HPI in talks to buy six pubs as it defends against takeover bid
Pub landlord HPI is in talks to buy up to six assets for about $75 million, and is considering co-investing in hotels alongside “top tier” operators, as it pursues a growth strategy and defends against a takeover bid from property giant Charter Hall and Hostplus.
“The group is currently in advanced discussions regarding six acquisition sites and we hold a right of first refusal over [a further] three assets being redeveloped by Australian Venue Co [the operator of the majority of our pubs],” managing director John White told shareholders at HPI’s annual general meeting in Melbourne on Wednesday.
No details were provided of the six potential acquisitions, but they include pubs in regional locations.
The three AVC pubs HPI has first right of refusal on are the Hotel Allen in Townsville, the Woodpecker Bar & Grill in Moreton Bay and the Royal Mail hotel near Noosa on the Sunshine Coast.
HPI’s directors have recommended shareholders reject the takeover offer of $3.85 per security (effectively $3.785 following payment of an interim distribution of 6.5¢) because it “materially undervalues” the $1.3 billion portfolio and its growth prospects.
Exploring capital partnerships
The takeover offer equates to about a 6 per cent discount to the net book value of HPI assets of $4.01. Charter Hall says its upgraded offer (from an initial $3.65) is “best and final”.
According to an ASX disclosure notice lodged on Wednesday, Charter Hall/Hostplus held a 25.43 per cent interest in HPI and had secured security holder acceptances of 3.17 per cent. That gives the bidders a 26.65 per cent controlling stake – still well short of the 50.1 per cent controlling stake needed to declare its offer unconditional.
No questions were asked on behalf of Charter Hall, its bid fund Charter Hall Retail REIT or Hostplus at the AGM. HPI security holders have until November 26 to accept the Charter Hall/Hostplus offer.
Directors of HPI argue the internally managed REIT can increase earnings and distributions through upgrades to existing pubs, acquisitions and through site “densification”.
Alongside a suite of acquisitions, HPI is also exploring “potential co-investment with top-tier pub operators”, the REIT disclosed at its AGM.
“The group is also exploring the possibility of capital partnerships, with initial discussions already in progress with an experienced pub operator through a capital light investment in freehold going concern assets, driving returns on invested capital,” Mr White said.
He later explained to the Financial Review that such an investment would be similar to the “destapling” of assets it undertakes with AVC (where HPI takes the freehold and AVC the leasehold), but at “lower price points”.
This would be under a separate mandate and could involve the creation of a new fund, entity or JV-type vehicle, Mr White said.
Outlook for REITs is improving
Alongside these acquisitions and new investment ventures, Mr White also provided further details about HPI’s plans to develop accommodation, fast food outlets and other types of offerings on vacant land across its portfolio – a key driver of future earnings growth.
In Brisbane, he said, the Crown Hotel has the capacity to support a 12-storey tower of 63 apartments while the Regatta Hotel could support 8,000 sq m of residential or short-stay accommodation. An office or dual key accommodation could be developed behind the Leichhardt Hotel in Rockhampton.
“Each of these opportunities could be monetised via the sale of a development approved site, development management agreement or joint venture with a specialist developer,” Mr White said.
He said the $5 million completed renovation of the Berserker Tavern in Rockhampton was a great example of the type of projects HPI was rolling out across its portfolio, and then rentalising on returns of 7.5 per cent.
“Weekly turnover [at the Berserker] has risen from $50,000 to $60,000 to around $160,000 by bringing in a totally new demographic to that market. Families never used to go there. [Now] we have a beer garden, play centre, upgraded sports lounge and a larger kitchen,” Mr White said.
Mr White told the Financial Review its Everton Park Hotel in Brisbane – currently being renovated – was an example of a large-format pub on a huge site which has potential for a quick service restaurant out of the front. He pointed out that AVC’s majority owner, private equity firm PAG, also owns Craveable Brands, which owns fast food chains like Oporto and Red Rooster – providing potential synergies.
In his presentation, Mr White highlighted that in a still “highly liquid” pub transaction market HPI’s portfolio traded on a cap rate – akin to an investment yield – of 5.5 per cent “well below the capitalisation rate implied by the Charter Hall and Hostplus offer of approximately 5.7 per cent”.
The takeover came at a time “when the outlook for REITs is improving, with growing consensus that interest rates have peaked and that central banks worldwide may soon begin reducing official rates”, he added.
“In an environment where rates are expected to decline, low-risk assets like HPI’s pubs, with long-term leases and attractive lease structures, are well-positioned to deliver robust performance and distribution growth.”
