Wrap Text
Summarised annual results for the year ended 31 December 2017
Liberty Two Degrees
JSE share code: L2D ISIN: ZAE000230553
(Approved as a REIT by the JSE)
("Liberty Two Degrees")
a portfolio established under the Liberty Two Degrees Scheme,
a Collective Investment Scheme in Property established in terms
of the Collective Investment Schemes Control Act, No. 45 of 2002,
as amended, and managed by STANLIB REIT Fund Managers (RF) Proprietary
Limited
(Registration number: 2007/029492/07)
("the Manager")
SUMMARISED ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2017
Highlights
FULL YEAR DISTRIBUTION OF 59.22 cents PER UNIT
NET ASSET VALUE PER UNIT INCREASED TO R9.86
ARREARS DECREASED TO 4.6%
CAPITAL DEPLOYED INTO 95%
DIRECT PROPERTY INVESTMENTS.
BALANCE SHEET HAS SIGNIFICANT GEARING CAPACITY.
Commentary
Profile
Liberty Two Degrees ("L2D"), a subsidiary of Liberty Holdings Limited, is a portfolio established under the Liberty Two Degrees Scheme ("the
Scheme") in terms of the Collective Investment Schemes Control Act, 2002 (Act No. 45 of 2002) ("CISCA"), as amended, to afford investors
growth in income and capital by investing at fair prices in a balanced spread of immovable properties and related assets as permitted by the
L2D Trust Deed. L2D is required by CISCA to be structured as a JSE-listed portfolio within a trust with an external independent trustee and
an external management company. The Scheme is managed by STANLIB REIT Fund Managers (RF) Proprietary Limited ("the Manager"),
and the appointed external independent trustee is FirstRand Bank Limited acting through its RMB Trustee Services Division. The Manager
has also been appointed as the asset manager of Liberty Group Limited ("LGL")'s interest in the Liberty Property Portfolio ("LPP").
At 31 December 2017, L2D's defensive and 100% South African direct property portfolio was valued at R8.71 billion (FY2016: R6.06 billion)
following the acquisition of a further 9% of the co-owned LPP for an amount of R2.51 billion, pursuant to LGL exercising its put option
("Put Transaction"), with effect from 1 July 2017 (as previously announced on SENS on 26 July 2017).
L2D is listed on the Johannesburg Stock Exchange ("JSE") with a market capitalisation of R7.6 billion at 31 December 2017
(FY2016: R9.5 billion) and is included in the South African Listed Property index ("SAPY").
L2D's portfolio strategy
L2D's strategy remains anchored on:
- an iconic retail focused, precinct driven real estate portfolio with a mix of defensive anchor assets which are supplemented by growth
from selected developments;
- focusing on enhancing growth opportunities in South Africa;
- maintaining industry leading operational metrics and prudent balance sheet management to support future returns; and
- evolution and growth of the portfolio by the management team whilst benefiting from a proven track record, industry expertise and
familiarity with portfolio assets.
Financial results
L2D reported net property income of R429.1 million for the year ended 31 December 2017 after taking into account the additional 9%
of the co-owned LPP assets. Including interest income and fair value adjustments total earnings came to R514.8 million. Interest income
accounted for c. 16% of gross income versus the pre-listing forecast of c. 27%. The decrease is largely attributable to the switch from
interest income to property income as result of the mid-year acquisition. Despite the adverse economic climate the arrears decreased to
4.6% (FY2016: 4.8%) and management are starting to see slightly improved trading data. L2D's board of directors of the Manager
("the Board") has declared a full year distribution of 59.22 cents per participatory unit ("unit"). An interim distribution of 30.00 cents
per unit was declared and paid in respect of the six months ended 30 June 2017. A final distribution of 29.22 cents per unit for the
six months ended 31 December 2017 has been declared. The full year distribution is lower than the pre-listing statement forecast mainly
due to the interest differential on the Put Transaction, the impact of the Stuttafords closure as well as the unexpectedly high
Eastgate municipal valuation and its consequential impact on rates.
L2D currently has no interest-bearing debt and will be able to take on debt (in line with its trust deed and considering market norms) to fund
future acquisitions, as appropriate.
