Our material risks and opportunities

Materiality determination

Guided by the International Framework on materiality, this report includes matters that substantively affect the Company’s ability to create and sustain value over the short, medium and long term.

Hospitality defines value as the delivery of sustainable returns and positive contributions to our shareholders, through distributions and capital appreciation, as well as our employees, business partners and the economy.

We determine the materiality of matters disclosed in our reports by considering substantial influences on our strategy, business model and the capitals we use to create value for our stakeholders.

Material risks and opportunities linked to strategy

We consider the global and domestic operating context as well as the outputs from our enterprise risk management system and stakeholder engagement processes.

We then evaluate and prioritise relevant matters to determine our material risks and opportunities, which have a direct impact on our business (depicted in the heat map below).

Market research and comparisons with our majority shareholder are also conducted to ensure that matters relevant to the industry and the Group were not excluded from the process.


Risk matters currently

Risk matter

1 Macro-economic climate

2 Local authority capability

3 Investment opportunity

4 Regulatory change and compliance

5 Crime, safety, security and health

 

6 Capital capacity and opportunities

7 Portfolio management and product relevance

8 Human resources

9 Cyber and IT information

10 Credit risk


Please refer to the governance report for details on risk management.

 

1MACRO-ECONOMIC CLIMATE – RISK AND OPPORTUNITY

Context:

  • Our operations, concentrated in South Africa, are affected by the cyclical nature of the hospitality industry, which affects distributions and the fair value of the property valuations.
  • Our growth is negatively affected by macro-economic factors and increased funding costs.
  • Exchange rate volatility affects occupancy, particularly by foreign business and leisure travellers.
  • Covid-19 is impacting severely on the global tourism sector due to restrictions on local and international travel.

Response:

  • We mitigate inherent trading risks by managing a well-diversified portfolio across geographic locations and hotel gradings.
  • Funding costs are mitigated by interest-rate hedges.
  • Hospitality is currently hedged at 54% of total facilities. Our LTV ratio is low at 26% and is well within the statutory limits of a REIT. We maintain comfortable headroom on our covenants with debt capacity constrained to Group requirements.
  • We work with industry bodies such as the Western Cape Tourism, Trade and Investment (‘Wesgro’) and the South African Tourism Services Association (‘SATSA’) to attract visitors to South Africa, which we believe is a competitive tourism destination.

Strength of risk response

Satisfactory

Magnitude of impact

High

Likelihood of occurrence

Almost certain

Risk rating

High

Strategic objective

2LOCAL AUTHORITY CAPABILITY – RISK AND OPPORTUNITY

Context:

  • Poor service delivery, limited infrastructure investment and funding challenges experienced by South African municipalities have hamstrung their capacity to supply water and electricity to ratepayers. Inconsistent water supply and unreliable electricity provision affect hotel operations and guest relations. Returns to shareholders are also affected by the additional cost burden of increases in rates and property taxes, and the cost of water and electricity which grows above inflation annually.

Response:

  • Our capital expenditure budgets are aligned with measures to reduce dependency on utilities. We also contracted independent valuers and experts to conduct municipal valuations.
  • The Fund earns 42% of its rental income from the Western Cape. Hospitality has rolled out a water resilience plan in the Western Cape and Eastern Cape hotels. A fire readiness and response programme was also put in place.
  • Hospitality is working with industry bodies such as Wesgro, South African Tourism and SATSA to seek solutions that will benefit the province’s hospitality industry.
  • Hospitality continues to investigate options for alternative energy supply.

Strength of risk response

Good

Magnitude of impact

Moderate

Likelihood of occurrence

High

Risk rating

Moderate

Strategic objective

3INVESTMENT OPPORTUNITY – RISK AND OPPORTUNITY

Context:

  • Challenging economic conditions, coupled with an over supply of hotels in certain markets, lead to subdued consumer spending. Some investments are therefore not yielding the returns expected amid low share liquidity or tradeability. It is in this operating environment that we assess hotel investment and major refurbishment opportunities, understanding the value, these opportunities could bring to our portfolio.

