Liberty 2 Degrees ‘rebuilding for growth’ through resilience

Liberty 2 Degrees (L2D) malls have attained a first in
Africa – a international accreditation for Covi-19 compliance in accordance
with SAFE Shopping Centres’ Risk, Resilience and Security Standards.

In the company’s recent financial results presentation for
the six months ended on the 30th of June 2020, Chief Executive
Amelia Bettie commented:

The Covid-19 pandemic has had far-reaching consequences
beyond the spread of the disease itself, as customer sentiment and behaviour continue
to echo the uncertainty of the pandemic. The constrained local economic
conditions as well as the related uncertainty, has dealt an immediate and near-term
impact to prospects for growth globally. Consequently, we expect our
performance to be impacted for the remainder of the 2020 financial year

The crisis has allowed the company to manage the business
with resilience and by continuing to monitor and to adapt to changing market
conditions, management’s focus for the remainder of 2020 will be on rebuilding
the business by working with tenants in creating environments that support the
resumption of safe trading in the short term and positioning the business for
sustainable growth.

Due to the distributable earnings decline and the prevailing
uncertainty resulting from the Covid-19 impact, the Board has decided not to
pay an interim distribution but will consider the payment of a final
distribution for the 2020 financial year that meets the regulatory
requirements. As of the 30th of June 2020, L2D’s 100% South African
property portfolio was valued at R8.7 billion (30 June 2019: R10.2 billion) and
the net asset value per share decreased by 19.5%. This excludes Century City
offices which were pending transfer as of the 30th June 2020 and has been
subsequently transferred in July 2020.

Our independent property valuers have decreased the
portfolio value by 14.8% compared to 30 June 2019 (14.3% compared to December
2019). Valuations have been negatively impacted due to the impact of Covid19 by
inter alia, the decrease in rentals for the current year, the negative reversions
and lower growth assumptions for the periods forecasted, as well as an increase
in vacancies and the time required to re-let vacant space. Our valuers have
also applied more conservative valuation metrics including adjustment to exit
capitalisation rates, discount rates and an increase in the periods allowed to
re-let space. The finalisation of the property valuations has required care and
prudence to ensure that a balanced outcome was achieved. This does however
remain challenging during this time
” says José Snyders, L2D’s Financial

L2D’s reported revenue and net property income (NPI)
decreased by 15.8% and 40.4% respectively in comparison to the prior period.
The NPI of R201.8 million for the six months ended on the 30th of
June 2020 (30 June 2019: R338.8 million) was significantly impacted by
decreases in footfall as shopper behaviour changed with the advent of Covid-19
and subsequently the national lockdown and restricted trading periods.

In line with our philosophy to respond with humanity and
empathy in dealing with tenant impact whilst balancing the need to protect the
sustainability of our business in the interests of our stakeholders, rental
relief and support has been provided on a pragmatic basis and in line with the
Property Industry Group guidelines. Relief offered was structured with
weightings in favour of level of impact on tenants’ ability to trade. Rental
relief negotiations are ongoing but difficult as many of the Covid-19
implications for tenants are evolving. L2D is still in evolving negotiation
with the restaurants who are requiring a different approach stepping forward
.” Snyders continues.

Currently 85.4% of the retail Gross Lettable Area (GLA) is
trading and only gyms and certain restaurants remain closed. The closure of
hotels in the Sandton City precinct, in line with the lockdown restrictions,
has impacted earnings negatively. The Sandton Sun hotel has recently re-opened,
with low occupancies continuing and we expect the remainder to start trading
once conditions have improved.

Interest expense has increased by 11.3% from 30 June 2019 because
of additional term debt that was drawn down in November 2019 and March 2020.
Including negative fair value adjustments of R1.5 billion, a loss before tax of
R1.4 billion was recorded compared to a profit of R244.2 million for the six
months ended on the 30th of June 2019.

