Description

Hospitality Property Trust Preferred C yields 10% and should provide 25% capital gains as credit markets stabilize. Even if that takes two years your IRR exceeds 20%.

BACKGROUND

I'll make this quick as the story is simple and the recent volume increase may not last. HPT-C's price has fallen from par the last six months due to general credit market turbulence instead of company-specific issues. HPT-C is pari passu with the 8.875% HPT-B which still trades at par. There seems to be a motivated seller driving HPT-C to 10% yield vs. the 9% range for issues of similar quality. As a bonus, HPT-C offers more capital gain potential than other issues with similar safety and liquidity. 

HPT is a REIT with roughly $4 billion of hotels and $2 billion of truck stops. The hotels include various Marriott brands, Intercontinentals, Hyatt Place, Crowne Plaza, Holiday Inn, Candlewood Suites, etc. Most are leased to a HPT taxable REIT subsidiary but some are leased to third parties. All are managed by large hotel operators such as Marriott, Intercontinental and Hyatt. The truck stops were bought in 2007 and leased to HPT spinoff TravelAmerica (see multiple VIC writeups on TA). Regardless of lease structure, the economics of these deals are quite similar across all properties. Rents run a little more than 10% of invested capital and consist primarily of base rent with a little upside participation. The leases and management deals are multi-decade in nature.

VALUATION

HPT is conservatively capitalized, borrowing a bit less than 50% against hard real estate assets:

Assets 5650   100%
Debt   2560    45%
Liabs   300     5%
Prefs   390     7%
Common 2390    42%

Common market cap is 3.1 billion, a 30% premium over book value. EBITDA of roughly 600m covers 150m of interest 4x and provides more-than-ample coverage for the measly 30m of preferred dividends. HPT pays out almost 290m per year in common dividends, and recently raised the quarterly common dividend by a penny.

MANAGEMENT

HPT is externally managed by RMR, who also manages office REIT HRP and nursing home REIT SNH. I will never nominate RMR as manager of the year -- their bread is clearly buttered on the side of asset growth vs. per share ROI. But they are well seasoned and very conservative. HPT had to take over some properties in the post-9/11 hotel downturn, but they never missed a common dividend. In fact, they increased the common dividend just prior to 9/11, then increased it again in July 2002. I also watched them successfully manage SNH through the nursing home debacle of the late '90s while numerous competitors went bankrupt.

Catalyst