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HOSPITALITY PROPERTY FUND LIMITED - Summary consolidated financial results for the year ended 31 March 2019

Release Date: 23/05/2019 09:05
Code(s): HPB HPF11 HPF12 HPF06     PDF:  
 
Wrap Text
Summary consolidated financial results for the year ended 31 March 2019

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")

Summary consolidated financial results for the year ended 31 March 2019

- Revenue for the year ended 31 March 2019 at R828 million
- Distribution per share of 105.39 cents for the year ended 31 March 2019
- LTV for the year ended 31 March 2019 at 16%

Commentary
Hospitality's board of directors ("board") declared a final dividend of 64.17 cents per share for the six
months ended 31 March 2019, bringing the total distribution for the year ended 31 March 2019 to 105.39 cents 
per share. The Fund's distributable earnings decreased by 8% for the year, mainly due to the weaker trading
conditions. Hotel occupancies are 1.8 percentage points (or 3%) down on the prior year, mainly due to volume 
lost in the Western Cape. The average room rate is marginally up by 1% on the prior year at R1 100, resulting 
in a revenue per available room ("RevPAR") decline on the prior year of 2%.

Rental income for the year ended at R828 million (2018: R867 million), being 4% down on the prior year
mainly due to the poor performance from the Western Cape hotels. Hospitality's rental income is subject 
to seasonal variability and the trading has been impacted by the macro-economic conditions and uncertainty. 
Hospitality's operating expenses for the year include the transaction costs related to the unsuccessful casino 
acquisition of R20 million. Excluding these costs, the year-on-year expenses have increased by R10 million or 
21% mainly due to the property-related costs increasing by R5.2 million and payroll costs increasing by 
R4.7 million. Net finance costs of R167 million (2018: R164 million) are higher than the prior year due to 
the weaker trading and capital expenditure increasing borrowings, partially offset by the negotiated interest 
rates being lower on the current borrowings. 

The following table reflects the operating financial results for the year ended 31 March 2019 compared to
the prior year ended 31 March 2018:

Summary of operating results as at 31 March 2019                                                                         
                                                  Actual           Actual      Variance on       Variance on     
                                                31 March         31 March         31 March          31 March    
                                                    2019             2018             2018              2018    
                                                   R'000            R'000            R'000                 %    
Contractual revenue                              827 631          866 501          (38 870)               (4)    
Sundry income                                      1 112                -            1 112               100    
Fund expenses(1)                                 (56 262)         (46 555)          (9 707)               21    
Net finance cost                                (166 988)        (164 063)          (2 925)                2    
Income from associates                               720              275              445               162    
Distributable earnings                           606 213          656 158          (49 945)               (8)    
Distribution comparative to prior years                                                                         
Clean out dividend (cents)(2)                          -            14.74           (14.74)             (100)    
Interim dividend (cents)                           41.22            27.09            14.13                52    
Final dividend (cents)                             64.17            78.46           (14.29)              (18)    
Combined distribution                             105.39           120.29           (14.90)              (12)    
(1) Fund expenses exclude exceptional transaction costs of R19 834.
(2) 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 year ended 31 March 2019. Room
occupancy for the Fund's hotels declined by 2.3% to 62.6% while the market experienced a decline in occupancy
levels of 1.6% to 62.4%. (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 increasing marginally by 0.5% on 
the prior year, mainly due to the lack of rate growth from the Western Cape hotels. RevPAR thus decreased by 
2.0%. The STR figures show a growth in ARR of 1.1% and a decline in RevPAR of 0.5% for the South African market
over the year. 

Hotel occupancy for the Fund's Western Cape hotels recovered in the second half of the year, although not
enough to compensate for the trading decline in the first six months. Occupancies declined by 7.8% to 61.8% 
and were impacted by the additional supply into the Western Cape and the poor sentiment stemming from the Cape
Town water crisis. ARR in the Western Cape is flat on the prior year at R1 647, resulting in a RevPAR decline 
of 7.8% to R1 018. As reported by STR, occupancy for the region declined by 4.4% to 63.8%, the ARR is 1.8% 
behind the prior year resulting in a RevPAR decline of 6.1% to R1 009. 

