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Date : 03/11/2021

Hotel Property Investments

ASX :

HPI

Market Cap : $688.51 Million

Dividend Per Share : $0.193

Dividend Yield : 5.50 %

Buy

52 Week Range : $2.84 - $3.67

Share Price : $3.50

Robust outlook given the impending reopening. We recommend a "Buy".

Company Analysis

Hotel Property Investments (ASX: HPI) is a real estate company and as the name suggests, they invest and own hotels and pubs across Australia. They have a straight-forward business model – where they acquire new properties and lease them out – generating revenue. HPI’s portfolio of property assets is heavily weighted to Queensland, and they also operate in South Australia, New South Wales, and Victoria.

The principal activity of the HPI Group is thus real estate investment in the hotels and pub sector in Australia. There has been no significant change in the nature of the principal activity during the year. However, markets are forward looking and given the outlook with domestic borders and international borders set to open amid high vaccination rates, the near term future is bright.

There are 3 pillars that give HPI strength, and these 3 pillars is also responsible for the long-term price action of the share price:

  • HPI’s asset portfolio
  • The long-term lease agreements that give stability to their earnings
  • The growth strategy being implemented to boost its assets and therefore its earnings

HPI owns 54 pubs and accommodation properties that have a total value of $952.5 million as of FY2021. Of these properties, 42 are leased to Queensland Venue Company (QVC) and 7 are leased to Australian Venue Company (AVC). QVC is a joint venture between Coles and AVC, and the entity is a very experienced pub and hospitality operator with over 150+ venues. This is perhaps the most important characteristic for HPI. The ability and the sheer strength of QVC and AVC means that HPI’s leases are in fact secure and safeguarded relatively more than most firms. It establishes a very secure income stream for HPI that is underpinned by long lease arrangements. In our opinion, HPI has a very attractive risk-return profile.

HPI is a top quality dividend stocks that is positioned for the reopening theme. We added HPI to our dividend portfolio when it was down back in February 2021 at a price of $3.17 a share. We were confident that the firm would manage to navigate the uncharted waters of the pandemic and position itself optimally for the recovery and the eventual reopening of borders, both domestically and internationally.

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Source: Tradingview.com

Since then, HPI has delivered a return of 10.4% and paid out dividends that total $0.193 a share. It is thus a top quality dividend stock. Additionally, HPI is currently implementing a growth strategy. The firm has been adding new assets to its portfolio and once the reopening is complete and business is back to normal, there is significant upside.

On 30 June 2021 the HPI Group’s net assets were $575 million representing net assets per stapled security of $3.30 (June 2020: $3.01). Major assets and liabilities included investment property of $952.5 million, borrowings of $361.3 million and a provision for payment of distributions of $16.9 million. During the period investment property values increased by $166.6 million resulting mainly from acquisitions of the following properties:

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The assets were purchased for a total value of $103 million (including costs). Other additions to the value of the investment property value were the result of fair value gains of $51 million, capital additions of $11.8 million and straight-line lease adjustments of $0.7 million.

The hotel occupancy of HPI continues to sit at 100% despite the impacts of the pandemic. This is because QVC and AVC are huge firms that can continue their operations – therefore de-risking HPI’s revenue stream. HPI Group’s assets are also long term assets with a weighted average lease expiry of 10.8 years, and in no danger of significant impacts in the near-term.

In the chart below, we can see that HPI’s assets are secured with high quality lease agreements that are not expiring anytime soon. In fact, the biggest lease expiry contract is not until FY28. Therefore, the company’s income is extremely stable and rather well safeguarded from the impacts of the pandemic.

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Source: HPI

Company Updates – FY21 Performance

The HPI Group recorded a total profit after tax for the year of $84.7 million.

Total revenue was up 11.0% to $60.1 million (2020: $54.1 million). Operating revenues and expenses included rental income from investment properties of $54.1 million, property cost recoveries of $6 million, property outgoing costs of $9.5 million, other trust and management costs of $4.4 million, and financing expenses of $12.5 million. Additionally, there was a fair value gain on investment property of $51 million.

