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LIBERTY TWO DEGREES LIMITED - Summarised Group Results for the Year Ended 31 December 2021 and Cash Distribution

Release Date: 28/02/2022 12:06
Code(s): L2D     PDF:  
Wrap Text
Summarised Group Results for the Year Ended 31 December 2021 and Cash Distribution

Liberty Two Degrees Limited
Incorporated in the Republic of South Africa 
(Registration number 2018/388906/06)
(Approved as a REIT by the JSE)
Share code: L2D     ISIN: ZAE000260576
("L2D" or "the company")

SUMMARISED GROUP RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2021 AND CASH DISTRIBUTION

SALIENT FEATURES
- Retail portfolio recovery underpins 5.47% increase in full-year distribution to 34.1 cents per share
  with loan to value remaining healthy at 23.87%
- Continued pressure on rental reversions of -25.9% relating to 6.7% of portfolio GLA
- Covid-19 impact on hospitality assets remained significant resulting in NPI down R17 million (178%)
- Strong recovery in operational metrics, with retail turnover up 24.5% and occupancy up to 96.8%
- International safety and security certification put our malls among the best in the world

OVERVIEW
L2D's operational and financial metrics, achieved in the difficult
context of Covid-19, showed sustained improvement in 2021. However,
the recovery across the portfolio remains uneven with some sectors
remaining impacted.

Demand for L2D retail space remains strong with occupancy across
the portfolio stabilised. Trading levels in the retail portfolio recovered
well and, in some cases, exceeded 2019 pre-Covid levels. The easing
of restrictions and momentum in vaccinations drove footcount
22.6% higher during the second half of the year ending with a strong
festive period. The net property income contribution from the retail
portfolio improved by 27.3%, an increase of R100 million compared to
2020 however remained 18% (R103 million) below 2019 which indicates
the continued impact of Covid-19. Rentals remain under pressure, and
we expect to see a lag between improving turnover translating into
rental income

The hospitality, food service and office sectors continued to bear
the brunt of restrictions and weak economic activity with the lack
of business travel and conferences continuing to impact our assets.
The hospitality sector's contribution to net property income was
c.R65 million less than 2019 and R17 million less than 2020. While it
positions us for upside as occupancies improve in line with the recovery
of business and travel sectors, our outlook for the sector remains
guarded.

Property rates and utility cost hikes above inflation and rental growth
rates remain a concern. Apart from greening and other initiatives to
lower consumption, we are engaging alongside our peers with the
relevant authorities. In particular, we continue to engage with the
City of Johannesburg in respect of the finalisation of the valuation of
Sandton City, against which we have lodged an appeal, as announced
on SENS on 17 February 2022.

Our balance sheet remains strong, with a low loan to value of 23.87%.
Underpinned by these trends, which are fully detailed in the
commentary below, full-year distributions were up 5.47% to 34.1 cents
per share.

RETAIL TRADING PERFORMANCE 
Annual turnover across our retail portfolio was 24.5% higher than last
year. Trading gained momentum as the year progressed, with turnover
in Q4 up 15.8% on Q4 2020 and 5.1% on Q4 2019. Sandton City and
Midlands Mall recorded the largest increases in Q4 turnover in rand
terms surpassing Q4 in both 2020 and 2019. Certain categories in our
portfolio, including luxury brands, technology and grocery, showed an
exceptionally strong recovery.

Quarterly
turnover           Q1 vs     Q2 vs     Q3 vs    Q4 vs    Q4 vs
growth (%)          2019      2019      2019     2019     2020
Sandton City        (3.5)      3.3      1.7      12.5     17.7
Eastgate           (16.6)    (11.9)   (15.0)     (6.3)     8.4
Nelson
Mandela Square     (41.6)   (39.0)    (33.4)     (9.4)    45.1
Midlands Mall       (8.0)    (2.5)      8.3      17.7     24.0
Midlands
Lifestyle Centre    11.6     16.3      37.7      58.1     46.1
Promenade           (8.7)    (9.9)    (13.8)     (5.5)     7.0
Botshabelo Mall     29.5     26.7      13.5      18.0      6.0
Total portfolio
(excl. MA)          (8.8)    (4.1)     (4.6)      5.9     15.6
Melrose Arch       (26.7)   (27.2)    (29.4)    (13.3)    22.0
Portfolio full      (9.7)    (5.1)     (5.7)      5.1     15.8

Annual turnover at Sandton City outpaced 2020 and 2019 turnover
by 31.3% and 4.3% respectively, generating its highest ever annual
turnover of c. R7.4 billion. In contrast, Eastgate's recovery was muted.
The economic decline of its catchment area over recent years resulted
in pressure on rentals and a downward adjustment of 11.7% to its
valuation. Various focused initiatives are in place to drive up turnover
and dwell time at Eastgate. We are also working with management at
Melrose Arch to find solutions to its high office vacancies.

