| Thu 18 Feb 2010, 12:39 | | HPA / HPB - Hospitality Property Fund - Unaudited Interim Results for the six |
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HPA HPB
HPA
HPA / HPB - Hospitality Property Fund - Unaudited Interim Results for the six
months ended 31 December 2009 and interest payment declaration
Hospitality Property Fund Limited
(Incorporated in the Republic of South Africa)
(Registration number 2005/014211/06)
Share code for A-linked units: HPA ISIN for A-linked units: ZAE000076790
Share code for B-linked units: HPB ISIN for B-linked units: ZAE000076808
("Hospitality" or "the fund" or "the company")
Unaudited Interim Results for the six months ended 31 December 2009 and interest
payment declaration
Highlights:
* Distribution per A-linked unit 57,46 cents
* Distribution per B-linked unit 36,30 cents
* Manco internalised December 2009
Comments
1. Introduction
Hospitality Property Fund Limited is a property loan stock company that invests
exclusively in hotel and leisure properties. The Fund`s units in issue comprise
A-and B-linked units with A-linked units having a preferential claim to earnings
with capped growth, whilst the B-linked units receive the balance
of earnings.
The effect of the global economic recession has been felt across all sectors
of the South African economy with the hospitality industry experiencing a
downturn since the latter part of 2008. The situation deteriorated
throughout 2009 and continues to have a major impact on the performance of the
hotel industry. Hotel occupancy levels have been under severe pressure with the
STR Global hotel benchmark reports indicating a decline in average occupancies
in South Africa of 12,8% for the reporting period compared to the same period in
2008.
A similar decline in occupancies experienced by the Fund has resulted in lower
distributable earnings being achieved. While the A-linked units` distribution
for the year remained unaffected, the decrease in the Fund`s distributable
earnings has had a leveraged negative effect on the B-linked units`
distribution.
2. Results
Total distributable earnings for the six-month period declined by 36,1%
compared to 2008. The A-linked units distribution of 57,46 cents grew by 5%
over the previous year, in line with the Fund`s distribution structure, while
distributions in respect of the B-linked unit declined by 60,6% to 36,30 cents
over the period. More than a year has passed since the collapse of the global
financial markets and the effects on the South African economy continues. The
last six months has seen a major drop off in corporate, government and leisure
travel compared to the corresponding period in 2008. To counter this, management
have aggressively marketed the hotels, the sales and marketing resources have
been supplemented, radical cost rationalisation has been applied at all units,
regrettably in some cases with the loss of jobs, whilst maintaining appropriate
service levels.
Approximately 84% (2008: 72%) of the Fund`s revenue was derived from fixed
rentals with CPI-linked escalations. The remaining 16% (2008: 28%) comprised
variable rentals which are linked to under lying hotel operational performance.
The decline in variable rentals was due to the lower trading levels affecting
the hotels` profitability and reflects the current stress on trading conditions
in the hotel industry.
Net finance costs were significantly higher than the previous year due to
additional costs incurred to service debt raised to undertake refurbishment
projects and acquisitions in the prior year.
The following table reflects the financial results for the six months to
31 December 2009 compared to the previous corresponding period.
Six months ending 31 December
2009 2008 Variance
(R`000) (R`000) (%)
Contractual rental 128 526 126 756 1,4
Fund expenses (16 086) (14 758) 9,0
Net finance costs (54 455) (21 606) 152,0
Profit before debenture interest 57 985 90 392 (35,9)
Recoupment of debenture interest 1 186 - 100,0
Debenture interest (59 171) (90 392) (34,5)
Distribution - A-linked unit (36 261) (33 702) 7,6
Distribution - B-linked unit (22 910) (56 690) (59,6)
Distribution - A-linked unit (cents) 57,46 54,72 5,0
Distribution - B-linked unit (cents) 36,30 92,04 (60,6)
3. Internalisation of management company
The internalisation of the management company was effective from 1 December
2009. The minimum purchase price of R123 million was paid to the previous
shareholders of Manco and the balance will be calculated at the end of June
2012, dependent on certain performance criteria and subject to a maximum value
of R180 million escalated by CPI annually. The transaction has resulted in
a further alignment of interests of key management with that of linked
unitholders, the elimination of perceived conflicts of interest and an
enhancement in the Fund`s yield.
