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HOSPITALITY PROPERTY FUND LIMITED - Unaudited condensed consolidated financial results for the six months ended 30 September 2018

Release Date: 21/11/2018 07:30
Code(s): HPB HPF11 HPF08 HPF09 HPF06     PDF:  
 
Wrap Text
Unaudited condensed consolidated financial results for the six months ended 30 September 2018

Hospitality Property Fund Limited
(Incorporated in the Republic of South Africa)
(Registration number 2005/014211/06)
JSE share code: HPB
ISIN: ZAE000214656
Bond company code: HPAI
(Approved as a REIT by the JSE)
("Hospitality" or "the company" or "the Fund" or "the group")

Unaudited condensed consolidated financial results for the six months ended 30 September 2018

- Rental income for the six months ended September 2018 increased to R345 million
- Investment property value decreased through revaluations to R12 billion
- Distribution per share of 41.22 cents for the six months ended September 2018

Commentary
Hospitality's board of directors ("the board") declared a dividend of 41.22 cents per share for the 
six months ended 30 September 2018. The Fund's distributable earnings increased by 16% for the six months to 
R237 million when compared to the prior six months ended 30 September 2017.

Rental income for the six months increased by 10% to R345 million (2017: R314 million) mainly due to the 
inclusion of the 29 hotel properties for the full six months period. Hospitality's rental income is subject 
to seasonal variability and has been further impacted by the trading in the Western Cape. Hospitality's 
expenses for the six months are 5% or R1.4 million up on the prior six months to R28 million in line with 
inflation. Net finance costs of R80 million (2017: R83 million) are lower than the prior six months due to 
the negotiated interest rates being lower on the current borrowings.

The following table reflects the operating financial results for the six months ended 30 September 2018 compared 
to the prior six months period ended 30 September 2017:

Summary of operating results for the period ended 30 September 2018
                                                  Actual           Actual      Variance on      Variance on 
                                               September        September        September        September 
                                                    2018             2017             2017             2017 
                                                   R'000            R'000            R'000                % 
Contractual rental income                        344 553          313 813           30 740               10 
Sundry income                                        282                -              282                - 
Fund expenses                                    (28 229)         (26 855)          (1 374)              (5)
Net finance cost                                 (79 567)         (82 572)           3 005                4 
Income from associates                                84                -               84              100 
Distributable earnings                           237 123          204 386           32 737               16 
Distribution                                    (237 123)        (204 386)         (32 737)              16 
No par value ordinary shares                     575 214          575 777             (563)               - 
Distribution comparative to prior years                                                                     
Clean-out dividend(1)                                  -            14.74           (14.74)            (100)
Distribution per ordinary share                    41.22            27.09            14.13               52 
Combined distribution                              41.22            41.83            (0.61)              (1)
(1) The clean-out dividend in the prior year of 14.74 cents per share was declared on 9 June 2017 and paid on 
    10 July 2017.                                                                        

Hotel trading results
The hotel trading results are compared on a like-for-like basis for the six months ended 30 September 2018. 
Room occupancy for the Fund's hotels declined by 2.6% to 60.6% while the market experienced a decline of 
2.0% to 60.0%. (For comparison to the STR Global South African Hotel Review ("STR") the Sun1 trading results 
are excluded.) 

The general sentiment towards the economy saw increased pricing competitiveness across all the market segments. 
This reflected in the average room rate ("ARR") for the portfolio declining by 0.9% on the prior period, mainly 
due to the poor performance from the Western Cape hotels. Revenue per available room ("RevPAR") thus decreased 
by 3.5%. The STR figures show a growth in ARR of 0.9% and a decline in RevPAR of 1.2% for the South African market 
over the same period. 

The Fund's hotel properties are predominantly located in the Western Cape and Gauteng provinces of South Africa 
and these properties generated 65% of the Fund's rental income over this period. Hotel occupancy for the Fund's 
Western Cape hotels declined by 14.3% to 51.8%. ARR in the Western Cape declined by 3.1% to R1 333, resulting in 
a RevPAR decline of 16.9% to R690. As reported by STR, occupancy for the region declined by 8.2% to 54.2%, the 
ARR is 4.6% behind the prior year resulting in a RevPAR decline of 12.4% to R695. The poor trading results in the 
Western Cape are largely due to a decrease in domestic corporate and government business as well as the poor 
sentiment stemming from the Cape Town water crisis.