In Gauteng, HPF's hotel occupancy over the period grew by 0.5% compared to the prior year to an occupancy of
59.9%. Individual hotels' trading remained volatile over the period with ARR increasing by 1.7%, resulting 
in RevPAR growth of 2.2% to R614. For the STR participating hotels in Gauteng, RevPAR increased by 2.5% to 
R688 and for the hotels in the rest of South Africa, RevPAR grew by 2.9% to R668, due to growth in the ARR. 
The remaining hotels in the Fund in the rest of South Africa grew RevPAR by 3.9% to R653, due to the growth 
in rate.

For the Sun1 properties, hotel occupancy was 4.7% down compared to the prior year but with ARR increasing by
5.9%, RevPAR grew by 1.0% to R272.

Property portfolio
The Fund's portfolio includes 53 hotel and resort properties in South Africa. The Fund's property portfolio
was independently valued at 31 March 2019, resulting in a negative fair value adjustment of an additional 
R357 million, subsequent to the interim adjustment of R431 million. 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. The
weighted average lease expiry period is 14.5 years. As at 31 March 2019, the carrying amount of the portfolio 
was R12.0 billion and the net asset value ("NAV") per ordinary share amounted to R17.77.

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 R212 million was spent during the year. This includes all capital
expenditure spent on refurbishment projects, replacement of hotel furnishing, equipment and IT equipment. 
The major refurbishment projects included part of the rooms' refurbishments at The Westin and the Arabella 
Hotel & Spa. These projects will continue into FY2020.

Funding
In the prior year, Hospitality restructured its long-term borrowings due to favourable terms being achieved.
The group's debt facilities with financial institutions as at 31 March 2019 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) of 16% (2018:15%). An interest rate swap with a nominal 
value of R250 million at a fixed rate of 7.88% matured in February 2019. This interest rate swap was replaced 
at a nominal value of R300 million at a fixed rate of 7.42% and will mature on 31 March 2022.

The interest cover ratio of 4.1 times (2018: 5.0 times) for the 12 months rolling to 31 March 2019 is well 
above the required debt covenant minimum of 2.0 times. The weighted average cost of net debt to 31 March 2019 
is 9.6% (2018: 10.3%). Global Credit Ratings Co. upgraded the Fund's long-term credit rating to A- (ZA) and its 
short-term credit rating to A1- (ZA) on 27 September 2018.

Prospects
Hotel trading is expected to remain under pressure until the outlook for the South African economy improves.
Gearing is currently low at 16% and the Fund is committed to and able to fund its ongoing capital expenditure
programme. In the short-term, the directors have therefore, decided to distribute 100% of distributable
earnings to Hospitality's shareholders.

The forecasts previously presented on 21 September 2018 in relation to the proposed acquisition of the Tsogo
casino precincts are withdrawn, due to the transaction not proceeding and the forecasts no longer being
relevant.

Dividend payment
The board has approved and notice is hereby given of a gross dividend payment number 28 of 64.17163 cents
per share for the six months ended 31 March 2019. 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, 2 377 256 ordinary
shares have been excluded from the dividend payment due to dissenting shareholder rights having been exercised 
and also excludes 562 774 ordinary shares 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, No 58 of 1962 ("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 tax 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. Assuming dividend withholding tax will be withheld at a rate of 20%, 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 51.33730 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 June 2019    
Shares will trade ex dividend        Wednesday, 12 June 2019    
Record date                             Friday, 14 June 2019    
Payment date                           Tuesday, 18 June 2019    

Shareholders may not dematerialise or rematerialise their shares between Wednesday, 12 June 2019 and 
Friday, 14 June 2019, both days inclusive.

Payments of the dividend will be made to shareholders on Tuesday, 18 June 2019. In respect of dematerialised
shares, the dividend will be transferred to the CSDP accounts/broker accounts on Tuesday, 18 June 2019.
Certificated shareholders' dividend will be deposited on or about Tuesday, 18 June 2019.