Annual rent increases averaged 2.5% across the pub portfolio and HPI acquired 11 assets during FY20 and FY21. These increases were offset by the $3 million p.a. rent reduction for eight pubs that was announced in January 2020. This reduction was effective 1 July 2020.

Adjusted Funds from Operations (AFFO) increased by 7.3% to $32.5 million (2020: $30.3 million). The final distribution for the six months ended 30 June 2021 is 9.7 cents (2020: 9.7 cents), for a total distribution of 19.3 cents for the year (2020: 20.0 cents). Property Valuation and Cap Rates: Portfolio valued at $952.5 million reflecting an average Cap Rate of 5.9%.

During the year ended 30 June 2021 the HPI Group raised $48.0 million (before costs) from new and existing Security holders via a Placement and Securityholder Purchase Plan. On 30 June 2021, the HPI Group’s total borrowing facilities of $403.0 million were drawn to $363.6 million, including $230.0 million under the US Private Placement (“USPP”) and $133.6 million under the Common Terms Deed (“CTD”) facility. On 30 June 2021, $130 million or 35.8% of drawn debt is on fixed interest terms.

In August 2021, HPI refinanced one of its loan facilities via a further issue of $80 million into the US Private Placement (“USPP”) market. $40 million of the new notes mature in August 2028 and $40 million mature in August 2033. The weighted average debt tenor has increased from 3.9 years to 5.7 years as of August 2021.

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Another Capital Raise + More Acquisitions

Following on from a very positive FY21 performance – both operationally and financially, HPI continues to push for growth as the light at the end of the pandemic tunnel is finally visible. In September, HPI announced it has entered into agreements to acquire the Edwardes Lake Hotel for a consideration of $28.0 million and is in advanced stages on a second acquisition, subject to final contract approvals, which is expected to be acquired for $7.9 million.

Edwardes Lake Hotel is a mixed-use complex in northern Melbourne, comprising a sports bar, gaming room, family bistro, bottle shop, kids zone and car parking for consideration of $28m which is leased to Francis Group (an existing tenant in the HPI portfolio). The Asset Acquisitions deliver on HPI’s strategy of investing in attractive markets and are leased to experienced pub operators with strong track records.

HPI is also undertaking a lease harmonisation program involving a $38.8m payment to QVC to standardise leases across HPI’s portfolio, strengthening HPI’s position as landlord and generating additional rental income together with the new acquisitions.

Funding the acquisition, HPI undertook a fully underwritten institutional placement to raise $50 million to partially fund the acquisitions and associated transaction costs in conjunction with existing debt facilities. Additionally, HPI supplemented the Placement with a $10 million Share Purchase Plan. The issue price for the Placement and SPP was $3.40 per share.

Earlier this month, Hotel Property Investments confirmed that an agreement has been reached to acquire the Ball Court Hotel, Sunbury for a total purchase price of $7.6m, representing an initial yield of 5.4%. The property comprises the Ball Court Hotel, four retail tenancies and an adjoining residential property that will provide future expansion potential for the Hotel. Australian Venue Company (AVC) is the tenant of the Hotel with a new 15 year lease.

Director Interests Increase

Donald Smith was appointed 1 October 2018 as Managing Director and Chief Executive Officer. Don Smith has more than 20 years of property and funds management experience with listed and unlisted companies.

Raymond Gunston was appointed on 19 November 2013 and as Chairman 1 November 2019. He comes with over 35 years of corporate and financial services experience in the public and private sectors, specialising in finance, treasury, mergers and acquisitions, and accounting.

Both the directors have topped up their holdings via the Share Purchase Plan at a price of $3.4 a share. This emphasizes the fact that the management will act in the best interest of the shareholders. It also allows us retail investors to de-risk the investment to a degree.

Industry Analysis

The travel industry was at its lowest point in 2020 and as a result, the part of the commercial real estate market that consists of hotels and pubs were experiencing an event that they had not witnessed before. Australia’s relatively tremendous handling of the pandemic has meant that even though interstate travel was being disrupted on an ongoing basis, local lockdown restrictions eased, and the majority of the population is free to move around. Queensland was one of the least affected states and the movement of people within the state was hardly restricted. This has meant that HPI’s customers were able to continue paying their lease payments.