In Gauteng, hotel occupancy over the period grew by 4.6% on the comparable period last year to an occupancy of 
62.4%. Individual hotels' trading remained volatile over the period with ARR remaining flat and thus RevPAR grew 
by 4.6% to R627. For the STR participating hotels in Gauteng, RevPAR increased by 4.4% to R696. For the hotels 
in the Rest of South Africa, occupancy declined by 0.7% to 68.1%, the ARR increased by 7.4% to R956 resulting in 
a RevPAR growth of 6.7% to R651. Per STR, the remaining hotels in the rest of South Africa grew RevPAR by 3.1%.

For the Sun1 properties, hotel occupancy was 4.2% behind the comparable prior year period but with ARR increasing 
by 5.3%, RevPAR grew 0.8% to R273.

Property portfolio
The Fund's portfolio includes 53 hotel and resort properties in South Africa. Management performed desktop valuations
on all investment properties and applied a materiality of R50 million to any single property. Where material changes
were identified, these properties were independently valued and a fair value adjustment of R431 million has been made. 
The fair value is determined by discounting the rental income (based on expected net future cash flows of the underlying
hotels) after considering capital expenditure requirements. The expected cash flows are discounted using an appropriate
discount rate. For more detail on the six properties revalued, please refer to note 3 on page 12. The weighted average
lease expiry period is 13.1 years. As at 30 September 2018, the carrying amount of the portfolio was R12.3 billion and 
the net asset value ("NAV") per ordinary share amounted to R18.13 (2017: R20.09).

Capital projects
In order to maintain the appeal of its properties, the Fund continually upgrades and invests in its hotels. Total
capital expenditure amounting to R100 million was spent during the six months and capitalised to investment properties. 
This includes all capital expenditure spent on refurbishment projects, replacement of hotel furnishing, equipment and 
IT equipment upgraded at the hotels. The major refurbishment projects included part of the rooms' refurbishments at 
The Westin and the Arabella Hotel & Spa. These projects will continue into 2019.

Funding
In the prior year, Hospitality restructured its long-term borrowings with more favourable terms being achieved. The
group's debt facilities with financial institutions as at 30 September 2018 amounted to R2.4 billion and the total 
drawn down facilities amounted to R1.9 billion resulting in a loan-to-value ("LTV") ratio (total interest-bearing
liabilities/investment properties plus properties held for sale) of 16% (2017: 16%).
 
The interest cover ratio of 4.6 times (2017: 4.1 times) for the 12 months rolling to September 2018 is well above 
the required debt covenant limit of 2.0 times. The weighted average cost of net debt to 30 September 2018 is 9.5% 
(excluding debt settlement fees paid in October 2017). Global credit ratings upgraded the Fund's long-term credit 
rating to A-(ZA) and its short-term credit rating to A1- (ZA).

Prospects
Hotel trading is expected to remain under pressure until the outlook for the South African economy improves. 
Ongoing capital expenditure requirements will be funded partially from a dividend retention and partially from 
debt facilities.

Dividend payment
The board has approved and notice is hereby given of a gross dividend payment number 27 of 41.22343 cents per share
for the six months ended 30 September 2018. The number of shares in issue at the date of the dividend declaration is 
578 154 207 ordinary shares (for the purposes of the dividend declaration, 2 940 030 ordinary shares have been 
excluded from the dividend payment. 2 377 256 ordinary shares relate to dissenting shareholder rights having been 
exercised and 562 774 ordinary shares are held as treasury shares). In accordance with Hospitality's REIT status, 
shareholders are advised that the dividend meets the requirements of a "qualifying distribution" for the purposes of 
section 25BB of the Income Tax Act.

