Liberty Two Degrees profit falls as debt costs rise
Interest expenses rise after it raised R1.5bn in debt, partly used to buy out its external management company
Liberty Two Degrees (L2D), says premium asset Sandton City, of which it owns a quarter, is outperforming other super regional malls which are losing tenants monthly and struggling to deliver trading density growth in excess of inflation.
Management said the strong performance from the iconic shopping centre had ensured it maintained its dividend payout while some of its peers saw dividends fall in the same period.
The company, also known as L2D, nevertheless still reported a fall in profit in its year to end-December after debt costs rose following a conversion to a corporate real estate investment trust (Reit).
Profit before tax fell 17% to R534.7m, partially because of interest expenses on debt raised in 2018, with the company’s full-year distribution up slightly to 60.43c from 60c previously, in line with its guidance.
L2D had previously warned distributions would be flat due to higher interest rate costs.
CEO Amelia Beattie said she was “very pleased” with what L2D's management team had achieved.
“The operating conditions for commercial property landlords are very difficult. A number of funds are seeing their dividends fall so to achieve the same level of dividend must be commended. Our malls are performing well in the weakest economic conditions in decades, especially Sandton City which stands out among its peers,” she said.
Sandton City achieved trading density growth of 9% which boosted the total trading density growth of its retail portfolio to 3.6%.
Retail vacancies remained low at 2.3% and below the South African Property Owners' Association sector average of 4.2%.
“We have a very strong leasing team which continues to do wonders,” Beattie said.
Retail leasing initiatives saw leases covering 149,101m² renewed in the period compared with 49,472m² in 2018.
Beattie said L2D might make acquisitions in the next financial year but it would be cautious while economic conditions were so weak.
As at December 31, 2019, L2D's South African property portfolio was valued at R10.27bn compared with R10.15bn the year before.
The company also raised about R1.5bn, partially to settle the purchase price for the acquisition of its then external management company, as well additional property assets it acquired.
It bought the external manager for R300m from Liberty, also acquiring R1.2bn in assets from the Liberty Property portfolio.
Since the listing of the company by parent Liberty Group in December 2016, fund managers have been critical of its external management company and complicated ownership structure, saying it has not created enough value to justify the fees it has received.
Headline earnings per share fell to 57.76c, from 59.86c previously, with interest expenses rising sharply to R145m, from R12.8m previously.
Arrears increased to 6.3% from 5.2% previously, with the company citing the difficult economic environment, which has particularly hit small independent retailers.
The predominantly retail-focused portfolio also includes interests in assets such as Eastgate Shopping Centre, Liberty Promenade and Melrose Arch.
Correction: February 24 2020
An earlier version of this article stated the Liberty Two Degrees dividend fell slightly, when it in fact rose.