Changes in fair values
L2D's property portfolio was valued at R8.71 billion by external independent registered valuers on an open market value basis at
31 December 2017. In total, investment properties increased by R2.65 billion as a result of the acquisition of a further R2.51 billion of the
LPP, as well as capitalised development and maintenance capital expenditure. The overall fair value adjustment resulted in a net decrease
of R25 million. In terms of IAS 40 and IFRS 13, L2D's investment properties are measured at fair value through profit or loss using valuation
inputs which are categorised as level 3 on the fair value hierarchy. There were no transfers between levels 1, 2 and 3 during the period.
Property portfolio
The portfolio vacancy rate increased during the year to 6.4% (FY2016: 4.6%). The Stuttafords space has been mostly let.
Leases covering 67 631m2 were renewed during the year at an overall reversion rate of 2.7%. A further 41 078m2 in new tenant deals were
concluded across the portfolio during the period.
Arrears decreased to 4.6% (FY2016: 4.8%) of the collectable book debt. The marginal decrease in arrears is encouraging given the tough
economic environment.
Gross lettable area(1) Gross lettable area
Geographic profile (m2) (%)
Gauteng 675 180 77.5%
Western Cape 92 588 10.6%
KwaZulu-Natal 83 385 9.6%
Free State 20 390 2.3%
Portfolio 871 543 100.0%
Gross lettable area(1) Gross lettable area
Sectoral profile (m2) (%)
Retail 500 973 57.5%
Office 332 290 38.1%
Specialised 38 280 4.4%
Portfolio 871 543 100.0%
(1) L2D owns a 31% undivided share of the properties as at 31 December 2017.
Gross lettable area - 2017
Portfolio Portfolio Gross lettable
excluding including Portfolio area
Vacancy profile % Stuttafords pre-lets 2017(1) 2016(1)
Office 10.3 9.7 10.3 9.6
Retail 1.2 3.7 4.3 2.5
Portfolio 4.6 5.8 6.4 4.6
(1) Vacancy excludes pre-let deals.
Lease expiry profile - gross
lettable area % Vacant Monthly(1) 2018 2019 2020 2021 2021+
Office 10.3 5.7 9.5 36.3 10.6 6.6 21.0
Retail 4.3 4.9 11.5 18.0 11.7 14.3 35.2
Specialised - - 2.8 15.8 4.8 11.2 65.4
Portfolio 6.4 5.0 10.4 24.9 11.0 11.2 31.1
(1) Month to month expiries consist primarily of leases that have expired, with new leases currently being negotiated, and commitments obtained
on a monthly basis in the interim.
Commitments
Capital development commitments outstanding amount to R390.7 million (FY2016: R293.1 million). Capital commitments will be funded
from existing resources.
Prospects
The performance of the L2D assets is underpinned by the quality of the portfolio. In spite of the tough economic environment and
the resultant impact on the consumer, the portfolio remains robust with strong underlying property income growth. As a consequence
of the mid-year acquisition L2D has foregone higher yielding interest income in exchange for sustainable property income. The short
term dilutionary impact is outweighed by the benefit of sustainable growth which better positions the portfolio going forward. The L2D
balance sheet is ungeared with significant capacity to make complementary acquisitions. L2D uses distribution per unit as a relevant
measure of financial performance. Management forecasts a full year distribution of approximately 60 cents per participatory unit for the
2018 financial year of which property income constitutes 99% in comparison to 62% forecasted at listing. This guidance is based on the
following key assumptions:
- Forecast investment net property income is based on contractual rental escalations and market-related renewals;
- Appropriate allowances for vacancies have been incorporated into the forecast;
- No dilutionary gearing is introduced;
- No major corporate and tenant failures will occur; and
- L2D maintains a 31% share of the assets that it co-owns in the LPP.
The forecast has not been reviewed or reported on by L2D's auditors.
Declaration of a cash distribution
The Manager has approved and notice is hereby given of a final distribution of 29.22000 cents per unit for the six months ended
31 December 2017 ("the distribution").
The timetable for L2D's 2017 final distribution will be as follows:
2018
Last date to trade cum dividend: Tuesday, 13 March
Units trade ex dividend: Wednesday, 14 March
Record date: Friday, 16 March
Payment date: Monday, 19 March
Unit certificates may not be dematerialised or rematerialised between Wednesday, 14 March 2018 and Friday, 16 March 2018, both
days inclusive.
