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LIBERTY TWO DEGREES LIMITED - Operational Investor Update for the period ended 30 September 2018

Release Date: 28/11/2018 13:48
Code(s): L2D     PDF:  
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Operational Investor Update for the period ended 30 September 2018

LIBERTY TWO DEGREES LIMITED
(Registration number: 2018/388906/06)
JSE share code: L2D
ISIN: ZAE000260576


Operational Investor Update for the period ended 30 September 2018


Liberty Two Degrees (L2D or the Company) has pleasure in presenting the highlights for the
period under review which are as follows:
    • The successful conversion to a Corporate REIT;
    • On track to deliver the forecast 60c distribution per share for the FY18 period;
    • Positive trading density growth reported at key assets despite tough trading
        conditions;
    • A marked improvement in retail vacancies;
    • Engagement with Edcon management continues, with proactive measures being
        taken to reduce portfolio exposure; and
    • The strategy of positioning L2D as a leading South African precinct focused, retail-
        centred REIT.

1. Successful REIT conversion
The conditions precedent to the restructuring transaction have been fulfilled resulting in:
   • The conversion of L2D from a Collective Investment Scheme in Property (CISIP) to a
       corporate REIT;
   • The cancellation of the PUT option by Liberty Group for no consideration;
   • The internalisation of the management company which also assumes the asset
       management function of the Liberty Property Portfolio (LPP); and
   • The acquisition of R1.2 billion in property assets from the LPP funded by debt.

L2D commenced trading as a corporate REIT on the Main Board of the JSE on Thursday, 1
November 2018 and, with an improved structure, is now positioned to optimise shareholder
value.

The new structure achieves:
   • Alignment of L2D with investors’ preference for an internalised management function
       common to the listed REIT sector;
   • Improved diversification in the L2D shareholder base and the improvement of liquidity
       over time;
   • The ability to better execute the investment objectives by management and
   • The elimination of any concern about the legacy of the PUT option.

2. Sectoral update
The retail sector
Although South Africa’s economic growth was subdued over the last quarter, the retail
centres continue to perform ahead of the market operationally. Management is focused on
actively managing the centres to ensure their continued relevance and extracting continued
growth. L2D remains cautious of the pressures affecting the South African retail environment
and will respond to dampened growth through innovation and the ability to create experiences
that continue to bring customers into the precincts.

Positive trading density growth of 3.4% at the end of September 2018 compared to 2.8% at
30 June 2018 and -1.8% at 31 December 2017 was reported. This excludes the new
Midlands Lifestyle Centre and Botshabelo Mall.

Per centre trading density growth is outlined below.

Trading density growth       September 2018     June 2018       December 2017      June 2017
(%)
Portfolio (Ex. Lifestyle          3.4%                 2.8%           -1.8%             -6.0%
Centre & Botshabelo)
Portfolio (Incl. Lifestyle        2.5%                 2.2%           -1.8%              -6%
Centre & Botshabelo)
Sandton City                      5.2%                  5.4%          -0.9%              -6.9%
Eastgate                          5.2%                  3.1%          -4.9%             -11.0%
Nelson Mandela Sqaure             -0.5%                -3.3%          -9.5%             -17.1%
Melrose Arch                      -5.6%                 1.5%           6.6%               1.2%
Promenade                         3.4%                  4.1%           6.6%               6.3%
Midlands(Excl Lifestyle           -0.7%                -0.9%          -2.8%               0.1%
Centre
Botshabelo                        14.3%                14.1%



In the period under review, portfolio leasing activity remained encouraging despite tough
economic conditions. Some exciting new stores were opened across the portfolio improving
the tenant mix and optimising trading at the centres, as well as lowering the portfolio vacancy
ratio significantly from 4.3% in June 2018 to 1.9% (10,088m²) in September 2018. This is
well below the sector average of 4.2% reported by SAPOA for the second quarter of 2018.

Renewals concluded as at September 2018 amounted to 43,541m² and leasing within the
retail sector provided a positive reversion of 2.9%.

