EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

The COVID-19 pandemic and subsequent lockdown of the economy on 27 March 2020, and particularly the hospitality sector, has had a profound impact on the group. The measures taken by government to limit the spread of COVID-19 and the resultant inability for travellers to travel internationally and inter-provincially will limit the demand for hotel rooms, which will impact the group’s revenue streams significantly for the 2021 financial year. Hotel trading is therefore expected to remain under pressure until the outlook on the South African economy improves.

Although the impact of COVID-19 is expected to have a longer-term impact on the hospitality industry and the group, management is not able to quantify the full impact at the date of this report. It is expected that the recovery of the industry will be slow due to the uncertainties around the health of travellers, and the negative economic impact on government, corporates and individuals to spend on hotel accommodation and conferences.

In response and as set out in the ‘COVID-19 response and action plan’ section of the commentary, the group has implemented the following steps to reduce costs and preserve cash:

Reduction of payroll burden: The group has implemented the temporary layoff of employees and has had to materially reduce pay for all levels including executive management and board members. The group will continue to operate on skeleton staffing levels until demand returns. In addition, employee recruitments and training have been placed on hold while salary increases, accrued bonus settlements and additional LTI allocations have been deferred. In order to alleviate the cash flow burden on both the group and its employees, applications have been submitted for the UIF TERS grant; pension and medical aid fund contribution holidays for a maximum period of three months; SDL payment holidays as well as PAYE payment deferrals.

Rent relief: Where the group is a lessee, rent concessions have been concluded in May 2020 for Cape Town City Bowl Complex, Garden Court Marine Parade, Garden Court East London and Garden Court Nelson Mandela Boulevard. Reduced rentals have been agreed for the period of the lockdown and negotiations for the low demand period will continue. This is a non-adjusting event which has no impact on the 2020 financial year. For the leases that fall within the scope of IFRS 16 the group has elected to apply the practical expedient available to lessees for rent concessions.

The rent reduced with 50% of the lease payments for the first three to 12 months after 31 March 2020. The change in lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change and reduction in lease payments affects only payments due before 30 June 2021. There is no substantive change to other terms and conditions of the lease.

The group has viewed the reduced rentals as variable lease payments against the lease liability and will recognise a gain in the income statement for this benefit in the period in which the event or condition that triggers the reduced payments occur.

Suppliers: The group has negotiated reduced or extended payment terms with major suppliers, particularly those providing fixed cost services such as security and lift maintenance. Municipal rates and taxes are a material fixed monthly cost for the group and while we currently continue to meet these obligations, we are lobbying government through industry bodies to grant a deferral or payment holiday. All contractual variable costs with suppliers have been reduced to nil until trading resumes by extending the period of the contracts.

Capital expenditure programme: The group has suspended all capital expenditure with only emergency capital expenditures and repairs and maintenance to be considered.

Facility capacity, liquidity and funding

The inability to generate revenue during the lockdown period, together with the expected slow recovery once the hotels can open and operate, made it clear the group will not be able to meet its covenant requirements in terms of its funding agreements for the measurement period 30 September 2020 and possibly 31 March 2021. Following negotiations with lenders, the group has secured:

• the waiver of its covenant requirements for the measurement period 30 September 2020, with the request for waiver of the 31 March 2021 to be considered post 30 September 2020;
• the capitalisation of bank funding interest to the group’s revolving credit facilities until 30 September 2020.

At the date of the annual financial statements, the lenders are not able to provide waivers on the minimum covenant requirements for the measurement period ending 31 March 2021. This will only be considered post 30 September 2020 and management has no reason to believe that the necessary waivers will not be granted.

Property valuations

The group’s property valuation methodology incorporates the use of the South African government bond yield 10Y. As at 31 March 2020, the rate applied was 10.50%. As at 26 May 2020, the yield has reduced to 9.01% and shareholders are referred to the sensitivity analysis presented in note 18 for the impact that such movements would have on the valuation of the property portfolio.

All of the above steps taken by management and the change in the bond yield are non-adjusting and accordingly have no impact on the financial results for the year ended 31 March 2020.

United Resorts and Hotels Limited disposal

The group has entered into a sale of shares and loans agreement with MH Limited, part of the Minor Hotels Group, dated 13 July 2020 in terms of which SSA will dispose of its entire 50% beneficial interest comprising shares and loan claims against United Resorts and Hotels Limited for aggregate proceeds of US$27.8 million being approximately R465 million.

Acquisition of additional shares in Hospitality Property Fund

The group acquired additional ordinary shares in Hospitality Property Fund Ltd. An ordinary resolution was proposed in terms of section 60 of the Companies Act to allow the board to acquire assets in exchange for ordinary shares in the group. On 10 July 2020 this resolution was duly approved by the group’s shareholders entitled to exercise more than 50% of the voting rights exercisable thereon.

The group has entered into share for share agreements with Allan Gray Proprietary Limited (acting for and on behalf of numerous of their clients under discretionary mandates), and numerous clients of each of Aylett & Co Proprietary Limited, Prudential Investment Managers (South Africa) Proprietary Limited and Bateleur Capital Proprietary Limited (each of whom acted on behalf of their clients under discretionary mandates) to acquire, in aggregate, 46 137 907 Hospitality shares from their respective clients, in aggregate constituting 7.98% of Hospitality’s issued share capital. The shares were acquired in exchange for the issue and allotment of 81 664 082 Tsogo Sun Hotels ordinary shares at an exchange ratio of 1.77 Tsogo Sun Hotels shares for every 1 Hospitality share acquired.

The group has also entered into share for share agreements with the trustees of the HCI Foundation and with Elsitime Proprietary Limited to acquire in aggregate 33 367 919 Hospitality shares constituting 5.8% of Hospitality’s issued share capital. These shares will be acquired in exchange for the issue and allotment of 59 061 217 Tsogo Sun Hotels ordinary shares at an exchange ratio of 1.77 Tsogo Sun Hotels shares for every 1 Hospitality share acquired, which is the same exchange ratio as applied to previous transactions concluded with other Hospitality shareholders since 3 July 2020, including the transactions notified to shareholders on SENS on 20 July 2020. The effective date of these transactions is expected to be on or about 19 August 2020 at which point Tsogo Sun Hotels‘ shareholding in Hospitality will increase to 75%. Marcel von Aulock and Laurelle McDonald hold 75% and 25% respectively of the issued share capital of Elsitime Proprietary Limited.