4. Property portfolio
The Fund`s portfolio comprises interests in 23 hotel and resort properties
in South Africa. The portfolio is segmented into three lease types, namely:
fixed lease properties, C-Corp lease properties and variable lease properties.
The Fund`s current portfolio value of R3,4 billion results from the
independent property valuation at 30 June 2009 plus capital expenditure over
the past 6 month period.
Rentals under fixed lease agreements are determined by normal contractual lease
terms, with inflation linked annual escalations. C-Corp lease agreements
comprise approximately 50% initial fixed lease rental, with the remaining being
a variable rental equivalent to 90% of the hotel`s EBITDA (earnings before
interest, tax, depreciation and amortisation) after deducting the fixed lease
portion. Variable lease agreements consist of rentals based on EBITDA from the
property`s under lying operations.
The previously announced transaction for the acquisition of a four-star hotel
in Durban for a purchase consideration of approximately R111 million is close to
being concluded.
The net asset value per linked unit as at 31 December 2009 was R18,17
(excluding deferred taxation).
The average lease expiry is 7,25 years.
* See Press for Graphs
5. Development and capital projects
The Fund`s refurbishment programme has been reassessed around the World Cup
event, to ensure that there is no impairment of trading conditions or
reduction of room stock over this period.
The refurbishment of the Protea Hotel Imperial, Pietermaritzburg at a cost of
R14 million is in progress and will be completed in May 2010. The Protea Hotel
Marine, Port Elizabeth will be refurbished in two phases, pre- and post-World
Cup at an expected cost of R20 million. Refurbishment of the Protea Hotel
Victoria Junction, Cape Town will take place after the World Cup. Plans are
also in place to increase the conference capacity and construct an additional
40 rooms at Champagne Sports Resort at a cost of R28 million.
6. Borrowings
The Fund`s interest-bearing liabilities increased by R140 million to R1 154
million during the reporting period, the major portion being utilised to fund
the acquisition of the Management Company.
The Fund`s weighted average cost of debt for the year was 10,2% and the gearing
ratio at 31 December 2009 was 32% of total asset value.
In compliance with International Financial Reporting Standards (IFRS) interest
swap agreements are valued on a mark-to-market basis. A fair value adjustment
of R0,8 million has been charged to the income statement. This fair value
adjustment has no effect on the distribution to linked unitholders but
adversely affects both the earnings and headline earnings.
All-in fixed rate Commencement date Maturity date
R253 million 10,45% * April 2008 May 2012
R150 million 11,45% August 2008 August 2013
R150 million 11,15% ** December 2008 December 2011
R249 million 12,01% *** September 2008 September 2015
R170 million 11,33% September 2008 September 2018
R972 million
* Extendable at the option of the funder to May 2014.
** Extendable at the option of the funder to December 2013.
*** Step-up swap structure - weighted average rate. The swap is structured as
follows:
(1 Sep 2008 - 31 Nov 2009 = 7,8% ; 1 Dec 2009 - 31 Aug 2010 = 10,6%;
1 Sept 2010 - 1 Sep 2015 = 13,2%).
Identifiable assets acquired and liabilities assumed
R`000
Furniture and equipment 732
Bank 529
Sundry creditors (529)
Total net identifiable assets 732
Goodwill
R`000
Fair value of acquiree 190 843
Less: Value of identifiable assets (732)
Goodwill 190 111
7. Unitholders
During the period some 21,7% of the A-linked units and 6,8% of the B-linked
units were traded. The Fund has a BEE ownership component of 22,1%.
8. Prospects
While the hotel sector felt the full force of the global economic collapse in
2009, it seems that the worst is over and confidence is growing that 2010,
particularly with the benefits of the FIFA World Cup, will be a better year.
