Hospitality warns of earnings drop

Hotel-focused property loan stock company Hospitality Property Fund, reeling because of an embattled hotel market, warned yesterday that distributable earnings per combined A and B unit for the six months to end-December were expected to be at least 28% lower than the corresponding period last year.

With hotels experiencing a tough period, the JSE-listed fund said the expected lower distributions were "primarily" as a result of the subdued economy reflected in low levels of demand and intense competition.

Adding to Hospitality’s woes were increases in municipal rates and electricity costs that were higher than inflation and which are eating into distributions. In a trading statement, Hospitality said the previous period included the last 11 days of the 2010 World Cup, when it reaped the benefits of higher demand.

In addition, the company said the Arabella portfolio, which was transferred to it in May, was affected by particularly poor winter trading conditions in the Western Cape during the initial take-on period.

"While these properties have since shown strong recovery, it is not sufficient to make up the initial trading deficit. Furthermore, the profits from the Courtyard joint venture have been significantly lower than the previous year."

Stanlib’s head of property funds, Keillen Ndlovu, said there had been phenomenal growth in the number of hotels locally. "Let us take the Sandton central business district as an example: there have been many hotels that have come up in the last few years. Most hotels generally came on stream when the economy was already weakening," he said.

Mr Ndlovu said the hotels received a lifeline from the World Cup and a few sporting tournaments last year and the year before.

"But afterwards, they were fully exposed to the weak economy, which led to less business travel, less leisure travel and less conferencing. The situation has been made worse by the sharp rise in expenses like electricity, water and rates and taxes."

Mr Ndlovu said it was difficult to pass the increase in costs on to room rates, given the "extremely" competitive nature of the hospitality environment at the moment.

"It is easy to bargain for good room rates at the moment and at times to get a free upgrade to a better room. For hotels to recover, they need economic growth to come back," he said.

The company’s interim results for the six months ending December are expected to be released on or about February 22.