Response:

  • We invest in quality properties in the South African hospitality industry to ensure we have adiversified portfolio across geographic locations and hotel gradings.
  • Investment opportunities are evaluated and approved by our Board, and formal due diligence is conducted by expert service providers prior to final acquisition.
  • We continue to investigate and identify refurbishment projects across our portfolio.
  • We fund new acquisitions with debt.

Strength of risk response

Good

Magnitude of impact

Moderate

Likelihood of occurrence

Possible

Risk rating

Moderate

Strategic objective

4REGULATORY CHANGE AND COMPLIANCE – RISK

Context:

  • We face increasingly complex compliance requirements, degradation of regulatory competence as well as policy uncertainty, including the possibility of land expropriation. At the same time, the cost of compliance is increasing while share liquidity and tradeability, as well as our share price, are low.
  • Administrative burdens associated with visa regulations for foreign minors entering South Africa, for example, have directly affected occupancy.
  • As a REIT, we are also subject to regulatory requirements in terms of the Companies Act, the JSE Listings Requirements, King IV,
    B-BBEE and the voluntary guidelines of the IIRC’s International <IR> Framework, as applicable.

Response:

  • We support the principles of sound corporate governance and continuously review covenants.
  • We have effective compliance controls throughout the organisation and meet our annual declaration to the JSE on REIT compliance.
  • We maintained our level 1 B-BBEE rating and continue monitoring government’s plans for transformation. We assess our tourism and property charter accordingly.
  • Our management team and employees are regularly trained in amendments to legislation and policy and we uphold compliance monitoring and processes already in place.

Strength of risk response

Good

Magnitude of impact

Low

Likelihood of occurrence

Possible

Risk rating

Low

Strategic objective

5CRIME, SAFETY, SECURITY AND HEALTH – RISK

Context:

  • We are concerned about the safety, security and wellbeing of our employees and tenants. Violent criminal activities, due to poverty and social unrest, have an adverse impact on our business and the hospitality industry. Fraud committed by staff, or other external parties, remains a threat to our industry and reputation.
  • Pandemics, such as Covid-19 can have a severe impact on the global economy and tourism and poses significant health and financial risk to our guests and employees.
  • The decline in the economy also has an impact on crime and therefore the safety of our guests and employees.

Response:

  • We implement incident response procedures and apply preventive measures to combat and detect fraud and suspicious behaviours. To further strengthen our defences, we ensure segregation of duties throughout the Group.
  • We hire skilled and experienced people to ensure completeness and accuracy in reporting.
  • Construction, operation, protection and exposure reports are compiled by independent experts to early identify any possible risk or threat.
  • We have adequate insurance cover against damage and theft and security procedures are in place.
  • We have implemented protocols at our hotels and at head office to protect our guests and employees.

Strength of risk response

Good

Magnitude of impact

High

Likelihood of occurrence

High

Risk rating

High

Strategic objective

6CAPITAL CAPACITY AND OPPORTUNITIES – OPPORTUNITY

Context:

  • As a committed investor in the South African hospitality industry, the sustainability of our business depends on our ability to identify and fund opportunities aligning with our strategy.
  • It is imperative that we do not miss opportunities to mitigate lower property values and the margin squeeze due to the fixed cost nature of the business.
  • Covid-19 has severely impacted trading conditions and the ability to generate revenue and profitability, which limits the Fund’s ability to invest in its properties, while protecting the Fund’s long-term sustainability.

Response:

  • We regularly conduct robust assessments of all opportunities. The performance of our existing portfolio is monitored by our Board and guides our appetite for disposals and/or acquisitions.
  • Our capital expenditure programme is reviewed and approved by the Board, and is within our risk parameters. Our distribution policy and budgets are reviewed and approved by the Board, which mainly comprises independent directors.
  • The flexibility of Hospitality’s capital expenditure programme allows for a quick response to events such as Covid-19. All capital expenditure has been suspended to protect and conserve cash.
  • Our covenants are continuously reviewed.