Payment of the distribution will be made to unitholders on Monday, 19 March 2018. In respect of dematerialised units, the distribution will
be transferred to the Central Securities Depository Participant ("CSDP") accounts/broker accounts on Monday, 19 March 2018. Certificated
unitholders' distribution payments will be posted on or about Monday, 19 March 2018.
Units in issue at the date of declaration of this distribution: 908 443 335
Liberty Two Degrees' income tax reference number: 9087144235
In accordance with Liberty Two Degrees' status as a REIT, unitholders are advised that the distribution meets the requirements of a
"qualifying distribution" for the purposes of section 25BB of the Income Tax Act, No. 58 of 1962 ("Income Tax Act"). The distribution on the
units will be deemed to be a dividend, for South African tax purposes, in terms of section 25BB of the Income Tax Act.
The distribution received by or accrued to South African tax residents must be included in the gross income of such unitholders and will not
be exempt from income tax (in terms of the exclusion to the general dividend exemption, contained in paragraph (aa) of section 10(1)(k)(i)
of the Income Tax Act) because it is a distribution distributed by a REIT. This distribution is, however, exempt from dividend withholding tax
in the hands of South African tax resident unitholders, provided that the South African resident unitholders provide the following forms to
their CSDP or broker, as the case may be, in respect of uncertificated units, or the company, in respect of certificated units:
a) a declaration that the distribution is exempt from dividends tax; and
b) a written undertaking to inform the CSDP, broker or the company, as the case may be, should the circumstances affecting the
exemption change or the beneficial owner cease to be the beneficial owner,
both in the form prescribed by the Commissioner for the South African Revenue Service. Unitholders are advised to contact their CSDP,
broker or the company, as the case may be, to arrange for the abovementioned documents to be submitted prior to payment of the
distribution, if such documents have not already been submitted.
Distributions received by non-resident unitholders will not be taxable as income and instead will be treated as an ordinary dividend which
is exempt from income tax in terms of the general dividend exemption in section 10(1)(k)(i) of the Income Tax Act. On 22 February 2017, the
dividends withholding tax rate was increased from 15% to 20% and accordingly, any dividend received by a non-resident from a REIT will be
subject to distributions withholding tax at 20%, unless the rate is reduced in terms of any applicable agreement for the avoidance of double
taxation ("DTA") between South Africa and the country of residence of the unitholder. Assuming dividend withholding tax will be withheld
at a rate of 20%, the net dividend amount due to non-resident unitholders is 23.37600 cents per unit. A reduced dividend withholding rate
in terms of the applicable DTA may only be relied on if the non-resident unitholder has provided the following forms to their CSDP or broker,
as the case may be, in respect of uncertificated units, or the company, in respect of certificated units:
a) a declaration that the distribution is subject to a reduced rate as a result of the application of a DTA; and
b) a written undertaking to inform their CSDP, broker or the company, as the case may be, should the circumstances affecting the reduced
rate change or the beneficial owner cease to be the beneficial owner,
both in the form prescribed by the Commissioner for the South African Revenue Service. Non-resident unitholders are advised to contact
their CSDP, broker or the company, as the case may be, to arrange for the abovementioned documents to be submitted prior to payment
of the distribution if such documents have not already been submitted, if applicable.
Events after reporting date
In line with IAS 10 Events after the Reporting Period, the declaration of the distribution occurred after the end of the reporting period,
resulting in a non-adjusting event which is not recognised in these financial statements.
Changes in directors of the Manager
The Scheme as a trust has no directors of its own. L2D is managed by the Manager in terms of CISCA and the Trust Deed.
The following changes in the Board of the Manager took place during the period:
- Mr Jose Snyders was appointed as financial director replacing Mr John Sturgeon, effective 23 March 2017. Mr Sturgeon remained on the
Board as a non-executive director and subsequently resigned from the board on 16 December 2017;
- Mr Peter Moyo resigned on 3 April 2017 and was replaced by a fellow independent non-executive director, Mr Michael Ilsley, who was
appointed as the interim chairman. Mr Ilsley resigned on 31 July 2017;
- Mr Angus Band was appointed as an independent non-executive director and chairman of the Board, effective 26 July 2017; and
- Ms Lynette Ntuli was appointed as an independent non-executive director of the Board, also effective 26 July 2017.
