Wrap Text
Reviewed results for the year ended 30 June 2012
and interest payment declaration
Hospitality Property Fund
(Incorporated in the Republic of South Africa)
(Registration number 2005/014211/06)
Share code for A-linked units: HPA ISIN for A-linked units: ZAE000076790
Share code for B-linked units: HPB ISIN for B-linked units: ZAE000076808
("Hospitality" or "the Fund" or "the company" or "the group")
Reviewed results for the year ended 30 June 2012
and interest payment declaration
Comments
1. Overview
1.1 Debt restructure
The last six months have been extremely challenging for the Fund. Hospitality's debt facilities with Absa
Bank Limited ("Absa") of R1.35 billion expired in February 2012. The timing of the expiry was unfortunate in
that economic conditions generally and the trading environment in the hospitality industry in particular, were
extremely unfavourable through the period that the refinancing negotiations took place. Despite initial positive
indications from financial institutions towards end 2011 to take up a major portion of the Absa debt, these
proposals were eventually declined due to the perceived volatility in hotel trading conditions. Absa thereafter
insisted on Hospitality raising R500 million through a rights issue in order to reduce the Absa debt. To bridge
the period from termination of the existing facility to receipt of the rights issue proceeds and refinancing, Absa
granted a bridge loan facility, the terms of which were extremely penal.
This process was concluded in June 2012 and the Board would like to extend its appreciation to unitholders
for supporting the rights issue of R530 million and to Nedbank Limited ("Nedbank") for providing an additional
term loan facility of R300 million. Absa's debt has consequently been reduced to R550 million. A penalty
interest rate of prime plus 2% amounting to a premium of R13.8 million in interest charges and a restructuring
fee of R6.7 million on the bridge loan facility, significantly affected the distributable profit for the six-month
period to 30 June 2012. As a result, B-linked units will not receive a distribution for this period and the A-linked
unit's distribution has been impaired. This is in line with the forecast contained in the rights issue circular.
1.2 Trading environment
According to STR Global, the hotel industry reported a year-on-year increase in occupancy of 6.8% to 58.5%
and a decrease in average room rates ("ARR") of 1.6% to R873, resulting in RevPar growth of 5.1% for the
year ended June 2012. The Fund's trading figures for that portion of its portfolio which is subject to variable
rental income (i.e. dependent on operational earnings) reflected similar trends with an increase in occupancy
of 7.0% to 57.5%, a decrease in ARR of 3.4% to R974 and RevPar growth of 3.4% for the 12-month period.
In particular, the industry trend for the last nine months has been encouraging, with consistent growth in
occupancy and ARR in each of the three successive quarters. This is despite a subdued domestic trading
environment, still characterised by oversupply of hotel rooms and a significant reduction in the overseas
leisure business due to ongoing global economic pressures particularly in the Euro zone, one of SA's main
source markets. The challenge facing the Fund and the industry is to ensure that optimal growth in ARR is
achieved on the back of improving occupancies.
Hotel owners continue to absorb increases in overhead costs which remain ahead of inflation. In particular,
escalations in administered prices such as electricity, water and municipal rates have a marked effect on
earnings. The Fund continues to proactively monitor and manage municipal valuations and has implemented
various initiatives to reduce consumption of utilities.
Insofar as the Fund's fixed lease properties are concerned, management constantly monitors and interacts
with the tenants in order to understand their underlying business performance and evaluate the serviceability
of rentals.
2. Results
Rental income was R2.2 million (0.7%) higher than the forecast set out in the rights offer circular ("forecast"). Rental
income grew by R49.6 million (17.9%) compared to 2011, this is largely as a result of the acquisition of the Arabella
portfolio (comprising the Westin-Cape Town and the Arabella Hotel and Spa Kleinmond) concluded on 13 May
2011. The standing portfolio (i.e. excluding the Arabella portfolio) reflected a decrease in rental income of 0.5%
when compared to the previous financial year. This was partly due to the previous corresponding period having the
last 11 days of the FIFA Soccer World Cup 2010 included, where the Fund reaped the benefits of higher demand.