While expectations around the economic benefits of this event appear to be
moderating, it will still enhance hotel profits. It is important to note that
only half of the event will take place within the 2010 financial year. The
majority of the Fund`s room inventory over the World Cup period has been
sold with the necessary deposits in place to secure the bookings. Management
expects an increase in corporate travel and conferencing prior to the World
Cup 2010 which will provide a further boost to the Fund`s results for the
next six months. Given that there appear to be signs of positive, albeit
moderate growth in the general economy, the period post-World Cup should see
a return to a more normalised trading environment for the hotel industry.
The Fund is presently considering a number of new acquisitions that have come
onto the market, some of which are unique and highly sought after properties.
It is likely that post-World Cup there will be even more acquisition
opportunities at favourable prices, partly as a result of the distressed
trading conditions and partly due to overzealous development over the past
two years.
As previously announced, the Fund intends to under take a capital raising by
way of a rights offer to a maximum value of R600 million to partly fund
certain of these acquisitions, the balance being funded by way of debt
facilities.
The rights issue is likely to be concluded before the end of the financial
year and further details will be announced in due course.
The existing portfolio, the bulk of which is newly refurbished, together with
the prospective new acquisitions should be well positioned to take maximum
advantage of the envisaged improvement in the economy.
These prospects have not been reviewed or audited by the Company`s auditors.
9. Changes in the composition of the Board and the company secretary
With effect from the Manco internalisation on 1 December 2009, the role of Mr
Youseph Aminzadeh changed from Executive Director to Non-executive Director and
Hospitality Property Fund Managers (Pty) Limited was replaced by Vexicure
(Pty) Limited as company secretary.
10. Payments of debenture interest
Unitholders will receive debenture interest payment number 8 for the six-month
period ended 31 December 2009, of 57,46 cents per A-linked unit and 36,30 cents
per B-linked unit.
2010
Last day to trade cum interest Friday, 5 March
Linked units will trade ex interest Monday, 8 March
Record date Friday, 12 March
Payment date Monday, 15 March
Unitholders may not dematerialise or rematerialise their linked units between
Monday, 8 March 2010 and Friday, 12 March 2010, both days inclusive.
BASIS OF PREPARATION AND ACCOUNTING POLICIES
The financial statements are prepared in accordance with International
Financial Reporting Standards (IFRS), including IAS 34 and the requirements of
the Companies Act of South Africa (Act 61 of 1973) as amended. KPMG Inc, the
independent auditor, has not reviewed the financial statements.
The financial statements are prepared on the historic cost basis, except for
investment properties and derivatives which are measured at fair value. The
significant accounting policies are as follows:
- investment property is initially recognised at cost including transaction
costs. Subsequent to initial measurement, investment property is measured at
fair value. Gains or losses arising from changes in fair value are included in
net profit or loss for the period in which they arise. These gains or losses
are transferred to a fair value reserve as they are not available for
distribution;
- interest-bearing liabilities and debenture capital are measured at amortised
cost;
- revenue comprises rental income from the letting of investment property and
is accounted for on a straight-line basis over the period of the lease in terms
of IAS 17; and
- deferred taxation on the fair value adjustment of investment properties has
been calculated at 14% on land value and 28% on buildings.
The accounting policies are consistent with those applied in the most recent
audited financial statements and the following new policies and standards have
been adopted:
- goodwill is initially measured as the excess of the sum of the fair values of
the consideration transferred over the recognised amount of the identifiable
assets acquired and liabilities assumed.
When the excess is negative it is recognised immediately in profit or loss.
Subsequent to initial recognition, goodwill is measured at cost less
accumulated impairment losses;
- contingent consideration classified as an asset or a liability that is a
financial instrument shall be measured initially at fair value, with any
resulting gain or loss recognised either in profit or loss or in other
comprehensive income in accordance with IFRS; and
- Operating Segments (IFRS 8) - the group has adopted this standard effective
1 July 2009. This standard requires the operating segment disclosure to be
based on the information that management uses internally to evaluate segmental
performance and when deciding how to allocate resources to operating segments.