The composition of the Board of the Manager remains compliant in terms of the requirements of the King IV Report on Corporate
Governance as well as the JSE Listings Requirements.
Basis of preparation
The summary consolidated financial statements are prepared in accordance with the JSE Listings Requirements for provisional reports and
the requirements of the Companies Act, 71 of 2008, applicable to summary financial statements. The JSE Listings Requirements require
provisional reports to be prepared in accordance with the framework concepts and the measurement and recognition requirements
of International Financial Reporting Standards (IFRS) and the SAICA Financial Reporting Guides as issued by the Accounting Practices
Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council, and to also, as a minimum, contain the
information required by IAS 34 Interim Financial Reporting. The accounting policies applied in the preparation of the financial statements
from which the summary financial statements are derived are in terms of IFRS and are consistent with those applied in L2D's financial
statements for the period ended 31 December 2016. The summarised financial statements have been prepared under the supervision of
Mr Jose Snyders CA(SA).
This summarised report is extracted from the audited information, but is not itself audited. The annual financial statements are audited by
PricewaterhouseCoopers Inc., who expressed an unmodified opinion thereon. The auditor's report does not necessarily report on all the
information contained in these summary financial statements. Unitholders are therefore advised that in order to obtain a full understanding
of the nature of the auditor's engagement, they should obtain a copy of the auditor's report together with the accompanying audited financial
statements, both of which are available for inspection at L2D's registered office. The Board takes full responsibility for the preparation of this
report and that the selected financial information has been correctly extracted from the underlying financial statements.
By order of the Board
16 February 2018
Statement of financial position
for the year ended 31 December 2017
R'000 2017 2016
ASSETS
Non-current assets 8 708 712 6 060 439
Investment properties 8 629 809 5 997 200
Investment properties under development 78 903 63 239
Current assets 396 888 2 868 431
Trade and other receivables 168 793 91 871
Financial investments 211 772 2 774 878
Cash and cash equivalents 16 323 1 682
Total assets 9 105 600 8 928 870
LIABILITIES
Current liabilities
Trade and other payables 146 796 168 449
Total liabilities 146 796 168 449
Participatory unitholders' capital and reserves
Capital 8 663 950 8 663 855
Retained surplus 265 406 44 063
Non-distributable reserve 29 448 52 503
Total unitholders' funds 8 958 804 8 760 421
Total unitholders' funds and liabilities 9 105 600 8 928 870
Statement of comprehensive income
for the year ended 31 December 2017
R'000 2017 2016(1)
Property portfolio revenue 665 854 43 924
Rental and related income 692 835 46 665
Adjustment for the straight-lining of operating lease income (26 981) (2 741)
Property operating expenses (236 709) (14 391)
Net rental and related income 429 145 29 533
Administration expenses (4 142) (887)
Net property income 425 003 28 646
Asset management fee (34 599) (2 202)
Profit from operations 390 404 26 444
Net interest 115 063 14 878
Interest income 135 001 14 878
Interest expense (19 938) -
Dividends received on financial instrument 5 492 -
Loss on disposal of financial instrument (460) -
Profit before fair value adjustments 510 499 41 322
Net fair value adjustments on investment properties 2 319 55 244
Fair value adjustments on investment properties (24 662) 52 503
Adjustment for straight-lining of operating lease income 26 981 2 741
Fair value adjustments on equity instrument 2 067 -
Total earnings 514 885 96 566
Basic and diluted earnings per unit
Basic earnings per unit (cents) 56.68 11.21
Fully diluted earnings per unit (cents) 56.68 11.21
(1) L2D listed on the JSE on 6 December 2016. The statement of comprehensive income reflects one month's operations.
