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1 income stock flying under the radar

Christine St Anne  |  16 Jul 2014Text size  Decrease  Increase  |  

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Christine St Anne is Morningstar's online editor. Follower her on Twitter @MStarChristine


Morningstar's readers would have read about the income opportunities in the Australian real estate investment trust (AREIT) sector. Besides the major banks, AREITs have proved to be a good hunting ground for yield-obsessed investors.

The recent article titled Getting steady income from AREITs highlighted what makes this asset class a good income investment.

While the recent focus on the AREIT sector has been on many of the big names, including Stockland (SGP) and Mirvac (MGR), there is one small AREIT that is positioned to give investors both yield and secure earnings -- Hotel Property Investments (HPI).

In 2013, HPI was officially launched on the Australian Securities Exchange, with strong take up from both retail and institutional investors.

Morningstar has now initiated coverage of the stock, with senior equities analyst Adrian Atkins describing HPI as an "income stock flying under the radar".

The AREIT owns 41 pubs and seven bottle shops. The majority of these shops and pubs are Queensland-based, with a small exposure to South Australia.

Earnings from these pubs and bottle shops are supported by long leases and a strong tenant in the form of supermarket giant Coles.

In fact, no material lease expires until fiscal 2021. Therefore, these long leases support HPI's ability to grow distributions over the medium term.

About 95 per cent of rental income comes from Coles with the remaining 5 per cent from speciality tenants located on the pubs' premises, such as 7-Eleven and Subway.

HPI can also be considered a defensive investment given its secure medium-term earnings, according to Atkins.

"Unlike most Australian REITs, robust rental growth of about 4 per cent per annum is assured by contracted rental increases of twice the consumer price index or at a fixed amount," he says.

While Sydney and Melbourne are perceived as the epicentres of Australia's entertainment culture, Queensland's growing population is also a tailwind for these businesses.

But while there are upsides, there are also some risks investors should consider. Like many businesses, HPI is also vulnerable to legislation.

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