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Liberty Two Degrees disappoints with maiden FY results

By Suren Naidoo

In its maiden full-year results, Liberty Two Degrees (L2D) delivered a lackluster 2017 performance, with 59.22 cents distribution per unit. This is over 5 cents below its initial forecast.

The SA real estate investment trust (REIT), which has stakes in iconic property assets like Sandton City and Melrose Arch, released its results for the full-year ending 31 December 2017 yesterday. L2D listed on the JSE in December 2016 as an offshoot from insurance and financial services giant, Liberty Group.

While its net asset value per unit increased by 22 cents to R9.86 and arrears decreased to 4.6% for the period, the vacancy rate across L2D’s portfolio was up to 6.4% from 4.6%. Vacancies were hit by the closure of Stuttafords, which had large store footprints at L2D’s Sandton City and Eastgate super-regional malls. The vacancy rate of 30% at its office properties within the Sandton City complex did not help, and saw overall office vacancies in the portfolio hit 10.3%.

Amelia Beattie, Chief Executive Officer of Liberty Two Degrees

Speaking at a results presentation, Amelia Beattie, Chief Executive Officer of L2D, stressed that the company had a robust portfolio with strong underlying property income growth. She said besides the negative impact of Stuttafords closure, distributions were affected by hikes in municipal rates as a result of an unexpectedly high municipal valuation of Eastgate shopping centre, as well as Liberty Group exercising a PUT option in July on shares worth R2.5bn.

“Our first year since listing was marked by numerous operational accomplishments as well as some headwinds, which included a challenging macroeconomic and political environment, the impact of the PUT option exercised by Liberty, the closure of Stuttafords and Eastgate Shopping Centre’s municipal valuation increase, all of which had an impact on our distribution,” commented Beattie.

“Following the decision by Liberty Group to exercise the PUT option in June 2017, our shareholding in the co-owned Liberty Property Portfolio increased from 22% to 31%. Our active asset management measures proved successful with the Stuttafords space now mostly let… Good letting activities which positively impacted on the trading environment as well as increased dwell times, set the platform for the fourth quarter of 2017, surprising on the upside. The portfolio trading density for the fourth quarter grew by 5.1% compared to the corresponding quarter in 2016,” she added.

National healthcare chain Dischem is set to become a new anchor tenant at both Sandton City and Eastgate. H&M is also set to open a major store in part of the space vacated by Stuttafords at Eastgate, while LC Waikiki and Pick n Pay Clothing will open new stores at Sandton City.

Eastgate shopping centre in Johannesburg, one of Liberty Two Degrees’ prime properties

Stuttafords had its flagship double level store at Sandton City. Beattie said before the department store’s closure, Sandton City had a zero vacancy rate. She said the closure had now opened up opportunities for new retail brands to come into Sandton City, thus broadening its retail mix.

On the office sector front, Beattie conceded that it “continued to see stress in the Sandton Central office market”. Sandton has seen explosive growth in new office developments.

While L2D has punted itself as a predominantly retail focused REIT, its office portfolio still makes up over 330,000sqm of its 871,000sqm overall portfolio. Its shareholding in the overall portfolio was valued at R8.71 billion at year-end.

Besides the Sandton City complex, Nelson Mandela Square, Eastgate and Melrose Arch, L2D’s property interests include Liberty Midlands Mall in Pietermaritzburg, Liberty Promenade Mitchells Plain in Cape Town and the newly developed Botshabelo Mall. Its other office assets include Standard Bank Centre in Johannesburg, Liberty Centre in Century City Office Park in Cape Town and Liberty Centre in Umhlanga Ridge, Durban. Also included is the John Ross Eco-Junction mixed-use development in Richards Bay.

Beattie said L2D continued to believe strongly in its South Africa only strategy, and was optimistic following the recent political changes in the country. “Despite the challenges impacting the business in 2017 we are on track to deliver net property income growth of between 7 and 9% in 2018, supported by the emergence of an improved trading environment in the second half of 2017. There are also green shoots in the SA economy. Our robust property portfolio is well positioned to show continued improvement,” she added.

L2D has forecast full-year distribution of 60 cents per share for the 2018 financial year.

Most analysts were disappointed with L2D’s results. Len van Niekerk, senior property analyst at Nedbank CIB, said: “The company’s maiden results were disappointing, especially considering it missed its forecast twice… L2D’s forecast for 2018 is only around 1.3% distribution growth, which is on the low end of the overall SA REIT sector’s performance.”

Nesi Chetty, head of listed property at MMI Investments, said: “L2D’s flat distribution is not great, but the results were in-line with market expectations… There were some one offs, such as the dilution from Liberty Group exercising its PUT option. The rates adjustment at Eastgate was a big negative.”

Going forward, Chetty said L2D was set for an improved performance. “It has good quality assets, which tend to be defensive. Sandton City, post the refurbishments, should attract higher footfalls and trading densities should pick up.”