Statement of changes in participatory
unitholders' capital and reserves
for the year ended 31 December 2017
Non-
distributable Retained
Capital reserve earnings Total
R'000 R'000 R'000 R'000
Units issued in exchange for the undivided share in property 6 000 000 6 000 000
Units issued for cash upon listing 2 780 212 2 780 212
Transaction costs for issue of new units (116 357) (116 357)
Total earnings for the period 96 566 96 566
Fair value adjustment on financial investment properties transferred to
non-distributable reserve 52 503 (52 503) -
Distribution to unitholders - -
Balance at 31 December 2016 8 663 855 52 503 44 063 8 760 421
Reversal of transaction costs for issue of new units 95 95
Total earnings for the period 514 885 514 885
Fair value adjustments on investment properties transferred
to non-distributable reserve (24 662) 24 662 -
Fair value adjustment on financial investment transferred
to non-distributable reserve 2 067 (2 067) -
Loss on disposal of financial investment transferred
to non-distributable reserve (460) 460 -
Distribution to unitholders (316 597) (316 597)
Balance at 31 December 2017 8 663 950 29 448 265 406 8 958 804
Statement of cash flows
for the year ended 31 December 2017
R'000 2017 2016
Cash flows from operating activities 127 248 120 809
Cash generated by operations 328 782 105 931
Interest received on financial investment 133 801 14 878
Bank interest received 1 200 -
Interest paid (19 938) -
Distribution to unitholders (316 597) -
Cash flows from investing activities (112 702) (2 782 947)
Expenditure on investment properties (121 205) (8 069)
Expenditure on investment properties under development (43 765) -
Acquisition of investment properties (2 476 555) -
Acquisition of investment properties under development (36 350) -
Investment in financial instruments - mutual funds 2 716 799 (2 774 878)
Investment in financial instruments - equity instrument (151 626) -
Cash flows from financing activities 95 2 663 820
Units issued for cash on listing - 2 780 212
Transaction costs reversal/(incurred) for issue of new units 95 (116 392)
Net increase in cash and cash equivalents 14 641 1 682
Cash and cash equivalents at the beginning of the year 1 682 -
Cash and cash equivalents at the end of the year 16 323 1 682
1. Segment earnings
December 2017 Administration/
Retail Office Specialised Other (1) Total
R'000 R'000 R'000 R'000 R'000
Total property GLA 500 973 332 290 38 280 871 543
L2D's share of total GLA(2) 155 325 103 026 11 869 270 219
Segment earnings
Property portfolio revenue 382 210 253 515 29 205 924 665 854
Rental and related income 397 719 263 802 30 390 924 692 835
Adjustment for the straight-lining of operating
lease income (15 509) (10 287) (1 185) - (26 981)
Property operating expenses (135 131) (89 631) (10 325) (1 622) (236 709)
Net rental and related income 247 079 163 884 18 880 (698) 429 145
Administration expenses (4 142) (4 142)
Net property income 247 079 163 884 18 880 (4 840) 425 003
Asset management fee (34 599) (34 599)
Profit from operations 247 079 163 884 18 880 (39 439) 390 404
Net interest 115 063 115 063
Interest received 135 001 135 001
Interest paid (19 938) (19 938)
Income from investment 5 492 5 492
Capital item (460) (460)
Profit before fair value adjustments 247 079 163 884 18 880 80 656 510 499
Net fair value adjustments on investment
properties 1 333 884 102 - 2 319
Fair value adjustments (14 176) (9 403) (1 083) - (24 662)
Adjustment for the straight-lining of operating
lease income 15 509 10 287 1 185 - 26 981
Fair value adjustments on equity instrument - - - 2 067 2 067
Total earnings 248 412 164 768 18 982 82 723 514 885
Segment assets and liabilities
Investment property 5 005 868 3 320 339 382 505 - 8 708 712
Trade receivables 75 040 49 773 5 734 38 246 168 793
Financial investments 211 772 211 772
Cash and cash equivalents 16 323 16 323
Total assets 5 080 908 3 370 112 388 239 266 341 9 105 600
Trade payables and other (81 555) (54 094) (6 232) (4 915) (146 796)
Net assets 4 999 353 3 316 018 382 007 261 426 8 958 804
(1) Administration and other includes administration expenses, asset management fees and investment income that cannot be allocated
specifically to the operating segments revenue.
Administration assets and liabilities includes the current account with Liberty Group Limited, cash and cash equivalents, VAT
payable and accruals, audit and printing fees and asset management fees.
(2) Segment earnings, asset and liabilities have been segmented per category GLA as a percentage of total GLA.