Hospitality's income tax reference number: 9770/799/1/47.

Subsequent events
Subsequent to year end, the board of directors declared a final gross cash dividend for the six months ended
31 March 2019 of 64.17 cents per share. The number of ordinary shares participating in the dividend at the
date of declaration was 575 214 177 (excluding appraisal right shares and treasury shares).

The Fund settled corporate notes HPF08 and HPF09, which matured on 15 April 2019, of R80 million and 
R150 million respectively. A new corporate note for R300 million was issued (HPF12) and will mature 
in March 2024.

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

Non-executive director Mr Jacques Booysen resigned from the board and Mr Marcel von Aulock was appointed as
a non-executive director to the board with effect from 1 December 2018.

Messrs Don Bowden and Zuko Kubukeli resigned as independent non-executive directors on 15 March 2019.

The board will be reconstituted subsequent to year-end. As disclosed in the Stock Exchange News Service
("SENS") announcement made on 15 March 2019, in order to align with the board of Tsogo Sun Hotels Limited 
("THL"), the following changes to the board will be effective from 1 June 2019:
- Mr Rob Nicolella will be stepping down as CEO but will remain a non-executive director of Hospitality;
- Mrs Mara de Lima, who has been the Chief Financial Officer ("CFO") of Hospitality for the past two years
  will be appointed as CEO;
- Mr Riaan Erasmus will be appointed as CFO to replace Mrs de Lima;
- Mr John Copelyn will step down as Chairman of the company and as a non-executive director;
- Mr Marcel von Aulock, the CEO of THL, will assume the role of non-executive director and Chairman of 
  the company;
- Mrs Laurelle McDonald, the CFO of THL, will remain on the board as a non-executive director;
- Mr Mohamed Ahmed, an existing board member, will assume the role of lead independent 
  non-executive director and Chairman of the Audit and Risk Committee. Mr Ahmed's appointment as Audit 
  and Risk Committee Chairman is with effect from 15 March 2019; and
- The balance of the independent non-executive directors will consist of Dr Moretlo Molefi, 
  Mr Jabu Ngcobo and Mr Chris Gina. 

In addition, Messrs Gerald Nelson, Sydney Halliday and Mohamed Gani will resign as independent 
non-executive directors with effect from 31 May 2019.

Hospitality would like to extend their gratitude and appreciation to all board members over their tenures
and welcome the newly constituted board.

Presentation
Shareholders are advised that a presentation that provides additional analysis and information, will be
available on the company's website at http://www.hpf.co.za from 24 May 2019.

By order of the board
JA Copelyn            JR Nicolella
(Chairman)            (Chief Executive Officer)