Portfolio footcount followed a similar recovery trend to turnover, albeit
at a slower rate. In 2021, it grew 26.1% with the last quarter having 22.9%
more customers visiting our malls than in Q4 2020, only 3.4% below
Q4 2019. This was due to greater movement of consumers and more
workers returning to offices as restrictions eased and vaccinations
increased. Our analysis of footcount data indicates a shift in shopping
patterns, with consumers spending more money over fewer visits to
our malls.

OCCUPANCY AND LEASING PERFORMANCE
Occupancy across the L2D portfolio remained stable. We ended the
year at 93.7% occupancy in the overall portfolio (June 2021: 93.7%;
December 2020: 93.3%). In the retail portfolio, occupancy improved
marginally to 96.8% (June 2021: 96.7%; December 2020: 95.3%), above
the MSCI Q3 2021 retail occupancy benchmark of 94.0%. Over the
year, Sandton City and Eastgate have improved their occupancies
from 97.9% and 92.9% to 98.3% and 94.6% respectively, ahead of the
Q3 MSCI Super Regional benchmark of 93.2%. At 86.2% occupancy
in our office portfolio (June 2021: 86.6%; December 2020: 87.6%), the
rate of decline has slowed. It remains above the MSCI Q4 2021 office
occupancy benchmark, which fell to an all-time low of 84.0%. Despite
the stabilisation, the outlook for the office rental market remains a
concern due to industry oversupply and the impact of remote working.

Demand for retail space in the L2D portfolio remains strong.
We concluded 291 leases (renewals and new deals) in the year,
equating to 147 507m2 or 15.6% of total portfolio GLA (December
2020: 148 725m2 or 15.7%). Our leasing strategy focused on attracting
and retaining quality tenants. We achieved a retention rate of 92.5% of
tenant leases expiring in 2021, of which 16.2% are still under negotiation.
We have begun negotiating leases due for renewal in 2022, with good
indication that major leases will be renewed.

Rental reversions for leases concluded during the period were
negative for both the retail and office sector, down 26.0% and 24.8%
respectively, albeit with some improvement over last year (December
2020: -32.2% and -26.2%, respectively). While we expect tenants to
remain under pressure, the upward trend in renewals from this lower
base should continue in 2022 given improving trading conditions.
This will likely have a positive effect on the future portfolio valuation,
which we believe has stabilised. Overall, the value of our portfolio
declined by 0.8% in 2021.

At the end of December 2021, 99.0% of rent relief agreements
pertaining to 2020 had been concluded. In 2021, we granted further
relief of R17.7 million to assist tenants most impacted by continued
Covid-19 restrictions. The fairness and transparency of our approach
has motivated tenants to settle arrears and strengthened our
partnership with them. Rental collections improved to 102.4%, based on
full amounts due and before rental relief adjustments.

FINANCIAL RESULTS                                                Audited                Audited                         
                                                             31 December            31 December
R'000                                                               2021                   2020             % Change
Revenue                                                          888 240                878 769                 1.08
Net property income                                              516 002                377 272                36.77
Profit from operations                                           459 216                342 355                34.13
Net interest expense                                            (148 085)              (146 909)                0.80
Profit before fair value adjustments                             311 131                195 446                59.19
Profit/(loss) before tax                                         258 610             (1 524 440)              116.96
Headline earnings                                                295 747                227 083                30.24
Basic and diluted earnings/(loss) per share (cents)                27.40                (166.09)              116.50
Headline earnings per share (cents)                                33.32                25.27(1)               31.86
Distribution per share (cents)                                     34.10                  32.33                 5.47
Net asset value per share (Rand)(2)                                 7.56                   7.71                (1.90)

1.  The December 2020 weighted average number of shares in issue have been restated accordingly to be consistent with 
    the December 2021 accounting treatment and disclosure.
2.  Calculated based on total equity divided by the number of shares in issue (908 443 334) excluding treasury shares 
    of 29 608 280 in 2021 and 12 986 793 in 2020.

