My past contributions have mostly involved small-cap stocks I believe to be undervalued with the potential for significant upside with dividends being a secondary consideration. After hours of tinkering with my brokerage's value and income screener, I have uncovered a solid mid-cap that seems to offer the best of both worlds in this turbulent and uncertain market. I believe Hospitality Proprieties Trust (Nasdaq:HPT) deserves increased investor attention at this particular point in time, and here's why.
HPT is what many would call a hotel REIT, but it is much more than that. It is well established (1995), and unique in that its property portfolio of 323 mid to upscale hotels e.g. Courtyard, Hyatt Place, Residence Inn, Crowne Plaza also contains approximately 200 travel centers (truck stops) adjacent to interstate highways, and operated under the TravelCenters of America and Petro brands. The travel centers add an element of diversification to the portfolio and helps mitigate certain risks that come with hotel properties. Specifically, while customers rent hotel properties on a day-to-day basis, travel centers can be counted on for more consistent income since they sell non-discretionary goods such as fuel and food. I venture to say those of us who have traveled around the country, have at one point or another, ventured into one of HPT's properties. HPT was recently selling at $24.25 with an 8.5% dividend yield.
The Business Drivers
There are several factors that should help boost future business and profitability at HPT's properties including:
- Individual income tax cuts which should produce more discretionary income that can be directed toward travel and leisure.
- Upcoming 2018 vacation season with stable fuel costs for the foreseeable future.
- Property renovations that should increase consumer desirability for HPT's product.
A recent Barron's article suggests that REITs as an asset class, are undervalued and should be considered as a portfolio addition. As pass-through entities, REITs pay little income tax and therefore aren't benefiting from the reduction in the corporate tax rate to 21% from 35%. The tax bill did provide a key benefit to REIT investors by enabling taxpayers to deduct 20% of REIT dividends, effectively lowering the maximum tax rate to 29.6%. This could make REITs relatively more attractive as an asset class.
Earnings are projected to increase 16% over the next 36 months and at the writing of this article, HPT's P/E ratio is 6.5x projected 2018 earnings, compared to the industry average of 13.2. Its price/book value is a low 1.44 compared to the industry average of 3.8. These numbers suggest one of two things: a company with problems and whose profitability is uncertain, or a company that is overlooked whose stock is technically oversold and will eventually recover. After reading the March 1st, Q4-17 earnings call transcript, I believe HPT is an example of the latter and worthy of serious consideration by both value and income driven investors.
Other Considerations and Conclusion
There will be gradual interest rate increases over the next 12-18 months and conventional wisdom is that REIT prices decline when interest rates rise. I believe that these inevitable increases have been anticipated for some time, and are already baked into HPT's current price which is near its 52 week low. Of the six analysts that follow HPT, four rate it a buy or strong buy and two have hold ratings. Their one year price targets range from $28 low to $35 high.
If my thesis holds true, and the analysts are correct, patient investors could see a 25% return while collecting a generous dividend with limited downside risk. As with any stock (REIT), there is the risk of capital loss, so conduct your own research and speak with your investment advisor about HPT. A quick update on my last recommendation, HealthWarehouse.com, Inc. (OTCQB:HEWA) was selling around $0.40 at that time. Last I checked, it was at $0.62 and has been as high as $1.00 since that article 18 months ago.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.