THE struggling Hospitality Property Fund on Tuesday provided more details of its plan to do away with its controversial dual unit structure.

The real estate investment trust (Reit) has offered two unit structures with different risks and rewards. While its A unit holders have been receiving a guaranteed distribution, its B unit holders are unhappy about their diminishing returns.

Investors who own A units are paid distributions first, capped at the consumer price index or 5%, whichever is lower. The B unit holders receive the balance.

The B unit holders’ distribution growth has fallen significantly in recent times. In the financial year to June, distributions to B unit holders fell 60.7%. “As part of resultant engagements with certain unit holders, Hospitality also participated in discussions on an appropriate swap ratio for a conversion of its share capital into a single class of shares. On the basis of those discussions, indications are that, in the context of a potential corporate transaction, there will be support for a swap ratio of one A share for every 3.5 B shares,” to Hospitality Property Fund said in a stock exchange news service announcement on Tuesday. The company also provided more details about talks with gaming and leisure group Tsogo Sun regarding a potential tie-up.

It said Tsogo Sun intended to “inject” a portfolio of hotel assets into the Reit in exchange for a significant portion of shares.

Tsogo Sun’s hotel portfolio is valued at about R10bn, while Hospitality’s hotels are valued at about R5bn including prized assets such as The Westin Cape Town, Radisson Blu in Granger Bay and Crowne Plaza in Rosebank, Johannesburg.

Hospitality cautioned that discussions with Tsogo were “at a very preliminary phase and there is no certainty that either the capital conversion or the potential transaction with Tsogo Sun will take place”.

Analyst at 36One Asset Management, Jean Pierre Verster, said Tsogo’s investment plan was attractive. “We think it is a good move, following the example set by US companies and mobile telecommunication operators who did similar deals in the past. It is a tax-efficient way to unlock value and give investors with different tax profiles, for example private clients versus pension funds, a choice of investing in the operations of the business or just in the property-related lease income stream,” he said.

Hospitality has performed weakly this year.

“Up till the end of July, Hospitality’s A unit (HPA) was the worst-performing listed property security in SA this year, falling 18.5%. Its B unit (HPB) was up 22.2% since the start of the year, but over the past 12 months was down 50.9% at the end of July,” Grindrod Asset Management’s chief investment officer, Ian Anderson, said on Tuesday.

The fund said last week that total distribution per linked unit had fallen 7.7% in the year to June. The Reit blamed weak economic growth and incorrect perceptions about Ebola and new visa rules.

Source: BDLIve Alistair Anderson