AS WE NAVIGATE THIS CHALLENGING TIME, OUR PRIORITY AS A LEADERSHIP TEAM IS ON PROTECTING THE LONGEVITY AND SUSTAINABILITY OF THE BUSINESS AND ENSURING ITS RESILIENCE INTO THE FUTURE.
Challenges have become synonymous with business in South Africa. This financial year ended in a global meltdown due to Covid-19, which wreaked havoc across the globe. When the first case was diagnosed in South Africa in March 2020, we found ourselves in the eye of the storm at our financial year end. This, together with the declaration of a national lockdown, created a lot of uncertainty in the future outlook of many businesses, including ourselves, and it appears the worst is not yet behind us. The past three years saw a constant decline in GDP in South Africa (2017: 1.4%, 2018: 0.8%,2019: 0.2%) and 2020 continues to follow the trend, with the Covid-19 crisis likely to push South Africa into a full recession. We remain focused on our strategic objectives to sustain, optimise and grow our business.
While the economic climate remained difficult, the business performed well, gaining momentum leading up to March. Revenue was expected to grow between 3% and 5% before the impact of Covid-19, which wiped out all growth prospects, and left the year’s revenue down by 7% on the prior year.
The first quarter of FY2021 is characterised by the national lockdown announced by President Cyril Ramaphosa on 23 March 2020 in terms of his powers under the Disaster Management Act, 2002, and the State of Emergency Act, 1997. The lockdown was effective from 26 March 2020 to contain the spread of Covid-19. The lockdown was extended to 30 April 2020 and beyond to slow the spread of Covid-19. During this time, many industries came to a grinding halt and closing most hotels was necessary. Tenants sought relief from landlords through the supervening impossibility of performance, and with little to no revenue, municipal rates and other property-related costs remain a burden to be serviced.
The hospitality industry was hit hard by Covid-19, with severe restrictions placed on travel and entertainment. Although the restrictions are being lifted, the fear instilled, and the hype created through social media, will see the prospective traveller remaining cautious and delaying business and leisure travel, not to mention the obvious crunch on disposable income.
Hospitality did not declare a final dividend at 31 March 2020 in order to protect the sustainability of the business. In respect of the final distribution, the board of directors, after considering and applying the relevant solvency and liquidity test as defined in the Companies Act, could not reasonably conclude that the company would meet the liquidity requirement after completing the final distribution. This was as a result of the Company not expecting to meet its interim and year-end bank covenant liquidity requirements. Lenders provided a waiver to these requirements to 30 September 2020 and would only consider waiving the year-end covenant requirements to 31 March 2021, during September 2020. As a result of the partial waiver to 30 September 2020, Hospitality’s debt becomes current and influences the outcome of the liquidity test. Distributable income ended 14% down on the prior year at R522 million.
Hotel occupancies for the Fund ended at 60.3% (down 3.7% on the prior year). This was driven by the significant impact of Covid-19 in March 2020, which traditionally is a high occupancy month in the South African market. The results over the year were inconsistent from month to month and from region to region. The Western Cape recovered from the water crisis in FY2019 and was achieving double digit growth of 18% on the prior year before the impact of Covid-19. The first quarter of trading included national elections in May and school holidays separated from the Easter holidays in April. This resulted in subdued business travel which had a negative impact on corporate hotels.
Hospitality acquired Southern Sun Pretoria in September 2019 for R200 million. The hotel comprises 240 rooms and is in the centre of Pretoria, which complements the Fund’s portfolio, especially in the government sector. Hospitality also acquired three additional sections in the Sandton Eye Sectional Title Scheme (‘the Scheme’), which comprises Radisson Gautrain Hotel, increasing the Fund’s ownership of the Scheme to 82%.
Refurbishments at Westin Hotel in Cape Town and Arabella Hotel, Golf and Spa in Hermanus started in 2018. These refurbishments were completed in 2019 at a cost of R89 million. Garden Court Hatfield Hotel also started its refurbishment, with a capital spend of R11 million to March 2020, and is expected to be completed towards the latter part of FY2021 (trading dependent). The remaining capital expenditure of R120 million was spent on replacing hotel furniture, equipment and other smaller projects across the remaining 51 hotels.
The Fund’s property portfolio was independently valued at 31 March 2020 by a newly appointed valuation company, De Leeuw Group. At the time of the valuations, the South African 10-year bond yield increased to 10.5%, resulting in higher discount rates used to discount future cash flows, and significantly reduced future cash flows due to the uncertainty of the impact of Covid-19. The portfolio was valued at R10 billion, resulting in an impairment of R2.5 billion.
Hospitality’s gearing remains within acceptable levels, with an LTV ratio of 26% at 31 March 2020. However, debt levels are expected to increase until some normality in hotel trading is achieved.
Ethical and responsible leadership is critical to the success and sustainability of the Fund and we remain committed to good governance. Hospitality’s Board was reconstituted with a new executive management team, effective from 1 June 2019. The reconstituted Board increased black and female representation on the Board as set out in the Board of directors. Hospitality retained its level 1 B-BBEE rating under Tsogo Sun Hotels Limited.
As we navigate this challenging time, our priority as a leadership team is to protect the longevity and sustainability of the business and ensure its resilience into the future. Our relationships with our employees, shareholders and business partners are built on principles of trust, honesty and fairness. In adversity, these relationships create strong partnerships and we are grateful to all our partners. Our lenders were extremely supportive, suppliers were understanding and met our needs, employees agreed to furlough at reduced pay and we gained invaluable guidance and support from our majority shareholder, Tsogo Sun Hotels. The Board extends its appreciation to Hospitality’s stakeholders for their invaluable support during this challenging time. The Fund has a strong diversified portfolio, an appropriate capital structure and the right ethical leaders to push through this adversity, and continue serving its stakeholders into the future.
Marcel von Aulock
Mara de Lima