Real estate investment trust Liberty Two Degrees (L2D) reports that, as Covid-19 restrictions eased and vaccinations gained momentum, consumer confidence and retail trade improved in the last quarter of 2021, resulting in its financial and operational metrics improving.

L2D CE Amelia Beattie says 2021 was a challenging year for the property industry. “The retail sector has had to reassess its ability to address customer needs and keep up with the evolving nature of their demands.”

She adds that workplace practices have been reshaped with a focus on flexibility and safety, yet with a requirement for ongoing collaboration.

However, despite the improvements towards the end of 2021, the recovery of L2D’s portfolio remains uneven, with differing outcomes for certain subsectors.

Nonetheless, occupancy levels across L2D's portfolio stabilised at 93.7% at the end of 2021, compared with 93.7% as at June 2021, and at 93.3% in December 2020.

The retail portfolio improved marginally in occupancy to 96.8%, compared with 96.7% as at June 2021, and 95.3% at December 2020. This is also above Morgan Stanley Capital International’s (MSCI’s) third quarter of 2021 retail occupancy benchmark of 94%.

From the start to end of 2021, L2D’s Sandton City and Eastgate Shopping Centre improved their occupancies from 97.9% and 92.9%, to 98.3% and 94.6%, respectively – ahead of the third-quarter MSCI super regional benchmark of 93.2%.

As such, L2D reports that its rate of decline in the occupancy levels of its office portfolio slowed at 86.2%, remaining above MSCI’s fourth-quarter of 2021 office occupancy benchmark, which fell to an all-time low of 84%.

Nevertheless, L2D reports that the outlook for the office rental market remains a concern owing to office oversupply and the change in use patterns.

FINANCIALS
L2D FD José Snyders highlights that net property income (NPI) improved by 19% year-on-year, benefitting from lower rental discounts, good containment of cost increases and an improvement in credit loss provisions.

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.

L2D’s property portfolio was valued at R8.4-billion at the end of 2021 – marginally down from the December 2020 valuation, following the significant write-down of R1.7-billion in 2020.

He says L2D has successfully refinanced R500-million of term debt, which expired at the end of October 2021, for a further five-year term, adding an additional R100-million term debt to fund any long-term capital commitments.

NEW BUSINESS
Throughout 2021, L2D concluded 291 renewals and new leases, equating to 147 507 m², or 15.6%, of total portfolio gross lettable area (GLA), marginally down from the 148 725 m², or 15.7%, held at December 2020.

With L2D’s experiential retail offerings well established across the malls, along with the easing of restrictions and the return of workers to offices in retail nodes, the fourth quarter of 2021 showed 22.9% more customers visiting the L2D malls than in the comparable period of 2020. This was only 3.4% below footfall levels of the fourth quarter of 2019.

L2D also notes that its footcount data reveals a shift in shopping patterns, with consumers spending more money over fewer visits to its malls with longer dwell times, translating into higher turnover.

Further, trading levels in L2D’s retail portfolio recovered well, and in some cases to levels exceeding those experienced in 2019, with yearly turnover in the retail portfolio being 24.5% higher than in 2020.

Year-on-year, turnover in the fourth quarter was 15.8% up, and 5.1% up based on comparable 2019 levels.

In this regard, Sandton City and Midlands Mall recorded the largest increases in turnover, with Sandton City outpacing 2020 and 2019 yearly turnover by 31.3% and 4.3%, respectively. Sandton City also generated its highest ever yearly turnover of R7.4-billion in 2021.

However, serving a different catchment area, L2D notes that Eastgate’s recovery was slower, leading to the company implementing various focused initiatives aimed at increasing turnover and dwell time.

L2D is also working with management at Melrose Arch to find solutions to its high office vacancies.

In total, L2D’s net property income contribution from the retail portfolio improved by 27.3% in 2021 – an increase of R100-million compared to 2020; however, still below 2019 levels.

Beattie cautions that while retail shows a “promising” recovery, sectors such as hospitality, food services and offices continue to bear the brunt of Covid-19 related restrictions and weak economic activity.

“The hospitality sector, which was impacted by the lack of business travel and conferences, remained under severe pressure, thus constraining income from those properties. The hospitality sector’s contribution to NPI was R65-million less than 2019 and R17-million less than 2020.

R850-million in term debt is up for refinancing in the third quarter of this year.

Going forward, L2D cites uncertainty in the trading environment, as well as the fragility of the South African socioeconomic environment, as being 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, is likely to slow our return to pre-pandemic levels of distributable income,” says Snyders.