Hospitality Property Fund’s first full year results significantly exceed expectations

Posted On Thursday, 30 August 2007 02:00 Published by eProp Commercial Property News
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Total return on Hospitality A-linked units total 38% and for B-linked units it amounts to a notable 116%. The Fund’s total returns during the reporting period significantly outperformed the listed property sector

Gerald NelsonThe A-linked unit distributions amount to 100,46c, as set out in the listing prospectus forecast for the year to 30 June 2007. The B-linked unit distribution equates to 140,40c, which exceeds the prospectus forecast by 17,9% and is 20,2% up on the previous year’s four-and-a-half month annualised distribution

Linked unitholders will receive debenture interest payment for the six-month period ended June 2007, of 50,83c per A-linked unit and 71,68c per B-linked unit.

Hospitality is a property loan stock company, which invests in properties in the hotel and leisure industries. It is a publicly traded company listed on the main board of the JSE Limited (JSE) in February 2006. Units in issue comprise A- and B-linked, with A-linked units having a preferential claim to earnings with capped growth, whilst the B-linked units receive the balance of earnings.

Hospitality is managed by Hospitality Property Fund Managers, a joint venture between property fund managers Grapnel Property Group and hotel specialists Hotel Tourism & Leisure Asset Management.

“Approximately 28% of the Fund’s earnings are derived from lease income which is linked to the underlying operational performance of the hotel properties. The B-linked units’ outperformance is attributable to this income component having benefited from robust trading conditions in the hotel industry as well as effective asset and hotel management structures,” notes Hospitality Property Fund CEO Gerald Nelson. Nelson adds that a number of the Fund’s acquisitions have been yield enhancing.

Continued positive performance is expected for Hospitality according to Deputy CEO Joseph Aminzadeh. “Economic and business conditions on balance remain favourable and the robust trading conditions for the hotel industry look set to continue particularly in the lead up to 2010. While Hospitality has a relatively small exposure of earnings from underlying operational income, it should nonetheless benefit from this positive environment,” points out Aminzadeh.

Aminzadeh refers to the latest Deloitte Hotel Benchmark report which states that trading conditions within the hotel industry remain buoyant with the revenue per available room (REVpar) across South Africa having grown 17,8% for the first six months of this year.

“This was largely driven by improvements in average room rates which grew by 15,3% compared to the same period last year, and to a lesser extent by increases in occupancies which have seen a growth of 2,2% so far this year,” says Aminzadeh.

During the year Hospitality increased its Black Economic Empowerment (BEE) shareholding during the period, which more than doubled to 30,4%. It currently exceeds the ownership target of 25% as set out in the Property Sector Transformation Charter.

Hospitality’s BEE partners, Nobuntu Investments (Pty) Limited and Nobuntu Investments II (Pty) Limited, increased their shareholding to 26,3% of units in issue during the reporting period. Together with the National Empowerment Fund Trust, this equates to a 30,4% BEE shareholding.  An additional 19,026,024 linked units were issued to fund various acquisitions and to expand the Fund’s BEE ownership component.

In terms of liquidity, 38% of the Fund’s units in issue were traded during the year ended June 2007. At year-end 91,375,470 linked units were in issue, comprising an equal number of A- and B-linked units. At the close of its financial year, Hospitality’s weighted average cost of debt was 9,01% and the effective gearing level was 18,3% of asset value.

Hospitality’s portfolio comprises interests in 21 hotel and resort properties. Throughout the trading period all the properties were fully let. The average lease period is 8,8 years, with the first lease expiring in one-and-a-half years.

The portfolio was independently valued at 30 June 2007 by JHI (Gensec Property Services Limited) at R1,7 billion, representing a growth in the portfolio value of 41,7% during the year.

“Hospitality’s resulting net asset value (NAV) totalled 1,334 cents per linked unit, which represents a 16,8% year-on-year increase,” notes Nelson. At 30 June 2007 the combined units were trading at a 30% premium to NAV compared to an aggregate 41% for the listed property sector.

During the year Hospitality acquired five hotel properties -- Protea Hotel Victoria Junction in Cape Town, The Richards Hotel and The Bayshore Inn in Richards Bay, The Hazyview Hotel in Mpumalanga and The Imperial Hotel in Pietermaritzburg -- for a combined acquisition consideration of R245 million.

Hospitality has, subsequent to the financial period, also entered into agreements to acquire the Hluhluwe Hotel & Safaris in KwaZulu-Natal, as well as increase its exposure to certain properties in which it is already invested, comprising the remaining 32% shareholding in the Park Inn Greenmarket Square, the remaining 35% shareholding in 90 units at the Radisson Hotel Waterfront and an extension to the Birchwood Executive Hotel & Conference Centre.

These properties are to be acquired for a total consideration of R195 million and were independently valued at R238 million, representing a 23% surplus to acquisition price. These acquisitions are likely to become effective between August and November 2007.

Various refurbishment and expansion projects within Hospitality’s existing portfolio are also under review. The Rosebank Hotel is currently undergoing a R250 million redevelopment, which is expected to be completed by May 2008. This major project commenced in July 2007.

“Although this has necessitated the closure of the hotel for a nine-month period, earnings are unlikely to be impaired as the rental income has been factored into the cost of the redevelopment and will continue to be received during this period,” says Hospitality’s Deputy CEO Joseph Aminzadeh.

Expansion opportunities at the Champagne Sports Resort, the Mount Grace Country House & Spa, and The Imperial Hotel are further under review, whilst refurbishment and repositioning projects are under review for The Winkler Hotel, The Richards Hotel, The Bayshore Inn and the Protea Hotel Richards Bay.

“The development projects will ideally position the portfolio to take advantage of the favourable trading conditions in the hotel industry anticipated to continue over the next few years, particularly in the lead up to 2010,” notes Aminzadeh.

The estimated total potential investment in these capital projects is approximately R500 million and the financial criteria which has been set is for the expenditure on aggregate to be at least earnings neutral. Should the development projects prove to be viable, these projects are likely to be completed during the course of the coming two financial years.

In order to fund various acquisitions and capital projects of approximately R750 million, Hospitality is seeking to undertake a R500 million rights offer at an issue price of 1 286 cents per A- linked unit right and R1 858 cents per B- linked unit right. The rights entitlement will be 17,4  A- linked unit rights and 17,4 B- linked unit rights per 100 A- or B-linked units.

Last modified on Wednesday, 23 April 2014 14:22

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