Furthermore, the Courtyard properties have underperformed expectations and the profits from the Courtyard Joint
Venture with City Lodge Hotels have been significantly lower than the previous year.
Fund expenses increased by R19.2 million (91.4%) compared to 2011 mainly as a result of the R6.7 million bridge
loan fee, a bad debt allowance of R3.8 million raised as a result of tenant arrears (although this is covered by an
acknowledgement of debt) and R4.8 million incurred for the Paulaner Brauhaus rental loss and closure costs. Net
finance costs were R2.3 million (1.3%) higher than forecast due to the rights issue proceeds being received on
18 June 2012, compared to the forecast which assumed the rights offer would be concluded end May 2012. The
penal interest rate of prime plus 2% charged on the bridge loan from 10 February to 18 June 2012, resulted in an
additional interest charge of R13.8 million and combined with the additional debt to fund the Arabella acquisition,
resulted in total net finance costs increasing by R63.8 million (56.6%) compared to the previous financial year.
The rates and taxes objection process with the City of Johannesburg in respect of Crown Plaza Rosebank and Holiday Inn
Sandton, has been satisfactorily resolved in line with the Fund's provisions and forecasts.
The net effect is that distributable earnings per combined linked unit declined by 33.2% to 120.99 cents compared
to the previous financial year. The A-linked unit distribution of 113.08 cents decreased by 7.4% and the B-linked unit
received a distribution of 7.91 cents which was 86.6% lower than the previous year. The distribution on the A-linked
unit was slightly higher than the distribution released in the forecast of 111.91 cents. Excluding the bridge facility fee
and penalty interest charged, the A-linked unit distribution would have been 128.22 cents, in line with the Fund's
distribution structure growth of 5% for this unit.
The directors are not aware of any material subsequent events between year-end and the date of this announcement.
The following table reflects the operating financial results for the year ended 30 June 2012 compared to the forecast
released in the rights issue circular and the previous financial year.
Year ended 30 June
FY 2012 FY 2012 FY 2011
Actual Forecast Variance Prior year Variance
(R'000) (R'000) (R'000) % (R'000) (R'000) %
Contractual rental 326 681 324 487 2 194 0.7 277 043 49 638 17.9
Fund expenses (40 289) (40 700) 411 1.0 (21 051) (19 238) (91.4)
Net finance costs (176 705) (174 384) (2 321) (1.3) (112 857) (63 848) (56.6)
Profit before debenture interest 109 687 109 403 284 0.3 143 135 (33 448) (23.4)
Taxation (84) (84) (100.0) (84) (100.0)
Recoupment of debenture
interest 15 469 14 432 1 037 (7.2) 17 534 (2 065) (11.8)
Recoupment of debenture
interest 15 469 14 432 1 037 (7.2) 17 534 (2 065) (11.8)
Income from associates 222 - 222 100 222 100
Debenture interest (125 293) (123 835) 1 458 1.2 (160 669) 35 376 (22.0)
Distribution A-linked unit (118 272) (116 814) 1 458 1.2 (108 389) (9 883) 9.1
Distribution B-linked unit (7 021) (7 021) 0.0 (52 280) 45 259 (86.6)
Distribution A-linked unit (cents) 113.08 111.91 1.17 (1.0) 122.12 (9.04) (7.4)
Interim 63.34 63.34 0.0 60.33 3.01 5.0
Final 49.74 48.57 1.17 (2.4) 61.79 (12.05) (19.5)
Distribution B-linked unit (cents) 7.91 7.91 0.0 58.90 (50.99) (86.6)
Interim 7.91 7.91 0.0 38.45 (30.54) (79.4)
Final 0.0 20.45 (20.45) (100.0)
Combined distribution (cents) 120.99 119.82 1.17 (1.0) 181.02 (60.03) (33.2)
Interim 71.25 71.25 0.0 98.78 (27.53) (27.9)
Final 49.74 48.57 1.17 (2.4) 82.24 (32.50) (39.5)
Approximately 65% (2011: 85%) of the Fund's revenue during the year was derived from fixed rentals with
CPI-linked escalations and the remaining 35% (2011: 15%) comprised variable rentals which are linked to underlying
hotel operational performance. This year-on-year change was a consequence of new F&V leases being concluded
with hotel operators which comprise fixed rentals of approximately 50% of first year budgeted EBITDA and variable
rentals of at least 90% of the balance after deducting the fixed rentals.