FINANCIAL PERFORMANCE
Notwithstanding the 24.5% increase in our retail tenant's turnover,
revenue (excluding the accounting impact of lease straight lining)
declined by 5%. The decline in the hospitality portfolio, negative lease
reversions and income lost from the sale of Century City offices during
the prior year contribute to this result. Net property income (NPI),
excluding the accounting impact of lease straight lining, improved
by 19% on 2020. The favourable movement in the NPI is explained by
the net impact of the release of the ECL provision and lower rental
relief provided, in line with the reduced impact of Covid-19, resulting
in a credit to the income statement of R14.9 million (compared to a
charge of R159.7 million in 2020). NPI growth also benefitted from the
R12.1 million settlement of our Covid-19 business interruption claim.

                                                NPI                     NPI
(%)                                  FY 21 vs FY 20          FY 21 vs FY 19
Retail                                           27                     (18)
Offices                                          (3)                    (23)
Hospitality                                    (178)                   (113)
Other                                             7                     (23)
Total NPI(1)                                     19                     (26)

1.  Total NPI excluding the adjustment for straight-lining of operating
    lease income.

Profit from operations grew 34% to R459.2 million, and 16% to
R473.3 million excluding lease straight lining. Net utility costs increased
due to higher consumption, tariff hikes and provisions raised in respect
of ongoing objections to municipal valuations. While operating costs
were R16.7 million higher, this was off a low base in 2020, as a result of
reduced costs due to the impact of Covid-19. In 2021, efforts to reduce
head office costs included a review of the cost base and a freeze on
hiring. However, lower asset management income earned on reduced
investment property valuations largely offset the savings achieved.

Net interest expense increased marginally by 0.8%, with lower average
debt costs offset by higher debt levels. Fair value adjustments
include the positive R41.9 million mark to market on the interest
rate hedges in place at the end of December 2021, and the property
valuation write-down of R108.5 million in 2021. The taxation expense
of R15.4 million resulted from temporary differences on the deferred
tax asset unwinding as provisions were utilised. Headline earnings
increased by 30.24% after adding back the fair value adjustments and
the distribution growth of 5.47% is calculated after further adjustments
for the impact of lease straight lining and deferred tax.

BALANCE SHEET AND PORTFOLIO VALUATION
Our balance sheet remains a key strength. With a loan to value (LTV)
of 23.87% at 31 December 2021 (31 December 2020: 20.51%), we
have sufficient liquidity and remain well within our bank covenants.
Our interest cover ratio is healthy at 3.09 times, with 75.8% of our
interest rate exposure hedged. The average cost of debt remains
relatively low at 7.85%. Total unutilised revolving credit facilities
amounted to R340 million at 31 December 2021. In terms of the share
buyback programme, a further 15.36 million shares were acquired
during the year at a cost of R70.3 million.

L2D's property portfolio was valued at R8.4 billion at 31 December
2021. This is marginally down from the December 2020 valuation,
following the significant write down by R1.7 billion in 2020. Values are
based on independent property valuations on 31 December 2021.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. Net asset value per share at 31 December
2021 was R7.56, down (1.9%) mainly as a result of the payment of an
interim dividend in August 2021 as well as the write down in property
valuations. We have c.R850 million of term debt expiring in October
2022, the refinancing of which will extend the average duration of our
term debt and hedged interest rate profile.

STRATEGIC BUILDING BLOCKS
The Safe Asset Group assessed all our malls during the year. Sandton
City, Nelson Mandela Square and Eastgate improved their SHORE
ratings significantly from 2020. Assessed for the first time, Midlands
Mall, Promenade and Botshabelo Mall also scored above 80%.

Noteworthy achievements in our environmental initiatives included
green star ratings on our entire portfolio of assets including a 6-star
rating on Sandton City. We also increased waste diversion rates from
around 40% to just under 80% (by weight), towards our target of being
net zero waste ready in 2022. We expect to receive this rating in 2023,
once we have 12 months of data for verification.

PROSPECTS
The operational performance of the retail portfolio is encouraging,
supported by quality assets which have shown their resilience. This
together with the strength of our tenant mix, should underpin strong
demand for L2D space and further improvement in turnover. However,
uncertainty in the trading environment is likely to continue to put
pressure on certain categories of tenants. The strain in the office rental
and hospitality sectors, together with negative rental reversions across
the portfolio, is likely to slow our return to pre-pandemic levels of
distributable income.