23 May 2019


Summary consolidated statement of comprehensive income
for the year ended 31 March 2019
                                                                            Audited           Audited    
                                                                              March             March    
                                                                               2019              2018    
                                                                              R'000             R'000    
Revenue                                                                     827 786           866 917    
Rental income - contractual                                                 827 631           866 501    
              - straight-line accrual                                           155               416    
Operating expenses                                                          (76 096)          (46 555)    
Operating profit                                                            751 690           820 362    
Other income                                                                  1 767                 -    
Insurance proceeds                                                              655                 -    
Sundry income                                                                 1 112                 -    
Net finance cost                                                           (166 988)         (164 063)    
Finance income                                                               17 206            27 706    
Finance costs                                                              (184 194)         (191 769)    
Profit before sale of fixed assets, fair value adjustments, 
equity accounted profit and taxation                                        586 469           656 299    
Profit on sale of furniture, fittings and equipment                               -               109    
Fair value adjustments                                                     (781 475)         (542 931)    
Investment properties, before straight-lining adjustment                   (787 414)         (537 144)    
Interest rate swaps                                                           6 094            (5 371)    
Change in fair value as a result of the straight-lining adjustment             (155)             (416)    
(Loss)/profit before taxation                                              (195 006)          113 477    
Equity accounted profit from associate after tax                                720               274    
Income tax expense                                                              191                 -    
(Loss)/profit for the year                                                 (194 095)          113 751    
Other comprehensive income                                                                               
Items that may not be reclassified subsequently to profit or loss:                                       
- Fair value adjustment of the investment properties 
  acquired under common control                                                   -         2 388 848    
Total comprehensive (loss)/income for the year                             (194 095)        2 502 599    
(Loss)/profit attributable to:                                                                           
- Equity holders                                                           (194 095)          113 751    
Other comprehensive income attributable to:                                                              
- Equity holders                                                                  -         2 388 848    
Earnings and diluted earnings per share (cents)                              (33.74)            22.97    
Headline earnings and diluted headline earnings per share (cents)            103.15            131.42    
Reconciliation between total comprehensive (loss)/income
for the year and headline earnings                                                    
Total comprehensive (loss)/income for the year                             (194 095)          113 751    
Adjustments:                                                                                             
Profit on sale of furniture, fittings and equipment                               -              (109)    
Straight-line adjustment                                                       (155)             (416)    
Fair value - investment properties revaluation                              787 569           537 560    
Headline earnings                                                           593 319           650 786    
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 shares                                                                        
No par value ordinary shares                                            575 214 177       495 203 569    
- Shares in issue                                                       578 154 207       498 143 599    
- HPF Employee Incentive Trust shares                                      (562 774)         (562 774)    
- Shareholder redemption                                                 (2 377 256)       (2 377 256)    
Earnings and diluted earnings per share (cents)                              (33.74)            22.97    
Headline earnings and diluted headline earnings per share (cents)            103.15            131.42    


Summary consolidated statement of financial position
as at 31 March 2019
                                                                            Audited           Audited    
                                                                              March             March    
                                                                               2019              2018    
                                                         Note                 R'000             R'000    
ASSETS                                                                                                   
Non-current assets                                                       12 026 805        12 534 884    
Investment properties                                       2            12 023 914        12 533 970    
Furniture, fittings and equipment                                               337               163    
Derivative asset                                                              1 783                 -    
Investment in associates                                                        771               751    
Current assets                                                              239 792           590 106    
Non-current assets held for sale                                                  -            65 600    
Receivables and cash                                                        239 792           524 506    
Trade and other receivables                                                 144 510           133 915    
Cash and cash equivalents                                                    95 282           390 591    
Total assets                                                             12 266 597        13 124 990    
EQUITY AND LIABILITIES                                                                                   
Equity                                                                   10 222 055        11 104 603    
Stated capital                                                            9 027 065         9 027 065    
Retained earnings                                                           343 035           444 108    
Common control reserve                                                   (1 106 013)       (1 106 013)    
Non-distributable reserve                                                 1 957 968         2 739 443    
Non-current liabilities                                                   1 649 775         1 941 596    
Interest-bearing liabilities                                              1 647 358         1 936 071    
Derivative liability                                                          1 971             4 042    
Long-term incentive liabilities non-current portion                             446             1 483    
Current liabilities                                                         394 767            78 791    
Trade and other payables                                                     79 219            51 919    
Short-term portion of interest-bearing liabilities                          290 000                 -    
Provision for shareholder redemption                                         24 129            24 129    
Long-term incentive liabilities current portion                               1 419               502    
Derivative liability                                                              -             2 241    
Total equity and liabilities                                             12 266 597        13 124 990    


Summary consolidated statement of changes in equity
for the year ended 31 March 2019
                                                      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                  5 575 253      (9 995)           138 719              -         893 526      6 597 503    
(audited)                                                                                                                          
Total comprehensive                                                                                                 
income for the year                              -           -          2 502 599              -               -      2 502 599    
Total other comprehensive                                                                                           
income for the year                              -           -         (2 388 848)             -       2 388 848              -    
Transaction costs                           (5 256)          -                  -              -               -         (5 256)    
(Tsogo transaction)                                                                                                                
Issue of no par value ordinary shares    3 467 063           -                  -              -               -      3 467 063    
Dividend declared on                             -           -           (147 192)             -               -       (147 192)    
24 May 2017                                                                                                                        
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                    -           -            537 560              -        (537 560)             -    
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 income for the year          -           -           (194 095)             -               -       (194 095)    
Dividend declared on                             -           -           (451 330)             -               -       (451 330)    
23 May 2018                                                                                                                        
Dividend declared on 21 November 2018            -           -           (237 123)             -               -       (237 123)    
Transfer to fair value                                                                                              
reserve - investment property                    -           -            787 569              -        (787 569)             -    
Transfer to fair value                                                                                              
reserve - interest rate swaps                    -           -             (6 094)             -           6 094              -    
Balance at 31 March 2019 (audited)       9 037 060      (9 995)           343 035     (1 106 013)      1 957 968     10 222 055    