December 2016 Administration/
Retail Office Specialised Other (1) Total
R'000 R'000 R'000 R'000 R'000
Total property GLA 522 652 318 620 7 060 848 332
L2D's share of total GLA(2) 102 732 29 925 1 553 134 210
Segment earnings
Property portfolio revenue 33 525 9 765 507 127 43 924
Rental and related income 35 623 10 376 539 127 46 665
Adjustment for the straight-lining of operating
lease income (2 098) (611) (32) (2 741)
Property operating expenses (11 016) (3 209) (166) (14 391)
Net rental and related income 22 509 6 556 341 127 29 533
Administration expenses (887) (887)
Net property income 22 509 6 556 341 (760) 28 646
Asset management fee (2 202) (2 202)
Profit from operations 22 509 6 556 341 (2 962) 26 444
Interest received 14 878 14 878
Profit before fair value adjustments 22 509 6 556 341 11 916 41 322
Net fair value adjustments 42 287 12 318 639 55 244
Fair value adjustments 40 189 11 707 607 52 503
Adjustment for the straight-lining of operating
lease income 2 098 611 32 2 741
Total earnings 64 796 18 874 980 11 916 96 566
Segment assets and liabilities
Investment property 4 639 006 1 351 305 70 128 6 060 439
Trade and other receivables 57 429 16 729 868 16 845 91 871
Financial investments 2 774 878 2 774 878
Cash and cash equivalents 1 682 1 682
Total assets 4 696 435 1 368 034 70 996 2 793 405 8 928 870
Total liabilities - trade payables (47 274) (13 770) (715) (106 690) (168 449)
Net assets 4 649 161 1 354 264 70 281 2 686 715 8 760 421
(1) Administration and other includes administration expenses, asset management fees and investment income that cannot be allocated
specifically to the main operating segments.
Administration assets and liabilities includes the current account with Liberty Group Limited, cash and cash equivalents, VAT
payable and accruals for listing costs, audit and printing fees and asset management fees.
(2) Segment earnings, assets and liabilities have been allocated to segments based on L2D's GLA.
Headline earnings, distributable income and earnings per unit
2017 2016
R'000 R'000
Reconciliation of total earnings to headline earnings and distributable income
Total earnings (basic earnings) 514 885 96 566
Fair value adjustments to investment properties and financial investment (4 386) (55 244)
Loss on disposal of equity instrument 460
Headline earnings 510 959 41 322
Adjustments for straight-lining of operating lease income 26 981 2 741
Distributable income 537 940 44 063
Cents Cents
Earnings per unit
Basic and diluted 56.68 11.21
Headline 56.25 4.80
Distributable income 59.22 4.85
000's 000's
Number of units in issue 908 443 908 443
Weighted average number of units in issue 908 443 861 422
2. Fair value hierarchy for financial instruments and investment property
IFRS 13 requires that an entity discloses for each class of assets and liabilities measured at fair value, the level in the fair value
hierarchy into which the fair value measurements are categorised in their entirety. The fair value hierarchy reflects the significance
of the inputs used in making fair value measurements.
The fair value hierarchy has the following levels:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 - inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly
(i.e. as prices) or indirectly (i.e. derived from prices);
Level 3 - inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Fair value hierarchy for financial instruments and properties
Audited 31 December 2017
Assets (R'000) Fair value Level 1 Level 2 Level 3
Investment properties 8 629 809 8 629 809
Investment properties under
development 78 903 78 903
Financial investments 211 772 153 693 58 079
8 920 484 153 693 58 079 8 708 712
Audited 31 December 2016
Assets (R'000) Fair value Level 1 Level 2 Level 3
Investment properties 5 997 200 5 997 200
Investment properties under
development 63 239 63 239
Financial investments 2 774 878 2 774 878
8 835 317 2 774 878 6 060 439
The fair value of trade and other receivables, cash and cash equivalents and trade and other payments approximate their carrying
value and are not included in the hierarchy analysis as their settlement terms are short-term and therefore from a materiality perspective
fair values are not required to be modelled.
Details of changes in valuation techniques
There have been no significant changes in valuation techniques in the period under review.
Significant transfers between level 1, level 2 and level 3
There have been no transfers between level 1, level 2 and level 3 financial investments and investment property for the period
under review.
Valuation techniques used in determining the fair value of assets in level 2 and 3
Level Instrument Valuation basis Main assumptions
1 Listed equity Listed price Not applicable
2 Mutual funds Quoted put (exit) price Not applicable
provided by the fund
manager
3 Investment properties Discounted cash flow Exit capitalisation rate, discount rate, annual rental and
operating escalation, annual cost escalation and vacancy.
