Our strategy and performance

Our strategy provides a comprehensive and responsive framework to deliver value to our shareholders and other stakeholders.

Informed by our ever-changing operating environment and our stakeholder engagement, our strategy is regularly reviewed to ensure it proactively responds to our material risks and opportunities. The severe impact Covid-19 had on Hospitality, the tourism industry and businesses globally, informed the Fund’s strategic approach to the crisis. Our strategic approach focuses on implementing the measures necessary to preserve our assets and cash resources and to ensure our sustainability beyond these uncertain times.

    Strategic objectives     Strategic enablers
           
SUSTAIN

Financial strength and durability

Maintain an appropriate capital structure and dividend policy to ensure the business survives through the economic cycles.

   

Product relevance

Own and maintain a variety of quality properties that are relevant in their markets.

           
OPTIMISE

Property portfolio management

Optimise operational efficiencies and grow rental income through effective contract management and robust tenant relationships.

   

Business intelligence

Continue to refine internal processes and systems to support portfolio management and decision-making.

           
GROW

Organic growth

Grow our portfolio through organic means.

   

Acquisitions

Continue seeking value-enhancing acquisitions, both through platform transactions and key single-asset acquisitions that are well diversified both geographically and across brand segments.

 

Demonstrating delivery

To demonstrate our strategy in action, we have built our performance and outlook reporting around our strategy.

Edward Hotel Kwa-zulu Hotel
SUSTAIN
Financial strength and durability

Maintain an appropriate capital structure and dividend policy to ensure sustainability through the economic cycles

Approach

  • As a REIT, the majority of our profit (a minimum of 75%) is required to be distributed to shareholders, subject to the solvency and liquidity test, as per the Companies Act.
  • Covid-19 had a significant influence on our ability to earn revenue and generate profits, which will have an impact on the dividend policy over the short, medium and long term.
  • We rely on financial markets to source equity and debt capital to fund growth and optimise our capital structure.
  • In the current climate, our focus is on ensuring business sustainability.
  • Our portfolio is diversified in terms of locations, brands and classes of hotels. This offers us some resilience to reduce the impact of the challenging cycle we find ourselves in.
  • We carefully manage our debt covenants, with our secured debt covenants requiring an LTV ratio below 40%, an interest cover ratio of not less than 2.0x, and a net debt:EBITDA ratio of no more than 3.5x.

Related material matters

  • Macro-economic climate
  • Investment opportunity
  • Regulatory change and compliance
  • Capital capacity and opportunities
  • Credit risk

2020 performance

During the year under review, Hospitality enhanced its resilience and sustainability through several initiatives aimed at protecting the business now and into the future.

We successfully refinanced maturing borrowings during the year amounting to R790 million at lower margins, reducing the weighted average cost of debt to 9.1% (2019: 9.6%). We continue to benefit from a restructured, less complicated debt structure with one special-purpose vehicle as security for all our borrowings. Properties encumbered can be added or removed to facilitate efficient and effective lending, while ensuring appropriate asset management in decisions to be taken on asset acquisitions or disposals. Hospitality remained within its debt covenants at year end, with an LTV ratio of 26% (against a covenant of not more than 40%), an interest cover ratio of 3.7x (against a covenant of not less than 2.0x), and a net debt:EBITDA ratio of 3.2x (against a covenant of no more than 3.5x).

As a result of, and in response to, Covid-19 the Board did not declare a dividend for the six months ended 31 March 2020. After careful review, this decision was taken as a response to conserve cash as well as the absence of the necessary waivers from our lenders regarding our net debt:EBITDA and interest cover covenant requirements for the measurement period 31 March 2021.

Given the current context, the Fund is unlikely to pay dividends in the next financial year, as it is unlikely the Fund will meet the relevant net debt:EBITDA and interest cover covenant requirements at 31 March 2021. Hospitality’s lenders were approached in this regard, details of which can be found in the FD’s review.


Key performance indicators

  Self-
assessment
12 months  
ended  
2020  
12 months
ended
2019
12 months
ended
2018
Distributable earnings R522 million   R606 million R656 million
Dividend per share (cents) 35.40^ 105.39 120.29
Interest cover ratio 3.7x 4.5x 5.0x
LTV ratio 26% 16% 15%
Average cost of net debt 9.1% 9.6% 10.3%
Market capitalisation R1.8 billion   R5.7 billion R6.8 billion
^ Only an interim dividend was paid due to the covenant requirements not being waived for the measurement period 31 March 2021. The earnings for the year were negatively impacted by Covid-19. Refer to the Financial Director’s review for further information.
2020 performance improved compared to prior year or achievement in line with strategy.
Performance flat against prior year or strategic goals.
Performance below prior year or strategic goals.