Local tax residents
Qualifying distributions received by local tax residents must be included in the gross income of such shareholders 
(as a non-exempt dividend in terms of section 10(1)(k)(aa) of the Income Tax Act), with the effect that the qualifying
distribution is taxable as income in the hands of the shareholder. These qualifying distributions are, however, exempt 
from dividend withholding tax in the hands of South African tax resident shareholders, provided that the South African
resident shareholders provided the following forms to their Central Securities Depository Participant ("CSDP") or broker, 
as the case may be, in respect of uncertificated shares, or the company, in respect of certificated shares:
(a) a declaration that the dividend is exempt from dividends tax; and
(b) a written undertaking to inform the CSDP, broker or the company, as the case may be, should the circumstances
    affecting the exemption change or the beneficial owner cease to be the beneficial owner;
    
both in the form prescribed by the Commissioner for the South African Revenue Service. Shareholders are advised to
contact their CSDP, broker or the company, as the case may be, to arrange for the abovementioned documents to be 
submitted prior to payment of the dividend, if such documents have not already been submitted. 

Non-resident
Qualifying distributions received by non-resident shareholders will not be taxable as income and instead will be
treated as ordinary dividends but which are exempt in terms of the usual dividend exemptions per section 10(1)(k) 
of the Income Tax Act. Unless the rate is reduced in terms of any applicable agreement for the avoidance of double 
taxation ("DTA") between South Africa and the country of residence of the shareholder, the net amount due to non-resident 
shareholders will be 32.97874 cents per share. A reduced dividend withholding tax rate in terms of the applicable DTA 
may only be relied on if the non-resident shareholder has provided the following forms to their CSDP or broker, as the 
case may be, in respect of uncertificated shares, or the company, in respect of certificated shares:
(a) a declaration that the dividend is subject to a reduced rate as a result of the application of a DTA; and
(b) a written undertaking to inform their CSDP, broker or the company, as the case may be, should the circumstances
    affecting the reduced rate change or the beneficial owner cease to be the beneficial owner;
    
both in the form prescribed by the Commissioner for the South African Revenue Service. Non-resident shareholders are
advised to contact their CSDP, broker or the company, as the case may be, to arrange for the abovementioned documents 
to be submitted prior to payment of the dividend if such documents have not already been submitted, if applicable.
Shareholders are requested to seek professional advice on the appropriate action to take.

The dividend is payable in accordance with the timetable below:
Last day to trade cum dividend        Tuesday, 11 December 2018
Shares will trade ex dividend       Wednesday, 12 December 2018
Record date                            Friday, 14 December 2018
Payment date                          Tuesday, 18 December 2018

Shareholders may not dematerialise or rematerialise their shares between Wednesday, 12 December 2018 and 
Friday, 14 December 2018, both days inclusive.

Payments of the dividend will be made to shareholders on Tuesday, 18 December 2018. In respect of dematerialised
shares, the dividend will be transferred to the CSDP accounts/broker accounts on Tuesday, 18 December 2018. 
Certificated shareholders' dividend will be deposited on or about Tuesday, 18 December 2018.

Income tax reference number: 9770/799/1/47.

Change in directorate
The following changes in directorate occurred during the period under review.

Mr Mohamed Ahmed was appointed to the board as an independent non-executive director, with effect from 14 August 2018.

Mrs Zola Malinga retired from the board at the annual general meeting of the company held on 18 October 2018.

Mr Robert Nicolella, who had served on the board as a non-executive director since 1 September 2016, was appointed as
an executive director and the chief executive officer of Hospitality, following the resignation of Mr Keith Randall as
an executive director and CEO, effective 1 November 2018. Mr Randall has stepped into the role of chief operating
officer.

The board welcomes Mr Ahmed to Hospitality and Mr Nicolella in his new role as CEO. The board thanks Mrs Malinga and
Mr Randall for their valued contribution to the company during their tenures on the board.

Presentation
Shareholders are advised that a presentation that provides additional analysis and information, will be available on
the company's website at www.hpf.co.za from 22 November 2018.