We have a focused operational strategy, grounded in robust property
fundamentals, and remain committed to executing our business in a
sustainable and flexible manner as we drive growth. The safety, security
and wellbeing of our customers, tenants, employees, service providers
and other stakeholders will remain our top priority.
Given the uncertainty that remains, we remain cautious about the year
ahead. The board has therefore resolved not to provide earnings and
distribution guidance for 2022.

SUBSEQUENT EVENTS
As announced on SENS on 25 February 2022, Mr Angus Band will be
retiring as a non-executive director and chairman of L2D with effect
from 1 March 2022. L2D would like to thank him for his leadership,
contribution, wisdom and stewardship over the years. Mr Nick Criticos
has been appointed as chairman of the Board with effect from
1 March 2022. L2D looks forward to his contribution and welcomes
him as chairman.

DECLARATION OF CASH DISTRIBUTION
The board of directors of L2D (Board) has approved, and notice is
hereby given, of a distribution of 18.31 cents per share for the six
months ended 31 December 2021 (the distribution). In addition to the
interim dividend of 15.79 cents per share, the full year dividend for
2021 amounts to 34.10 cents per share.

The distribution is payable to L2D shareholders in accordance with the
timetable set out below.

Last date to trade cum dividend               Tuesday, 15 March 2022
Shares trade ex-dividend                    Wednesday, 16 March 2022
Record date                                    Friday, 18 March 2022
Payment date                                  Tuesday, 22 March 2022

L2D uses distribution per share as a relevant measure of financial
performance. Share certificates may not be dematerialised or
rematerialised between Wednesday, 16 March 2022 and Friday,
18 March 2022, both days inclusive. Payment of the distribution will
be made to shareholders on Tuesday, 22 March 2022. In respect of
dematerialised shares, the distribution will be transferred to the Central
Securities Depository Participant (CSDP) accounts/broker accounts on
Tuesday, 22 March 2022. Certificated shareholders' dividend payments
will be posted on or about Tuesday, 22 March 2022.

Shares in issue at the date of declaration of this distribution:
908 443 334, inclusive of 29 608 280 treasury shares.

L2D's income tax reference number: 9178869237.

In accordance with L2D's status as a REIT, shareholders 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 shares 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 shareholders
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
shareholders, provided that the South African resident shareholders
provide the following forms to their CSDP or broker, as the case may
be, in respect of uncertificated shares, or the company, in respect of

- a declaration that the distribution is exempt from dividends tax; and
- 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. Shareholders 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 shareholders 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.

Assuming dividend withholding tax will be withheld at a rate of 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 shareholder, the net dividend amount due
to non-resident shareholders is 14.64800 cents per share. A reduced
dividend withholding rate in terms of the applicable DTA may only be
relied on if the non-resident shareholder has provided the following
forms to their CSDP or broker, as the case may be, in respect of
uncertificated shares, or the company, in respect of certificated shares:

- a declaration that the distribution is subject to a reduced rate as a
  result of the application of a DTA; and
- 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 shareholders 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.

Any forecast or forward-looking statements have not been reviewed or
audited by L2D's external auditors.

On behalf of the Board of Directors

Angus Band               Amelia Beattie           Jose Snyders
Chairman                 Chief Executive          Financial Director

28 February 2022

The full long-form announcement is available at: 
https://senspdf.jse.co.za/documents/2022/jse/isse/l2de/YE21.pdf. 
The contents of this short-form announcement are the responsibility 
of the Board. This short-form announcement is only a summary of the 
information in the full announcement and does not contain full or 
complete details. Any investment decisions made by investors and/or 
shareholders should be based on the full announcement as a whole. 
Shareholders are encouraged to review the full announcement, which 
is available on SENS and on L2D's website: 
https://www.liberty2degrees.co.za/investors/sens. It is also 
available, at no cost, on request at: investors@liberty2degrees.co.za 
or from the Sponsor at: sponsorteam@merchantec.co.za during normal 
business hours. The financial results for the year ended 31 December 
2021 were audited by the Group's auditor, PricewaterhouseCoopers 
Inc., who expressed an unqualified audit opinion thereon. The 
auditor's report is available on L2D's website at: 
https://www.liberty2degrees.co.za/investors/results-centre. 

Sponsor: Merchantec Capital

Date: 28-02-2022 12:06:00
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