DISCLOSURE REQUIRED IN TERMS OF IFRS 3 (BUSINESS COMBINATIONS)
Internalisation of the management company
On 1 December 2009 the group obtained control of Hospitality Property Fund
Managers (Pty) Limited ("Manco"), the external property asset management
company that managed Hospitality Property Fund Limited ("Hospitality") by
acquiring 100% of the shares and voting interests in the company. The effect of
the transaction resulted in the internalisation of the management from an
external manager.
Over the past few years there has been a significant shift from external to
internally managed property companies both internationally and in South Africa.
The advantages of internalising include the yield enhancement from the lower
cost of internal management, the elimination of perceived conflicts of
interests and the further alignment of interests of key management with the
interests of Hospitality linked unitholders.
During the month of December 2009 the effect of the internalisation resulted in
no additional revenue to the Fund due to inter-company group charges being
reversed but an increase in net profit of R0,5 million as a result of reduced
expenses. If the acquisition had occurred on 1 July 2009, there would be no
increase in consolidated revenue but net profits would have increased by R4,6
million.
The following summarises the major classes of consideration transferred, and
the recognised amounts of assets acquired and liabilities assumed at the
acquisition date:
R`000
Consideration transferred
Fair value - cash 82 000
Fair value - A-linked units issued 19 393 (1 521 014 units@ R12,75)*
Fair value - B-linked units issued 21 446 (1 521 014 units @ R14,10)*
122 839
* The fair value of the linked units was based on the listed unit price on the
JSE at 30 November 2009.
Contingent consideration
The purchase price shall be an amount equivalent to the average of the 30 June
2009, 2010, 2011 and 2012 values of Manco. The values of Manco for each of the
years shall be calculated by taking the net profit after tax cash flows from
Manco`s operation for each of the years escalated by the CPI for a six-year
forecast period and discounting the forecast cash flows by the average yield of
Hospitality over the previous 12 months. Subject to a minimum price of R123
million and a maximum price of R180 million escalated by CPI between the
effective date and 30 June 2012.
The minimum price was discharged in December 2009 and the balance of the
purchase price will be paid to the sellers in cash or in linked units, at
Hospitality`s election, within 30 days of the issue of the audited financial
statements of Hospitality for the 12 months ended 30 June 2012.
The group has included an amount of R67,8 million as contingent consideration
related to the additional consideration, which represents its fair value at the
acquisition date. The fair value of the contingent consideration was calculated
by applying a DCF valuation with an escalation rate of 9,5% and a discounted
rate of 10,5%.
The goodwill is attributable mainly to the improved profitability of the group
following the internalisation of the management company and the acquired skills
and technical talent acquired through the work-force. None of the goodwill is
expected to be deducted for income tax purposes.
Transactions separate from the acquisition
The group incurred acquisition related costs of R1,874 million relating to
external legal fees, external transaction sponsor and independent advisory
fees, independent reporting accountants fees, directors fees, printing and
press announcements costs, JSE listing and inspection costs. An amount of
R1,699 million was expensed and the balance of R0,175 million relating to share
issue expenses was allocated against share premium.
