Hospitality Properties Trust (HPT 8.3%) is up 13% year-to-date, which is fabulous given the high 8.3% dividend that comes along with ownership. That said, the stock has gone nowhere since March, so let’s take a look under the hood here, suggests John Freund, high yield specialist and contributing editor to Todd Shaver’s The Bull Market Report.
Hospitality is a REIT that owns and operates 327 hotels and 179 travel centers (or truck stops, if you’re not in the Travel industry). The portfolio is spread across 45 states, as well as Puerto Rico and Canada. The hotels are mostly brand names that are operated by the REIT, including Marriott, Sonesta, Wyndham, Hyatt and Regency.
The key metric for REITs is funds from operations (FFO), because FFO discounts depreciation which is often manipulated by REITs in order to avoid making large payouts to shareholders (REITs are obligated to pay out 90% of earnings).
Hospitality’s 1Q19 FFO was $145 million, a 6% decrease from the previous year. At first glance, this sounds bad, but on further inspection the company sold 20 travel centers in January for $310 million, which is a one-time event that doesn’t impact FFO.
In fact, several profitable travel centers are taken off the books, so we have to account for that when comparing this year with the previous year. Hospitality did bank $160 million in earnings from the sale, and used a hefty chunk of that to accelerate deferred payment of rent — meaning the company is getting ahead of its annual costs, which is a very good sign.
Hospitality also recorded a 3% YoY decline in revenue per available room (RevPAR). Again, this looks bad. But the reason RevPAR lagged this quarter is because the company is initiating some major renovations across its properties. 28 hotels were under renovation during 1Q19, including 11 full-service hotels.
1Q18 saw 23 hotels under renovation, only three of which were full-service. The company planned it this way as the first quarter is generally the slowest quarter in terms of occupancy. So management is looking to reduce the negative impact of renovation during the more seasonably strong quarters, which we give them credit for.
Weather also played a major factor, with adverse weather conditions impacting several hotel chains across the country. It’s important to note that of the hotels not affected by either renovations or weather, RevPAR actually increased 2% YoY.
Of the 16 hotels which completed renovation during 1Q19, RevPAR increased 9%. That’s a terrific sign of things to come — as more and more hotels complete renovation and come online, we expect RevPAR to increase as room rates rise.
So what looks bad at first glance, isn’t quite as bad when you take a deeper look. The company is undergoing a bit of a transformative period, and investors are in wait-and-see mode with the stock as to whether RevPAR and FFO pick up during the next few quarters, as is expected. Should those metrics increase, the stock will as well. There will only be 15 hotels under renovation during 2Q19, compared with 22 last year.
As the economy continues to strengthen, businesses will continue to send employees on sales trips and to conferences across the country. That is Hospitality’s bread and butter, and we expect 2019 to be a strong year for the company.
There’s more to the story here than the 1Q19 numbers lead us to believe. We’re confident management’s renovation and growth strategy will pay dividends down the road, and we’re expecting a nice boost to the stock over the coming months.
