MarketWatch's Bearish Analysis On Hospitality Properties Trust Is Dead Wrong

Jun. 8.12 | About: Hospitality Properties (HPT)

Investors have to be careful what they read on the internet when it comes to income stocks. This week Chuck Jaffe of MarketWatch wrote a very bearish article on hotel real estate investment trust Hospitality Properties Trust (NYSE: HPT), which he called the "Stupid Investment of the Week."

The problem with the article, which will likely scare off income investors looking for attractive REIT investments (of which HPT is certainly one) is that Mr. Jaffe apparently is not a seasoned investment analyst, but rather a financial journalist. As a result, his analysis on HPT is dead wrong. In the article, he writes the following:

"Buying the stock based mostly on its yield means overlooking the financial figures behind the payout. Look at the company's cash-flow and earnings and it's not too difficult to predict a dividend cut in the future. Last year, Hospitality Properties paid out $250 million in dividends but only made $190 million after tax."

A quick glance at HPT's 2011 cash flow statement shows a completely different picture, however, which is crucial for investors worried that a dividend cut is imminent after reading this article. Cash flow from operations in 2011 was $355 million and capital expenditures were $70 million, netting free cash flow of $285 million. The only number the article got right was the dividend payout of about $250 million. As you can see, HPT earned far more than their dividend last year. They had excess free cash flow of $35 million after paying out the distributions to shareholders.

Income-seeking investors need to be very careful when analyzing REIT stocks. Looking at reported earnings per share and comparing them with the dividend (which apparently is what Mr. Jaffe did) ignores the fact that earnings include non-cash items like depreciation and amortization. When looking at cash payouts and the ability of a REIT to pay out its current dividend, you need to focus on cash flow, not accounting earnings.

With that perspective, HPT looks like a solid REIT investment based on current fundamentals.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.