Key initiatives

  • Ongoing review and management of our capital structure
  • Ensure an appropriate distribution policy/ratio
  • Ongoing review of our cost of debt

Reflecting on 2019’s commitments

In our 2019 IAR, we stated certain priorities for FY2020. Below is the status of these goals:

2020 priorities   Status
Growth in distribution and distribution per share  
Increase gearing ratio to utilise cash more effectively  
Completed
Ongoing
Not achieved
2021 objectives and future outlook

Preserve cash and ensure the business remains sustainable during uncertain and unprecedented times brought about by Covid-19.

SUSTAIN
Product relevance

Own and maintain a variety of quality properties that are relevant in their markets

Approach

  • Hospitality has a five-year capital expenditure programme per property, which is prepared in consultation with the hotel management companies. These programmes include major upgrades and extensions, smaller projects to improve hotel amenities as well as ongoing maintenance and IT capital expenditure. Capital investments and projects are proposed by management and approved annually by the Board.
  • Under this programme, the investment cycle for major refurbishments is generally 10 to 14 years while softs, which include upholstery, linen and curtains, are replaced on average every five to seven years. FF&E consist of various components, with expected replacement cycles of between five and 12 years.
  • Due to the impact of Covid-19, all capital expenditure was suspended in the short term. We understand this will create a need to recalibrate our investment cycle and to catch up on planned investment when trading improves, and debt levels are lower.

The Fund’s capital expenditure benchmark is 20% (on average) of rental income and is evaluated on the investment criteria per property:

  • Once projects are approved, Hospitality is tasked with overseeing projects outsourced to specialist service providers. Suppliers are assessed and approved to ensure standards are maintained at competitive prices.
  • We continuously review the suitability of individual properties into the Fund’s investment strategy and will, from time to time, dispose of properties that no longer meet our investment criteria.

Related material matters

  • Macro-economic climate
  • Local authority capability
  • Investment opportunity
  • Regulatory change and compliance
  • Crime, safety, security and health
  • Capital capacity and opportunities
  • Portfolio management and product relevance, which relies on available funding

2020 performance

A number of capital improvement projects were undertaken at a total cost of R220 million and included the following larger projects:

  • The second phase of the FF&E refurbishment of the bedrooms at Westin and Arabella Hotel, Golf and Spa, which commenced in FY2019, were completed during FY2020 at a cost of R89 million.
  • The refurbishment of The Garden Court Hatfield, at a cost of R11 million to March 2020, 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.

Key performance indicators

  Self-
assessment
12 months
ended
2020
12 months
ended
2019
12 months
ended
2018
Capital expenditure R220 million R212 million R73 million
Capital expenditure as a percentage of rental income 29% 26% 17%
Disposals None None Portion of
Kopanong
for R1 million
2020 performance improved compared to prior year or achievement in line with strategy.
Performance flat against prior year or strategic goals.
Performance below prior year or strategic goals.

Reflecting on 2019’s commitments

In our 2019 IAR, we stated certain priorities for FY2020. Below is the status of these goals:

2020 priorities   Status
The second phase of the FF&E refurbishment of bedrooms at Westin over the winter months. All bedrooms will be completed at the end of this phase  
The second phase of the FF&E refurbishment of bedrooms at Arabella Hotel, Golf and Spa over the winter months. All bedrooms will be completed at the end of this phase  
Refurbishment of the ‘International Centre’ conference facility at Birchwood Hotel and OR Tambo Conference Centre, refurbishment of smaller conference and meeting facilities, and the replacement of kitchen and laundry equipment  
Commencement of the FF&E refurbishment of the bedrooms at Garden Court Morningside  
Commencement of the FF&E refurbishment of bedrooms at Garden Court Hatfield. This project was placed on hold after two out of the five phases were completed  
Façade repairs and repainting of Southern Sun Cullinan  
Façade repairs and repainting of StayEasy Century City  
The first phase of the refurbishment of loft rooms at Protea Hotel Marine  
Replacement of corridor carpets at Radisson Blu Gautrain  
Replacement and upgrade of lifts at Garden Court South Beach  
Softs refurbishment to conference rooms and restaurant at Champagne Sports Resort  
  Completed   Ongoing   Not achieved

Key initiatives

  • Maintain and upgrade key properties, subject to available funding
  • Develop initiatives to address utilities risk
2021 objectives and future outlook

We will continue to limit capital expenditure until trading levels normalise and debt reduces. Historically, the properties were well maintained, but we will need to catch up in future years to ensure the relevant refurbishment cycles are maintained and the properties remain relevant to the high levels of guests’ expectations.

