Tsogo Sun in Hospitality deal
Sale of 29 hotels expected to reduce cost of funding while providing access to capital for future opportunities
Tsogo Sun has sold 29 hotels to its subsidiary, the listed real estate investment trust (Reit) Hospitality Property Fund (HPF), for R3.6bn.
Since Tsogo took over HPF in 2016 and injected a slew of assets, the company’s fortunes have improved substantially.
Tsogo Sun has added 39 hotels including these 29, since it bought a controlling stake in the group.
Tsogo has injected the assets in exchange for more than 50% of HPF’s ordinary shares. HPF now has a market capitalisation of about R4.58bn. After the deal, it will own 53 hotel or hospitality industry assets.
HPF CEO Keith Randall said the transaction was in line with the company’s growth strategy of acquiring "value-enhancing properties", from within Tsogo’s existing portfolio and external opportunities. Randall said the transaction represented an attractive acquisition for Hospitality, with the Tsogo portfolio comprising 29 successful and established hotel properties.
"We are broadening Hospitality’s earnings base, brand and product offering and developing a greater presence in primary metropolitan areas by adding 3,771 rooms catering for business and leisure travellers," Randall said.
The greater scale was expected to reduce its cost of funding while providing access to capital for future opportunities, he said.
We are developing a greater presence in primary metropolitan areas by adding 3,771 rooms
Tsogo Sun’s CEO, Marcel von Aulock, said the deal was the next step for Tsogo’s entertainment and hospitality-focused property strategy.
Tsogo holds 50.6% of the issued ordinary shares of HPF. The cash portion of the purchase consideration of R1.03bn would be used by Tsogo to reduce interest-bearing borrowings.
The rest of the purchase consideration would be settled by the issue of 174,064,861 HPF ordinary shares, which Tsogo was intending to retain.
Von Aulock said after Tsogo became a majority shareholder of Hospitality, the Hospitality board proposed that the name of the company be changed from Hospitality Property Fund to Tsogo Sun Property Fund.
Invy Asset Management’s Chris Segar said the transaction was mutually beneficial. "Tsogo has been able to split the gaming from its property assets and Tsogo can now take out a large portion of their hotel income pre-tax via the Hospitality Reit structure. Hospitality is on an improved footing given the significant increase in room numbers within the new scalable multibrand hotel portfolio.
"Given the size of the transaction, Hospitality will certainly move up in the South African listed property index," he said.
HPF’s management had performed well with former CEO Vincent Joyner steadying the ship in 2016. The management "seem to be implementing their strategy effectively" under Randall’s guidance.
There were "certainly signs of a turnaround", Segar said.