3 Investment properties Fair value Not applicable
under development
Investment properties - basis of valuation
The investment properties were independently valued as at 31 December 2017 by professional valuers, namely Rode & Associates
Proprietary Limited, Mills Fitchet Magnus Penny & Wolffs t/a Magnus Penny Associates CC and Jones Lang LaSalle Proprietary Limited,
all of which are registered valuers in terms of the Property Valuers Professional Act, No. 47 of 2000.
The valuation of the properties is prepared in accordance with the guidelines of the South African Institute of Valuers for valuation
reports and in accordance with the appraisal and valuation manual of the Royal Institution of Chartered Surveyors, adapted for
South African law and conditions.
The properties have been valued on a discounted cash flow basis. In the majority of cases, discounted cash flows have been used to
determine a present value net income to which the capitalisation rate is applied as at 31 December 2017. In order to determine the
reversionary rental income on lease expiry, renewal or review, a market gross rental income (basic rental plus operating cost rental)
has been applied to give a market-related rental value for each property as at 31 December 2017. Market rental growth has been
determined based on the individual property, property market trends and economic forecasts. Vacancies have been considered based
on historic and current vacancy factors as well as the nature, location, size and popularity of each building.
Appropriate discount rates have been applied to cash flows for each property to reflect the relative investment risk associated with the
particular building, tenant, covenant and the projected income flow. Extensive market research has been conducted to ascertain
the most appropriate market-related discount rate to apply, with regard to the current South African long-term bond yield
(R204 risk-free rate) and the relative attractiveness that an investor may place on property as an asset class.
On the basis that turnover or profit rental income has a greater degree of uncertainty and risk than the contractual base rental, a risk
premium of between 1% and 6% has been added to the discount rate and to the market capitalisation rate, to reflect the greater
investment risk associated with the variable rental element on a property by property basis.
Reconciliation of level 3 assets
The table below analyses the movement of level 3 assets for the period under review.
R'000 2017 2016
Investment property and investment property under development
Opening balance 6 060 439 -
Additions - property acquired 2 512 905 6 000 000
Capitalised cost 160 030 7 936
Fair value adjustments (unrealised) (24 662) 52 503
Closing balance 8 708 712 6 060 439
The fair value gains and losses are included in the fair value adjustments line in profit or loss.
Sensitivity analysis of level 3 assets
Investment property
Investment properties fair values were derived by determining sustainable net rental income, to which an appropriate capitalisation
rate is applied. Capitalisation rates are adjusted for occupancy levels, age of the building, location and expected future benefit of
recent alterations.
The capitalisation rates applied at 31 December 2017 range between 6,25% and 9,00%. This compares to the R186 government bond
yield of 9,45%. The non-observable adjustments included in the valuation can therefore be referenced to the variance to the ten-year
government rate.
The table below indicates the sensitivity of the aggregate market values for a 100bps (2016: 50 bps) change in the capitalisation rate.
Change in capitalisation rate
100bps 100bps
2017 Rm increase decrease
Properties below 6,8% capitalisation rate 6 980 6 035 8 275
Properties between 6,8% - 8,5% capitalisation rate 1 515 1 334 1 755
Properties between 8,6% - 9,0% capitalisation rate 214 196 237
Total 8 709 7 565 10 267
Change in capitalisation rate
50 bps 50 bps
2016 Rm increase decrease
Properties below 6,8% capitalisation rate 5 326 4 941 5 776
Properties between 6,8% - 8,5% capitalisation rate 568 532 608
Properties between 8,6% - 10,5% capitalisation rate 166 158 176
Total 6 060 5 631 6 560
The table below indicates the sensitivity of the aggregate market values for a 50 bps (2016: 50 bps) change in the discount rate.
Change in discount rate
50 bps 50 bps
2017 Rm increase decrease
Total property portfolio 8 709 8 494 8 845
Change in discount rate
50 bps 50 bps
2016 Rm increase decrease
Total property portfolio 6 060 5 940 6 186
3. Related party disclosure
Ultimate parent
Standard Bank Group Limited ("Standard Bank")
Parent
Liberty Holdings Limited ("LHL")
Transactions with related entities
In terms of the Relationship Agreement entered into between L2D and LGL, L2D granted LGL a put option ("Put Option") in terms of
which LGL may sell further portions of its undivided shares in the properties that it co-owns with L2D to L2D from time to time.
