Hospitality Properties Trust: 8% Yield For Your Portfolio

| About: Hospitality Properties (HPT)

Hospitality Properties Trust (NYSE:HPT) stock trades around $23.5 versus its 52-week range of $19.77-$28. The stock is up 13% in the last year. Hospitality Properties has recently increased its dividend payment to $0.47 per quarter. The stock now yields 8%. the record date is October 22, 2012, and is payable on November 19, 2012. The stock of other hotel REITs such as Hersha Hospitality Trust (NYSE:HT) yields 5%, Starwood Hotels (HOT) yields 0.9%, and Host Hotels & Resorts (NYSE:HST) yields 2%. I think the strong balance sheet of the company and its high profile hotel portfolio provides a floor for the stock, making the dividend a safe investment.

The company continues to retire its short-term debt. Early August, the company issued $500 million of 5% Senior notes due in 2022. Proceeds from this offering will be used to retire the shorter dated $287 million of 6.75% notes due February 2013. Also redeemed will be $6 million of the 7% preferred stock. The remaining proceeds will be used for general corporate purposes. I like the "use of proceeds" language of "general corporate purposes" because the company can now use the remaining $207 million for any purpose including construction/renovation, redemption of debt or stock buybacks. The company has been very proactive in using the low interest rate environment to issue cheaper and longer dated debt to retire short-term debt.

Fundamentals that support the dividend yield:

  1. A strong balance sheet with a debt/cap of 38%, secured debt of $0, and interest coverage of 4.3x. It has $300 million of unsecured debt that comes due in 2014. However, given that the company has $750 million available on its revolver and strong FFO growth, retirement of the debt is not a concern. Also, the company is well within its covenant requirements.

  2. Travel Centers of America has shown strong EBITDAR growth, up 13.5% in Q2-2012, or 1.75x rent coverage versus 1.6x last year.

  3. The company continues to upgrade its portfolio of hotels. Although RevPAR is impacted by the renovation costs in the short-run, I think this is a positive in the long-term. Additionally, the company has sufficient liquidity to pay for the renovation costs.

  4. The hotel REIT has a diversified portfolio with improving expense coverage metrics

I will conclude by saying that the stock of Hospitality Properties Trust has been under pressure due to their renovation commitments. This should be taken as an opportunity to capture the 8% dividend yield.

Risk in investing in Hospitality Properties Trust continues to be a weakness in the economy, which could slowdown consumer spending. Any delay in the renovation or an increase in the renovation costs could also impact RevPAR growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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