Strength of risk response

Satisfactory

Magnitude of impact

Moderate

Likelihood of occurrence

Possible

Risk rating

High

Strategic objective

7PORTFOLIO MANAGEMENT AND PRODUCT RELEVANCE – OPPORTUNITY

Context:

  • Our products are diversified across domestic and international brands. Product relevance in our target markets impacts our ability to create value over the long term.
  • Hotel management companies manage our properties on behalf of tenants.
  • Relationships and contract management are crucial aspects of our business.
  • As we operate in a competitive space, ongoing maintenance and repairs are essential to avoid our offerings becoming obsolete.
  • We invest in fire, life and safety insurance, relative to the age of the property, to protect our assets.
  • To attract and retain more discerning guests, we keep abreast of technology and social trends that meet modern needs and protect our properties from damage.

Response:

  • Our capital structure and capacity enable five-year capital expenditure programmes, which are updated annually, for each property. Our capital expenditure budgets are approved by our Board.
  • We regularly review the performance of our hotel management companies, and conduct property visits and site inspections, as well as fire, life and safety surveys, in terms of organisational resilience management standards. We have comprehensive insurance cover as well as construction occupancy protection exposure reports, and maintain an up-to-date assets and infrastructure dossier.

Strength of risk response

Good

Magnitude of impact

Low

Likelihood of occurrence

Possible

Risk rating

Low

Strategic objective

8HUMAN RESOURCES – RISK AND OPPORTUNITY

Context:

  • Our independent Board and executive team have the skills, capabilities and expertise required to advise and lead the Group.
  • The South African hospitality and tourism sectors are constantly evolving with the risk of skills shortages due to high turnover at management level.
  • Changes in labour legislation and instability as well as employment equity requirements, particularly our ability to attract and retain skilled B-BBEE staff, are significant factors considered by the business.

Response:

  • Our job specifications ensure effectiveness and clarity for managers and staff.
  • Our employees are skilled appropriately and have the necessary experience. We invest in training programmes that develop specific skill sets.
  • Central services are used for expert requirements.

Strength of risk response

Good

Magnitude of impact

Low

Likelihood of occurrence

Possible

Risk rating

Low

Strategic objective

9CYBER AND IT INFORMATION – RISK

Context:

  • The data-centric hospitality environment is prone to cybercrime, hacking, hacktivism and other IT breaches, which threaten data integrity and increase the risk of information loss.
  • South African companies must comply with the Protection of Personal Information Act, which requires businesses to collect, process and store personal information responsibly or pay fines for abuse.

Response:

  • We maintain robust IT infrastructure impervious to external attacks.
  • Our IT systems are regularly backed up by reputable service providers.
  • Our central servers are held with third parties who consistently monitor and audit our IT security systems.

Strength of risk response

Satisfactory

Magnitude of impact

Low

Likelihood of occurrence

Probable

Risk rating

Moderate

Strategic objective

10CREDIT – RISK

Context:

  • An uncertain economic climate increases the risk of tenant defaults and bad debts. Our management companies are affected by the same constraints, particularly in difficult trading conditions.
  • Tenants are provided with working capital by the Fund on a short-term basis, according to their lease terms.

Response:

  • We mitigate credit risk with a debtor management programme.
  • Our deposit and bank guarantee procedures identify and monitor debtors and defaulters.
  • Tenants are provided with working capital by the Fund, on a short-term basis, according to their lease terms, although the recoverability of these working capital loans could be at risk until such time that trading levels normalise. Tsogo Sun Hotels, Hospitality’s controlling shareholder, can step into lease or management agreements on short notice.

Strength of risk response

Satisfactory

Magnitude of impact

High

Likelihood of occurrence

Possible

Risk rating

High

Strategic objective