Considering the number of companies announcing billion dollar writedowns this reporting season, Hotel Property Investment’s results seemed even more dull than usual. As ever, that's just fine with us.
|Year to 30 June||2016||2015|| /(—)
|Rental Income ($m)||44||41||7|
|Borrowing exp. ($m)||10||10||0|
|Distrib. Profit ($m)||27||24||12|
|NTA per share ($)||2.28||2.07||10|
|*9.3 cents unfranked, ex date already past|
|**Gearing = net debt/(total tangible assets - cash)|
We still consider ALE Property Group to be higher quality, due to its more geographically diverse properties including landmark real estate in metropolitan areas, but HPI also has some very attractive features.
HPI’s portfolio of 44 properties, mostly located in regional Queensland, continues to be 100% occupied with an average of 7 years remaining before the leases expire. Its major tenants, Wesfarmers-owned Coles and Woolworths-backed ALH Group, are also financially strong and need HPI’s pubs hotel licence to operate bottle shops making it unlikely that they'd walk away.
With very little capital expenditure — HPI only needs to pay for structural maintenance with all improvements funded by tenants — its major expenses are the costs associated with debt or running its trust structure which will remain relatively flat. This means distributions should rise along with rent, which has been growing at an average of around 3.9% per year.
Assuming long-term rental growth of around 3-4% and with an unfranked dividend yield of 6.2%, the implied total return at current prices is 9-10%. Whilst this might sound impressive, bear in mind that you'll only get this return if the assumptions are met and you hold forever. If you sell between now and forever, then your return will be affected by how much the market is prepared to pay for this rising stream of income, and the sooner you sell the greater the impact will be. So if long-term interest rates start to rise, then HPI's shares would very likely fall. Also note that there's no franking on the distributions, so that will knock a few per cent from your post-tax total return.
As a result, we'd want a much lower price before recommending HPI as a Buy. However, we're raising our Sell price to $4 and, for patient long-term holders that are happy to with the pretax income of 5–6%, growing annually at around 3–4%, HPI remains a HOLD.
Note: The Intelligent Investor Equity Income Portfolio owns securities in Hotel Property Investments. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.