3. Property portfolio
The Fund's portfolio comprises interests in 26 hotel and resort properties in South Africa. As at 30 June 2012, the
fair value of the portfolio was R3.86 billion. The portfolio is segmented into three lease types, namely: fixed lease
properties, F&V (fixed and variable) and variable lease properties.
Rentals under fixed lease agreements are determined by normal commercial lease terms, with inflation linked annual
escalations. F&V lease agreements comprise approximately 50% initial fixed lease rental, with the remainder being
a variable rental equivalent to 90% to 98% of the hotel's EBITDA (earnings before interest, tax, depreciation and
amortisation) after deducting the fixed lease portion. The F&V lease category now includes the previous C-Corp
leases. Variable lease agreements consist of rentals based on EBITDA from the properties underlying operations.
In line with its strategy of focusing on large well located properties with strong brands in major metropolitan areas,
the Fund has identified certain non-core properties amounting to R217.9 million for disposal. It is currently in various
stages of negotiation regarding the disposals, details of which will be released in due course.
The net asset value per linked unit as at 30 June 2012 was R10.15 (excluding deferred taxation), a decrease of
20.2% from 2011 primarily as a consequence of a general write-down in valuations of the standing portfolio. The
weighted average lease expiry period is 7.34 years.
4. Development and refurbishment projects
The Fund invested a total of R60 million to complete various refurbishment projects during the period under review.
Details of the significant refurbishment projects are as follows:
refurbishment of the Protea Hotel Victoria Junction at a cost of R41 million and the Inn on the Square at a cost
of R35 million were both completed within budget and reopened on 1 September 2011;
the refurbishment of the Protea Hotel Hazyview was also completed during the period at a cost of R7.5 million;
a second phase refurbishment of the rooms at the Radisson Blu Waterfront was completed in August 2012,
where the Fund's pro rata investment amounted to R8.0 million.
With the completion of these projects, virtually all F&V lease properties have been refurbished and will require
minimal further capital expenditure in the short term. The high quality of the Fund's properties will provide a solid
platform to benefit from improved trading in a recovering market.
The application process for the development rights on the Phase 2 land at Arabella Hotel & Spa is in progress
and the Fund expects a response from the relevant authorities in 2013. If the development rights are secured, the
Fund will market this development with a view to realising a profit from the sales of residential stands which will be
classified as distributable income.
5. Rights issue
The Fund successfully concluded a rights issue on 18 June 2012. A total consideration of R530 million was
raised through the issue of 36 000 000 A-linked units at R11.48 and 36 000 000 B-linked units at R3.25. The net
proceeds of the rights issue were utilised to reduce the Absa bridge loan.
An amount of R15.5 million of the rights offer proceeds was allocated as a recoupment of debenture interest in
respect of the period 1 January 2012 to 18 June 2012 as the rights issue units received the full distribution for the
six months to 30 June 2012 despite being in issue for less than half a month. This recoupment was necessary in
order to ensure that the distributions of pre rights issue unitholders were not unjustifiably compromised.
6. Debt facilities
The group's debt facilities with financial institutions as at 30 June 2012 amounted to R1.46 billion as detailed below.
Total funds withdrawn on these facilities were R1.36 billion resulting in a loan to value (LTV) ratio (total interest-bearing
liabilities/investment property value) of 35.2%. The average cost of borrowings was 9.74% (2011: 8.91%) for the
period under review with 76% of the group's borrowings at year-end subject to fixed interest rates through interest
rate swap structures. The interest rate swap agreements that were in place with Absa at year-end for R1.04 billion
remain unchanged.
