Hotel Property Investments says investors still thirsty for more pubs
Increased corporate competition for quality long-leased assets means the pub transaction market will stay hot while interest rates remain low, says Hotel Property Investments (HPI), one of Australia’s leading pub landlords.
The business, which owns 56 pubs valued at $1.2 billion, reported a 21 per cent rise in rental revenue, a 300 per cent increase in profit to $120 million due mainly to revaluations, and lifted its distribution 6 per cent for the six months to December 31.
Chief executive Don Smith said there’s growing realisation among professional investors that pubs with quality tenants offer a strong commercial covenant and income security, leading to more potential buyers on pubs that hit the market.
“We’ve seen cap rates tighten across the pub sector over the past couple of years as they have effectively become investment grade properties – investors are realising they are good assets with good long-term leases,” Mr Smith said.
Capitalisation rates, known as cap rates in the sector, are akin to an investment yield. Declining or tightening cap rates typically accompany rising values.
Pubs have been among the hottest property asset classes through the pandemic and there were a record $2 billion in sector transactions through 2021 with HPI – now the only ASX-listed hotel stock – among the most active traders.
“The cap rates for a lot of our capital city pubs came in at 4.5 per cent when we had them revalued, and that seems to be where the market is at for good-quality pubs with good-quality tenants,” Mr Smith said.
The weighted average cap rate acoss HPI’s portfolio, many of them regional operations, tightened from 5.9 per cent to 5.4 per cent over the period.
“We are seeing a tightening of caps rates across the board,” he said.
Mr Smith said further cap rate compression is possible, but the level of demand – and the prices paid for pubs – hinge on interest rate movements, with rises widely tipped later this year.
HPI bought two new pubs including Edwardes Lake Hotel in Reservoir, Melbourne, for $28 million in the back half of 2021, and this week settled on the $66 million acquisition of seven South Australian properties leased to its dominant tenant Australian Venue Co.
It will remain on the lookout for new pubs, said Mr Smith, who stressed it would only pursue assets that will grow earnings per security.
“We’re still seeing opportunities out there and an active sales market for pubs,” he said.
“We want to buy assets that add to earnings growth.”
Like most property trusts, HPI stock is trading at a discount to the value of its assets.
“People have got an eye on what will happen with interest rates in the future,” he said.
“If they go up a bit, long-WALE [weighted average lease expiry] REITs [real estate investment trusts] tend to be a bit soft [but] we would expect that to sort itself out and revert to close to net tangible asset value.”
