Hotel Property Investments: Result 2015
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We love to see dull results from property trusts like Hotel Property Investments, and this one fitted the bill, with the excitement being limited to news that it had applied to ASIC for an Australian Financial Services Licence (AFSL). The application was made 'to give [HPI] flexibility and ultimately reduce costs in future', which in plain English means HPI will consider internalising its management to reduce costs.
The timing will depend on when (and if) ASIC approves the application, so any change is unlikely before this year's AGM in November.
As we noted in Hotel Property Investments: Interim result 2015, accounting rules mean the performance of 28 properties transferred out of HPI before it listed are included in results, making comparisons difficult. We've compared the 2015 result to the pro rata 2015 forecast in the prospectus, except for gearing and net tangible assets (see Table 1).
| Year to 30 Jun | 2015 | 2015F | /(–) (%) |
|---|---|---|---|
| Rental income ($m) | 40.7 | 38.7 | 5 |
| Borrowing expense ($m) | 10.4 | 11.3 | (8) |
| Distributable profit ($m) | 24.7 | 21.1 | 17 |
| DPS (c) | 16.3* | 15.9 | 3 |
| Gearing (%) (see Note) | 43 | 44 | (2) |
| NTA per share ($) | 2.07 | 1.96 | 6 |
| * 8.4 cents final dividend (unfranked), ex date already past | |||
| Note: Gearing = net debt / (total tangible assets - cash) | |||
HPI made four acquisitions while selling seven hotels during 2015 and is looking to sell an additional small property. Management continues to hunt for more pubs, but with those on long leases to high quality tenants such as Woolworths and Wesfarmers being in high demand, good opportunities are hard to come by.
Rental growth averaged 3.9% across the portfolio, with most of its leases increasing annually by the lower of 4% or twice the 5-year average inflation rate. HPI took advantage of continued low interest rates to reduce the margin paid on its debt by 0.2% during 2015.
Capitalisation rates held steady at 7.42% compared to 2014 but one-third of its properties are subject to independent valuations at 31 Dec 15. Despite most of its properties being located in Queensland, which is still suffering from the mining downturn, we wouldn't be surprised if capitalisation rates fell given the competition for pubs, particularly those like HPI's which are leased to subsidiaries of Woolworths and Wesfarmers on leases averaging eight years in duration.
HPI guided to a distribution of 17.7 cents for 2016, an 8.8% increase on 2015 and giving a forecast unfranked yield of 6.9%. HOLD.
Note: Our Income Portfolio owns shares in HPI.
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