 

OPTIMISE
Property portfolio management

Optimise operational efficiencies and grow rental income through effective contract management and robust tenant relationships

Approach

Our property portfolio management approach is outlined in our business model.

Related material matters

  • Macro-economic climate
  • Local authority capability
  • Investment opportunity
  • Regulatory change and compliance
  • Crime, safety, security and health
  • Capital capacity and opportunities
  • Human resources
  • Cyber and IT information
  • Credit risk

2020 performance

  • Southern Sun Rosebank (previously operating under the Crowne Plaza brand) was rebranded under the Southern Sun brand of hotels managed by Tsogo Sun Hotels to:
    • Leverage from Tsogo Sun Hotels’ marketing and distribution platform
    • Gain access to Tsogo Sun Hotels’ loyalty programme
    • Drive efficiencies and cost savings in the hotel businesses.
  • The hotel operating plans and budgets are reviewed quarterly and prepared annually.
  • Three additional sections were acquired in the Sandton Eye Sectional Title Scheme (‘the Scheme’). The Scheme comprises Radisson Gautrain Hotel and the acquisition of the additional sections resulted in the Fund increasing its ownership in the Scheme to 82%.

Key performance indicators*

  Self-
assessment
12 months
ended
2020
12 months
ended
2019
12 months
ended
2018
Contractual rental income R768 million R828 million R867 million
Occupancy 60.3% 61.1% 62.9%
Average daily rates (‘ARR’) R1 231 R1 100 R1 089
Revenue per available room (‘Revpar’) R743 R673 R685
B-BBEE rating Level 1 Level 1 Level 1
* Includes Hospitality’s portfolio of 54 properties and includes Southern Sun Pretoria, which was acquired effective 19 September 2019 (FY2019/8: 53 properties).
2020 performance improved compared to prior year or achievement in line with strategy.
Performance flat against prior year or strategic goals.
Performance below prior year or strategic goals.

Key initiatives

  • Quarterly reviews with hotel management on business performance
  • Reviews of operating plans, standards and brand opportunities
2021 objectives and future outlook

Although lockdown restrictions started to ease, allowing hotels to reopen, Covid-19 continues creating major economic and financial distress for the economy and consumers alike. This, coupled with the ban on international travel, will continue putting pressure on performance in the medium term, even once the ban is eased.

Reflecting on 2019’s commitments

In our 2019 IAR, we stated certain priorities for FY2020. Below is the status of these goals:

2020 priorities   Status
Quarterly reviews with hotel management on the business’s performance will continue  
The reviews of operating plans, standards and brand opportunities will continue  
Various initiatives under the approved capital expenditure plans are aimed at reducing the cost and/or consumption of water and electricity, improving operational resilience  
Completed
Ongoing
Not achieved
OPTIMISE
Business intelligence

Refine internal processes and systems to support portfolio management and decision-making

Approach

The Fund aims to act as opportunities arise or identify risks before they become material. This requires an information database with reports readily available to management.

Related material matters

  • Regulatory change and compliance
  • Crime, safety, security and health
  • Portfolio management and product relevance
  • Human resources
  • Cyber and IT information

2020 performance

Information is consolidated and reported on business planning and consolidation software, with the underlying general ledger maintained in SAP Software Solutions. The capital expenditure process was matured in SAP and is running efficiently. We built a database to retain all relevant hotel information received to analyse information and improve decision-making. The efficiency of existing systems allowed reporting to continue, with employees working from home through the national lockdown imposed to curb the spread of Covid-19.


Key initiatives

  • Continue building and refining internal processes and systems to support portfolio management and decision-making
  • Accounting system integration and streamlining

Reflecting on 2019’s commitments

In our 2019 IAR, we stated certain priorities for FY2020. Below is the status of these goals:

2020 priorities   Status
Continue improving the internal control environment through the use of systems at the Fund  
Continue analysing and enhancing systems and processes to effectively manage the portfolio  
Refine monthly reporting internally and quarterly reporting to the Board using the system’s available tools  
  Completed   Ongoing   Not achieved
2021 objectives and future outlook

Looking ahead, we will continue analysing and enhancing systems and processes to effectively manage the portfolio. Furthermore, we plan to refine monthly reporting internally and quarterly reporting to the Board using the system’s available tools.

 

GROW
Organic growth

Grow our portfolio through organic means

Approach

  • Monitor performance strategies of the management team at the hotel properties.
  • Compare hotel performance against the market performance of the key regions.
  • Review key initiatives to protect or enhance operating margins.

