Why Sandton City’s owner threw in the towel

How is it that a company that owns what is probably Gauteng's most coveted slab of real estate has been such a disappointing listing?

Shares in Liberty Two Degrees (L2D) had lost over 60% of their value since going public in 2016 before last week’s R5.55 share price buyout bid was announced. You can hardly blame the company for embracing an offer from parent Liberty Group, pitched at a 46% premium to the volume-weighted average price at which the stock had been trading over the previous 30 days. Still, the offer is a 35% discount to L2D’s last stated NAV of R7.59 a share. (Though given muted investor demand for listed property and the parlous state of our economy, say insiders, few would expect Liberty to pay NAV.)

While L2D has been one of the more consistent payers of dividends, which is a large part of the reason investors buy property stocks, its total return, including payouts, over the three years to end June is -4.1%.

L2D CEO Amelia Beattie lays part of the blame for the share’s performance at the company’s tiny free float of 12%. “Liquidity has always been an issue, so there’s a small margin to trade out of,’’ she says.  

While the listing environment has been horrible for almost all property stocks, L2D has underperformed the sector in recent years. Beattie ascribes this to the stock being tightly held by a handful of large investors. Liberty Group itself, now owned by Standard, owns 60% of the company.  

It’s clear that this latest deal confirms that the big shrink in the JSE’s beleaguered property sector shows no signs of stopping

Still, it’s clear that this latest deal confirms that the big shrink in the JSE’s beleaguered property sector shows no signs of stopping, as buyouts, mergers and delistings gain momentum.

It’s likely that Liberty Group’s proposal will get the nod from a required minimum of 75% of L2D shareholders and consolidate Liberty’s property assets under one unlisted umbrella.

Together, Liberty Group and L2D own assets worth R25.2bn (split R16.8bn/R8.4bn), which include large retail precincts: Sandton City, Nelson Mandela Square, Eastgate and Melrose Arch in Joburg; Midlands Mall in Pietermaritzburg; and Promenade Shopping Centre in Cape Town’s Mitchells Plain.

Liberty Group and L2D also own a portfolio of Sandton-based hotels (Sandton Sun, InterContinental Sandton Towers and Garden Court Sandton City) as well as a small office portfolio.  

Though the timing of the announcement took the market by surprise, the move wasn’t entirely unexpected.  

As Ridwaan Loonat, senior property analyst at Nedbank CIB, points out, Liberty’s offer was “always a strong possibility — the unknown was if and when it would happen’’.

Whether L2D’s imminent delisting — likely to be followed by others — is a good or a bad thing depends on one’s perspective. 

Loonat says the deal helps unlock value for existing shareholders, and this is underscored by the share price reaction after last week’s announcement. The stock surged 45% to 570c, up from a record low of 357c early last week. 

However, Loonat says the downside to L2D’s delisting is that JSE investors will have one fewer property stock to invest in. At least four other property stocks have already disappeared from the JSE in the past year or so on the back of buyout and merger activity: Irongate (former Investec Australia Property Fund), Arrowhead Properties, Indluplace and, most recently, UK-focused Industrials Reit.     

But Beattie says the proposed buyout is best now for shareholders.

She argues that large retail assets are better unlisted, not subject to short-term dividend growth expectations and stock market vagaries. Which raises the question: why did L2D bother to list in the first place?

“Back then, the sector was trading at a 40% premium to NAV. So there was good reason to bring unlisted real estate assets to the market,” says Beattie. “A listing also gave investors exposure to assets they wouldn’t otherwise have had access to.”   

Now, though, the sector trades at a discount to NAV of more than 30%. Add in higher interest rates and reluctant capital, and it’s difficult to unlock value for investors. 

“In this environment, one can do a lot more with one’s assets off-market,” says Beattie. Early last week, before the buyout announcement was made, L2D’s share was trading at a hefty 53% discount to NAV, despite a strong post-pandemic rebound in trading metrics at most of its malls and hotels.

Despite load-shedding and a weak economy, the Reit also continues to achieve above-market dividend growth. Earlier this week L2D declared a 7.4% year-on-year increase in dividend payouts for the six months to end-June (at a 100% payout ratio).

In this environment, one can do a lot more with one’s assets off-market

—  Amelia Beattie 

Foot count in its retail portfolio was up 9.1%, while turnover rose by 6.8% on average. Rental reversions on lease renewals turned positive for the first time in four years at almost all of L2D’s malls, Melrose Arch being the only exception.  

At Sandton City, the jewel in L2D’s crown, trading density (turnover per square metre) was up an encouraging 19.6%. The two best-performing retail sectors in this regard were food services (+28%) and luxury brands (+19.7%).

Retailers continue to expand and upgrade their stores at Sandton City. These include Cartier, Burberry, Dolce & Gabbana, Nike and Zara. In fact, when Zara opened its newly refurbished store in May after a four-month closure, turnover for that month surged 50% (year on year).  

Craig Smith, head of research at Anchor Stockbrokers, says while it’s sad to see companies delist that have an interesting story and a clear growth path, the property sector is set for further consolidation given how many property counters are tightly held and difficult to trade in.  

He says illiquidity creates challenges for investors who need to withdraw or reallocate capital and can lead to wild swings in share prices. 

He says the sector may in fact benefit from certain delistings if the proceeds are reinvested in other property stocks. “That will potentially create more liquidity and buoyancy for existing Reit counters,” he says. 

Smith adds: “We went through a wave of new listings in 2013-2016 and the reality is that many of those companies should probably never have listed. They were just too small or too tightly held, or didn’t really have the prospects to gain sufficient scale to warrant a listing.’’ 

We went through a wave of new listings in 2013-2016 and the reality is that many of those companies should probably never have listed

—  Craig Smith 

He says at the time almost too much money was poured into listed property, which resulted in share prices running too hard. So a correction was probably inevitable.  

Brendon Hubbard, portfolio manager at ClucasGray, also expects more deals on the corporate action front as value chasers with strong balance sheets start circling.

He says European mall owner Hammerson is the next stock that will be ripe for a buyout and delisting.  

Hubbard says Hammerson’s assets, spread mostly between the UK, France and Ireland, are way more valuable than they are effectively priced at.

The company trades at a 52% discount to NAV despite recently posting an impressive operational rebound for the six months to end-June.

Hubbard refers to Hammerson’s Value Retail segment in particular.  It’s a portfolio of centres tenanted by luxury goods retailers and has recorded double-digit turnover growth.  

“That’s amazing in a European context,’’ he says. “Whoever buys Hammerson now will probably be generating enormous profits in five years’ time.’’