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Hospitality Property Fund Delivers Positive Growth

Hospitality Property Fund Delivers Positive Growth Hospitality Property Fund CEO Gerald Nelson2

Hospitality Property Fund has declared a second interim distribution results with A-linked unit distribution growth of 5% to 66.51 cents, and B-linked unit showed an increase of 16.2% to 9.19 cents for the six months ended December.

Commenting on the performance and industry fundamentals, CEO Gerald Nelson, said: “We are pleased that Hospitality achieved positive year-on-year growth in distributions, benefiting from the improving hospitality business environment, and after weathering extremely tough industry-wide operating conditions between 2009 and 2011. We also overcame our debt refinancing issues in the previous year. Positive trends in the hospitality market have confirmed the recovery trend that started some 12 months ago, with growth in occupancies and room rates matching levels last seen prior to the global downturn in 2008. We believe that the hospitality sector is in a confirmed recovery phase, now that the post-2010 oversupply of rooms is dissipating and limited new supply is coming on stream. Improved sentiment among corporates and the public sector is supporting increased demand for accommodation and conferencing. As a result, the positive trend in occupancy and room rates seen over the last 12 months should be sustainable for the remainder of the financial year. Hospitality is well positioned to benefit from these positive fundamentals.”

“We continue to deliver on our strategic milestones to enhance the overall quality of our property portfolio. Having created a solid base with critical mass, we are following a two-pronged approach by acquiring large hotel properties in major metropolitan areas with diverse source markets and strong brands while disposing of non-core properties. The high quality of our properties provides a solid platform to benefit from as trading improves in the recovering market.”

Financial review

  • Rental income for the period increased 8.3% to R174 million, underpinned by improving overall occupancies and average room rates (“ARR’s”) over the bulk of the properties, more particularly in the core metropolitan portfolio.
  • Fund expenses decreased by some R2.7 million, mainly due to the saving on the prior year provision for bad debt amounting to R4.8 million in respect of a potential tenant default.
  • Net finance costs decreased by R14.0 million as the proceeds of the rights offer were utilised to reduce bank debt.
  • The distribution per combined linked unit increased 6.2%. The A-linked unit distribution grew by 5.0% to 66.51 cents, in line with the Fund’s distribution structure, while the distribution on the B-linked unit showed an increase of 16.2% to 9.19 cents compared to the previous corresponding period. Both distributions are in-line with those contained in the forecast.
  • Total funds withdrawn against the Fund’s debt facilities amounted to R1,32 billion translating into a loan to value (LTV) ratio of 33,9%. The average cost of borrowings was 9.84% (2011: 8.8%) for the period under review of which 78,8% was subject to fixed interest rates through interest rate swap structures.

Strategy review

  • Hospitality continued to focus on its strategy of improving the quality of its property portfolio, having achieved critical mass by bulking up the assets of the Fund since listing.
  • This includes pursuing opportunities to acquire strategic properties such as the recent announcement to acquire the Radisson Blu Gautrain Hotel in Sandton and the acquisition in 2011 of the Westin Cape Town, with a combined value exceeding R1 billion.
  • Refurbishment and development projects totalling some R750 million have been completed across the remaining portfolio since 2008, enhancing the value proposition of Hospitality’s property portfolio.
  • The Fund continues to market six properties, with a combined value of R217.9 million, that no longer fit its investment criteria and therefore were previously earmarked for disposal. No deals have to date been finalised and the Fund is under no pressure to lower its asking prices to expedite sales as these properties are generally trading profitably.
  • In order to fund future growth opportunities, the Board approved a structure to establish a Domestic Medium Term Note Programme (Corporate Bond) in December 2012. The proceeds raised through this issuance will inter alia be utilised to fund the anticipated Radisson Blu Gautrain Hotel acquisition.
  • Mr Nelson, co-founder of the Fund who has held the position of Chief Executive Officer (“CEO”) since its listing in 2006, has announced that he will be retiring as CEO from the Fund at the end of June 2013 and will remain on the board as a non-executive director. He will be succeeded by Mr Andrew Rogers, the deputy CEO of the Fund, assisted by Mr Ridwaan Asmal in his continuing role as Financial Director.

Portfolio review

  • The Fund’s portfolio of interests in 26 hotel and resort properties in South Africa had a book value of R3.896 billion as at 31 December 2012, translating into a net asset value per linked unit of R10.16 (excluding deferred taxation).
  • In December 2012, the Fund reached an agreement to purchase the Radisson Blu Gautrain Hotel and associated facilities, for R443.4 million. This prestigious property is located adjacent to the Gautrain station and meets all the Fund’s investment criteria. It is expected to yield around 8.2% in year one with 15% growth in earnings in the second year, to be generated through a fixed and variable lease structure. This acquisition is subject to the fulfilment of various conditions precedent including raising the necessary funding.
  •  The Fund has not initiated any significant refurbishment projects since June 2012. Minor projects were carried out at the Radisson Blu Waterfront and the Westin Cape Town at a combined cost of R15.0 million.
  • Finalisation of the application process for the development rights on the Phase 2 land at Arabella Hotel & Spa is in progress.

Hospitality Property Fund Limited is a JSE-listed property loan stock company offering investors exposure to the hospitality sector through the ownership of select hotel and leisure properties.
It is the largest multi-branded hotel owner in South Africa and has built strong partnerships with well-recognised local and international hotel brands. The Fund consists of twenty-six hotel and resort properties valued at approximately R3,9 billion located throughout South Africa, and is highly diversified in terms of geographic location, star grading, brands and market mix.
The Fund’s profits are distributed in full as debenture interest, free of tax and linked unitholders are consequently taxed according to their individual tax status. The Fund comprises a total of 124,8 million A-linked units and 124,8 million B-linked units, which are traded on the JSE under the codes HPA and HPB, respectively. The A-linked units have a preferential claim to earnings with capped growth. The B-linked units receive the balance of the earnings.