ASX code: HPI
Share price: $2.87
Industry: Real Estate
Forecast FY2018 Distribution: 21.0c
Australians are well known for their love of property and beer. With the ASX listed pub-focused AREIT, Hotel Property Investments (HPI), investors can effectively bundle these passions into a sound income producing investment.
HPI listed on the ASX in late 2013 at $2.10 per security and has delivered good returns for investors since. HPI owns a portfolio of freehold pubs and associated specialty tenancies located across Queensland and South Australia.
Management have typically focused on assets that meet an investment criteria concentrated on property location, property condition and tenant quality. Specific to its tenancy base, HPI’s portfolio is almost exclusively leased to specialist operators in Coles and ALH, respectively backed by retailing heavyweights Wesfarmers and Woolworths. As such, we see little risk to HPI’s contracted rental income stream.
Portfolio metrics remain sound. Occupancy is 100 per cent while the weighted average lease expiry (WALE) is relatively high at 6.8 years. In an era of persistently low inflation, we also view HPI’s fixed rental increases for most of its portfolio of about 3.8 per cent per annum as a significant positive.
The recently announced first half result was sound, with funds from operations up 7 per cent to $14.2m. Inclusive of fair value gains booked during the half, totalling $56m, reported profit surged higher to $71.2m.
Property revaluation gains resulted from independent valuations completed at the half year and reflected a significant firming in the weighted average cap rate (WACR) from 7.3 per cent to 6.5 per cent.
As at December 2016, gearing was 36.6 per cent, though we expect this to rise towards the lower end of management’s target range of 40 to 50 per cent over the coming 6 months. HPI management concurrently extended the weighted average tenor of debt to 4.2 years.
While risks relating to gaming and liquor regulations will likely persist into the future, we believe investors are well compensated for such risks at current entry prices. We expect HPI to pay out distributions of about 21 cents per security in FY2018. This equates to an attractive forward yield of about 7.3 per cent.
In our view, HPI is an attractive investment proposition for the income focused investor. HPI provides exposure to a portfolio of high quality hotel assets with growing distributable income, underpinned by long-term leases to financially strong tenants.
Originally published in The Australian Newspaper on Tuesday 21 March 2017.
ASX code: HPI