Summary consolidated statement of cash flows
for the year ended 31 March 2019                                                     
                                                                            Audited           Audited    
                                                                              March             March    
                                                                               2019              2018    
                                                                              R'000             R'000    
Cash flows from operating activities                                                                     
Cash generated from operations                                              771 480           725 127    
Finance income received                                                      17 206            27 706    
Finance costs paid                                                         (184 194)         (191 769)    
Distribution to shareholders                                               (688 453)         (351 293)    
Net cash (utilised for)/generated from operating activities                 (83 961)          209 771    
Cash flows from investing activities                                                                     
Acquisition and development of investment properties                       (211 992)         (416 873)    
Proceeds on disposal of non-current assets held for sale                          -               911    
Acquisition of furniture and equipment                                         (290)                -    
Dividends received from associate                                               700                 -    
Cash acquired through acquisition of subsidiary                                   -           202 640    
Acquisition of subsidiary                                                         -        (1 030 000)    
Proceeds from disposal of investment property                                   234                 -    
Proceeds from disposal of furniture, fittings and equipment                       -               109    
Net cash utilised for investing activities                                 (211 348)       (1 243 213)    
Cash flows from financing activities                                                                     
Interest-bearing liabilities raised                                         100 000         1 928 935    
Interest-bearing liabilities paid                                          (100 000)       (1 709 700)    
Cash proceeds from rights issue                                                   -         1 000 000    
Transaction costs                                                                 -            (5 256)    
Net cash inflow from financing activities                                         -         1 213 979    
Net (decrease)/increase in cash and cash equivalents                       (295 309)          180 537    
Cash and cash equivalents at beginning of the year                          390 591           210 054    
Cash and cash equivalents at end of year                                     95 282           390 591    


Summary consolidated segmental information
for the year ended 31 March 2019

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 executive committee, who are the group's chief operating decision makers. 
Generally, 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. Sun1 is disclosed as a separate segment as the grading 
is different to the existing portfolio.                                            
                                                                            Audited           Audited    
                                                                              March             March    
                                                                               2019              2018    
                                                                              R'000             R'000    
Total assets                                                                                             
Western Cape                                                              5 087 453         5 860 680    
Gauteng                                                                   3 603 185         3 330 214    
Rest of South Africa                                                      2 493 286         2 474 430    
Sun1                                                                        839 990           933 830    
Head Office                                                                 242 683           525 836    
                                                                         12 266 597        13 124 990    
Rental revenue                                                                                           
Western Cape                                                                312 387           368 587    
Gauteng                                                                     266 785           259 774    
Rest of South Africa                                                        186 438           186 693    
Sun1                                                                         62 176            51 863    
                                                                            827 786           866 917    
Operating profit for the period                                                                          
Western Cape                                                                312 387           368 587    
Gauteng                                                                     266 785           259 774    
Rest of South Africa                                                        186 438           186 693    
Sun1                                                                         62 176            51 863    
Head Office income                                                            1 767                 -    
Head Office expense                                                         (76 096)          (46 555)    
                                                                            753 457           820 362    
Reconciliation between headline earnings and distributable earnings                                      
Headline earnings                                                           593 319           650 786    
Insurance proceeds                                                             (655)                -    
Fair value - interest rate swaps                                             (6 094)            5 371    
Income tax expense                                                             (191)                -    
Exceptional transaction costs                                                19 834                 -    
Distributable earnings                                                      606 213           656 157    
Distribution per share (cents)                                                                           
No par value share                                                           105.39            120.29    
- Clean out                                                                       -             14.74    
- Interim                                                                     41.22             27.09    
- Final                                                                       64.17             78.46    
                                                                             105.39            120.29    

