Hotel Property Investments: Interim result 2019
Recommendation
With rental growth tied to inflation and the sale of only one pub during the half, this was a predictable result from Hotel Property Investments (HPI).
Six months to Dec | 2018 | 2017 | (%) |
---|---|---|---|
Distrib. Profit ($m) | 14.3 | 14.3 | - |
Distribution (cps) | 9.8* | 9.8 | - |
Gearing (%)** | 37.9 | 38.3 | (1) |
NTA per share ($) | 2.83 | 2.67 | 1 |
*Unfranked, ex-date already past | |||
**Gearing = net debt/(total tangible assets - cash) |
Less predictable, though, is the long term outlook for its 43 pubs - the majority of which are leased to Coles in Queensland. As we've mentioned, many pubs use a 'mosquito-zapper' model - low-priced food, drink and entertainment are employed to lure punters towards the real prize: the 'VIP rooms'. The inviting lights and sounds of gaming machines promise riches - but only for their owners, who derive the majority of their profits from punter losses.
Happily, statistics show that people are wising up - not only are they getting less boozy; they're also tending to put less money into poker machines. Increased regulation and education campaigns seem to be paying off, which is good news for society but bad news for pub owners.
Pubs that are well located in urban areas close to high-traffic areas and key infrastructure such as train lines should be able to adapt; perhaps shifting to a premium food and beverage style offering or ultimately converting to higher and better uses such as apartments. But rural or lower traffic areas are particularly vulnerable, as their locations don't lend themselves to other uses. HPI's portfolio falls into the latter camp.
One thing HPI does have going for it is that a pub licence is required to make retail liquor sales in Queensland. As long as the law remains as is, HPI's pubs will hold strategic value for tenants like Coles; as shown by today's announcement of a joint venture between it and KKR. There's a limit to how far that can be stretched, though, and as we noted in our last review, we wouldn't be surprised to see a number of properties vacated at the end of their leases. That makes the stock's forward distribution yield of 6.3% precarious, and more risk-averse members may want to take profits. For now, though, we think the strategic value of the assets is (just) enough to continue to HOLD.