By order of the board
JA Copelyn                            JR Nicolella
(Chairman)                            (Chief executive officer)

21 November 2018 


Condensed consolidated statement of comprehensive income
for the six months ended 30 September 2018
                                                                                       Unaudited          Unaudited  
                                                                                       September          September  
                                                                                            2018               2017  
                                                                         Note              R'000              R'000  
Revenue                                                                                  344 922            313 901  
Rental income - contractual                                                              344 553            313 813  
- straight-line accrual                                                                       87                 88  
- sundry income                                                                              282                  -  
Operating expenses                                                                       (28 229)           (26 855) 
Operating profit                                                                         316 693            287 046  
Net finance cost                                                                         (79 567)           (82 572) 
Finance income                                                                            10 819             16 062  
Finance costs                                                                            (90 386)           (98 634) 
Profit before fair value adjustments, equity                          
accounted profit and taxation                                                            237 126            204 474  
Profit on sale of investment property                                                        134                 37  
Fair value adjustments                                                                  (408 094)            (3 496) 
Interest-rate swaps                                                                       22 763             (3 496)  
Fair value adjustment on investment properties                              3           (430 857)                 - 
Profit before taxation                                                                  (170 834)           201 015 
Equity accounted profit from associate after tax                                              84                  -  
Other comprehensive income                                                                                           
Fair value adjustment on investment properties                                                 -          2 388 848  
Total comprehensive (loss)/income for the year                                          (170 750)         2 589 863 
(Loss)/profit attributable to:                                                                                       
- Equity holders                                                                        (170 750)           201 015  
Other comprehensive income attributable to:                                                                          
- Equity holders                                                                               -          2 388 848  
                                                                                                                     
                                                                                                                     
Earnings and diluted earnings per share (cents)                                           (29.68)            623.12  
Headline earnings and diluted headline earnings                                              
per share (cents)                                                                          45.20              48.36
Reconciliation between total comprehensive (loss)/income              
for the period and headline earnings                                  
Total comprehensive (loss)/income for the period                                        (170 750)         2 589 863 
Adjustments:                                                                                                      -  
Profit on sale of investment property                                                       (134)               (37) 
Fair value adjustment on investment properties                                           430 857         (2 388 848)  
Headline earnings                                                                        259 973            200 978  
Number of shares/units                                                                                               
No par value ordinary shares                                                         575 214 177        575 214 177  
- Shares in issue                                                                    578 154 207        578 154 207  
- HPF Employee Incentive Trust shares                                                   (562 774)          (562 774)  
- Shareholder redemption                                                              (2 377 256)        (2 377 256)  
Weighted average number of ordinary shares                                                                           
No par value ordinary shares                                                         575 214 177        415 630 178  
- Shares in issue                                                                    578 154 207        418 570 208  
- HPF Employee Incentive Trust shares                                                   (562 774)          (562 774) 
- Shareholder redemption                                                              (2 377 256)        (2 377 256) 
Earnings and diluted earnings per ordinary share (cents)                                  (29.68)            623.12  
Headline earnings and diluted headline earnings                       
per ordinary share (cents)                                                                 45.20              48.36  


Condensed consolidated statement of financial position
as at 30 September 2018                                  
                                                                                         Restated                   
                                                                       Unaudited        Unaudited           Audited 
                                                                       September        September             March 
                                                                            2018             2017              2018 
                                                          Note             R'000            R'000             R'000
ASSETS                                                                                                              
Non-current assets                                                    12 221 173       12 957 643        12 534 884 
Investment properties                                        2        12 202 628       12 956 947        12 533 970 
Furniture, fittings and equipment                                            205              219               163 
Derivative asset                                                          17 506                -                 - 
Investment in associates                                                     834              477               751 
Current assets                                                           270 235          568 560           590 106 
Non-current assets held for sale                                          64 969           62 572            65 600 
Derivative asset                                                               -              422                 - 
Straight-lining of operating leases current portion                            -               88                 - 
Trade and other receivables                                               89 674          117 651           133 915 
Cash and cash equivalents                                                115 592          387 827           390 591
Total assets                                                          12 491 408       13 526 203        13 124 990 
EQUITY AND LIABILITIES                                                                                              
Equity                                                                10 482 523       11 347 384        11 104 603 
Stated capital                                                         9 027 065        9 037 060         9 027 065 
Retained earnings                                                        230 122          147 454           444 108 
Common control reserve                                       6        (1 106 013)      (1 106 013)       (1 106 013) 
Non-distributable reserve                                              2 331 349        3 268 883         2 739 443 
Non-current liabilities                                                1 707 248        1 342 331         1 941 596 
Interest-bearing liabilities                                           1 706 655        1 337 684         1 936 071 
Derivative liability                                                           -            4 647             4 042 
Long-term incentive liabilities non-current portion                          593                -             1 483 
Current liabilities                                                      301 637          836 488            78 791 
Trade and other payables                                                  45 496           19 124            51 919 
Short-term portion of interest-bearing liabilities                       230 000          790 327                 - 
Provision for shareholder redemption                                      24 129           24 129            24 129 
Long-term incentive liabilities current portion                              986            2 725               502 
Derivative liability                                                       1 026              183             2 241 
Total equity and liabilities                                          12 491 408       13 526 203        13 124 990 