On 26 July 2017 LGL exercised its Put Option to sell to L2D a further R2.5 billion worth of undivided shares in the properties that it
co-owns with L2D.
At 31 December 2017 there is a R54.5 million (FY2016: R36.1 million) loan due from LGL to L2D in respect of money market deposits
for gift card funds and tenant deposits.
Liberty Centre Head Office Cape Town
78% of the property is let to LGL, a fellow subsidiary of L2D. Rental income received by L2D for the year was R11.6 million
(FY2016: R0.9 million).
Liberty Centre Head Office Umhlanga Ridge
Approximately 80% of the property is let to LGL on a five-year lease. Rental income received by L2D for the year was R6.0 million
(FY2016: R0.4 million).
Eastgate Office Tower
LGL took occupation of 2 617m2 of office space in the Eastgate Office Tower during the year.
Rental income received by L2D for the year ended 31 December 2017 was R892 074.
Transactions with the Manager
R34.6 million of management fees were paid to the Manager for the year ended 31 December 2017 (FY2016: R2.2 million) in respect of
management and administration of the collective investment scheme.
Transactions with other related entities
STANLIB Wealth Management Limited, as a lessee, paid an amount of R3.9 million (FY2016: R0.7 million) as an operating lease expense
for rental of its premises in the Melrose Arch precinct in Johannesburg.
JHI Retail Property Proprietary Limited ("JHI Retail")
The property management function in respect of L2D is undertaken predominantly by JHI Retail. JHI Retail manages the Sandton City
Complex, the Eastgate Complex, Liberty Promenade Shopping Centre, Liberty Midlands Mall, Nelson Mandela Square, Liberty Centre
Head Office (Umhlanga), John Ross Eco-Junction and the Standard Bank Centre.
A consortium comprising JHI Retail and Epsidex Proprietary Limited ("Epsidex") is managing the Botshabelo Mall. Amdec Investments
Proprietary Limited ("Amdec") continues to manage the Melrose Arch precinct. Neither Amdec nor Epsidex are related parties of L2D.
JHI Retail is 51% owned by JHI Properties Proprietary Limited and 49% by LHL. It is accounted for as a joint venture of the group.
Mrs A Beattie is a director of both JHI Retail and the Manager. Property management service net fees paid by L2D to JHI Retail for the
period 1 January 2017 to 31 December 2017 amounted to R18.3 million (FY2016: R1.4 million).
STANLIB Property Development Proprietary Limited
Development fees amounting to R1.8 million were paid to STANLIB Property Development Proprietary Limited and were capitalised
to the relevant development projects.
Transactions with Standard Bank
Standard Bank Centre
The Standard Bank Centre is fully let to Standard Bank on a seven-year lease. Rental income received by L2D for the period 1 January
2017 to 31 December 2017 was R11.8 million (FY2016: R0.9 million).
Liberty Two Degrees
JSE share code: L2D ISIN: ZAE000230553 (Approved as a REIT by the JSE)
("Liberty Two Degrees")
a portfolio established under the Liberty Two Degrees Scheme, a Collective Investment Scheme in Property established in terms of the
Collective Investment Schemes Control Act, No. 45 of 2002, as amended, and managed by STANLIB REIT Fund Managers (RF) Proprietary
Limited
(Registration number: 2007/029492/07)
("the Manager")
Registered Office
Liberty Life Centre 1 Ameshoff Street Braamfontein 2001
PO Box 10499 Johannesburg 2000
Investor Relations
Email address: investors@liberty2degrees.co.za
Company Secretary
JM Parratt
Sponsor
Java Capital
19 February 2018
Webcast details
Webcast url: http://www.corpcam.com/LibertyTwoDegrees19022018
Conference call details:
PARTICIPANT TELEPHONE NUMBERS (Assisted)
Johannesburg (Telkom) 010 201 6800
South Africa (Toll Free) 0 800 200 648
Johannesburg (Neotel) 011 535 3600
UK 0 333 300 1418
Date: 19/02/2018 07:06:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
the information published on SENS. The JSE, their officers, employees and agents accept no liability for (or in respect of) any direct,
indirect, incidental or consequential loss or damage of any kind or nature, howsoever arising, from the use of SENS or the use of, or reliance on,
information disseminated through SENS.
Sharenet Sites 
