Vacancies hurt Hospitality

Johannesburg - Hospitality Property Fund's [JSE:HPA] bleak results were in line with market expectations as the entire hotel and leisure sector struggles with vacancies.

The property loan stock company reported a 36.1% drop in distributable earnings for the six months ending December 2009.

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.

A-linked distributions grew at 5% as per the fund's distribution structure, but its B-linked unit distribution dropped by 60.6%.

"The travel industry is very dependent on travel by government employees, and they haven't started travelling much yet," said Coronation Fund property analyst Anton de Goede.

According to De Goede, Pravin Gordhan's Budget speech suggested that levels of government travel seen two to three years ago won't be reached in the near future.

Government employees' travel expenses will have to be cut considerably, if Gordhan's aim of tightening the state's belt is to be realised.

Hospitality's portfolio includes a number of Protea and Holiday Inn hotels as well as the Radisson at the V&A Waterfront, Mount Grace in the Magaliesberg and Champagne Sports Resort in the Drakensberg.

"The whole hotel sector is generally down," said investment manager at Catalyst Fund Managers Zayd Sulaiman. According to Sulaiman, a big chunk of the loss is also attributable to less travelling and fewer conferences by corporate entities.

Data from Smith Travel Research's (STR's) global hotel benchmark survey confirmed that occupancies and revenues in South Africa are under pressure. According to the survey, hotel occupancies dropped by 12.8% during the last six months of 2009.

City Lodge results on Thursday also showed the hotel sector is struggling. It reported a normalised headline earnings drop by 14%, with vacancies up by 11%.

"Hopefully after the World Cup the leisure component will come through," said De Goede.

According to De Goede, corporate travel will be cheaper once the event is over, and the country's finances will look healthier near the end of the year.

Hospitality CEO Gerald Nelson said most industries in South Africa are changing their expectations about World Cup benefits. "No one's quite expecting from it what we did two years ago; the middle of a recession isn't exactly a great time to host a World Cup."

According to Nelson, the fund will benefit positively from the tournament, but it's not known how the fund will perform the two or three months before kick-off.

"Corporates will not be able to construct during the World Cup, so we expect some boost in the corporate section of the market before [the World Cup]."

The company plans a rights offer of R600m to take advantage of acquisition opportunities after the World Cup.

Gearing is currently at a healthy 32% of total asset value.

"We're at the bottom of the cycle, but once the market turns the B-unit shares will shares will stand to benefit the most," said Sulaiman.

- Fin24.com