The Liberty Two Degrees FD explains that the role of the CFO in challenging times is multipronged.
José Snyders is the FD of Liberty Two Degrees (L2D), a company primarily invested in large retail centred precincts, which includes the Sandton City Complex and the adjacent hotels, the Sandton Convention Centre, Eastgate Shopping Centre, Liberty Promenade Shopping Centre and the Liberty Midlands Mall.
José joined L2D in January of 2017 and says even though the company has a pretty strong portfolio of assets, the South African environment was already challenging because of the low economic growth, limited disposable income and a significant part of the population being unemployed.
Additionally, the amount of money that South African property owners spend on utility costs and municipal rates has grown at a much higher percentage per annum than what has occurred for income growth in the underlying portfolios. “We've seen unsustainable double digit growth in the cost increases for electricity, water and rates for the last few years and that trend seems to be continuing unabated.”
The pandemic further exacerbated the challenges in the industry, but he says these difficulties have presented an opportunity to reimagine some aspects of the business.
Creating value
José says the role of the CFO/FD in challenging times is multipronged, but a major element is assisting the business in maintaining adequate processes and information flow for identifying what is happening, and then ensuring that what is happening is in line with the strategy and the desired outcomes for the business, and making pre-emptive adjustments where necessary along the way.
He says in their line of business, creating value entails addressing changing consumer needs and making sure their assets evolve to address those needs over time. That requires thinking about what people will want to experience when visiting the assets in two to five years from now and making sure that the portfolio is migrating to fulfilling that need timeously.
“A lot goes into having foresight of what changes are starting to happen in the marketplace, the ability to predict trends in consumer driven commercial properties and then efficiently allocating capital in addressing the changes required within our broader portfolio to meet the needs expressed.”
The pandemic resulted in malls, retailers, hotels and convention centres being unable to trade for extended periods of time, or trading under restricted conditions. As a consequence, L2D had to provide a lot of support to tenants in the form of rent relief and other measures to support the sustainability of their businesses through this period of time.
At the same time, they had to keep spending on the properties, making sure that when the economic growth eventually rebounds and consumer spending improves, customers return to their assets, and spend money in their portfolio. José says, “There are certain categories of spend that you can't avoid. For instance you have to maintain your asset, because if it falls into disrepair, people don’t come back.”
He says he has played a major part in containing costs and making sure that the L2D portfolio is being managed as efficiently as possible. “For example, utility and rates bills are significant expense items that are increasing annually. We counteract these increases by investing in green technology that enhances our operational efficiencies. In turn, better operational performance due to good sustainability practices may result in a lower cost of capital and a more readily available and diverse pool of capital.”
The CFO is key in making the capital allocation decisions within the business: making sure that the analysis and thinking around capital allocation is complete, that the data it’s based on is correct and that all factors necessary in making a decision are being discussed and brought to the fore.
He explains that with all the volatility and uncertainty that exists in the current environment, raising capital is challenging: “The decision as to how you spend the capital that you do have becomes exponentially more important because of scarce capital in an environment such as this. You also have to make sure that you aren't spending money in areas that are not ultimately going to provide a return and position your portfolio to capitalise on growth opportunities as they re-emerge.
In addition, there is the role of communicating strategy to the broader market, to report on the results of the business and maintain effective financial controls in the business, and to make sure that funding lines both in debt and equity are sufficient for the needs of the business in rolling out the strategy.
Exploring new growth opportunities
Looking forward, he says it’s important to recognise that at the back end of the pandemic, the assets only work if the tenant mix within the assets is correct. “Retail customers are choosy and in South Africa are supplied with an abundance of retail alternatives. Each customer wants to go into a mall that has an adequate mix of tenants that caters to all their needs for shopping and entertainment, while offering a class leading experience. A mall doesn't work with retailers in isolation: it’s the integration of the tenant mix that makes it work.”
He says some problems don’t have a quick fix, such as vacant office buildings due to insufficient economic growth, which has been exacerbated by the shift to work-from-home. Another challenge is the trend of retail moving online – L2D embraces this challenge in that it is an opportunity for physical brick and mortar to evolve and become more experiential and personalised.
José says going forward, creating value will entail looking at extracting more value from their existing asset base and that includes looking at the physical master planning around their assets, and seeing what additional add-ons to the portfolio will make sense in attracting more customers to those environments, enabling L2D to maximise the proportion of wallet spend in their precincts.