Related material matters

  • Macro-economic climate
  • Local authority capability
  • Investment opportunity
  • Crime, safety, security and health
  • Capital capacity and opportunities
  • Portfolio management and product relevance

2020 performance

The hotel trading results are compared on a like-for-like basis for the year ended 31 March 2020. Room occupancy (excluding SUN1) for the Fund’s hotels declined by 3.7% to 60.3%, while the market experienced a decline of 3.9% to 59.9%. For comparison to the STR Global South African Hotel Review (‘STR’), SUN1’s trading results are excluded. The decrease was driven by the significant impact of Covid-19 in March 2020, which is traditionally a high occupancy month in the South African market. The ARR for the portfolio increased by 3% to R1 231, driven by the increase in ARR from the Western Cape, mainly due to the recovery of the water crisis in the prior year. The resultant Revpar decreased by 0.8% to R743. The STR figures reflect a decrease in ARR of 2.6% to R1 270 and a decline in Revpar of 6.4% to R760 over the year for the South African market.

In Gauteng, hotel occupancy over the year decreased by 8.1% to 55.1% with the ARR largely remaining flat, resulting in a Revpar decrease of 8% to R561. For the STR participating hotels in Gauteng, occupancies decreased by 6.7% to 57.3% and ARR decreased by 1% to R1 143, resulting in a Revpar decrease of 8% to R654. The portfolio situated in the rest of South Africa showed more resilience in the pre-Covid-19 economic environment, with occupancies remaining flat on the prior year at 67.3%, while increasing ARR by 3% to R997, resulting in an overall Revpar increase of 3% to R672. Occupancies for the STR comparative set decreased by 0.9% to 62.0%, the ARR decreased by 3% to R1 081 and Revpar decreased by 4% to R670. The SUN1 portfolio experienced marked pressure on volume, with occupancies decreasing by 7.1% to 50.2%, the ARR remained flat year on year at R507, resulting in a decrease in Revpar of 7% to R254.


Key performance indicators

Occupancy^ 2020
%
2019
%
2018
%
2017
%
2016
%
Western Cape 61.0 61.8 67.0 68.8 65.7
Gauteng 55.4 59.9 59.3 60.2 59.3
Rest of South Africa 67.3 67.3 68.9 66.4 63.9
Sub-total (excluding SUN1) 60.3 62.6 64.4 64.6 62.6
SUN1 50.2 54.0 56.6 58.5 63.2
Total 58.7 61.1 63.0 63.6 62.7
South African hotel industry (‘STR’)* occupancy 59.9 62.4 64.2 65.1 64.0

^Includes Hospitality’s portfolio of 54 properties and excludes Champagne Sports Resort up to FY2018 and Southern Sun Pretoria up to FY2019.

* STR Global South African Review: April to March.

Key initiatives

  • Quarterly reviews with hotel management on business performance
  • Reviews of operating plans, standards and brand opportunities

  Access Hospitality’s annual results presentation on http://www.hpf.co.za/investors for more trading results.

2021 objectives and future outlook

Trading is expected to remain under pressure in FY2021 due to the impact of Covid-19. Most hotels were closed for the first three months of the year and, although restrictions are being lifted, international and leisure travel remain prohibited. It is unlikely that 2020 will produce any relevant trading results for the full FY2021 since the greater part of the year had hotel trading restrictions.

 

GROW
Acquisitions

Continue to seek value-enhancing acquisitions, both through platform transactions and key single-asset acquisitions that are well diversified both geographically and across brand segments

Approach

  • Our approach to growth is to invest in well-located, value-enhancing hotels in major urban centres with strong brands and diverse source markets.
  • We evaluate acquisitions across several criteria including macro-economics, location and class of hotel, yield potential and debt sourcing.

Related material matters

  • Macro-economic climate
  • Local authority capability
  • Investment opportunity
  • Regulatory change and compliance
  • Crime, safety, security and health
  • Capital capacity and opportunities

2020 performance

Hospitality acquired Southern Sun Pretoria for R200 million on 19 September 2019.

Key performance indicators

  Self-
assessment
12 months
ended
2020
12 months
ended
2019
12 months
ended
2018
Property portfolio value R10 billion R12.0 billion R12.6 billion
Number of hotels 54 53 53
Net asset value per share R13.27 R17.77 R19.21
2020 performance improved compared to prior year or achievement in line with strategy.
Performance flat against prior year or strategic goals.
Performance below prior year or strategic goals.

Reflecting on 2019’s commitments

In our 2019 IAR, we stated certain priorities for FY2020. Below is the status of these goals:

2020 priorities   Status
Hospitality will continue considering hotel property acquisitions in key locations  
  Completed
  Ongoing
  Not achieved
2021 objectives and future outlook

Hospitality will continue considering hotel property acquisitions in key locations.