Company Reports

A key attraction of Hotel Property Investments is favorable lease terms that provide predictable, growing rental income from long-term leases to Queensland Venue Co. QVC is a joint venture between supermarket giant Coles and private equity-owned Australian Venue Co. AVC manages the day-to-day operations of the hotels, with Coles needing the hotel licences to operate its liquor retailing business under restrictive Queensland laws. There is ongoing uncertainty around Coles' longer-term strategy regarding its liquor business following competitor Woolworths' decision to exit its liquor and hotel businesses.

No-moat-rated Hotel Property Investments’ soft first-half fiscal 2024 result aligns with our expectations. Adjusted funds from operations fell 2.1% to AUD 18.5 million as 3.4% growth in rental income was offset by higher debt costs. Fiscal 2024 distribution guidance of AUD 0.19 per security was maintained. We lift our fair value estimate by 3% to AUD 3.40 per security, mainly on the time value of money. On a dividend yield of 6.6%, we consider the stock undervalued.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

After a selloff in recent months caused by rising bond yields, most AREITs look cheap. Two such trusts are Waypoint REIT and Hotel Property Investments, which are 4-star-rated and trade at 17% discounts to their unchanged fair value estimates of AUD 2.80 and AUD 3.30, respectively. The narrow-moat-rated and conservatively geared BWP Trust also appeals though it is less undervalued, trading at just a 6% discount to its AUD 3.60 fair value estimate. All offer solid forecast distribution yields of between 5.3% and 7.3%, albeit with limited distribution growth potential in the medium term as higher debt costs offset rental growth. No-moat-rated Centuria Industrial REIT's security price is down 30% from the late 2021 peak and the trust is well-placed to benefit from strong leasing conditions in industrial markets, but we have some reservations about its financial health and consider it fairly valued.

Hotel Property Investments, or HPI, is tracking in line with our full-year expectations. First-half fiscal 2021 revenue increased 6% to AUD 28.8 million on rent average increases of 2.3% and acquisitions, partly offset by rental reductions at eight pubs in July 2020 after negotiating lease extensions. Adjusted funds from operations increased 3% to AUD 15.5 million but dilution from the 2020 equity raising to fund acquisitions caused distributions to fall 7% to AUD 9.6 cents per security. Guidance is for full-year distributions of AUD 19.3 cps, broadly in line with our expectations and representing a yield of 6.3% at the current price. We maintain our AUD 3.00 fair value estimate and consider the stock fairly valued.

A key attraction of Hotel Property is favourable lease terms that provide for predictable above-inflation rental income from long-term leases to joint venture entity Queensland Venue Company or QVC, which is an agreement between supermarket giant Coles and private equity owned (Kohlberg Kravis Roberts) Australian Venue Company, or AVC. AVC manages the day-to-day operations of the hotels, with Coles needing the hotel licences to operate its liquor retailing business under restrictive Queensland laws. There is ongoing uncertainty around Coles' longer-term strategy regarding its liquor business following competitor Woolworth’s decision to exit its liquor and hotel businesses.

A key attraction of Hotel Property is favourable lease terms that provide for predictable above-inflation rental income from long-term leases to joint venture entity Queensland Venue Company or QVC, which is an agreement between supermarket giant Coles and private equity owned (Kohlberg Kravis Roberts) Australian Venue Company, or AVC. AVC manages the day-to-day operations of the hotels, with Coles needing the hotel licences to operate its liquor retailing business under restrictive Queensland laws. There is ongoing uncertainty around Coles' longer-term strategy regarding its liquor business following competitor Woolworth’s decision to exit its liquor and hotel businesses.

Our fair value estimate on no-moat Hotel Property Investments remains AUD 3.30 per share, despite its recent announcement to acquire two new hotel properties at a total of AUD 60 million. Hotel Property Investments will raise up to AUD 35 million, which equates to a 7% increase in the number of shares on issue. Given the modest addition to the number of shares, and the issue price being just 2% below our fair value estimate, the raising is immaterial to our fair value estimate.

Our fair value estimate remains AUD 3.30 per security for no-moat Hotel Property Investments following in line first-half fiscal 2020 results. Average rental increases of 3.5% during the half-year is tracking in line with expectations. Our forecast fiscal 2020 distribution of AUD 20.7 is also in line with management’s reaffirmed guidance. At our fair value estimate, the REIT has a fiscal 2020 distribution yield of 6.3%.

Hotel Property Investments reported a solid first-half result. This was anticipated as fiscal 2015 distribution guidance was lifted in January. Higher rental income and lower financing costs saw adjusted funds from operations at AUD 11.6 million and slightly ahead of prospectus guidance of AUD 10.6 million. This translates to a distribution of AUD 0.079 per security for the first half with full-year distribution guidance reiterated at AUD 0.161 per security. Our forecasts remain largely intact. Our fair value estimate increases to AUD 2.90 from AUD 2.60 to reflect a lower cost of capital, in line with our global reassessment of required investment returns.

Hotel Property Investments has upgraded fiscal 2015 distribution guidance to AUD 0.161 per security, consistent with our forecast, and beating prospectus guidance of AUD 0.159 cents. The upgrade comes as no surprise given that the firm is benefiting from low interest rates and accretive acquisitions. We incorporate the transactions into our forecasts but our AUD 2.60 fair value estimate stands. At current prices, Hotel Property Investments looks fairly valued, offering a solid, 6.2% dividend yield. Since we initiated coverage in mid-2014, the stock has performed very well, paying two distributions and gaining 20% in price, enough to converge with our fair value estimate.

Following on from Hotel Property Investments' release of statutory accounts in late August, the trust released a post-result briefing with further details on its performance. There is no change to our view that the trust is performing well, slightly ahead of proforma prospectus guidance. Distributions were ahead of original guidance, largely a result of a looser hedging policy, which allowed the benefits of lower interest rates to flow through to distributable earnings. Net property income beat prospectus guidance as the trust listed nine days ahead of the time frame captured in prospectus estimates.

We initiate coverage on Hotel Property Investments with a fair value estimate of AUD 2.60. We consider Hotel Property Investments attractive and recommend it for income investors. At current prices of about AUD 2.12, Hotel Property Investments trades at an 23% discount to our fair value estimate. The fiscal 2015 distribution yield is 7.6%, or 7.9% after adjusting the share price for the second-half 2014 distribution of AUD 8.8 cents to be paid shortly (ex-dividend date is 26 June). In addition to the attractive yield, distribution growth should be strong as rents are contracted to grow at about 4% per annum.

Hotel Property Investments is an Australian REIT with a portfolio of 41 pub properties and seven detached bottle-shop properties primarily in Queensland (90% by value) and South Australia (10% by value). Secure earnings and reasonable gearing underpin our medium uncertainty rating. We don't believe Hotel Property Investments has an economic moat, but we still see it as an attractive income stock flying under the radar of most investors.

We initiate coverage on Hotel Property Investments with a fair value estimate of AUD 2.60. We consider Hotel Property Investments attractive and recommend it for income investors. At current prices of about AUD 2.12, Hotel Property Investments trades at an 23% discount to our fair value estimate. The fiscal 2015 distribution yield is 7.6%, or 7.9% after adjusting the share price for the second-half 2014 distribution of AUD 8.8 cents to be paid shortly (ex-dividend date is 26 June). In addition to the attractive yield, distribution growth should be strong as rents are contracted to grow at about 4% per annum.