Facility Expiry Margin
Nedbank R'000
Loan 1 176 300 July 2015 JIBAR + 290 bps
Loan 2 400 000 May 2016 JIBAR + 290 bps
Loan 3 30 250 May 2016 JIBAR + 290 bps
Loan 4 150 000 June 2015 JIBAR + 270 bps
Loan 5 150 000 June 2016 JIBAR + 284 bps
906 550
ABSA Bank
Facility A 2 year 200 000 June 2014 JIBAR + 205 bps
Facility B 3 year 150 000 June 2015 JIBAR + 247 bps
Facility C 4 year 100 000 June 2016 JIBAR + 284 bps
Facility D revolving loan 100 000 June 2014 JIBAR + 205 bps
550 000
Total facility 1 456 550
7. Unitholders
During the period some 43% of the A-linked units and 51% of the B-linked units were traded on the
JSE Limited.
8. Changes to the composition of the Board
Subsequent to Mr F M Berkeley's resignation from the Board on 14 February 2012, Mr W C Ross was
appointed as the Acting Chairman. Mr D G Bowden was appointed as a non-executive independent director
to the Board with effect from 24 August 2012.
9. Prospects
While the local economy picked up in late 2011 and in the first quarter of 2012 prospects are still heavily
dependent on developments in the global economy. With GDP growth expected to be constrained to around
2.7% (from 3.1% in 2011), recovery of the economy as a whole and consequently the hotel and leisure
industry is expected to be slow and protracted. The hospitality industry will continue to face the challenge
of sub optimal occupancy rates and continuing pressure on room rates in the short term. There is, however,
optimism in the market with some signs of recovery in occupancies. The Fund's focus over the next year is to
optimally yield room rates to maximise profitability on the back of improving occupancies. Distributions for the
12 months ended 30 June 2013 are expected to be in line with the forecast issued in the rights offer circular
of 134.63 cents per A-linked unit and 14.11 cents per B-linked unit.
10. Payments of debenture interest
A-linked unitholders will receive debenture interest payment number 13 for the six-month period ended
30 June 2012 of 49.74 cents. No debenture interest is payable to the B-linked unitholder for the period.
2012
Last day to trade cum interest Friday, 7 September
Linked units will trade ex-interest Monday, 10 September
Record date Friday, 14 September
Payment date Monday, 17 September
The above distribution is not regarded as a dividend and therefore no Dividends Tax is payable on the
distribution amount.
Unitholders may not dematerialise or rematerialise their linked units between Monday, 10 September and
Friday, 14 September 2012, both days inclusive.
By order of the Board
W C Ross G A Nelson
(Acting Chairman) (Chief Executive Officer)
22 August 2012
Directors: W C Ross (Acting Chairman)*+, G A Nelson (CEO), K H Abdul-Karrim*+, Y Aminzadeh (Dutch)*,
R Asmal, L de Beer *+, Z N Kubukeli*+, M B Madumise*+, W J Midgley*, A S Rogers (Deputy CEO)
(*Non-executive, +Independent)
Registered office: "3 on Glenhove", corner Tottenham Avenue and Glenhove Road, Melrose Estate, 2196
Tel: +27 11 994 6320 Fax: +27 11 994 6321
Email: info@hpf.co.za Web: www.hpf.co.za
BASIS OF PREPARATION AND ACCOUNTING POLICIES
The preparation of these results was supervised by the Financial Director, Mr Ridwaan Asmal.
The condensed annual financial statements have been prepared in accordance with the recognition and
measurement requirements of International Financial Reporting Standards (IFRS), including the presentation
and disclosure requirements of IAS 34 Interim Financial Reporting and the AC 500 series issued by the Accounting
Practices Board and the requirements of the Companies Act of South Africa, 2008. KPMG Inc, the independent
auditor, has reviewed the financial statements and expressed an unqualified review opinion, which is available for
inspection at Hospitality's registered office. The accounting policies used are consistent with those used in the
annual financial statements for the year ended 30 June 2011, except for Circular 3/2012 Headline earnings.
