JSE-listed real estate investment trust (Reit) Liberty Two Degrees (L2D) said on August 1 that it sees continued positive momentum reinforced by a strong balance sheet.

It reported an interim distribution pay-out for the six months ended June 30, which is an 11% increase on the distribution for the 2021 interim period.

The company's operational metrics have shown a steady recovery in the first half of this year, with a 16.1% improvement in turnover growth compared with 2019, said L2D CE Amelia Beattie.

"First quarter achieved 13.6% in turnover on the first quarter of 2019, and is tracking 25.4% ahead of Statistics South Africa's industry benchmark of 1.9% year-on-year for the first quarter of 2021. Trading gained momentum as the year progressed, with turnover in the second quarter, up 18.4% on the second quarter of 2019," she said.

The company is encouraged by its financial and operational metrics, which have shown continued positive momentum in the recovery of its property portfolio, with the retail assets driven by quality tenancies, providing the biggest share of the uplift.

This has been supported by an encouraging recovery in the hospitality assets that are starting to show increased levels of activity.

"The positive momentum has been supported by the lifting of the National State of Disaster and the removal of the remaining Covid-19 regulations, which contributed to a return in both retail and consumer confidence, boding well for our portfolio in the first half of the year," said Beattie.

While the South African economy remains under pressure with a low growth forecast for the remainder of this year, L2D remains realistic about the uncertainties which prevail and focused on building on the momentum gained in the first half of this year.

"Our commitment to creating value underpins our financial and operational performance and management's ability to drive financial and operational excellence. We aim to build on the momentum gained in turnover and footcount recovery, drive leasing performance and lower reversions, which containing costs to strategically position the company for further growth," she said.

L2D continues to enable future growth through prudent financial management, recording a 10% increase in net property income to R272-million, supported by lease income escalations and improved activity in the retail portfolio and hospitality assets, said L2D FD José Snyders.

"Included herein, net utility costs increased owing to higher consumption coupled with marginally lower recoveries in certain cost categories which were exacerbated by the increased cost associated with load shedding, municipal tariff hikes and provisions raised in respect of ongoing objections to municipal rates valuations," he added.

The Reit said it was encouraged by the recovery in the hospitality sector, which has seen increased occupancies at both the Sandton Sun and Garden Court hotels, with net revenue up R14-million from the prior year. Operating costs are higher than the comparative period in 2021 at R7.1-million, but Snyders said efforts to reduce costs were ongoing.

"L2D's conservative balance sheet is a critical strength within the uncertain environment. We have a healthy loan to value of 24.64% at June 30, 2022, up from 23.87% at December 31, 2021, and sufficient liquidity to meet our operational needs. We remain well within our banking covenants. Our interest cover ratio remains healthy in excess of three times, with 63% of our interest rate exposure hedged," he highlighted.

Further, L2D's average cost of debt remains relatively low at 7.75%. L2D’s property portfolio was valued at R8.4-billion in the period, which is a marginal decrease of less than 1% from the December 2021 valuation, Snyders said.

"Our customer experience initiatives continue to pay off as the portfolio records the highest footcount in the first six months of 2022 compared to the prior three comparative years," said Beattie.

The L2D portfolio consistently experiences double-digit growth in footcount, having not dropped below 10% this year. This encouraging start to the year contributed to better occupancy rates and good leasing activity in the period, indicating the strong demand for L2D retail space where 179 leases, of renewals and new deals, were concluded in the first half of 2022, equating to 46,992m², she highlighted.

"On the back of this solid performance, we are pleased to report that the L2D Board has declared a full interim distribution pay-out of 17.48 cents per share for the first six months, a double digit increase of 11% over the prior year interim distribution reinforced by a strong balance sheet," Beattie added.

Meanwhile, the continued double-digit increases in municipal and utility costs, coupled with increased periods of load-shedding and a weak consumer environment facing an increased inflationary burden, remains a catalyst for downside pressure on the portfolio’s performance.

The portfolio occupancy level declined marginally to 92.9% in June, down from 93.7% at December 2021, with continued pressure in the office sector. L2D’s office exposure remains low, making up 3.1% of the overall vacancy and improved retail occupancy.

"Though not yet positive, we are seeing an improvement in the downward trend that has plagued rental renewals over the last few periods. Rental reversions across the portfolio were negative 16.3%, with retail renewals reverting at negative 15.6% and offices at negative 26.1%, compared to June 2021 when retail was negative 26.6%, and office at negative 21%.

"It is worth noting that that there is a time lag between turnover improvement and improvement in lease renewals, which are also dependent on the timing of expiry of the in-force leases" noted Beattie.

Further, the company reduced reliance on power grid by 3.6% across the portfolio, with additional solar roof plant installation done at Promenade Mall, in Cape Town.

"L2D remains focused on achieving its net-zero targets across waste, water and energy. To date, L2D achieved a significant improvement in its waste diversion rate at 84%, up from 35% in 2021.

“Several initiatives are already in place to reduce electricity consumption across the portfolio, including the most recent installation of a 1 MW solar roof plant at Liberty Promenade Mall. The centre’s carbon footprint will be offset by 2.3 t of carbon dioxide each year," Beattie said.