m2 in renewals;
- Strong balance sheet – loan-to-value ratio of 23.97%;
- Net asset value per share at 30 June 2021 of R7.62 supported by independent valuations;
- Positive trend in monthly turnover growth in 2021; and
- 100% distribution pay-out of 15.79 cents.
The comparative half-year results must be seen within the context of strong trading in the first quarter of 2020, followed by the impact of the first lockdown; this severely affected trading and necessitated rental rebates and discounts for the remainder of the year. The steady recovery in trading in the first half of 2021 allowed a consequent reduction in rental rebates and discounts. Accordingly, the interim periods are not directly comparable, and in some cases, we refer to 2019 as a base. We saw a monthly improvement in operational performance in 2021, despite the uncertain socioeconomic environment. Key operational indicators, including customer visits to our malls, tenant occupancies, rental collections, turnover growth and occupational health and safety, have been encouraging. We continue to work with our security team, business partners and government to safeguard our assets, and with our tenants and customers to restore confidence.
The first six months of the year showed promise, buoyed by the easing of restrictions from March 2021, with a steady improvement in footcount and turnover at our malls. This encouraging start to the year contributed to better occupancy rates and good leasing activity in the period. Pleasingly, we saw an improvement in the rental arrears position, with almost all rental relief negotiations related to the 2020 period now concluded. However, the impact on the economy of the ongoing Covid-19 pandemic, along with the recent social unrest, are contributing to a difficult trading environment for the property sector.
Despite challenging trading conditions, demand for L2D space remains strong. Portfolio occupancy improved to 93.7% at June 2021 (December 2020: 93.3%). This highlights the portfolio’s resilience and our ability to attract new tenants, especially in the retail portfolio. At June 2021, the retail portfolio occupancy rate had improved to 96.7% (December 2020: 95.3%), remaining ahead of the MSCI Q1 2021 retail occupancy benchmark of 93.2%. The office sector remains under pressure, however, with the industry oversupply further impacted by the shift to working from home. Office occupancies declined to 86.6% at June 2021 (December 2020: 87.6%) but remain above the SAPOA Q2 2021 office occupancy benchmark of 85%. Our leasing strategy continues to pay off, with 133 leases (renewals and new deals) concluded in the first six months, equating to 44 106 m2. Rental reversions remain negative for both the retail and office sector, down 26.6% and 21.0% respectively; however, these are slightly ahead of our expectation for the year. The negative reversions are due to the challenging operating environment as a result of the ongoing Covid-19 impact.
The retail portfolio showed significantly better turnover and footcount over the period following the easing of the lockdown restrictions. The latest monthly turnover data is provided for May 2021. L2D’s turnover after the hard lockdown grew consistently over the first five months of the year. Tenant trading and turnover showed a positive trend, with monthly turnover up 88.1% and 3.7%, compared to May 2020 and May 2019 respectively.
Monthly trading density in May 2021 grew 50.2% and 5.2% compared to May 2020 and May 2019 respectively. Portfolio footcount followed a similar recovery, up 106% and 55% in May and June 2021, compared to May and June 2020 respectively. Improved rental collection supported good cash flow management. Based on the full amounts due and before any rental relief, rental collections showed monthly increases and reached 112% in June 2021. The high collections in June were a result of the settlement of arrears balances as further rent relief negotiations were finalised. At 30 June 2021, 93.2% of negotiations with tenants related to the 2020 period had been concluded (December 71.7%). We continue to provide critical focus and support for tenants most affected by the ongoing Covid-19 pandemic, largely in the restaurant, fast-food, hospitality, gyms and entertainment categories.
The hospitality sector continues to be severely impacted. Only the Sandton Southern Sun hotel is trading, while the Sandton Convention Centre closed following the move to adjusted level 4. This continues to negatively impact the rental income derived from these operations.
Balance sheet and portfolio valuation
Our conservatively managed balance sheet is one of our key strengths. With an LTV of 23.97% at 30 June 2021 (31 December 2020: 20.51%), we have sufficient liquidity and remain well within our bank covenants. Our interest cover ratio is healthy at 3.4x with 79.2% of our interest rate exposure hedged. The average cost of debt remains relatively low at 7.92%. Total unutilised revolving credit facilities amounted to R247 million at 30 June 2021.
L2D’s property portfolio was valued at R8.5 billion at 30 June 2021. This is marginally up from the December 2020 valuation, following the significant write down of the property valuation by R1.7 billion in 2020. The values are based on independent property valuations performed at 30 June 2021, which is in line with L2D’s policy to have external independent valuations performed at both the interim and final reporting date. The Standard Bank Centre has been classified as a non-current asset held for sale and is reflected at net selling price, following the signing of a binding offer to purchase. The divestment process is underway. L2D’s net asset value per share at 30 June 2021 was R7.62.
The revenue decline of 8% compared to the prior year period is mainly as a result of the ongoing closure of the hospitality sector and the Century City sale.
Reported net property income (NPI) grew 19% compared to the comparative period. The improved trading environment resulted in lower levels of rental discount in comparison to the prior period. Coupled with lower vacancies, this resulted in improved rental revenue, albeit off a lower base given the impact of hard lockdowns on rental revenue in the comparative period. On a net basis, lower utility consumption and other cost reductions contributed to savings in property operating expenses, which bolstered NPI for the six-month period. Above-inflation increases in rates and municipal charges remain a concern.
Profit from operations of R215.2 million was up 18% compared to the prior year period. Lower operating costs in line with our strategic response to Covid-19 supported this result. Net interest expense decreased 9% from 30 June 2020 due to the lower JIBAR base rate for floating rate debt. Fair value adjustments include the positive R29.2 million mark to market on the interest rate hedges in place at the end of June 2021, the marginal property valuation uplift of R1.8 million in June 2021, and a R6.8 million adjustment for the straight-lining of operating lease income. The taxation expense of R7.5 million resulted from temporary differences on the deferred tax asset gradually unwinding as provisions are utilised. Including positive fair value adjustments of R37.8 million (30 June 2020: negative R1.5 billion), we recorded profit after taxation of R174.4 million for the six months ended 30 June 2021 (30 June 2020: R1.4 billion loss due to the devaluation of the property portfolio).
The Covid-19 third wave, coupled with the recent spate of social unrest, has made the outlook for the rest of the year more uncertain. Given this context, the board has resolved not to provide earnings and distribution guidance for the remainder of the 2021 financial year.
The safety, security and wellbeing of our employees, customers, tenants, service providers and other stakeholders remains our top priority. Despite the climate of uncertainty, our quality assets and tenants should continue to underpin resilient demand for L2D space and trading levels, as evidenced in the first half of the year. The focus of our capital and risk management strategies will be to protect and preserve our balance sheet and control costs, while we carefully pursue the growth opportunities aligned with our strategic value drivers. We have a clear and focused operational strategy, grounded in property fundamentals, and we remain committed to executing our business in a sustainable manner and remaining flexible as we rebuild for growth.
In the light of the improved trading performance and the strength of the balance sheet, the board has declared a mid-year distribution of 15.79 cents per share. No interim distribution was paid in 2020.
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