Hospitality sector set for a turnaround

JOHANNESBURG – Investment manager, Zayd Sulaiman, of Catalyst Fund Managers, says it appears that the hospitality sector might be stabilising, with a slight improvement in occupancy rates in the hotel industry over the last few months. This could bode well for property funds like Hospitality which was the worst property performer on the JSE in 2011.

Sulaiman says the sector has been under pressure since the global financial crisis in 2008 and due to the oversupply of hotel rooms built for the Soccer World Cup in 2010.

The Hospitality Property Fund was one of the groups that benefited greatly from the soccer spectacle with many of its hotels fully booked during the World Cup. But it also incurred debt from two major five star hotel acquisitions in the Western Cape in 2011.

On Monday it said in a Sens announcement that it is renegotiating its roughly R1.35bn debt facility with Absa, which expires in February 2012. The company is in discussions with the bank and other funders regarding the re-financing of the facility.

“It is likely that any re-financing will require Hospitality to undertake a rights offer during the first half of 2012 in order to reduce its gearing levels,” it said.

Sulaiman says the property fund’s loan to value level is quite high at 40%, mainly due to the debt associated with the acquisition in 2011 of the Westin Grand Hotel Arabella Quays adjacent to the Cape Town International Convention Centre and the fund’s hotel refurbishment programme over the last few years.

The fund's units in issue comprise A- and B-linked units. A-linked units have a preferential claim to earnings with capped growth, while the B-linked units receive the balance of earnings. Hospitality invests exclusively in hotels and leisure property.

Sulaiman says the build-up of supply in the hospitality sector together with low occupancies post the global financial crisis have diluted and decimated the earnings of the fund and thus caused stress on the share price, especially the B units.

Refinancing the debt is likely to be expensive, Sulaiman says, as the debt was previously negotiated before the global crisis when debt margins were low. He adds that margins have since gone up by more than 1% to 3% depending on the quality of the property portfolio and the level of gearing.

He says should the fund undertake a rights offer in order to reduce its gearing levels this could be good news for shareholders as they will be able to acquire shares at a good rate, depending on what they paid for their initial shares. Hospitality CEO Gerald Nelson said the company may need to sell shares to existing investors as part of the re-financing of its debt.

Sulaiman says: “If there’s a rights issue it doesn’t prejudice any existing shareholders unlike a private placement. You follow your rights so that you’re not diluted, but you have to put up the cash.”

Sulaiman’s view is that shareholders should ride out the storm. “The hospitality sector cannot remain under pressure forever. No one is building new hotels and thus there is very little new supply. We’ve already seen occupancies improve since around August and September. The latest data indicates that December was also relatively good. It appears the sector has bottomed out. There should be good growth over the long term.”

He said it appeared hotel occupancy and room rates have stabilised. “So, hopefully off the low base, the same way as the share price of the B-unit came down by 70% from its highs, when things revert to normal and we don’t know how long that is going to take, the share price of the B-unit could increase exponentially and easily increase by 100% to 200%.” Sulaiman says the share is attractively priced for the long-term investor.

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