Notes to the summary consolidated financial statements
for the year ended 31 March 2019

1.  Basis of preparation and accounting policies
    The summary consolidated financial statements are prepared in accordance with the requirements of the 
    JSE Limited Listings Requirements for preliminary reports and the requirements of the Companies Act, 
    71 of 2008, applicable to summary financial statements. The JSE Listings Requirements require preliminary 
    reports to be prepared in accordance with the framework concepts and the measurement and recognition 
    requirements of International Financial Reporting Standards ("IFRS") and the SAICA Financial Reporting 
    Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the 
    Financial Reporting Standards Council and to also, as a minimum, contain the information required by 
    IAS 34 Interim Financial Reporting. The accounting policies applied in the preparation of the 
    onsolidated financial statements from which the summary consolidated financial statements were 
    derived are in terms of International Financial Reporting Standards and are consistent with those 
    accounting policies applied in the preparation of the previous consolidated annual financial statements.

    This summarised report is extracted from audited information, but is not itself audited. The annual 
    financial statements for the year ended 31 March 2019 were audited by PricewaterhouseCoopers Inc., 
    who expressed an unmodified opinion thereon. The audited annual financial statements and the auditor's 
    report thereon are available for inspection at the company's registered office.

    The directors take full responsibility for the preparation of the preliminary report and that the 
    financial information has been correctly extracted from the underlying annual financial statements.

    The preparation of these summary consolidated financial statements were supervised by MR de Lima 
    in her capacity as Hospitality's Financial Director.

                                                                           2019              2018    
                                                                          R'000             R'000    
2.  Investment property                                                                              
    Opening balance as at 1 April                                    12 533 970         8 061 038    
    Acquisition of Merway and Cullinan                                        -         2 172 892    
    Acquisition from Savana                                                   -           301 550    
    Additions to investment properties                                  211 992           145 478    
    Fair value adjustment recognised through profit or loss            (787 569)         (536 252)    
    Fair value adjustment recognised through other                                
    comprehensive income                                                     -         2 388 848    
    Transfer from non-current assets held for sale                       65 600                 -    
    Disposal                                                               (234)                -    
    Straight-line rental income accrual                                     155               416    
    Closing balance as at 31 March                                   12 023 914        12 533 970    

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.

    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 31 March 2019, the significant observable inputs were as follows:
    - a weighted rental growth of 5.25% (2018: 5%);
    - a reversionary capitalisation rate of between 7.25% and 7.75% (2018: 7.23% to 8.07%); and
    - a risk-adjusted discount rate of between 12.50% and 13.00% (2018: 12.23% to 13.07%).

    Material adverse changes to valuations are due to the material change in rental income, largely 
    due to the change in sentiment, mainly in Cape Town, stemming from the drought and the impact this 
    has had on the summer season in Cape Town, as well as the lower domestic corporate business which
    collectively impacted negatively on hotel occupancy levels.

    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                                         707              (707)   
    25bps change in the terminal capitalisation rate                       (291)              313    
    50bps change in the discount rate                                      (233)              239    
                                                                                                     
    Interest rate swaps
    The group has interest rate swaps that are not hedge accounted which are level 2 fair value measurements.
    The fair value of the derivatives is a net liability of R0.2 million (31 March 2018: R6 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 31 March 2019 amounted to 
    R442 million (31 March 2018: R420 million) of which R40 million was receivable at 31 March 2019 
    (31 March 2018: R42 million).                                                    

5.  Changes in accounting policies
    The group has adopted all the new, revised or amended accounting pronouncements as issued by the 
    International Accounting Standards Board (IASB) which were effective for the group from 1 April 2018. 
    In particular, the following standards had an impact on the group's financial statements:
    (i)  IFRS 9 Financial Instruments
         The group has applied IFRS 9 retrospectively, but has elected not to restate comparative information. 
         As a result, the comparative information provided continues to be accounted for in accordance with 
         the group's previous accounting policy for financial instruments, IAS 39.
        
