Hospitality Property Funds in right issues plans

Posted On Friday, 03 February 2012 02:00 Published by eProp Commercial Property News
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The bad news for shareholders of Hospitality Property Fund, last week it announced plans for a rights issue to help refinance a R1,35bn debt facility with Absa that expires this month.

Gerald Nelson

The owner of swanky hotels like Mount Grace in Magaliesburg, Holiday Inn Sandton and Radisson Blu Waterfront in Cape Town last week announced plans for a rights issue to help refinance a R1,35bn debt facility with Absa that expires this month.

Market talk is that Absa is getting nervous about its substantial exposure to the ailing hotel sector, forcing Hospitality to reduce its gearing levels.

A rights issue will dilute the distributable income that the fund pays out bi-annually to shareholders. The biggest worry is that Hospitality may no longer be able to honour its 5%/year growth commitment to A unit holders.

Last year, A units still appeared on a number of stock-pick lists because the stock offers an attractive initial yield (around 11% compared to the sector’s 8%) and has a preferential claim to earnings, with growth of 5%/year virtually guaranteed.

B units get paid the balance of distributable earnings. Not surprisingly, B unit holders have had to bear the brunt of weak demand for hotel rooms. The share price is down from R20 to less than R5 over the past 18 months. Moreover, B units’ income distributions for the year to June 2011 were slashed by 33%.

In a trading statement released in early December, management warned that distributions to B unit holders for the six months to December 2011 would drop again following poor winter trading conditions and higher operating costs — this time by at least 80%.

At the time, management said A units’ distributions for the second half of calendar 2011 would remain unaffected. However, last week asset manager Alternative Real Estate put out a sell signal on both the A and B units.

Alternative Real Estate fund manager Maurice Shapiro says Hospitality Property Fund’s plans to refinance debt by way of a rights issue will dilute the value of existing shares and raises concerns around the safety of the A units.

“Income from A units may no longer be guaranteed,” says Shapiro. “We expect that by this time next year, if not before, A units distribution will be cut. We have advised our clients not to own either A or B units and not to subscribe to the rights issue.”

Asked whether there is indeed a chance of A unit holders having to forfeit their 5% growth in income payouts in the near future, Hospitality Property Fund CEO Gerald Nelson says it’s hard to say, as the terms of the rights issue will only be known in a week or two.

“A lot will depend on how much capital we have to raise and what lending margins we can secure on new debt facilities. But margins will no doubt be higher than what we negotiated back in 2006.’’

Sesfikile Capital director Mohamed Kalla says matters are complicated by the fact that Hospitality doesn’t offer a clawback agreement on its A units. “Let’s assume income payouts drop from 122c in June 2011 to 114c in June 2012. When the company makes a profit again and resumes its 5% growth policy for A units, say in June 2013, growth will be based on 114c and not 122c. So it could take nearly two years for payouts to get back to current levels.”

Kalla says shareholders of both Hospitality A and B face some difficult decisions. “One option could be decoupling the A and B units before doing the rights issue. If shareholders approve, Hospitality will be allowed to issue only B units. This should maintain some of the income protection enjoyed by the A units and would be a relatively better (and cheaper) funding option for the group in our view. But it would require long-term commitment from the holders of B units.”

Kalla says the question is, do you sell your stock and take the pain upfront or do you stay committed and wait out the downturn?

“Either way, it could be a bumpy ride ahead.”

Last modified on Friday, 18 April 2014 16:23

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