Condensed consolidated statement of changes in equity
for the six months ended 30 September 2018
                                                       Treasury                      Common            Non-            
                                              Stated      share      Retained       control   distributable            
                                             capital    reserve      earnings       reserve         reserve         Total 
                                               R'000      R'000         R'000         R'000           R'000         R'000 
Balance at 1 April 2017 (audited)          5 575 253     (9 995)      138 719             -         893 526     6 597 503 
Total comprehensive income for the year            -          -     2 502 599             -               -     2 502 599 
Transaction costs (Tsogo transaction)         (5 256)         -             -             -               -        (5 256)
Issue of no par value ordinary shares      3 467 063          -             -             -               -     3 467 063 
Dividend declared on 24 May 2017                   -          -      (147 192)            -               -      (147 192)
Dividend declared on 9 June 2017                   -          -       (48 312)            -               -       (48 312)
Dividend declared on 22 November 2017              -          -      (155 789)            -               -      (155 789)
Common control reserve                             -          -             -    (1 106 013)              -    (1 106 013)
Transfer to fair value                   
reserve - investment property                      -          -    (1 851 288)            -       1 851 288             - 
Transfer to fair value                   
reserve - interest rate swaps                      -          -         5 371             -          (5 371)            - 
Balance at 31 March 2018 (audited)         9 037 060     (9 995)      444 108    (1 106 013)      2 739 443    11 104 603 
Total comprehensive loss for the period            -          -      (170 750)            -               -      (170 750)
Dividend declared on 23 May 2018                   -          -      (451 330)            -               -      (451 330)
Transfer to fair value                   
reserve - investment property                      -          -       430 857             -        (430 857)            - 
Transfer to fair value                   
reserve - interest rate swaps                      -          -       (22 763)            -          22 763             - 
Balance at 30 September 2018 (unaudited)   9 037 060     (9 995)      230 122    (1 106 013)      2 331 349    10 482 523 
                                         


Condensed consolidated statement of cash flows            
for the six months ended 30 September 2018                            
                                                                           Unaudited          Unaudited 
                                                                           September          September 
                                                                                2018               2017 
                                                                               R'000              R'000
Cash flows from operating activities                                                                    
Cash generated from operations                                               355 285            201 746 
Finance income received                                                       10 819             16 062 
Finance costs paid                                                           (90 386)           (98 634) 
Distribution to shareholders                                                (451 330)          (195 776) 
Net cash outflow from operating activities                                  (175 612)           (76 602) 
Cash flows from investing activities                                                                    
Acquisition and development of investment properties                         (99 662)          (304 013) 
Acquisition of furniture and equipment                                           (93)               (21) 
Acquisition of subsidiary, net of cash acquired                                    -           (827 360) 
Proceeds from disposal of investment property                                    234                  - 
Proceeds from disposal of furniture, fittings and equipment                      134                 37 
Net cash outflow from investing activities                                   (99 387)        (1 131 357) 
Cash flows from financing activities                                                                    
Interest-bearing liabilities raised                                                -          1 050 000 
Interest-bearing liabilities paid                                                  -           (658 764) 
Cash proceeds from rights issue                                                    -          1 000 000 
Transaction costs capitalised                                                      -             (5 504) 
Net cash inflow from financing activities                                          -          1 385 732 
Net (decrease)/increase in cash and cash equivalents                        (274 999)           177 773 
Cash and cash equivalents at beginning of the period                         390 591            210 054 
Cash and cash equivalents at end of the period                               115 592            387 827 


