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'Rooms' for Improvement: Hospitality Properties Trust (HPT)

January 18, 2008 | About:
Hospitality Properties Trust [NYSE:HPT] Jan. 18, 2007 close: $30.99

Yield = 9.94% 52-week range: $29.50 - $49.00

HPT is a real estate investment trust [REIT] that owns 292 hotels and 185 travel centers in 44 states around the USA, Puerto Rico and Canada. Managed brands include Marriott, and Intercontinental Hotels Group. As a REIT, virtually all the profits are distributed to shareholders each year [through quarterly payouts] making for a very generous yield [9.94%] at today's price.

Since coming public in 1995 the company has always been profitable even during times of turmoil, such as post-September 11, 2001 when travel was severely curtailed. The leases that HPT operates have consistently generated positive cash flow as they are not directly tied to the operating profitability of the hotel operations. As such, dividend payments have increased in 11 of the past 12 years. The current quarterly distribution is now $0.77 /share.

FFO [Funds from Operations] is often the best gauge of health for REITs. FFO for 2007 is estimated to have been $4.60/share and Value Line looks for $4.75 for 2008. The 9.94% yield is well covered and expected to rise again over the next few years.



Since 1995 these shares have normally traded at a premium to book value. The premium has been as high as 69% [in 2004] and as low as (-16%) [in 2000] with an average price/book value of 124% over the full 12-year period these shares have been public.

In the current stock market environment HPT is available at just 98% of BV.

The only years prior to right now that HPT traded at a discount to BV were 1999 and 2000. The shares bottomed at $17.90 [in late 1999] before rallying strongly to $36.80 over the next 34 months. Not coincidently, 1999-2000 was also a time when the yield on HPT was in the 10% or higher range.

A return to a normalized 124% of year-end 2007's BV leads to a target price of $39.18 or + 26.4% above today's close. Value Line assumes a rise in year-end 2008 book value to $35.50. That could easily support a $44 goal price 12 months out.

Are these projected prices reasonable? HPT shares touched $42.40, $47.30, $46.30, $51.50 and $49 at their peaks in 2003 - 2007 respectively.

FFO, Annual Distributions and Book Value are all higher now than they were when those much higher share prices were being paid by the public.

Risk? With the share price now depressed by the general market sell-off, these shares are trading well below the lows in the four years 2003 - 2007. The 9.94% yield figures to put a nice floor under the share price as well.

Value Line rates HPT's stock price stability at the 90th percentile and gives them an 80th percentile earnings predictability score. Their financial strength rating is a decent B+.

Barclays Global Investors and Capital Research and Management owned 6.8% and 6.2% of these shares as of the March 2007 proxy statement. Guru David Dreman is a holder as well.

With 25 - 50% upside on top of the huge dividend, I see Hospitality Properties as a good, conservative play in a volatile market.

Disclosure: I bought HPT shares earlier today.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.2/5 (18 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
In today's [Jan. 21, 2008] Barrons issue, Morgan Keegan put forth a similar viewpoint to mine regarding Hospitality Properties Trust.

They noted the 18 dividend increases over the past 13 years. They also mentioned the lease structure as a stable cash flow generator and opined that this was not being reflected in the current stock price.

Morgan Keegan rated HPT as 'Outperform' from its $31.16 price when their report was written on Jan. 15th.
bobmisko
Bobmisko - 6 years ago
Thanks for the post. I'm watching values closely as they continue to come down. My benchmark for the cap rate is the loan rate plus 3 to 4 points. This would represent distressed values and I would jump on any reit even with growth prospects that are limited.

Example:

10 year rate is currently 7.45%. With a 3.5 spread you get a 10.95% cap rate. With Hospitality cap rates averaging around 9.9% historically, HPT is getting close to being a great value. With 2007 EBIT at $250m and a market cap at $2.910b the cap rate is 8.6% so we've got another 20% in prices to fall. If 2008 brings a mild/severe recession, I'm sure prices will be in that range. I'm being patient and waiting to turn a good buy into a great buy.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Since HPT is already below the LOWS since 2003 you take the risk of waiting too long to get in. Why not take a partial position now and then increase it later if you're lucky enough to see it even cheaper?
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
In today's panic sell-off market HPT was UP $1.18 or + 3.81%.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
While Bobmisko has been waiting for a lower entry point HPT shares have surged to $35.18 or + $4.19 [up 13.5%] in just two trading days.
danielw
Danielw - 6 years ago


I wouldn't call anybody out for waiting. Apart from being a bit rude, and opening yourself up for being called out on the stocks you've recommended that have collapsed, different people have different buy points for stocks. In addition to all that, keeping cash on hand is prudent--for individual investors as well as gurus.

--Daniel
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Hospitality Properties Trust announced excellent quarterly and annual earnings [and FFO] this week.

Hospitality Properties Trust's fourth-quarter income up

By Riley McDermid

Last update: 9:14 a.m. EST Feb. 13, 2008Print RSS Disable Live Quotes

NEW YORK (MarketWatch) -- Hotel real estate investment trust Hospitality Properties Trust (HPT:Hospitality Properties Trust

News, chart, profile, more

Last: 34.46+0.35+1.03%

4:00pm 02/15/2008

HPT 34.46, +0.35, +1.0%) said Wednesday that its fourth-quarter net income rose to $76 million, or 81 cents a share, from $60 million, or 79 cents a share, a year earlier. Funds from operations for the quarter also increased to $108.2 million, or $1.15 a share, from $75.6 million, or $1 a share. Analysts had expected earnings of 79 cents a share and FFO of $1.11 a share, according to Thomson Financial. Shares of Hospitality Properties Trust closed Tuesday at $34.51. Community


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1 Comment (view all)


Great stock to own for equity upside and dividend payout. But if you're reading this you already know that....


- Durkin86

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