Going forward, if the travel industry and all its constituent industries are to rebound, domestic travel for Australians is very important. The opening of international borders will bring a massive boost to the economy and more so to the hotel industry that has been so reliant on international visitors. Pubs in Australia are not going anywhere. There is likely to be a huge influx of people spending time in pubs and hotels as we open up from November.

The pub real estate is arguably one of the safest real estate markets, especially given the structural changes that are taking place in other segments such as retail and office spaces. But that being said, it is not associated with high growth due to its high maturity. This is why acquisitions are extremely important for a firm such as HPI to continue its growth.

Overall, we expect the pubs and hotel industry to rebound very quickly once domestic restrictions are eased. As international restrictions are eased, the influx of business travellers and students coming in will also bring added revenues to the industry. The near-term outlook is thus very bright, and in the long-term, this is a mature industry that will continue to plug away along with inflation and GDP growth of Australia.

Investment Thesis

We have addressed all the 3 pillars of strength that we mentioned so far. HPI has a solid asset portfolio that is leased to quality customers – giving the firm stability as far as earnings and cash flows go. HPI has also constantly been active in the market and acquiring new hotels and pubs to add to their established portfolio. Add to this the industry outlook, we start to see how well rounded the firm’s future is. This forms a base for the firm’s very strong dividend profile as well.

We have kept mentioning stability throughout this report and the evidence of the stability can be seen below. The revenues and earnings are solid. We can see consistent growth over the past few years. In a troubling 2021, Revenues grew by 11% and the EBITDA margin stood at 76%. Our estimates are based on an assumption that the firm continues to aggressively look for M&A opportunities to boost their asset base.

This asset base provides HPI with a solid stream of revenues. We expect HPI to grow its revenues by 18% in FY22 and then revert to its mean of about 5%-6% FY23 and onwards. We are fairly bullish for FY22 given that the firm has already acquired the Edwardes Lake Hotel. Additionally, the rather strong capital position and the management’s strategy to pursue growth gives it a boost.

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HPI has always been a high margin business. Why? Because they lease out their pubs and hotels as opposed to operating the assets themselves. The increases in rent payments given the high property prices is expected to push their EBITDA margins higher in FY22. Following on, we expect the margins to be relatively stable around the 83%-85% mark.

The balance sheet of HPI is strong. Gearing sits at 37.8% and the NTA per security is $3.28 a share. There is significant earnings and balance sheet capabilities for HPI to continue paying its rather strong dividends.

The dividend guidance for FY22 is $0.205 a share. This represents a 6.22% growth in dividends from FY21. At current prices, HPI’s FY22 dividend guidance comes in at a dividend yield of 5.66%.

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The valuation multiples of HPI are fairly modest. Looking at the numbers below, you are probably also wondering why all three multiples are so close together. This occurs since HPI is a very high margin business. Therefore, the EV/Revenue and EV/EBITDA multiples are close to each other. Given the outlook of the pubs and hotel industry for the reopening play and also the real estate market’s bullish run, HPI’s multiples are rather inexpensive.

HPI shares are trading below the average industry P/E of 19.93x for FY22. The stock is pricing the growth strategy that HPI is implementing and given the high dividends that are also in the mix, we are of the opinion that HPI is a fantastic opportunity to gain access to the reopening play in a defensive manner as HPI leases out their properties as opposed to operating the pubs and hotels.

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Our initial report on HPI can be accessed by click here.

Recommendation

Hotel Property Investments has performed well since our first recommendation. The company has performed well operationally and financially. The 3 biggest characteristics underpinning our recommendation are – HPI’s asset portfolio, the stability of the revenues and earnings given the long-term leases, and the growth strategy that is in place to further growth the potential for earnings. The dividend policy is also fairly high with FY22 distribution guidance coming in a yield of 5.6% at current prices. Given the outlook for the industry and the company, we continue to recommend long-term investors to “Buy”.

 

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