By order of the Board
T E Sewell G A Nelson
(Chairman) (Chief Executive Officer)
17 February 2010
Statement of comprehensive income
for the six months ended 31 December 2009
Unaudited Unaudited Audited
31 Dec 2009 31 Dec 2008 30 June 2009
R`000 R`000 R`000
Revenue 130 150 128 929 261 919
Rental income - contractual 128 526 126 756 256 686
- straight-line accrual 1 624 2 173 5 233
Expenditure (16 086) (14 758) (31 276)
Property and other operating
expenses (16 086) (14 758) (31 276)
Operating profit 114 064 114 171 230 643
Manco internalisation
transaction cost (1 699) - -
Net finance cost (54 455) (21 606) (63 172)
Finance income 1 000 16 245 24 139
Finance costs (55 455) (37 851) (87 311)
Profit before debenture
interest,
fair value adjustments and
taxation 57 910 92 565 167 471
Recoupment of debenture
interest 1 186 - -
Debenture interest (59 171) (90 392) (162 238)
(Loss)/profit before fair
value adjustments
and taxation (75) 2 173 5 233
Fair value adjustments (2 387) (131 773) 88 116
Revaluation of investment
properties (1 624) (2 173) 199 386
Interest rate swaps (763) (129 600) (111 270)
(Loss)/profit before taxation (2 462) (129 600) 93 349
Taxation - - (54 889)
Total (loss)/profit and
comprehensive
(loss)/income for the period (2 462) (129 600) 38 460
Reconciliation between
earnings,
headline earnings and
distributable earnings
(Loss)/profit for the period (2 462) (129 600) 38 460
Adjustments:
Debenture interest 59 171 90 392 162 238
Earnings (linked units) 56 709 (39 208) 200 698
Adjustments:
Fair value - investment
properties revaluation
(net of taxation) 1 624 2 173 (144 497)
Headline earnings (linked
units) 58 333 (37 035) 56 201
Fair value - interest rate
swaps 763 129 600 111 270
Manco internalisation
transaction cost 1 699 - -
Straight-line rental income (1 624) (2 173) (5 233)
Distributable earnings 59 171 90 392 162 238
Number of units/shares
A-linked unit 63 112 101 61 591 087 61 591 087
B-linked unit 63 112 101 61 591 087 61 591 087
Weighted average number of
units/shares
A-linked unit 61 847 345 61 591 087 61 591 087
B-linked unit 61 847 345 61 591 087 61 591 087
Distribution per linked unit
(cents)
A-linked unit 57,46 54,72 110,76
- Interim 57,46 54,72 54,72
- Final - - 56,04
B-linked unit 36,30 92,04 152,65
- Interim 36,30 92,04 92,04
- Final - - 60,61
93,76 146,76 263,41
Earnings per linked units
(cents)
A-linked unit 45,85 (31,83) 162,93
B-linked unit 45,85 (31,83) 162,93
91,69 (63,66) 325,86
Headline earnings per linked
unit (cents)
A-linked unit 47,16 (30,07) 45,62
B-linked unit 47,16 (30,07) 45,62
94,32 (60,14) 91,24
Earnings and diluted earnings
per ordinary
share (cents) (1,99) (105,21) 31,22
Statement of cash flows
for the six months ended 31 December 2009
Unaudited Unaudited Audited
31 Dec 2009 31 Dec 2008 30 June 2009
R`000 R`000 R`000
Cash flows from operating
activities
Cash generated from operations 75 447 113 385 265 321
Finance income received 1 000 16 245 24 139
Finance costs paid (55 455) (37 851) (87 311)
Distribution to unitholders (71 847) (85 236) (175 627)
Net cash (outflow)/inflow from
operating
activities (50 855) 6 543 26 522
Cash flows from investing
activities
Acquisition and development of
investment properties (8 451) (815 564) (939 953)
Acquisition of management
company (124 699) - -
Net cash outflow from
investing activities (133 150) (815 564) (939 953)
Cash flows from financing
activities
Proceeds from the issue of
linked units 40 827 - -
Share issue expenses paid (175) - (185)
Interest-bearing liabilities
raised 140 325 647 469 733 838
Net cash inflow from financing
activities 180 977 647 469 733 653
Net decrease in cash and cash
equivalents (3 028) (161 552) (179 778)
Cash and cash equivalents at
beginning of period 9 828 189 606 189 606
Cash and cash equivalents at
end of period 6 800 28 054 9 828
Statement of financial position
as at 31 December 2009
Unaudited Unaudited Audited
