JSE-listed Liberty Two Degree (L2D) says it continued a strong recovery in its operational and financial metrics during the year ended December 31.

It has, therefore, approved a distribution of 18.99c apiece for the six months ended December 31. In addition to the interim distribution of 17.48c apiece, the full-year distribution for 2022 amounts to 36.47c apiece.

L2D says the full-year distribution payout is supported by a strong balance sheet and represents an increase of 6.95% over the prior period.

As alluded to, the balance sheet remains robust. The loan-to-value (LTV) is 24.42%, and interest cover ratio is healthy at 2.95 times, both well within banking covenant requirements.

L2D says R850-million of term debt which expired in the second half of the year was refinanced and that 80.27% of interest rate exposure is hedged. At period end, the average cost of debt is 9.23% with total unused credit facilities available of R339-million.

The year saw South Africa, in line with the rest of the world, lifting the last of its Covid-19 restrictions, buoying consumer confidence, travel and tourism and general sentiment which supported the positive momentum in performance, L2D outlines.

The company’s operational metrics have shown good growth in 2022, with the portfolio’s turnover and footcount exceeding 2019 (pre-Covid-19) levels.

The retail portfolio generated a 21.9% increase in turnover compared with 2021 (18.3% compared with 2019) and recorded a 24.9% growth in footcount compared with 2021 (9.9% compared with 2019).

Higher demand for retail space resulted in improved retail occupancy rates and positive leasing outcomes, providing an enhanced customer experience, L2D avers.

Trading gained momentum as the year progressed, with turnover in the fourth quarter up 21% on that of the fourth quarter of 2019. The portfolio is said to have experienced an exceptional December trading period, with Sandton City in particular having generated R1.25-billion in turnover.

Although the office recovery has been muted, the office portfolio occupancy rate has improved on a like-for-like basis.

Portfolio reversions, while still negative, have improved to -10.4% from -25.9% in the prior period.

Net property income, excluding the impact of lease straight lining, grew by 7.3% over the period supported by the core retail portfolio and a recovery in the hospitality assets.

However, continued double-digit increases in administered municipal and utility costs, coupled with increased periods of loadshedding, prevailed in 2022 and remain a concern, L2D says.

Additionally, notification was received post year-end that the Sandton City rates appeal has been unsuccessful. Consequently, provision for the arrear rates and interest has been made, resulting in a net impact of about 2c apiece on the distribution per share for the financial year.

The portfolio occupancy level improved to 93.5% in December, with demand for both retail and office space increasing.

Retail occupancy improved to 97.9%.

PROSPECTS

South Africa's economic prospects this year remain challenged by several headwinds. High levels of inflation, rising interest rates and high levels of unemployment weigh on disposable incomes. The inability of State-owned utility Eskom to provide consistent and adequate supply of electricity compounds the country’s weak economic outlook and limited growth prospects, L2D outlines.

Notwithstanding this challenging macroeconomic environment, it says it remains steadfast in executing initiatives in support of its strategic value drivers.

Its strategy includes a focused drive on cost containment, extracting value from efficiencies and considered capital allocation, including investment in renewable energy, modernising its heating, ventilation and air conditioning systems and using grey water harvesting to defray continued excessive increases in utility costs.

Improving on the muted office performance and recovery in the hospitality sector remains a focus.

Overall, L2D believes the portfolio rentals and cost of operations for tenants in its portfolio have rebased to more sustainable levels boding well for rental growth in lease negotiations going forward. However, it continues to expect a lag between the improving operational metrics translating into rental income owing to the contractual nature of leases and timing of renewals.

Based on L2D’s current forecasts, and assuming that the board continues to approve a 100% distribution payout ratio, it expects the 2023 full-year distribution to be between 0% and 8% higher compared with the prior year.

This is dependent on no further significant negative changes in the intensity of loadshedding, cost of diesel or the municipal rates valuations of the portfolio.