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Morningstar | Hotel Property’s in Line 1H19 Results See No Change to its AUD 3.05 FVE

Broadly in line first-half fiscal 2019 results see no change to no-moat Hotel Property Investments’ fair value estimate of AUD 3.05 per share. Highlights include a 4.1% increase in rental revenue primarily driven by annual rent increases and the rental uplift from the Quest Griffith acquisition in fiscal 2018, partly offset by the rental loss from the sale of the Wickham hotel in the first half of fiscal 2019. Management also guided to a fiscal 2019 dividend of AUD 19.9 cents per security, or cps, which includes AUD 0.02 cents of capital we expect represents part of the proceeds from the sale of the Wickham Hotel. In accordance with management guidance, our forecast fiscal 2019 distribution increases to AUD 19.9 cps from the previous AUD 19.8 cps. At our fair value estimate, the REIT has a distribution yield of 6.4% and screens as fairly valued.

Other than contracted rent increases, we think near-term uplift in rents will most likely come from potential development opportunities. However, as no concrete development plans have been finalised, it is too early to include them in our modelling. Given historically low cap rates, management indicate acquisitions are unlikely in the near term but point to the potential to build more rooms at existing pub hotels leased to Coles. Unfortunately, progress on this opportunity is stalled as Coles awaits the Queensland regulator’s decision regarding its proposed transaction with Kohlberg Kravis-backed Australian Venue Company. Management are also looking at developing a hotel on land it acquired adjacent to the Regatta in Toowong, Queensland. A decision on this development is expected by the end of calendar year 2019.

Another positive is the REIT’s portfolio of properties continued to see fair value gains of AUD 6.9 million in the first half of fiscal 2019, compared with a gain of AUD 4.2 million in the first half of fiscal 2018. The fair value increase was driven by a modest decline in the average cap rate for the portfolio to 6.45% from 6.5%. We continue to expect moderate fair value increases on the back of relatively stable cap rates, and annual rental increases, with a further potential boost from future development opportunities. Notwithstanding, the value of its investment properties moderately reduced to AUD 694 million from circa AUD 700 million due to the sale of the Wickham hotel for AUD 14 million, which had a book value of circa AUD 12 million.

The REIT also maintained a sound balance sheet, with gearing (borrowing less cash/total assets less cash) reducing to 37.9% as at Dec. 31, 2018 from 39.4% as at June 30, 2018. This was a result of the fair value increase in its property portfolio as well as reduction in borrowings to AUD 266 million from AUD 277.5 million, with part of the proceeds of the Wickham Hotel sale used to repay debt. Gearing is below management’s target range of 40% to 50%, although following payment of its interim distribution AUD 9.8 cents it should creep back to about 40%, but well below covenant gearing of 60%.