Pretoria - Listed Hospitality Property Fund has entered into negotiations with Tsogo Sun Holdings on the potential acquisition of a R3.3billion portfolio of hotel assets from the listed hotel and gaming group.
The group said it was preparing to raise about R1.8bn through a rights issue.
Keith Randall, the chief executive of Hospitality, confirmed on Friday that negotiations were taking place with Tsogo Sun.
Randall said the proposed acquisition would be implemented on an income-for-income basis and would be funded through a combination of debt and equity.
Subject to the conclusion of formal agreements related to the proposed transaction and securing the necessary shareholder approval, Hospitality was preparing to undertake an underwritten rights offer to raise about R1.8bn, he said.
Randall said the rights offer pricing would be based on the then prevailing market price of Hospitality’s shares.
Hospitality was also negotiating a further increase in debt facilities, he said.
Randall added that Hospitality continued to assess value accretive property acquisitions, both within Tsogo Sun’s existing portfolio and external opportunities to increase the fund’s critical mass.
However, Randall said the most significant of these proposed transactions would involve the acquisition of additional hotels from Tsogo Sun.
Acquisitions
The disclosure about the negotiations taking place with Tsogo Sun follow Hospitality finalising the acquisition of 10 properties valued at R1.7bn from Southern Sun Hotels, and indirect wholly-owned subsidiary of Tsogo Sun, effective from September last year.
There was concern about that transaction, but the Competition Tribunal approved it in August last year, subject to a number of conditions related to the potential exchange of information.
These conditions were imposed on the merger because of concerns expressed by the Competition Commission that because Hospitality leased hotel properties to competitors of Southern Sun Hotels, the merged entity had the ability to potentially exclude competitors by not renewing their lease agreements and share sensitive competitive information.
Vincent Joyner, who was chief executive of Hospitality until December, said last year that transaction would provide the fund with exciting future growth prospects and an attractive pipeline of acquisitions in the medium term, because it was anticipated Hospitality would provide the platform for Tsogo Sun’s strategy of growing a hospitality-focused real estate investment trust.
Hospitality at end-December had a portfolio comprising 24 hotels and resort properties in South Africa valued at R7.8bn.
The fund on Friday reported a 46 percent increase in distributable earnings to R197m in the six months to December from R135m in the previous corresponding period.
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Randall said distributable earnings were impacted by the Tsogo Sun transaction, which contributed R67m, for the four months from September.
Distributable earnings increased by 8 percent on a like-for-like basis, adjusted for the impact of the transaction and disposal of certain properties.
A dividend a share of 56.09c was declared for the four months to December.
Randall stressed this dividend was not comparable to the previous comparable period because of the Tsogo Sun transaction, the restructure of the fund’s dual class share capital structure to a single class capital structure, including the clean-out dividend, and the disposal of the Inn on the Square during the reporting period.
Rental income increased by 28 percent to R303m, but like-for-like rental income grew 3percent to R225m.
Randall said a 4 percent increase in foreign arrivals during the 2016/2017 holiday period supported the domestic hospitality sector, but domestic demand remained subdued, because of the uncertain macro economic climate and weak business sentiment.
He added that the continued stability of the rand, even at stronger levels against major currencies, provided support for the value proposition of the South African tourism sector to international tourists.
Shares in Hospitality declined 0.7 percent on the JSE Friday to close at R14.10.