A Member of Pat McKeough’s Inner Circle recently asked for his advice on a REIT that owns 112 hotels in 33 U.S. states and operates in both the premium-branded and economy-lodging segments.
While the REIT’s distribution is a high 11.8. That payout to unitholders will account for an estimated 103.2% of its 2019 cash flow. At the same time, costly renovations will continue to limit cash flow for the next two years.
Q: Hi Pat. Can you please give me your take on American Hotel Income Properties REIT? Thank you.
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American Hotel Income Properties REIT (Symbol HOT.UN on Toronto; www.ahipreit.com), owns 112 hotels, comprising over 11,523 rooms in 33 U.S. states.
American Hotel began trading in February 2013, after it sold 10.1 million units to the public at $10.00 each.
The REIT operates in two segments:
The Premium Branded Hotels business consists of 67 hotels, with 7,684 guestrooms. Those properties are primarily located in secondary markets under some of the world’s leading hotel brand partners such as Marriott International, Hilton Worldwide, InterContinental Hotels Group, Choice Hotels International and Wyndham Hotel Group.
The Economy Lodging Hotels business consists of 45 hotels (comprised of 3,839 guestrooms) that cater primarily to mobile workforce employees in the transportation, construction, and resource industries. This includes four of the biggest North American railway companies: Union Pacific, BNSF, CSX and Canadian Pacific.
American Hotel believes this is a profitable niche market, as contracts with large railways keep occupancy rates high relative to the overall hospitality industry. The hotels are close to large rail-switching yards and hubs, and the railway contracts keep them about 74% occupied. The specially designed buildings feature crew shuttles and 24-hour food service.
Effective November 1, 2017, the properties under the Economy Lodging Hotels segment were rebranded under various Wyndham banners including Baymont Inn and Suites, Travelodge, Super 8 and Days Inn.
Thanks to new properties, American Hotel’s revenue jumped 261.1%, from $48.1 million in 2013 to $173.5 million in 2016 (all amounts except unit price and market cap in U.S. dollars). Revenue jumped 75.0% in 2017 to $303.7 million. That growth also came from acquisitions—the number of properties owned by the REIT rose 26.4%, to 115 in 2017 from 91 in 2016. In 2018, revenue rose a further 11.5%, to $338.6 million.
Cash flow per unit increased from $0.72 in 2013 to $0.82 in 2014, but due to additional units outstanding, it then fell to $0.81 a unit in 2015, and to $0.80 in 2016. Cash flow per unit again dropped in 2017, to $0.76—also the result of more units outstanding from the purchase of new hotels. In 2018, cash flow per unit dropped to $0.65. That was due to lower contributions from larger hotels under renovation, hurricanes in Florida and reduced government travel in the early part of 2018, due mostly to the U.S. government shutdown.
In the latest quarter, American Hotel’s revenue fell 3.2%, to $79.6 million from $82.2 million. Cash flow per share dropped 20.0%, to $0.12 from $0.15. The lower results were again due to reduced contributions from larger hotels under renovation and the Florida hurricanes.
In April 2016, the REIT started paying its distributions in U.S. dollars. The current monthly payment of $0.054 per unit yields a very high 11.8% on an annualized basis.
American Hotel’s units now trade at 8.7 times its likely 2019 cash flow of $0.63 U.S. a unit. However, the REIT needs to keep renovating its aging properties to remain competitive. That will hold back its cash flow for a least this year, and possibly next year. As a result, in 2019, its distributions will account for an estimated 103.2% of its cash flow. American Hotel has stated its commitment to maintaining its current distribution level, but that’s no guarantee the rate won’t be cut. As well the REIT’s growth-by-acquisition strategy adds considerable risk.
Recommendation in Pat’s Inner Circle: American Hotel Income Properties REIT is not recommended.
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