Opinions
Ben Cheng
American Hotel Income
HOT.UN-T
COMMENT
Jul 18, 2016
$10.350
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DON'T BUY
A huge dividend is not a good thing. The market is telling us something – the dividend is too high. They may be capitalizing too much of their maintenance expenditures. The CAP-X is about 6% of net operating income. It should be 20-25%, which is closer to what they are actually spending. They don’t have to cut their dividend, but at this point in the cycle and with more sensitivity in the cycle, they should be more conservative with their capital.
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DON'T BUY
This REIT has had so many problems. They owned a lot of railway depot hotels, where engineers would take rest. These contracts have been lost and they own in secondary markets. They have over distributed and missed earnings on several occasions. They are now having to invest to keep these assets maintained. This is still a work in progress stock. He does not think the 12% yield will be sustainable. Stay away.
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DON'T BUY
He once owned this, selling it before Covid fortunately. The reason was that the 9% dividend could not be sustainable. Indeed, the dividend was cut during Covid. He wouldn't buy it back. Their hotels remain largely empty. He isn't a flipper or trader. Perhaps you can make a trade her if the US economy rapidly reopens and travel revives. There are better ways to play the reopening. Doesn't know when their dividend will return.
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DON'T BUY
They own U.S. hotels, a high-risk, high-reward stock. He's bearish on hotels, which is struggling with labour costs and keeping labour. HOT.UN has done a good job restoring vacancies, in the low-70s, though their peak was in the 80s. However, they've made up the balance on their hotel rates. Their balance sheet is slightly higher, so he would avoid. There are better hotel names.
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It has come under pressure for two fronts. Across the US there is quite a bit of new hotel product that is coming on stream over the next 12-24 months. But they are not competing in the same tier 1 cities as the new product so should not be affected by the new volume. Also, they have a lot of contracts with rail operators. Volumes for rails have dropped off considerably.