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Hospitality B Property share analysis |
29 Apr 2012. On 14 March 2012 it was announced that RECM, who I admire & follow closely, had invested in Hospitality B (they had increased their exposure to 5%); and more recently one of our readers asked me to do a write-up on the company, so I decided to take a closer look. In March the Hospitality Property Fund published a healthy looking medium-term forecast, but I'm concerned that far less is being projected in their medium term forecast in terms of refurbishment expenditure than has been the average over the last 3.5 years. If average historic refurbishment spend is assumed then suddenly the forecast looks dismal. It could be that the past 3.5 years has seen far higher refurbishment spend than what is required on average to sustain the hotels, but something would need to convince me of that before I invested. And I would need to be more convinced than usual before I invested in Hospitality B, because I already have a lot of exposure to tourism through my stake in South Africa Travel Online.
The Hospitality Property Fund is a property loan stock company with a portfolio of 26 hotel & resort properties in South Africa. The Hospitality B units get whatever is left over of the distributions once Hospitality A units have taken their share.
Hospitality listed on 10 Feb 2006. The distribution of the A linked units grew at 5% p.a. for the first 6 years, and then at the lesser of 5% p.a. & inflation. As you can see in the table, the change in B unit distributions is far more volatile. In this table of the distributions, I used Hospitality's own Medium term profit forecast to guestimate the 2012, 2013 & 2014 distributions (of course reality will be different, and whether you want to invest in Hospitality B depends on the extent to which you think their medium-term forecast will pan out).
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
|
Hopsitality B distribution (R) |
1.40 |
1.66 |
1.53 |
0.88 |
0.59 |
0.10 |
0.70 |
0.87 |
Adjustment for refurbishment spend |
|
|
|
|
|
- |
-1.40* |
-2.33* |
* Refurbishment costs over the last 3.5 years have been R223m p.a., adding inflation at 5% gives R234m in 2013 and R246m in 2014. No figure was given for Radisson Blu capex assumed in the medium-term forecast, so I've assumed it's half the last valuation (which was R151m), i.e. R75m, so capex assumed by management was then R75m+R35m = R110m. So, must adjust for R234m-R110m = R124m in 2013, and R207m in 2014.
I've listed the assumptions in order, with those at the top the ones I consider to be the most contentious (my comments in right hand side column):
Other than the budgeted capex on Radisson Blu, no provision for major refurbishments in the forecast period. |
Refurbishment expenditure is less than the R223m p.a. spend over the last 3.5 years. |
Normal capital expenditure of R35m in FY2012, escalating at CPI in 2013 & 2014 |
|
City of Johannesburg R13m amount in dispute has not been expensed. |
Adjustment made in valuation |
Refinanced term loans totalling R850m to be concluded with banks through a club loan facility at JIBAR + 260bps on conclusion of the rights issue effective 1 June 2012 |
If banks are trying to get out of this type of debt, there's the risk they wont be able to secure these terms. |
Current Absa access facility rate to be lowered from prime + 2% to prime -0.5% on securing term loans from June 2012 |
|
Bad debt averages to that over the period 2006 to 2012 (i.e. R1.9m) instead of the 2012 bad debt provision of R4.8m. |
I'd prefer to see percentages averaged, but the principle of averaging is ok for a long-run assumption |
The terminal occupancy is the theoretical maximum occupancy that each property is likely to trade at during extended periods of high demand. Occupancies are assumed to grow by GDP until terminal occupancy levels are achieved, after which trading volumes are assumed to remain static for 2 years & then decline by 5% for one year (indicating additional supply being brought into the market in response to high demand). |
Seems reasonable |
Average room rates growth by CPI annually until terminal occupancy levels are achievel, after which ARR is forecast to grow by CPI + GDP. |
Seems reasonable |
Bridging loan for Absa debt facility of R1.35m, at prime + 2% until 31 May 2012, debt restructure facility fee of R6.75m payable to Absa in May 2012. |
Presumably they've got a good idea of these terms. |
Electricity costs take account of anticipated Eskom increases as well as savings through efficiency measures that have been implemented. |
Seems reasonable |
General head office expenditure based on the 2012 forecast, increasing at CPI annually. |
Seems reasonable |
Hotel payroll expenses increase at CPI + 2% |
Seems reasonable |
Rights issue of R500m concluded by end May 2012. |
My guess is that the rights issue will be succesful |
The table below shows the valuation of a Hospitality B unit using a 10% discount rate and assuming various distributions going forward (PLS distributions are usually deemed to be interest in an individual's hands, and so different individuals will have different rates of tax payable. I have not correctly taken this into account - as a rough approximation I've assumed changes in net distributions are offset by changes in the discount rate).
|
2007-2014 |
2013-2014 |
2012 |
Average Hospitality B distribution |
R0.97 |
R0.79 |
R0.10 |
RAW Valuation |
R9.71 |
R7.85 |
R1.00 |
Valluation after City of Johannesburg dispute* |
R9.65 |
R7.79 |
R0.94 |
Valuation after increase to refurbishments |
R4.49 |
R0.00 |
R0.00 |
* Since management are confident of a good outcome, I've assume a loss of R5m of the R13m, equating to 6c/unit
Obviously there's nothing golden about using a 10% discount rate, and there's tons of assumptions, all of which are probably wrong, going into these valuations!