31 Dec 2009 31 Dec 2008 30 June 2009
R`000 R`000 R`000
ASSETS
Non-current assets 3 603 546 3 075 244 3 404 252
Investment properties 3 411 079 3 063 095 3 389 043
Straight-line rent income
accrual 1 624 12 149 15 209
Furniture and equipment 732 - -
Goodwill 190 111 - -
Current assets 21 391 50 927 12 619
Trade and other receivables 14 591 22 873 2 791
Cash and cash equivalents 6 800 28 054 9 828
Total assets 3 624 937 3 126 171 3 416 871
EQUITY AND LIABILITIES
Equity 819 035 641 390 809 265
Share capital and share premium 259 195 247 148 246 963
(Accumulated loss)/retained
earnings (720) 980 980
Fair value reserve 560 560 393 262 561 322
Non-current liabilities 2 721 171 2 360 716 2 483 644
Debentures 1 186 507 1 157 912 1 157 912
Interest-bearing liabilities 1 153 889 927 195 1 013 564
Derivative liability 71 220 88 785 70 456
Contingent consideration 67 843 - -
Deferred taxation 241 712 186 824 241 712
Current liabilities 84 731 124 065 123 962
Trade and other payables 26 746 33 673 52 115
Debenture interest payable 57 985 90 392 71 847
Total equity and liabilities 3 624 937 3 126 171 3 416 871
Net asset value per linked
unit (Rands)
A-linked unit 16,21 14,61 15,97
B-linked unit 16,21 14,61 15,97
Net asset value per linked unit
(excluding deferred taxation)
(Rands)
A-linked unit 18,17 16,12 17,93
B-linked unit 18,17 16,12 17,93
Statements of changes in equity
for the period ended 31 December 2009
Share Share Retained
capital premium earnings
R`000 R`000 R`000
Balance at 1 July 2008 12 247 136 980
Total comprehensive income
for the period 2 173
Transfer to fair value reserve (2 173)
Balance at 31 December 2008 12 247 136 980
Balance at 1 July 2009 12 246 951 980
Issue of share capital 1 12 406
Share issue expenses (175)
Total comprehensive income
for the period (75)
Transfer to retained earnings (1 625)
Balance at 31 December 2009 13 259 182 (720)
Fair value
reserve Total
R`000 R`000
Balance at 1 July 2008 522 862 770 990
Total comprehensive income
for the period (131 773) (129 600)
Transfer to fair value reserve 2 173 -
Balance at 31 December 2008 393 262 641 390
Balance at 1 July 2009 561 322 809 265
Issue of share capital 12 407
Share issue expenses (175)
Total comprehensive income
for the period (2 387) (2 462)
Transfer to retained earnings 1 625 -
Balance at 31 December 2009 560 560 819 035
Condensed segmental information
for the six months ended 31 December 2009
Fixed lease C-Corp lease Variable lease
agreements agreements agreements
R`000 R`000 R`000
Income statement
- 31 December 2009
Segment revenue 70 634 54 335 5 181
Expenditure
Segment operating
results 70 634 54 335 5 181
Net finance cost
Profit/(Loss) for
the period 70 634 54 335 5 181
Income statement
- 31 December 2008
Segment revenue 66 190 55 582 7 157
Expenditure
Segment operating
results 66 190 55 582 7 157
Net finance cost
Profit for the period 66 190 55 582 7 157
Total Corpo-
segments rate Total
R`000 R`000 R`000
Income statement
- 31 December 2009
Segment revenue 130 150 - 130 150
Expenditure (17 785) (17 785)
Segment operating
results 130 150 (17 785) 112 365
Net finance cost (54 455) (54 455)
Profit/(Loss) for
the period 130 150 (72 240) 57 910
Income statement
- 31 December 2008
Segment revenue 128 929 128 929
Expenditure (14 758) (14 758)
Segment operating
results 128 929 (14 758) 114 171
Net finance cost (21 606) (21 606)
Profit for the period 128 929 (36 364) 92 565
Directors: T E Sewell (Chairman)*+, G A Nelson (CEO), Y Aminzadeh (Dutch)*,
R Asmal, K H Abdul-Karrim*+, Z N Kubukeli*+, B M Madumise*+, W J Midgley*,
A S Rogers (Deputy CEO), W C Ross*+
(*Non-executive, +Independent)
Registered office: "3 on Glenhove", Cnr Tottenham Avenue and Glenhove Road,
Melrose Estate, 2196
Tel: +27 11 994 6320 Fax: +27 11 994 6321
Email: info@hpf.co.za
Web: www.hpf.co.za
Date: 18/02/2010 12:39:01 Produced by the JSE SENS Department.
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