INTRODUCTION AND WELCOME
On behalf of the Tsogo Sun Hotels team, welcome to our inaugural integrated annual report. This year, the group celebrated its 50th anniversary, as well as the successful separate listing of Tsogo Sun Hotels on the Johannesburg Stock Exchange.
While there have been many highlights for us as a business, as we write to you, the world remains in the grip of the COVID-19 pandemic.
The reality of the pandemic and the consequent lockdowns imposed to combat the spread of COVID-19 have been devastating. At its heart, this is a human crisis. We send our sincere condolences to those who have lost loved ones to the virus.
Economically, the lockdown implemented has had a severe impact on the South African economy as a whole. The travel and tourism industry has been particularly hard hit, and our group deactivated the vast majority of its hotels in the last quarter of the financial year.
ENSURING OUR SUSTAINABILITY
We understand that our operations contribute to the livelihoods of our wide base of stakeholders – from our employees and suppliers to our communities and investors. Decisive action was required and we reacted swiftly to safeguard our business.
Our immediate focus is on protecting the sustainability of the business and ensuring that we have the financial and operational resilience to survive the lockdown.
We immediately implemented health protocols and control measures to safeguard our employees. Following the deactivation of the majority of our portfolio, we engaged with employees to share the anticipated impact of the lockdown on our business. We consulted extensively with employees to reach an agreement about the necessary temporary layoffs of staff and, post-year-end, a skeletal operating structure was established.
To assist employees who were temporarily laid off, the group applied to the Unemployment Insurance Fund (‘UIF’) Temporary Employer/Employee Relief Scheme (‘TERS’) to supplement the reduced remuneration of employees. As developments unfold, the necessary adjustments to the basis of the layoff will be reviewed against operational requirements and we will remain committed to engaging honestly with staff in this evolving situation.
Ensuring adequate liquidity for the group will be critical. As at 31 March 2020, the group was well within lender covenant requirements and, going forward, lenders to Tsogo Sun Hotels and Hospitality approved the waiver of the September 2020 covenants, securing our short-term liquidity.
The group remains committed to improving our offering and delivering great experiences to our guests. We invest continuously in the capital expenditure (‘capex’) required to keep the hotels in optimal operating condition. While we invested in the appropriate planned capex during the year, as part of our COVID-19 response plan, the group suspended all capex. Only emergency capex, and repairs and maintenance, will be considered in order to preserve cash.
For more information on our strategic response, refer here.
DELIVERING FINANCIAL VALUE IN A CHALLENGING TIME
From a financial performance perspective, the business delivered solid results in an environment that was challenging before the arrival of COVID-19 in southern Africa. Total income was R4.5 billion (2019: R4.4 billion), which is 2% above the prior year. This was primarily due to growth in hotel rooms’ revenue, and in food and beverage revenue, which was offset by a reduction in property rental income and other income. COVID-19 had a marked impact on the group’s fourth quarter trading. The initial international travel regulations and the subsequent total ban on inter-provincial travel resulted in a significant decrease in revenue in March.
Managing costs remains of paramount importance and, despite the strict cost controls implemented during the year, the above-inflationary increases in administered costs, including property rates and utilities, continued to place pressure on our business.
The low revenue growth, coupled with cost pressures, meant that earnings before interest, tax, depreciation, amortisation, rentals and exceptional items (‘Ebitdar’) ended 9% down on the prior year at R1.4 billion (2019: R1.5 billion).
We fully expect the lockdown to impact our financial performance in the year ahead but we continue to take steps to minimise the impact as far as possible while engaging with government and relevant bodies to find a way to continue to operate safely. We can thus protect the livelihoods of our many stakeholders who depend on Tsogo Sun Hotels.
For more information on our financial performance, refer to the chief financial officer’s review.
ENSURING EFFECTIVE LEADERSHIP TO PROTECT VALUE
As a leadership team, we have focused on operating with ethics and responsibility, balancing the – at times – conflicting and competing needs of our stakeholders to ensure that we protect the viability of the business. In the crisis, engagement has been critical and we have collaborated with stakeholders across the spectrum to find ways to preserve value.
For more information on our governance, refer here.
POST-YEAR-END DEVELOPMENTS
Hospitality formally terminated the lease with Marriott over the Arabella Hotel & Spa. In June 2020, Marriot announced that it would be terminating its relationship with three of Hospitality’s hotels: The Mount Grace, The Edward and Hazyview Sun. These are iconic South African hotels with rich histories. The Mount Grace in Magaliesburg was developed by the Brand family and was the sister hotel to the Grace in Rosebank, which we acquired and restored in 2015 and now operate as 54 on Bath. Magaliesburg is a beautiful area and has great domestic and international tourism potential, as well as strong demand for conferencing, weddings and shorter family getaways with its close proximity to Johannesburg. The Edward is a landmark on the Durban beachfront where we already have a strong presence. The hotel has a 111-year history, beautiful facilities and will add something different to our portfolio in that node. Lastly, Hazyview is on the key tourist route through Mpumalanga on the doorstep of the Kruger National Park. The addition of this hotel in the area will complement our Sabi River Sun hotel, allowing us to broaden the offering we have for the local and foreign markets which will return to Kruger when circumstances improve. We remain committed to these properties and have full faith in their viability post the COVID-19 pandemic. We are delighted to bring them under the Tsogo Sun Hotels management portfolio and fully integrate them into our distribution and management network, once the conditions for their reactivation are achieved.
On 13 July 2020, we announced the sale of the group’s 50% interest in the Maia Luxury Resort and Spa for aggregate proceeds of US$27.8m. Our intention since the listing has been to reduce our US Dollar denominated interest-bearing debt. COVID-19 has limited our ability to apply cash resources towards the settlement of this debt. The proceeds from the sale of this hotel assists us in achieving this objective and we believe that the disposal is in the best interest of the group at this time.
In uncertain times, the best investment you can make is in yourself. Hospitality has consistently traded below its net asset value despite owning a portfolio of valuable hotels, which we understand well given that the economic drivers are largely the same for South African hotels whether they are owned by Hospitality or Southern Sun Hotel Interests (‘SSHI’). As announced, we have acquired additional HPB shares from Hospitality shareholders in exchange for shares in Tsogo Sun Hotels at an exchange ratio of 1.77 TGO shares for every 1 HPB share held. To preserve cash resources in order to withstand the impact of COVID-19, we consider it prudent to use ordinary shares in the company, as opposed to cash, for the purposes of acquiring additional Hospitality shares. At the date of writing, the group increased its shareholding in Hospitality to 75%.
OUTLOOK AND APPRECIATION
As we look ahead, we know that the worst is not yet behind us. In spite of this, as mentioned, there have been some positive developments subsequent to our year end, which we believe will stand the business in good stead once trading normalises.
We remain supportive of the government’s efforts to halt the spread of the virus. As we have highlighted, no industry can survive an extended period without revenue. We welcome the opportunity to continue to engage with government and regulators to find ways to continue to open the economy as quickly as possible with due regard for safety.
On behalf of the entire leadership team, we extend our appreciation to our stakeholders for their support and collaboration as we all navigate this crisis. Thank you to our teams for your understanding and, while the future is uncertain, we remain committed to ensuring the sustainability of our operations. The short-term outlook is not positive and in the current circumstances it is nearly impossible to predict how the COVID-19 crisis will unfold.
We know, from 50 years of experience, that the legacy we leave behind is determined by the decisions we take today. We are committed to protecting the business and ensuring that we are able to deliver 50 more years of exceptional experiences to our guests.
John Copelyn
Non-Executive chairman
Marcel von Aulock
Chief Executive Officer