Statement of comprehensive income
for the year ended 30 June 2012
Reviewed Audited
2012 2011
R'000 R'000
Revenue 315 956 277 358
Rental income contractual 326 681 277 043
straight-line accrual (10 725) 315
Expenditure (40 289) (21 051)
Operating expenses (40 289) (21 051)
Operating profit 275 667 256 307
Transaction costs on business combinations (16 958)
Net finance cost (176 705) (112 857)
Finance income 1 214 13 366
Finance costs (177 919) (126 223)
Profit before debenture interest, goodwill, fair value adjustments
and taxation 98 962 126 492
Recoupment of debenture interest 15 469 17 534
Debenture interest (125 293) (160 669)
Loss before fair value adjustments, goodwill and taxation (10 862) (16 643)
Gain on bargain purchase 141 437
Fair value adjustments (218 776) (393 649)
Investment properties, before straight-lining adjustment (169 132) (415 651)
Straight-line rental income accrual 10 725 (315)
Total fair value of investment properties (158 407) (415 966)
Contingent consideration 32 842
Goodwill impairment (38 822)
Interest rate swaps (21 547) (10 525)
Loss before taxation (229 638) (268 855)
Debenture discount amortisation (174)
Equity accounted profit/(loss) from associate after tax 222 (60)
Taxation 14 053 58 195
Total loss and comprehensive loss
for the year (215 537) (210 720)
Reconciliation between earnings, headline earnings and
distributable earnings
Loss for the year (215 537) (210 720)
Adjustments: Debenture interest 125 293 160 669
Loss (linked units) (90 244) (50 051)
Adjustments:
Gain on bargain purchase (141 437)
Equity accounted profit/(loss) from associate after tax 60
Goodwill impairment 38 822
Fair value investment properties revaluation, net of tax 154 995 357 456
Fair value straight-line rental income (10 725) 315
Headline earnings (linked units) 92 848 166 343
Fair value interest rate swaps 21 547 10 525
Transaction costs on business combinations 16 958
Contingent consideration (32 842)
Debenture discount amortisation 174
Straight-line rental income 10 725 (315)
Distributable earnings 125 294 160 669
Number of units/shares
A-linked unit 124 761 391 88 761 391
B-linked unit 124 761 391 88 761 391
Weighted average number of units/shares
A-linked unit 90 040 080 80 462 949
B-linked unit 90 040 080 80 462 949
Distribution per linked unit (cents)
A-linked unit 113.08 122.12
Interim 63.34 60.33
Final 49.74 61.79
B-linked unit 7.91 58.90
Interim 7.91 38.45
Final 20.45
120.99 181.02
Loss per linked units (cents)
A-linked unit (50.11) (31.10)
B-linked unit (50.11) (31.10)
(100.22) (62.20)
Headline earnings per linked unit (cents)
A-linked unit 51.55 103.36
B-linked unit 51.55 103.36
103.10 206.72
Loss and diluted loss per ordinary share (cents) (119.69) (130.94)
Statement of financial position
as at 30 June 2012
Reviewed Audited
2012 2011
R'000 R'000
ASSETS
Non-current assets 3 758 599 4 109 300
Investment properties 3 639 508 3 940 558
Straight-line rent income accrual 4 447 15 172
Investment properties and related accrual 3 643 955 3 955 730
Furniture and equipment 482 748
Investment in associate 162
Goodwill 114 000 152 822
Current assets 275 678 57 903
Non-current assets held for sale 217 900
Properties held for trading 18 980 16 940
Trade and other receivables 23 356 37 413
Cash and cash equivalents 15 442 3 550
Total assets 4 034 277 4 167 203
EQUITY AND LIABILITIES
Equity 370 883 537 155
Share capital and share premium 392 127 342 862
Retained earnings 115 278 123 718
Fair value reserve (136 522) 70 575
Non-current liabilities 3 563 628 2 152 503
Debentures 2 124 285 1 668 714
Interest-bearing liabilities 1 359 527 411 380
Derivative liability 43 086 21 542
Deferred taxation 36 730 50 867
Current liabilities 99 766 1 477 545
Trade and other payables 37 631 63 257
Bank overdraft 12 333
Interest-bearing liabilities 1 328 962
Taxation 84
Debenture interest payable 62 051 72 993
Total equity and liabilities 4 034 277 4 167 203
A. Net asset value per linked unit (Rand)
A-linked unit 10.00 12.43
B-linked unit 10.00 12.43
B. Net asset value per linked unit (excluding deferred taxation)
(Rand)
A-linked unit 10.15 12.71
B-linked unit 10.15 12.71
