Page 11 - Integrated Annual Report

We took the opportunity to collapse the Hospitality Property Fund back into the management company in a share swap and accordingly TSH now owns the properties it manages and more in their entirety. This has simplified the business considerably. It both strengthens its balance sheet immediately and will in due course considerably strengthen its income statement once the business is again on its feet. Like our gaming operations, the hotel business has taken a great many steps to tighten its control over overheads and lighten its operating expenses. In due course these will be significant in its performance once the disruption of the pandemic retreats.
We do believe the business will again become cash positive during the next few months and avoid any long- term damage to its future. It is, however, too soon to predict when it will be sufficiently back on track to resume paying dividends.
Properties:
Our property division is a diverse portfolio of rented premises, primarily acquired and developed over the last six years. These acquisitions and developments were heavily funded by debt, often accompanied by shareholder guarantees from HCI.
Like gaming this division had a great setback in the initial total lockdown period of the first three months of the pandemic. Whilst it has not yet recovered totally, its tenants in all sectors of its property holdings are again paying their rental and vacancies are slowly declining to a near normal pre-COVID-19 level.
Debt in each property has been carefully assessed and restructured to ensure the level of revenue from the building is sufficient to service its debt.
We exited The Fulcrum in Sea Point when the city refused it permission to increase its height restrictions. Whilst this involved a substantial loss to the division it seemed preferable to leave rather than starting afresh with new plans purporting merely to reduce that loss conditional on us investing further in the property.
We have taken the opportunity to buy back stakes held by minorities in affected properties where they wanted to leave, at prices we believe to be value enhancing in the medium term.
We have also sold some properties at fair prices where there has been real buyer interest and they were not core to the division.
While we have greatly constricted development, we have nevertheless built an office block for the Dentsu head office, completed the construction of two houses on the property at Steenberg and are in the final stages of completing a building in Paarl for rental to Food Lovers Market.
The net effect of all this activity is that we have reduced
HCI shareholder guarantees in respect of properties from a total of R1.2b to R976m during the year. Debt on properties has been reduced from R2,3b to R2,2b despite new builds at Dentsu and Paarl. Vacancies and ongoing rent relief are now approximately 5% of potential revenue.
Profitability of the division was adversely affected by the write down of property values which seems prudent to us, and the losses associated with the Fulcrum.
Our intention in this division is to focus on limiting HCI guarantees for its debt until our bankers are satisfied to regard it as a free-standing division with its own balance sheet.
Growth Opportunities:
Impact Oil and Gas (“IOG”):
As the years go by with no clarity on the legal rights of explorers in South Africa, the size of the state carry, the degree of accommodation of BEE required, royalties claimable and the tax structure of production right holders there has been a growing disillusion with prospecting for oil and gas in South Africa.
Disappointingly several companies with capacity to responsibly drill deep sea wells have abandoned blocks in our waters. ExxonMobil, Equinor, BHP, Cairn, Cosmos and Anadarko are amongst the departees. Worryingly ENI has now resigned from Opasa which may well be a sign of its imminent departure.
While there is a growing clamour against fossil fuels across many developed countries, the truth about the South African economy is its electric grid is still overwhelmingly dependent on coal fired power stations. It has no prospects in the medium term of generating base electricity from any source other than fossil fuels. It should in our opinion aim to replace coal fired power stations with gas ones and focus its efforts on technologies around carbon capture and storage rather than exclusively on wind and solar solutions to limit greenhouse gases. Not only is gas significantly less polluting than coal but gas power plants are also by their nature “peaking” plants. Unlike coal fired plants they can be turned on and off as the surplus or shortage of electricity generated from other energy sources waxes and wanes on any day. It is a flexibility fundamental to the stable operation of the grid where solar and wind generated power vary considerably from day to day. This will remain so until we can store electricity for very much longer than is currently practicable.
One can only hope that there will be a greater drive by the department to get the long-promised bill enacted this year. Failure to do so is going to accelerate the pace at which global companies vote with their feet and our country will unquestionably be the worse for it.
Nevertheless, even black clouds have their silver linings. Last year we reported ExxonMobil and Equinor
HOSKEN CONSOLIDATED INVESTMENTS LIMITED
INTEGRATED ANNUAL REPORT 2021 9