What we do

We earn our income through rentals received from our tenants. The hospitality industry is characterised by rental income subject to seasonal variability and a high level of capital expenditure. The potential upside allows Hospitality to leverage the assets for higher potential returns.

Our portfolio caters to a wide-ranging domestic and international market and accommodates various segments including corporate, government, leisure, Group conferencing and event business. Our properties are well diversified in terms of geographic location and class of hotel, thus mitigating some of the inherent risks associated within the cyclical nature of the hospitality industry.

As the property owner, we have a symbiotic relationship with our tenants and the hotel management companies who are typically the representatives of the brands in our portfolio. Our focus is the asset management of our properties and a long-term strategy in acquiring, disposing of and investing in a relevant portfolio to protect and grow shareholder returns. This strategy is delivered through responsible capital expenditure, an evaluation of acquisition opportunities and the optimal source of funding for these investments. Our strategy is to have dynamic and symbiotic relationships with the hotel management companies who focus on managing the hotel operations to maximise the income-generating capability of each hotel.

1
  We raise equity/capital from shareholders through the issue of Hospitality shares. We pay dividends to our shareholders, complying with the JSE regulatory requirements for a REIT while taking cognisance of prevailing economic conditions and our cash requirements to maintain and improve the portfolio and manage debt levels.
     
2
  We source funding to invest in organic and acquisitive growth opportunities, using debt and/or equity. We restructured our debt portfolio, including our medium-term note programme, normal bank debt and revolving credit facilities, to diversify between lenders, simplify the security structure and reduce the average cost of net debt.
     
3
  We maintain and improve our properties through regular and responsible capital investments. Feasibility studies are conducted to analyse the return potential under prevailing trading conditions. Board approval is required for all capital expenditure projects and once approved, all expansions and major refurbishments are outsourced to third-party development consultants.
     
4
  We measure the consumption of electricity and water and review municipal rates. Energy and water-saving initiatives are encouraged and supported through capital replacement where appropriate.
     
5
  We evaluate acquisition opportunities to deliver on our objective to sustainably grow our assets under management. We review and dispose of certain properties that do not match our investment strategy to enhance the quality of our property portfolio. The proceeds of sales are applied to the reduction of debt or other growth opportunities.
     
6
  We receive rental income from our tenants. The leases for all our hotel properties are fixed and variable leases. Typically, the fixed portion of the lease is 50% of the budgeted EBITDAR, escalating at the consumer price index (‘CPI’) on a varying cycle, of two or three years. The varied portion is between 75% and 98% of actual EBITDAR less the fixed portion.
     
7
  Our tenants have management and licence agreements with reputable hotel management companies. We regularly engage with our tenants and their hotel management companies. We monitor the performance of our properties through monthly and quarterly reports provided by each hotel management company. In addition, we conduct peer group benchmarking, statistical analyses and reviews of economic trends to optimise the performance of the properties.

REIT 101

Hospitality is a REIT in terms of the JSE Listings Requirements. Below we summarise what a REIT is and how this investment vehicle benefits investors.

What governs a REIT?

REITs in South Africa are governed by the JSE Listings Requirements and the Income Tax Act, 1962 (‘IT Act’). The IT Act allows for REITs to deduct dividends paid to shareholders for income tax purposes, as long as the dividends meet the definition of a ‘qualifying distribution’ in terms of section 25BB.

What are the REIT compliance requirements in accordance with the JSE Listings Requirements?

A REIT must:

  • Own at least R300 million in property
  • Keep its debt below 60% of its gross asset value
  • Earn at least 75% of its revenue from rental revenue*
  • Distribute at least 75% of its total distributable profits as a dividend to the holders of its listed securities, subject to meeting the solvency and liquidity requirements as per section 4 of the Companies Act
  • Have a committee to monitor risk

To retain its REIT status, every REIT must, on an ongoing basis, meet the relevant REIT criteria prescribed by the JSE. Each member of the Board must sign an annual REIT compliance declaration confirming that the Company meets the relevant REIT criteria. The declaration is submitted to the JSE.

What are the benefits of a REIT to investors?

  • Shareholders of a REIT do not pay securities transfer tax on buying or selling of REIT shares
  • South African investors will receive gross dividends from a South African REIT entity, without the deduction of withholding tax being levied against the dividend. However, investors will have to pay tax on the dividends that they receive at their applicable marginal income tax rate when they include it in their taxable income
  • Foreign shareholders of South African REITs will be levied a dividend withholding tax at 20% or the applicable double tax agreement rate could apply
  • No capital gain tax liability arises in a REIT on the disposal of immovable property, a share in a REIT or a share in a controlled company
  • Rental revenue is the Group’s revenue derived from owning or leasing of immovable property let or sub-let to tenants plus dividends received from another REIT where the investment in that REIT is not consolidated in the Group’s accounts.