Condensed consolidated segmental information
as at 30 September 2018

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 board. Geographical segments are used to measure performance as the group's board 
believes that such information is the most relevant in evaluating the results of certain segments relative 
to other entities that operate within these industries, particularly post the acquisition of the additional 
hotel properties during the previous period. Sun 1 is disclosed as a separate segment as the grading is 
different to the rest of the portfolio.

                                                                            Unaudited         Unaudited    
                                                                            September         September    
                                                                                 2018              2017    
                                                                                R'000             R'000
Total assets                                                                                               
Western Cape                                                                5 292 395         5 737 283    
Gauteng                                                                     3 555 534         3 532 535    
Rest of Africa                                                              2 484 376         2 783 313    
Sun 1                                                                         935 292           961 469    
Head Office                                                                   223 811           755 254    
                                                                           12 491 408        13 769 854    
Rental revenue                                                                                             
Western Cape                                                                   84 189            92 476    
Gauteng                                                                       138 242           120 162    
Rest of Africa                                                                 90 688            82 532    
Sun 1                                                                          31 803            18 731    
                                                                              344 922           313 901    
Operating profit for the period                                                                            
Western Cape                                                                   84 189            92 476    
Gauteng                                                                       138 242           120 162    
Rest of Africa                                                                 90 688            82 532    
Sun 1                                                                          31 803            18 731    
Head Office                                                                   (28 229)          (26 855)    
                                                                              316 693           287 046    
Reconciliation between headline earnings and distributable earnings                                        
Headline earnings                                                             259 973           200 978    
Fair value - interest rate swaps                                              (22 763)            3 496    
Straight-line rental income                                                       (87)              (88)    
Distributable earnings                                                        237 123           204 386    
Distribution per share (cents)                                                                             
No par value share                                                              41.22             41.83    
- Clean out                                                                         -             14.74    
- Interim                                                                       41.22             27.09
                                                                                41.22             41.83    


Notes to the unaudited condensed consolidated financial statements
for the six months ended 30 September 2018

1.  Basis of preparation and accounting policies
    The unaudited condensed consolidated financial statements for the six months ended 30 September 2018 have 
    been prepared in accordance with the framework concepts and the recognition and measurement criteria of 
    International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards 
    Board ("IASB"), the preparation and disclosure requirements of IAS 34 Interim Financial Reporting, the 
    SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting 
    Pronouncements as issued by Financial Reporting Standards Council ("FRSC"), the Listings Requirements of 
    the JSE Limited and the requirements of the Companies Act of South Africa. Except for IFRS 9 and IFRS 15 
    as disclosed in note 5 the accounting policies are consistent with IFRS as well as those applied in the 
    most recent audited annual financial statements as at 31 March 2018. The unaudited condensed consolidated 
    financial statements for the six months ended 30 September 2018 should be read in conjunction with the 
    annual financial statements for the year ended 31 March 2018, which have been prepared in accordance with 
    IFRS. This interim report, together with any forward-looking information contained in this report, has 
    not been audited or reviewed by the group's auditors. These financial statements were prepared under the 
    supervision of the financial director, MR de Lima CA(SA).

2.  Investment properties
                                                                                 2018              2017    
                                                                                R'000             R'000    
                                                                                                           
    Opening balance as at 1 April                                          12 533 970         8 061 038    
    Additions to investment properties                                         99 662            32 618    
    Fair value adjustment                                                    (430 857)                -    
    Disposal of investment property                                              (234)                -    
    Straight-line accrual rental income                                            87                 -    
    Acquisition of Merway and Cullinan                                              -         2 172 893    
    Acquisition of Savana                                                           -           301 550    
    Fair value uplift                                                               -         2 388 848    
    Closing balance as at 30 September                                     12 202 628        12 956 947    

3.  Fair value estimation
    The group fair values its investment properties and interest rate swaps. There were no transfers into or out of 
    level 3 financial instruments.
    
