Hotel Property Investments: Hotel harmony
About the author:
- Author name:
- By Fiona Buchanan
- Job title:
- Co-Head of Research, Senior Analyst
- Date posted:
- 22 September 2021, 8:00 AM
- Sectors Covered:
- Property, AREITS
- HPI has announced further acquisitions, a lease harmonisation program and a capital raising.
- FY22 DPS guidance is unchanged at 20.5c which equates to a yield of 6.2%.
- We retain an Add rating with a revised price target of (login to view).
Acquisitions, lease harmonisation and capital raising
HPI has entered into an agreement to acquire a freehold mixed use complex (The Edwardes Lake Hotel) for $28m (5.0% cap rate) and is in advanced negotiations on a second acquisition for $7.9m (5.4% cap rate).
HPI has also announced a ‘lease harmonisation’ which involves a payment of $38.8m (4.5% rental yield) to its major tenant QVC.
To partially fund the acquisitions HPI has completed an underwritten institutional placement raising $50m at $3.40 and has launched an SPP to raise up to $10m (opens 22 September and closes on 13 October).
FY22 DPS guidance remains unchanged at 20.5c.
Acquisitions - The Edwardes Lake Hotel is located in Reservoir which is 12km from the Melbourne CBD. It sits on a 49,000sqm site and is being acquired from existing tenant Francis Group (the ongoing operator).
The asset has a 19.4 year WALE (2x20 year option); triple net lease structure; and 2.5% fixed rental reviews. The second potential acquisition HPI has flagged has a 20 year WALE. Both assets are 100% occupied.
The portfolio is now valued at +$1bn across 56 assets (majority leased to QVC/AVC). Metric remain solid: WALE 11.3 years; WACR 5.9%; 100% occupancy.
Lease harmonisation - HPI will pay $38.8m to its major tenant QVC for 249 gaming licences (4.5% rental yield with a reviews comprising the lower of CPIx2 or 4%). Prior to this transaction, HPI owned 1,684 gaming licences which now increases to 1,933 (vs a total of 2,031 across the portfolio).
This standardises the lease agreements across HPI’s portfolio resulting in a greater majority of gaming entitlements reverting to HPI at lease expiry (standard lease structure detailed overleaf).
Post the above transactions, gearing stands at 37.8%. We note existing debt facilities of $30.2m have also been used.
NTA is $3.28 vs $3.30 at June 2021.
Forecast and valuation update
We adjust our forecasts for the two acquisitions, lease harmonisation and placement. FY22 DPS guidance of 20.5c remains unchanged.
Following changes, our blended DCF/NAV valuation moves to (login to view) based on a 5.9% cap rate.
HPI is an internally managed REIT with exposure to pub and accommodation assets. It has minimal near-term leasing risk with a long-term weighted average lease expiry profile. The portfolio remains weighted towards QLD assets.
Based on FY22 DPS guidance of 20.5c, HPI offers a distribution yield of +6%.
Key catalysts include accretive acquisitions (HPI has a strong relationship with its main tenant QVC/AVC); M&A; and asset revaluations.
Key downside risks relate to any potential regulatory changes that could negatively impact property valuations or JV strategy; non-renewal of leases; and unknown COVID impacts on the key tenant.
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