The Hospitality Property Fund is a property loan stock company with a portfolio of 26 hotel & resort properties in South Africa. Its most recent acquisition on 13 May 2011 was the Westin Cape Town & Arabella Hotel & Spa.
Fixed lease |
F&V lease |
Birchwood Hotel & Conference Centre |
|
Champagne Sports Resort |
Crowne Plaza Johannesburg - The Rosebank |
Kopanong Hotel & Conference Centre |
Holiday Inn Sandton - Rivonia Road |
Premier Hotel King David |
Inn on the Square |
Variable lease |
Mount Grace Country House & Spa |
Radisson Blu Waterfront |
Paulaner Brauhaus |
Courtyard Arcadia (jointly owned with City Lodge Hotels) |
Protea Hotel Edward |
Courtyard Cape Town (jointly owned with City Lodge Hotels) |
Protea Hotel Hazyview |
Courtyard Eastgate (jointly owned with City Lodge Hotels) |
Protea Hotel Hluhluwe & Safaris |
Courtyard Rosebank (majority owned through sectional title scheme) |
Protea Hotel Imperial |
Courtyard Sandton (majority owned through sectional title scheme) |
Protea Hotel Marine |
Protea Hotel Richards Bay |
|
Protea Hotel - The Richards |
|
Protea Hotel - The Winkler |
|
Protea Hotel Victoria Junction |
|
The Bayshore Inn |
|
Westin Cape Town |
The properties are diversified across South Africa, catering to business travel (some 40% of revenue in FY2011), leisure travel (30% of revenue) & conferencing (30% of revenue).
Over the last 3.5 years a total of R662m was spent on refurbishment (assumed R70m of the 2009 spend on Mount Grace was for refurbishment as opposed to expansion), or R781m with inflation at 5% added, equating to R223m p.a.
6 months to 31 Dec 2011 |
R55m spent on refurbishment projects (it wasn't explained why the numbers add to more than R55m):
Comment in interims: "With the completion of these projects, all F&V lease properties, with the exception of Protea Hotel Hluhluwe & Safaris have been refurbished and will require minimum further capital expenditure in the short term." |
2011 |
During the year a total of R109m was invested:
|
2010 |
R41m was invested in refurbishing:
|
2009 |
R532m spent on refurbishing & enlarging the Fund's existing portfolio of hotels:
|
2008 |
Info wasn't shared on refurbishment spend |
Cents per unit distribution |
Hospitality A distribution |
Hospitality B distribution |
% change in B unit values on previous year |
2014 GUESTIMATE |
R124m |
R78m (87c/unit) |
23% |
2013 GUESTIMATE |
R118m |
R63m (70c/unit) |
700% |
2012 GUESTIMATE |
R112m |
R9m (10c/unit) |
-83% |
R108m (122.11c/unit) |
R52m (58.9c/unit) |
-33.1% ("In addition to muted demand, there was a significant oversupply of room stock as the number of rooms available on a national basis increased by almost 20% in the 2 years prior to the World Cup. This has led to widespread discounting. Pressure from increasing overhead costs, which are appreciably higher than inflation, further eroded margins.") |
|
R73m (116.30c/unit) |
R55m (87.98c/unit) |
-42.4% ("as some of the 21% of the Fund's earnings are derived from lease income linked to the operational performance of hotel properties, the lower B-linked unit distribution primarily reflected unfavourable trading conditions in the hotel & leisure industry for the period...The positive effect of the World Cup was partly impaired by bad debt write-offs linked to the Queensgate Group, a tenant at 2 of the Fund's properties.)" |
|
R68m (110.76c/unit) |
R94m (152.65c/unit) |
-8.1% (Some "25% of the Fund's earnings are derived from lease income which is linked to the operational performance of the hotel properties. This decline in distribution of the B-linked unit was pimarily as a result of the unfavourable trading conditions.") |
|
R65m (105.49c/unit) |
R102m (166.16c/unit) |
18.3% (Some "one third of the Fund's earnings are derived from lease income which is linked to operational performance of the hotel properties. The high growth in distribution of the B-linked units was primarily as a result of the favourable trading conditions") |
|
R41m (100.46c/unit) |
R58m (140.40c/unit) |
16.7% ("28% of the Fund's earnings are from lease income that is linked to the underlying operational performance of hotel properties. The growth in distributions when compared to the listing prospectus were predominantly attributable to this income component having benefited from recent trading conditions"). |
|
Left out as there were only 4.5 months |
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