Edcon update
The Edcon Group (Edcon) comprises 5.7% in terms of gross lettable area (GLA) across the
overall portfolio. Although the Edcon brands in the portfolio continue to show positive trading
density growth, managing L2D’s exposure to the market risks of Edcon remains a high
priority.

L2D aims to continue to pragmatically reduce its Edcon exposure and management continues
to engage with Edcon to ensure that the impact on the portfolio is minimised.

Development update
Development activities enable L2D to remain at the forefront of retail and leisure trends.
Management’s approach to redevelopments aims to enhance the relevance to customers
through the creation of world-class, experiential places.

The following developments were recently completed:
        • The Midlands Lifestyle Centre, which included the expansion of the mall from
           56,000m² to 78,000m².
       •   The Sandton Food District refurbishment.
       •   The Stuttafords reconfiguration at Eastgate as well as at Sandton. The conversion
           at Eastgate involved the subdivision of the space to accommodate Dis-Chem,
           H&M and Mr Price and all tenants are currently trading according to expectations.




The office sector
The competitive environment in the office sector, an oversupply of space in the Sandton CBD
as well as the dampened growth in the South African economy remains a challenge.
Considerable efforts are being made to attract the right calibre of new tenants and retain
current tenants. The overall office vacancy rate of 8.7% (29,008m²) in September 2018
compared to 9.7% in June 2018 remains below the SAPOA rate of 11.2%.

Additional leasing deals have been concluded that will further reduce this vacancy to 7.6%.
The continued pressure in the office sector has resulted in a negative reversion of 13.6% in
this component of the portfolio which comprises 1.73% of GLA to the overall office portfolio.
Management continues to monitor the impact on the portfolio due to the negative reversions
expected in the office sector.

3. Capital management
The acquisition of an additional R1.2 billion in assets from the Liberty Property Portfolio (LPP)
was fully debt funded. The introduction of a conservative level of debt has enhanced the
capital structure with a current loan-to-value (LTV) of 16%. One third of the total debt has
been hedged at a rate of 9.60% NACS and management anticipate hedging to 75% as the
targeted hedge ratio by Q1 2019. Increases in the interest swap curve since announcing the
restructure in May 2018 has however increased the banks blended funding rate which could
impact distribution growth in 2019 if these term rates remain at current levels.

4. Innovation and trends
Data analytics continue to enable the centres to set trends in the retail sector and
management continuously investigates the potential implementation of measures to better
serve customers’ needs and preferences. The camera-based Syenap foot count system that
is being rolled-out across the portfolio enables management to better understand customer
activity thereby improving leasing and marketing strategies. A full year of data for Sandton
City is now available, reflecting year-on-year foot count growth at 8.2% and encouraging
positive foot-count growth on average at the other centres is seen.

This Black Friday, a 15% growth in foot count across the portfolio compared to 2017 was
seen.



5. Board
L2D has recently welcomed Brian Azizollahoff as the Lead Independent Director and Zaida
Adams as an Independent, Non-executive Director to the Board. Their appointments further
strengthen the independence of the Board and both bring a wealth of wisdom and
experience.

6. In conclusion
L2D remains committed to delivering sustainable and quality income distributions to investors
by driving the portfolio’s operational and financial performance. The asset management team
continues to increase retail exposure to international tenants as a differentiator in the target
markets - a strategy that has had a positive impact on growth and has enabled L2D to
enhance its position as a retail leader.

The new leases concluded in the period are indicative of the continued strong retail demand
at the centres. The portfolio remains well positioned for operational growth, supported by
good quality underlying property income and supplemented by yield-enhancing
developments.

L2D is committed to creating sustainable value for all stakeholders through a strategy of
future proofing its assets.

The Company enters its closed period as at 01 December 2018. L2D’s full-year financial
results for the period ended 31 December 2018 are due to be released on SENS on Friday,
22 February 2019. A presentation of the Annual Results is scheduled to take place on
Monday, 25 February 2019.

The information set out in this update has not been reviewed or reported on by the
Company’s auditors.

Johannesburg
28 November 2018

Sponsor:
The Standard Bank of South Africa Limited

Date: 28/11/2018 01:48:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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