Commenting on the Fund’s performance, CEO Andrew Rogers, said that:

“Hospitality’s performance during the first six months of the year reflected the weaker hospitality trading environment. In our core portfolio, occupancy and room rates continue to track industry trends. Occupancy increased 1,1% to 66,3% for those properties in our portfolio that are subject to variable rental income compared to a 1,0% increase in occupancy to 64,3% for the hotel industry (STR Global). The Fund reported an increase in rental income of 2,3%, as a result of the weaker hospitality trading environment.

However, our Western Cape and Sandton portfolios continue showing strong growth. The hotel industry downturn has further validated our strategy to focus on growing our exposure to large hotels in major metropolitan centres. This should support our performance, despite the uncertain short-term outlook for the economy and the hotel sector.”

 Trading review

• The hotel industry (STR Global South Africa Hotel Review) reported a year-on-year increase in occupancy of 1,0% to 64,3% for the reporting period. This is due to the subdued pace of domestic economic growth. Average daily rates ("ADR") were up 5,9% to R1 022, resulting in revenue per available room ("RevPAR") growth of 7,0%.
• Hospitality’s trading performance for the core portfolio which is subject to variable rental income and excluding conference hotels (hotels where revenue generated from conferencing exceeds rooms revenue) was in line with the overall hotel and leisure market. Occupancy increased by 1,1% to 66,3%, ADR increasing 4,4% to R1 290 resulting in RevPar growth of 5,6% to R855 for the six months to 31 December 2014.
• In addition to the muted economy, other factors impacting the South African hospitality industry during the six months under review included reduced international travel as a result of the Ebola epidemic in Africa and its perceived impact on South Africa while arrivals from Asian countries have also been negatively impacted by the recently implemented visa requirements. In addition, restricted public sector spending in line with cost saving measures imposed by the Finance Ministry also contributed to the lower demand from government segments.

Financial review

• Rental income growth of 2,3% to R217,4 million, reflects the weaker hospitality trading environment and other factors including:
• Higher rates in December 2013 due to the arrival in South Africa of many foreign dignitaries, to pay tribute to the late President Nelson Mandela. The resultant year–on-year impact was a decline of some R10 million, mainly at the Fund’s Sandton properties
• The negative impact of the lease conversion at Birchwood Hotel and OR Tambo Conference Centre (“Birchwood”) from a fixed to a F&V lease was R6,7 million compared to the previous year.
• Properties in outlying areas, predominantly those on the disposal list (“secondary portfolio”), experienced a sharper decline in demand than in the core portfolio.
• Strong trading results from its properties in the Western Cape, which are all well located, somewhat ameliorated these factors. The change in hotel operator at Kopanong led to an improved performance.
• Fund expenses decreased by R1,5 million (7,7%) to R18,3 million.
• Net finance costs were up 13,7% to R80,3 million, due to additional debt of R196 million raised to fund acquisitions and capital projects, the impact of additional swaps contracted for and the 25 basis point rise in the South African prime overdraft rate in July 2014.
• Distributable earnings per combined linked unit decreased by 7,4% to 82,45 cents, in line with the updated forecast of 82,33 cents. The A-linked unit distribution of 73,33 cents showed a 5,0% increase, consistent with forecast and the distribution policy. The distribution of the B-linked unit declined by 52,6% to 9,12 cents, meeting the updated forecast of 9,0 cents.
• Total funds withdrawn against the Fund’s debt facilities amounted to R1,79 billion translating into a loan to value (“LTV”) ratio of 35,5% and an interest cover ratio (ICR) of 2,48 times. The average cost of borrowings for the six months under review was 9,23%. Of the borrowings, 68% were subject to fixed interest rates through interest rate swap structures.
• Additional 5-year secured notes for R60 million and 2.5-year secured notes for R80 million were issued in February 2015. The proceeds will be utilised to repay the R40 million unsecured note that matures in April 2015 and to fund the capital expenditure programme for FY2016.

 Portfolio review

• The Fund’s portfolio of interests in 26 hotel and resort properties in South Africa had a carrying amount of R5,0 billion as at 31 December 2014, translating into a net asset value per linked unit of R11,24 up 2,5% from a year ago. The combined linked unit market value of the Fund’s securities at the end of the period traded at a 30% discount to the NAV.
• The Fund continues to evaluate opportunities to deliver on its strategy and is accelerating the disposal of properties from its secondary portfolio. This will unlock additional capital resources while releasing management time to focus on the core portfolio.
• The renegotiation of the new fixed and variable lease at Birchwood from 1 July 2014 included the investment by the Fund of a further R60 million in the property for the Terminal Convention Centre development, funded through the issue of linked units to the sellers.
• The Fund invested R76,6 million to acquire additional units at the Radisson Blu Waterfront, increasing its share of the rental pool by 19% to 54%. The acquisition was funded by a combination of debt and equity.
• Hospitality continued to upgrade several of its properties during the period, as follows
• A R11,0 million repositioning at the Mount Grace Country House and Spa, including a new mountain cycling club and children’s entertainment facilities, led to improved demand in the peak summer holiday period.
• Refurbishment of 167 rooms at Birchwood for R12,3 million to support the hotel’s initiatives to attract additional corporate clients, including the relaunch of a section of the hotel as “The Silverbirch Hotel”.
• Four new rooms were added at the Radisson Blu Gautrain and the public areas were upgraded, with a total investment of R10,3 million.
• The Radisson Blu Waterfront conference facilities and public areas were refurbished, at a cost of R9,4 million.\
• An outdoor swimming pool, with an investment of R8,4 million, was completed at The Westin Cape Town to enhance the appeal of the hotel to the leisure market.
• The Fund is awaiting a final decision on the approval of Phase 2 at Arabella Hotel & Spa by the Minister of Environmental Affairs & Development Planning.