Hotel Industry sentiment on the mend

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Andrew Rogers, who will take the reins as CE from Hospitality cofounder and property industry stalwart Gerald Nelson next month, is confident that the company has turned the corner. Andrew Rogers, who will take the reins as CE from Hospitality cofounder and property industry stalwart Gerald Nelson next month, is confident that the company has turned the corner.

The post-2010 soccer World Cup slump in hotel occupancies and revenues, which left punters badly burnt, is probably still fresh in many memories.

But that’s not stopping investors from climbing back into Hospitality Property Fund The owner of swanky hotels like Mount Grace in Magaliesburg, Holiday Inn Sandton and Radisson Blu Waterfront in Cape Town has seen the price of its B units recover 90% (albeit off a very low base) since mid-November.

Hospitality A units, which offer an annuity-like income stream that grows at a virtually guaranteed 5%/year, are up 38% over 12 months.

That follows a dismal 2009-2012, in which Hospitality B was one of the listed property sector’s worst-performing counters. It tumbled from around R20 in early 2009 to a record low of R2,72 in September last year.

Last year, Hospitality wasn’t just hit by weaker trading conditions but also had debt refinancing troubles, which forced the company to do a rights issue. That diluted earnings to such an extent that Hospitality wasn’t able to honour its 5%/year growth commitment to A unit holders for the year to June 2012. In fact, A unit holders saw income payouts drop by 7,4% while B units’ distributions were slashed by 86,6%.

Hospitality shareholders were no doubt relieved when growth in payouts (5% for As and 16,2% for Bs) was resumed when results for the six months to December 2012 were announced in March.

Management has reported a strong uptick in room occupancies since October last year. And it seems the company is now well-placed for a further slow but steady recovery in earnings.

Andrew Rogers, who will take the reins as CE from Hospitality cofounder and property industry stalwart Gerald Nelson next month, is confident that the company has turned the corner. “The pain has been taken. We have come through the worst of it.”

Rogers says Hospitality is on track to meet forecast growth in income payouts for this year and next (12 months to June): B unit distributions are expected to recover 78,3% in 2013 and 89,3% in 2014 while A unit holders are set to grow by 19,1% in 2013 and thereafter.

Rogers notes the oversupply of hotel rooms created by overzealous developers in the run-up to the 2010 World Cup is now being taken up. There has been a particularly strong recovery in the corporate, government and meetings/conference/incentive markets since the beginning of the year, which accounts for two-thirds of Hospitality’s revenue.

“This market usually pulls back the quickest in a downturn. But it also recovers fastest when the market turns.”

Rogers says average room occupancies are back at around 63%, up from 51%-53% a year ago.

Occupancies at some of Hospitality’s flagship Johannesburg and Cape Town properties have already recovered to the mid-70% area.

But he concedes that higher occupancies have not yet translated into real growth in room rates. Average room rates are typically still 10%-20% below 2008 highs. He cites 2-3-year forward rate contracts that were closed at rockbottom prices with corporate clients in the downturn as one reason for this.

However, many of these contracts are starting to unwind, which should provide support for room rate increases over the next 12 months. Rogers believes demand will start to outstrip supply in the major metro areas within the next 12-18 months, given that hardly any new hotels have been planned or built since 2010, which will provide a further boost for room rates.

While some investors will be disappointed with Nelson’s departure as CE at a relatively youthful 57, Rogers is no newcomer to the business. He joined Hospitality as COO in January 2007 after a number of years at the Southern Sun group. He has been deputy CE for the past three years. Rogers has strong hotel operational skills and is known for his energetic, hands-on approach.

Anton de Goede, property fund manager at Coronation Fund Managers, says Rogers has detailed knowledge of the strengths and weaknesses of Hospitality’s portfolio, which should help ensure a smooth transition.

Analysts generally prefer the A to the B units because the stock is trading at an attractive forward yield of around 8,4% versus the sector’s 7,1% and has a preferential claim to earnings.

B units, trading at a forward yield of around 4%, are a higher-risk option but offer better capital growth potential should the recovery continue to gain momentum.


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