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Date : 04/02/2021

Hotel Property Investments

ASX :

HPI

Market Cap : $535.59 Million

Dividend Per Share : $0.09

Dividend Yield : 6.12 %

Buy

52 Week Range : $1.45 - $3.56

Share Price : $3.17

A very stable company with high margins, acqusition led growth and a high dividend yield. We recommend members to "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.

As of FY2020, HPI held 45 pubs and accommodation properties in its asset portfolio. A couple of months ago, the firm acquired 3 more properties – taking the tally to 48. Post the acquisition, HPI generates 89% of its revenues from Queensland, 5.7% from South Australia, 2.9% from Victoria, and 2.4% from New South Wales. Most of their pubs in Queensland have been leased to Queensland Venue Company (QVC) – a joint venture between Coles and Australian Venue Company. The other major corporation that leases HPI’s properties is Australian Leisure & Hospitality (ALH) – a joint venture that is 75% owned by Woolworths group. It is important to consider who the tenants are because they determine the sustainability of HPI’s revenues.

  • Secure Income Stream with long term lease arrangements secured.
  • Ownership of majority of the liquor and gaming licences.

These are the 2 big advantages that HPI has in its operations and this allows them to generate stable revenues. The below chart shows the lease expiry profile of HPI. The firm has managed to extend all hotel leases that were expiring in calendar year 2021. QVC is known to have exercised multiple contract extension options for hotels that were due to expire in CY2021.

HPI’s total value of all their properties is estimated to be $849.2 million. The weighted average lease expiry of HPI’s portfolio is 11.4 years and they maintain a 100% hotel occupancy rate for all of their 48 properties. This along with the fact that HPI’s leases are secure in the near term, minimises risks that may be posed by the pandemic. With the rollout of a vaccine, the sustainability of the lease agreements will only get better given HPI operates with the big players and they hold the licences.


Source: HPI

Company Updates

The chart below plots the HPI stock’s 1 year performance against the benchmark index – ASX 200 (blue line), and against the sector – ASX 200 Listed Property Fund (orange line). It is very evident that HPI has out-performed its sector since the crash in March 2020, and it has performed quite similar to the broader ASX-200 index with low degrees of volatility compared to some of its real estate peers.

The stock price recovered very quickly from the Covi19 crash due to a few reasons:

  • Occupancy was unaffected.
  • HPI’s clients were not expected to cancel lease contracts given they are usually high-profile players who can sustain periods of low business.
  • The fact that Queensland was mildly affected also made sure market sentiment does not degrade – this can be seen in the very low trading volume spikes compared to HPI’s peers.


Source: Tradingview.com

On the 20th of November, HPI completed a $40 million fully underwritten placement offer at an offer price of $3.04. The funds were to be used partially in the acquisition of 3 hotel properties that cost the firm $63.3 million, and the transaction costs that came with. In addition to the equity placement offer to institutional investors, HPI also raised $8 million in a share purchase plan at the same offer price.

The acquisition consisted of a tavern in Brisbane for $31.3 million, a pub in Melbourne of $22.7 million, and a freestanding tavern in Airlie Beach for $9.3 million. HPI have also confirmed that the properties have been leased to experienced pub operators. The acquisition is funded by $40 million in equity and the remaining $23.3 million by debt facilities.

The weighted average lease expiry for these 3 new properties is 13.4 years and they collectively bring in revenues of $4.2 million. The investment thus will pay for itself in 15 years.

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 tremendous handling of the pandemic has meant that even though interstate travel is being disrupted on an ongoing basis, local lockdown restrictions have 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. Given how mature the industry is, the growth rate is estimated to resemble the inflation rates going forward. Once the economy is thriving again and international travel is back in full swing, the demand for hotels and pubs is estimated to increase.

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.

Investment Thesis

HPI is an extremely stable company that has very sustainable revenues, earnings, and profits. Their lease tenures are long and with the weighted average at 11.4 years. This makes sure that there is very little volatility in the revenues it generates. HPI has very few expenses. The only costs that they incur are property management related and interest expenses for any debt payments. They have no selling and marketing costs, or any maintenance costs unless there are refurbishment costs on lease contract expiry. Bottom line – they are a very well-oiled machine with EBITDA margins at 79%.

The financial impacts of Covid19 were as follows:

  • $400,000 rent abatement
  • $3.4 million rent deferred.

HPI has not availed any JobKeeper assistance and they delivered Net Profits of $40 million for FY2020. The net profits declined compared to FY2019 and the reason for this was the decrease in fair value gains on their investment properties. Asset prices declined in FY2020 due to the pandemic and this reflected in the overall profitability of the firm. This is a one time occurrence due to the impact of the pandemic. Despite the challenging operating environment, HPI reported a growth on operating profit by $2.5 million.

The addition of the 3 new properties in FY2021 is estimated to FY2021 revenues by around $2.1 million as they will kick in for the second half of the financial year. Barring any other acquisitions that HPI may still surprise us with, this puts our revenue estimates for FY2021 in the range of $56 million – $58 million – in accordance with the growth rate we have seen in the past 5 years – that is, around 3% CAGR.

The balance sheet of HPI shows considerable strength. Post the fund raising and acquisition, the gearing is estimated to be 38.2%. The total real estate assets are valued at $849.2 million. The total cash on its balance sheet, however, is just $1.1 million. While this may pose a red flag, a 100% occupancy rate means that there is consistent revenue that is being generated in order to make its debt commitments. The total assets sit at $855 million and exceeds the total liabilities by 2.47x. Post the acquisition, where debt was used to partly fund it, the borrowings of HPI increased from $301.5 million to $327.3 million.

The ratio analysis chart shows that the performance of HPI’s assets is very consistent. The return on its capital follows the same trajectory as well – given how balanced its cash flows are. The return on equity has been declining in the past 3 years. This is because HPI has been raising equity to fund its acquisitions. As their equity is being further diluted, their returns will start to come close to the return on assets line. This in the long term is a good sign – an indication that HPI will have low levels of debt.

Dividends are the biggest attraction when it comes to HPI. In FY2020, the firm distributed 20 cents per share in dividends. Given the economic impacts of the pandemic, the firm had not provided guidance early on for FY2020. However, post good performance and very minor impacts, HPI has announced that their dividend distribution guidance for FY2021 will be 19.3 cents per share. The half year dividend for FY2021 is expected to be 9.6 cents a share and will be paid on the 5th of March 2021.


Source: HPI

Recommendation

The outlook for HPI is straight-forward. With occupancy at 100%, there is no room for organic growth, and any growth in the coming years will be driven by acquisitions – which the firm will either have to raise equity or debt to be able to fund. The performance of the stock will closely resemble the broader ASX-200 index and we do not expect the stock to beat the index. The dividends are high, and we recommend long-term investors to “Buy” HPI for its dividend distributions and average capital growth in line with the broader market index.

 

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