Hospitality Property Fund targets up to 30 hotels
The latest Tsogo Sun deal creates further recovery upside for the previously embattled hotel owner
Hospitality Property Fund, the JSE’s only hotel-focused real estate investment trust (Reit), is set to increase the value of its portfolio by nearly 50% if a proposed R3.3bn deal with Tsogo Sun gets the green light.
The transaction will be Hospitality’s second major acquisition from Tsogo in less than a year. The trust, which has undergone a huge restructuring over the past 12 months, last year acquired 10 of Tsogo’s hotels in a share swap deal worth R1.7bn.
The deal, which became effective on September 1, brought Hospitality’s portfolio to 24 properties, worth around R7bn.
Flagship assets include Radisson Blu Waterfront and the Westin in Cape Town; Crowne Plaza — The Rosebank, Radisson Blu Gautrain and Holiday Inn Sandton in Johannesburg; Mount Grace Country House & Spa near Magaliesburg; and Champagne Sports Resort in the Drakensberg.
Last Friday, management issued a cautionary to coincide with the release of Hospitality’s interim results for the six months to December, saying it had entered into negotiations with Tsogo to acquire another R3.3bn portfolio of hotels.
The proposed transaction will be implemented on an income-for-income basis and should significantly increase Tsogo’s shareholding in Hospitality.
Tsogo is already the largest single shareholder in Hospitality with a 50.6% stake. Hospitality is looking to undertake an underwritten rights offer to raise around R1.8bn to help fund
Newly appointed Hospitality CEO and former MD of Tsogo Sun 1 Hotels, Keith Randall, who took over the reins from Vincent Joyner in January, said this week the company could not release further details about the proposed transaction at this stage.
However, it is believed that the deal involves at least 20 to 30 Tsogo hotels.
Tsogo is the largest hotel and gaming operator on the JSE and owns more than 90 hotels in SA, the Seychelles and the Middle East.
Analysts expect Tsogo to inject more of its hotels into Hospitality over time. ClucasGray portfolio manager Brendon Hubbard says Tsogo’s intention has always been to spin off their hotel properties into a separate listed entity for operational and tax benefits.
“Tsogo made that clear from the outset when they first mooted a tie-up with Hospitality 18 months ago.”
Hubbard says Hospitality is the ideal vehicle for this purpose as its Reit status provides a far more tax-efficient structure for Tsogo hotels than a normal company would.
The acquisitions also hold benefits for Hospitality as it will provide further scale, diversification and, more importantly, access to Tsogo’s established sales and branding network.
Last week’s proposed R3.3bn transaction follows the collapse of Hospitality’s A and B dual structure into a single-class share in September. The complicated dual-share structure, coupled to various management issues, had created plenty of in-fighting among shareholders, fuelled by the surprise sacking of former CEO Andrew Rogers and the subsequent resignation of FD Ridwaan Asmal in mid-2015.
Investor sentiment was further hit at the time by a sharp fall-off in earnings due to a drop in government spending on conferences and fewer foreign tourists, following government’s introduction of stricter visa requirements.
As a result, the Hospitality B share price fell nearly 70% in the 12 months to end-July 2015.
Since Joyner’s appointment as CEO in September 2015 the company has undergone a major turnaround and share-price recovery.
Hospitality was the JSE’s best-performing property stock in 2016 with a total return of 46%. The share price is up another 7% year
Joyner was instrumental in the collapse of the A and B structure and bringing Tsogo on board.
Last year there was a steady increase in occupancies and revenues due to a rise in foreign tourism arrivals to SA.
Hubbard believes there’s further potential share-price upside, given that the counter is still trading at a discount to net asset value and offers an attractive dividend yield of more than 10% on a normalised basis.
The proposed R3.3bn deal will further broaden Hospitality’s earnings base.
“We like Hospitality, both from a yield and sector perspective, as we are currently quite bullish on tourism.”