Statement of changes in equity
for the year ended 30 June 2012
Share Share Retained Fair value
capital premium earnings reserve Total
R'000 R'000 R'000 R'000 R'000
Balance at 30 June 2010 13 259 182 (701) 405 714 664 208
Loss/Total comprehensive loss for the year (210 720) (210 720)
Transactions with owners, recorded
directly in equity 5 83 662 335 139 (335 139) 83 667
Issue of shares 5 95 551 95 556
Share issue expenses, net of tax (11 889) (11 889)
Transfer from fair value reserve investment
properties (net of deferred tax) 357 456 (357 456)
Transfer to fair value reserve -contingent
consideration (32 842) 32 842
Transfer to fair value reserve interest rate swaps 10 525 (10 525)
Balance at 30 June 2011 18 342 844 123 718 70 575 537 155
Loss/Total comprehensive loss for the year (215 537) (215 537)
Transactions with owners, recorded
directly in equity 7 49 258 207 097 (207 097) 49 265
Issue of shares 7 59 407 59 414
Share issue expenses, net of tax (10 149) (10 149)
Transfer from fair value reserve investment
properties (net of deferred tax) 154 995 (154 995)
Transfer to fair value reserve contingent
consideration 30 555 (30 555)
Transfer to fair value reserve interest rate swaps 21 547 (21 547)
Balance at 30 June 2012 25 392 102 115 278 (136 522) 370 883
Statement of cash flows
for the year ended 30 June 2012
Reviewed Audited
2012 2011
R'000 R'000
Cash flows from operating activities
Cash generated from operations 275 121 253 334
Finance income received 1 214 13 366
Finance costs paid (177 919) (126 223)
Distribution to unitholders (136 235) (162 533)
Net cash outflow from operating activities (37 819) (22 056)
Cash flows from investing activities
Acquisition and development of investment properties (75 257) (1 000 524)
Properties held for trading (2 040) (16 940)
Acquisition of furniture and equipment (35) (397)
Loan to/(from) associate 60 (60)
Net cash outflow from investing activities (77 272) (1 017 921)
Cash flows from financing activities
Proceeds from the issue of linked units 530 280 600 402
Share issue expenses paid (10 149) (11 889)
Interest-bearing liabilities (repaid)/raised (380 815) 431 971
Net cash inflow from financing activities 139 316 1 020 484
Net increase/(decrease) in cash and cash equivalents 24 225 (19 493)
Cash and cash equivalents at beginning of year (8 783) 10 710
Cash and cash equivalents at end of year 15 442 (8 783)
Condensed segmental information
for the year ended 30 June 2012
Information regarding the results of each reportable segment is included below. Performance is measured based
on operating profit before finance costs, as included in the internal management reports that are reviewed by the
group's CEO. Segment profit is used to measure performance as management believes that such information is
the most relevant in evaluating the results of certain segments relative to other entities that operate within these
industries. Inter-segment pricing is determined on an arm's length basis.
Total
Fixed Variable of all
lease F&V lease lease Head operating
R'000 agreements agreements agreements office segments
Statement of comprehensive
income 30 June 2012
Segment revenue 120 796 192 965 12 920 326 681
Expenditure (40 289) (40 289)
Segment results 120 796 192 965 12 920 (40 289) 286 392
Statement of comprehensive
income 30 June 2011
Segment revenue 122 615 139 348 15 080 277 043
Expenditure (21 051) (21 051)
Segment results 122 615 139 348 15 080 (21 051) 255 992
Statement of financial
Position 30 June 2012
Non-current assets
Investment properties 1 042 000 2 352 000 249 955 3 643 955
Current assets
Non-current assets
held for sale 217 900 217 900
Trade receivables 4 613 9 068 (45) 9 720 23 356
Segment assets 1 046 613 2 578 968 249 910 9 720 3 885 211
Statement of financial
position 30 June 2011
Non-current assets
Investment properties 1 109 000 2 593 930 252 800 3 955 730
Current assets
Trade and other receivables 6 695 8 801 (437) 22 354 37 413
Segment assets 1 115 695 2 602 731 252 363 22 354 3 993 143
Date: 22/08/2012 05:41:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
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