    Management reviewed the valuations on the investment properties performed at 31 March 2018, by JHI, being the 
    independent valuer. Due to the unexpected variation in trading, management applied a materiality threshold of 
    R50 million, based on management's experience and judgement, to any single property. Desktop valuations were 
    conducted and where a property exceeded the materiality threshold, an independent valuation was requested from 
    JHI. Material adverse changes to valuations at 31 March 2018 include The Westin, Southern Sun Cullinan, Southern 
    Sun Waterfront and the Protea Hotel Victoria Junction hotels. The material change in the rental income has been 
    largely due to the change in sentiment towards Cape Town stemming from the drought and the impact this had on 
    the summer season in Cape Town, as well as the lower domestic corporate business. Material favourable changes 
    in the valuations of the Birchwood Hotel and the Holiday Inn Sandton are due to improved trading conditions and 
    better operating margins.

    The fair value changes from 31 March 2018 to 30 September 2018, are noted below.

                                                        Investment         Investment              Fair     
                                                        properties         properties             value     
                                                    revalued as at              as at       adjustments    
                                                      30 September           31 March             R'000    
                                                              2018               2018                     
                                                             R'000              R'000                     
                                                                                                          
    Fair value (decrease)/increase                      12 103 113         12 533 970          (430 857)    

    The group's investment properties have been categorised as level 3 values based on the inputs to the valuation
    technique used. The group has elected to measure investment properties at fair value. The fair value is 
    determined by using the discounted cash flow method by discounting the rental income (based on expected net 
    cash flows of the underlying hotels) after considering the capital expenditure requirements. The expected cash 
    flows are discounted using an appropriate discount rate. The core discount rate is calculated using the R186 
    (long bond) at the time of valuation, to which is added premiums for market risk and equity and debt costs. 
    The discount rate takes into account a risk premium associated with the local economy as well as that specific 
    to the local property market and the hotel industry. Fair values are estimated annually by an external 
    appointed valuer.

    As at 30 September 2018, the significant observable inputs were as follows:                        
    - a weighted rental growth of 5%
    - a revisionary capitalisation rate of between 7.23% and 8.07%; and                        
    - a risk-adjusted discount rate of between 12.23% and 13.07%.                        

    The table below indicates the sensitivities of the aggregate property values for the following changes 
    to assumptions:

                                                                               Increase        Decrease     
                                                                                     Rm              Rm    
                                                                                                           
    5% change in the net cash flows                                             600 451        (600 451)    
    25bps change in the terminal capitalisation rate                           (259 729)        300 136    
    50bps change in the discount rate                                          (222 782)        250 367    

    Interest rate swaps
    The group has interest rate swaps which are level 2 fair value measurements.

    The fair value of the derivatives is a net asset of R16 million (30 September 2017: R4 million net liability) and 
    is calculated as the present value of the estimated future cash flows based on observable yield curves, which is 
    consistent with the prior year.

4.  Related parties
    Rental income received from Tsogo Sun for the period 1 April 2018 to 30 September 2018 amounted to R216 million 
    (30 September 2017: R162 million) of which R20 million is receivable at 30 September 2018 (30 September 2017: 
    R18 million).

5.  New accounting standards
    This note explains the impact of the adoption of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts 
    with Customers on the group's financial statements.

    IFRS 9 Financial Instruments
    IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial
    assets and financial liabilities, derecognition of financial instruments, impairment of financial assets and hedge
    accounting.            
            
    The group applies IFRS 9 Financial Instruments, and measures lifetime expected credit losses for all trade
    receivables, however, this has had an insignificant impact on the group's numbers, both in the current and prior 
    periods, due to the short-term nature of trade receivables. In addition, there have been no historic issues relating 
    to the collectibility of receivables. The contractual terms of agreements were considered in particular, which 
    requires fixed rental to be paid in advance and variable rental to be paid within 15 days.

