IN WHAT could be the first step in its plan to list a property fund, leisure company Tsogo Sun is in talks to buy a significant stake in struggling real estate investment trust (Reit), Hospitality Property Fund.
Hospitality yesterday announced that it and Tsogo were discussing a transaction. Its company secretary, Rosa van Onselen, said she was “not in a position to comment on the potential transaction”.
Tsogo, a hotel portfolio controlled by Hosken Consolidated Investments is worth around R10bn. Tsogo’s CEO Marcel von Aulock said in May that the listing of a separate property fund on the JSE was being discussed internally.
Hospitality owns properties worth about R5bn. Some — including Arabella Hotel and Spa near Hermanus in the Western Cape and Birchwood Hotel and Conference Centre in Boksburg, Gauteng — are poor performers.
But the fund also owns some prized hotels. The Westin Cape Town, Radisson Blu in Granger Bay and The Crowne Plaza in Rosebank, Johannesburg, could help bring scale to Tsogo Sun’s property listing.
Grindrod Asset Management’s chief investment officer Ian Anderson said last week that a company wanting to list specialised funds would need to list sizeable funds to get support from institutional investors.
Most listings in the property sector in the past year have been small, with assets worth less than R5bn coming to market each time. A listing of R15bn would be significant.
Investors are seeking large liquid property funds in a sector where only a few dominate. Growthpoint Properties and Redefine Properties account for about a third of listed South African property.
Hospitality listed in 2006 and initially provided strong returns to investors. The fund benefited from a healthy tourism sector before the 2008-09 recession, but investors have not been impressed since.
Hospitality converted to the Reit capital structure, and is supposed to pay out the majority of income as distributions to shareholders. But in recent years its income has not been as constant or easy to forecast as that of other nonspecialised property funds, as hotel bookings can be highly erratic.
The fund has an A and B share structure, and investors who own A units are paid distributions first — capped at CPI or 5%, whichever is lower. The B unit holders receive the balance.
With Hospitality barely earning any income in the past few years, the B unit holders’ distribution growth has fallen. Share price growth has also been weak.
In the past year its A unit’s share price has fallen 8% to R11.50 and its B unit’s share price has plummeted 71% to R3.