         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 standard applies two criteria to determine how financial assets should be classified and
         measured, namely:
         (a) the entity's business model for managing the financial assets; and
         (b) the contractual cash flow characteristics of the financial asset.
        
         The group has applied IFRS 9's classification and measurement requirements based on the facts and 
         circumstances of the various types of instruments at the date of adoption of IFRS 9.
        
         The only change as a result of the implementation of IFRS 9 is that, in the prior year, the impairment 
         of trade receivables was assessed based on the incurred loss model. Individual receivables which were 
         known to be uncollectable were written off by reducing the carrying amount directly. The other 
         receivables were assessed individually to determine whether there was objective evidence that an 
         impairment had been incurred. For these receivables the estimated impairment losses were recognised 
         in a separate provision for impairment. Amounts charged to the provision account were generally 
         ritten off when there was no expectation of recovering additional cash.
        
         Financial liabilities classification and measurement under IFRS 9 has not changed significantly from 
         IAS 39. Financial liabilities are either held at fair value (either required or designated) or at 
         amortised cost. The new standard has not impacted the financial liabilities of the group.

         The below table summarises the original classification under IAS 39 and the new classification 
         under IFRS 9 for each class of the group's financial assets and financial liabilities.
         
                                           Original classification        New classification           
                                           under IAS 39                   under IFRS 9                 
         Derivative financial              Fair value through             Fair value through           
         instruments                       profit or loss                 profit or loss               
                                                                          Financial assets at          
         Trade receivables                 Loans and receivables          amortised cost               
                                                                          Financial assets at          
         Sundry and other debtors          Loans and receivables          amortised cost               
                                                                          Financial assets at          
         Cash and cash equivalents         Loans and receivables          amortised cost               
                                                                          Financial assets at          
         Related-party receivables         Loans and receivables          amortised cost               
                                           Financial liabilities at       Financial liabilities at     
         Interest-bearing liabilities      amortised cost                 amortised cost               
                                           Financial liabilities at       Financial liabilities at     
         Trade payables                    amortised cost                 amortised cost               
                                           Financial liabilities at       Financial liabilities at     
         Tenant deposits                   amortised cost                 amortised cost               
                                           Financial liabilities at       Financial liabilities at     
         Related-party payables            amortised cost                 amortised cost               

    (ii) IFRS 15 Revenue from Contracts with Customers
         IFRS 15 established a comprehensive framework for determining and reporting the nature, amount, 
         timing and uncertainty of revenue and cash flows arising from an entity's contract with customers. 
         It replaces IAS 18, which covers contracts for goods and services, and IAS 11, which covers 
         construction contracts and their related interpretations in IFRS and applies to all contracts
         with customers except for contracts within the scope of other standards on leases, insurance
         contracts and financial instruments. If therefore does not impact the group's revenue as its 
         revenue is derived from lease contracts.

6.  Subsequent events
    Please refer to page 5 for details on subsequent events.

7.  Commitments
    The board has committed a total of R263 million for maintenance items at its hotel properties of 
    which R263 million is anticipated to be spent within the 2020 financial year. R32 million of the 
    committed capital expenditure has been contracted for at year-end. The board has committed
    R29 million for expansive capital expenditure.

Administration

Registered office
The Zone 2, Loft Offices East Wing
2nd Floor, corner Oxford Road and Tyrwhitt Avenue
Rosebank, 2196
Tel: +27 11 994 6300 

Directors
JA Copelyn (Chairman)*, GA Nelson*#(Lead Independent Director), JR Nicolella (CEO), MR de Lima (FD), 
M Ahmed*#, MSI Gani*#, ZJ Kganyago*, SA Halliday*#, L McDonald*, MN von Aulock*
*Non-executive  #Independent

Company Secretary
LR van Onselen

Transfer secretaries
Computershare Investor Services Proprietary Limited

Sponsor
Java Capital

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