Edcon Limited commenced with business rescue proceedings
during April 2020. The investment L2D has in Edcon ranks as a secured creditor.
Management was in continual engagement with business rescue practitioners and
the business rescue plan has been adopted. There are two acquisition deals
currently in negotiation and we are working closely with Edcon in assisting in
the conclusion thereof. The Board has elected to write down the fair value of
the investment in Edcon to zero as of the 30th of June 2020.

In line with Safe Spaces which underpins the L2D building
blocks, L2D aims to drive a clearly defined mall strategy that ensures the mall
environments hold the highest standard of safety and security for tenants and
shoppers. In the period, L2D was affirmed by SAFE Shopping Centres, a Global
certification and advisory company, as the first responsible owner in Africa to
achieve international certification following a Covid-19 assessment, taking the
extra steps to ensure duty of care for tenants and shoppers.

In addition to prioritising the safety and security of all
stakeholders, management’s focus for the remainder of 2020 will be to rebuild
the L2D business for growth. In accelerating the work that has already been
done in merging online retail with physical environments while using technology
to improve operations, L2D has made a strategic appointment in the period to
strengthen the leadership team and deepen the talent pool.

Patrick Masithela joins L2D as Chief Information Officer
effective on the 1st of August 2020 and has been appointed to the
L2D Management Committee. In his capacity, Pat will be responsible for
providing strategic and operational leadership to the Information Technology
and Digital Transformation initiatives. These will primarily focus on how L2D
continues to transform its retail environments to remain at the forefront of
the changing retail landscape.

The Safe Shopping Centres certification is an
achievement we are proud of, especially during this critical and unprecedented
time. We are encouraged that the efforts that we continue to make to keep our
environments safe during this time, meet global standards and remain in the
best interests of all our stakeholders. We are pleased with the appointment of
Patrick Masithela to the team. Pat’s well-developed understanding of technology
trends and the meaningful deployment of technology to enable business strategy,
positions us well to drive our ambition of Rebuilding for Growth. As many businesses
have been placed under pressure due to the pandemic, these unprecedented times
necessitate an awareness of the needs of all our stakeholders and the execution
of strategic initiatives to ensure we remain relevant and sustainable for the
long term. In rebuilding the business for growth, we aim to focus on refreshing
our assets, creating new spaces to pivot and adjust to a new normal and explore
new opportunities
,” says Beattie.

These opportunities include; filling tenant vacancies and
working closely with tenants to rebuild their businesses, the execution of
L2D’s building blocks as a key focus to enable the continuation of enhancing
the tenant and customer experience and remain relevant in this faced-paced
environment, and a focus on rebuilding the capacity of the L2D people while
taking new ways of working into account in order to achieve the outcomes that
are aligned to the overall vision to be the leading South African, precinct
focused, retail-centred REIT.

Furthermore, we have continued to place a focus on
contributing to the greater good. In June 2020, we introduced touch-less
parking at Sandton City, Eastgate Shopping Centre and Midlands Mall. 50% of
parking income raised (R1.25 million) will be donated to OnePeople Fund which
buys maize in bulk and distributes it in partnership with local Non-Profit
organisations, distributing more than 370 000 meals each week to many of South
Africa’s most vulnerable

We have remained committed to transformation and we are
actively working on improving and achieving our targets with specific actions
in place to ensure that we drive each element during the year. Our bold market
leading sustainability initiatives are in place to ensure that we continue to
reduce the impact of our operations on the natural environment as we continue
our journey to Net Zero 2030
.” adds Beattie.

The key imperative for 2020 is to have a Net Zero Waste
readiness by the end of the year and L2D are on track to achieve this.
Management will continue to draw on L2D’s strong balance sheet, complemented by
robust liquidity management processes, and is satisfied that there are
sufficient cash reserves and unutilised debt facilities to cover our business
commitments as they fall due.

Looking ahead, the board of L2D will consider the payment of
a final distribution for the 2020 financial year once the full year results are
available and in accordance with regulatory requirements. Given current
uncertainty, the board has made the decision not to provide earnings and
distribution guidance for the remainder of the 2020 year at this stage.

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