    The loss considerations for financial assets are based on assumptions about risk of default and expected loss rates.
    The group uses judgement in making these assumptions and selecting the inputs to the impairment calculation based on 
    the group's past history, existing market conditions as well as forward looking estimates at the end of each reporting
    period.

    On 1 April 2018 (the date of initial application of IFRS 9), the group's management had assessed the financial
    instruments held by the group and had classified its financial instruments into the appropriate IFRS 9 categories. 
    The classification was based on the group's business model for managing the financial instruments as well as the 
    contractual terms of the cash flows.

    Based on this assessment, there have been no changes to the classification of the financial instruments from the
    previous financial year. A summary of the salient features which were considered in this assessment is 
    included below:

    Trade and other receivables
    The group's business model is to hold the asset for collection of contractual cash flows and the cash flows 
    represent solely payments of principal and interest on principal, therefore; the IFRS 9 criteria for 
    classification at amortised cost is met.

    Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost 
    less provision for impairment.

    Trade and other payables
    Trade and other payables continue to be measured initially at fair value and subsequently at amortised cost. 
    Trade and other payables are analysed between current and non-current liabilities on the face of the statement  
    of financial position, depending on when the obligation to settle will be realised.

    Cash and cash equivalents
    Cash and cash equivalents include cash on hand, bank deposits and other short-term highly liquid investments. 
    Cash and cash equivalents are measured at amortised cost, which is equivalent to fair value.

    Financial liabilities
    There has been no changes to the classification and measurement of debt, which is still measured at amortised cost
    under IFRS 9.

    Based on the above, IFRS 9 has not had a significant impact on either the measurement or the classification of 
    the group's financial instruments.

    IFRS 15 Revenue from contracts with customers
    The impact of IFRS 15 Revenue from Contracts with Customers is not material to the group's numbers.

    IFRS 16 Leases
    The impact of IFRS 16 Leases is not expected to be material to the group's numbers.

6.  Restatement of September 2017
    As at 30 September 2017, goodwill of R265 million and a common control reserve of R841 million was recognised in
    relation to the acquisition of the 29 properties by Hospitality from Tsogo Sun. The accounting of the transaction 
    was finalised in March 2018. This resulted in no goodwill being recognised and R1 106 million being recognised in 
    the common control reserve.

7.  Subsequent events
    Shareholders are referred to the Tsogo Sun Holdings Limited ("Tsogo") announcement published on SENS on 
    12 November 2018 where shareholders were to consider Tsogo's proposed disposal of a portfolio of seven mixed-use 
    casino properties to Hospitality ("transaction") and the subsequent distribution by Tsogo, of its entire Hospitality 
    shareholding to Tsogo shareholders. The Tsogo board had withdrawn the resolutions that were to have been considered 
    at the reconvened general meeting scheduled for 09:00 on Monday, 12 November 2018. As such, the transaction detailed 
    in the circular issued to Hospitality shareholders on 21 September 2018 will not be implemented. 
            
    Please refer to page 3 for details on dividends declared.

8.  Commitments
    The board has committed a total of R240 million for maintenance items at its hotel properties of which R240 million
    is anticipated to be spent within the financial year. In total, R147 million of the committed capital expenditure 
    has been contracted for, of which R99 million has been spent at 30 September 2018.

Administration

Registered office
The Zone 2, Loft Offices East Wing
2nd Floor, corner Oxford Road and Tyrwhitt Avenue
Rosebank, 2196
Tel: +27 11 994 6320 

Directors
JA Copelyn (Chairman)*, GA Nelson*#(Lead Independent Director), J Booysen*, JR Nicolella (CEO), MR de Lima (FD), 
M Ahmed*#, DG Bowden*#, MSI Gani*#, ZJ Kganyago*, ZN Kubukeli*#, SA Halliday*#, L McDonald*
*Non-executive  #Independent

Company Secretary
LR van Onselen

Transfer secretaries
Computershare Investor Services Proprietary Limited

Sponsor
Java Capital
Date: 21/11/2018 07:30:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE'). 
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