AHOTF - American Hotel: Why I'm Skipping Its 9.7% Dividend
2023-03-16 03:37:35 ET
Summary
- American Hotel stock is down about 40% in the last 12 months.
- It now offers a mesmerizing cash distribution yield of 9.7%.
- The stock appears to be undervalued and the cash distribution doesn't seem to be in danger.
- However, the stock has tended to underperform the stock market proxies in a price change and total returns. Additionally, the growth outlook of the hotel REIT industry is unclear.
- So, at best, we think the stock is a hold.
American Hotel Income Properties REIT LP ( HOT.UN:CA ) (AHOTF) stock reinstated its monthly U.S. dollar cash distribution in February 2022. The cash distribution is 72% below its pre-pandemic levels.
It doesn't make sense for the cash distribution to be higher now given the high yield it offers now, as the stock is down so much. Roughly, the stock has declined about 40% in the last 12 months and now yields 9.7% on the OTC market.
Its price action was much worse than the stock market proxies.
The total returns provide a similar picture even when stretched out to a 10-year period for a longer term view.
Notably, the stock's average volume on the OTC market is about 7,206. It is much more liquid on the TSX with an average volume of about 111,115. So, if you choose to take a position, it's better to do so on the TSX for better liquidity.
Recent Results
As a hotel and resort REIT, American Hotel's occupancy rate is below its pre-pandemic levels, but surprisingly, probably not as much as people may think. Specifically, its 2019 occupancy rate was 74.5% versus 68.9% in 2022, albeit this was an improvement from 2021's 66.0%.
American Hotel also saw revenue growth of 16.6% year over year to $281.4 million. However, this is 16% below the revenue of the 2019 base year.
Other than the occupancy rate, another key performance metric of the business is the average daily rate ("ADR"), which rose 12.6% in 2022 to $125. This increase was boosted by inflation, which is not a good thing when inflation is high. However, at least the ADR increased at a rate that's higher than inflation. Unfortunately, like its peers, American Hotel also experienced cost pressures, particularly in labor, which continues to weigh on its operating margins.
In 2022, its net operating income ("NOI") margin came in at 31.7%, down from 36.8% in 2021. For reference, its 2022 NOI margin wasn't too far off from the 2019 NOI margin of 33.4%. Its 2022 EBITDA margin was 25.3%, down from 29.3% in 2021 and 28.0% in 2019.
American Hotel's 2022 funds from operations ("FFO") was $42.0 million, down marginally from 2021's FFO of $42.3 million. Its FFO per unit was down 2% to $0.47. Its 2019 FFO was $55.3 million and FFO per unit was $0.70.
Notably, though, American Hotel had some meaningful changes to its portfolio. It reduced its number of properties from 78 in 2021 to 71 in 2022. (For reference, it had 79 properties in 2019.)
As shown in the table below, its debt to EBITDA ratio and interest coverage ratio improved to 9.8x and 2.1x, respectively. However, its total debt to asset ratio increased from 67% in 2021 to 69% in 2022.
American Hotel 2022 results press release
Is the Dividend Safe?
American Hotel has 92.8% of debt in fixed interest rates, and debt maturities of $16.0 million in Q4 for two hotels in Pennsylvania. The fixed interest debt should provide predictability for its debt obligations.
As of the end of 2022, American Hotel had available liquidity of $24.1 million, consisting of unrestricted cash of $12.9 million and borrowing availability of $11.2 million under a revolving credit facility.
The REIT reported normalized FFO per unit of $0.38 per unit in 2022, up from $0.32 in 2021. This implies a payout ratio of 47%, which seems sustainable.
Going into 2023
In the Q4 press release , management noted:
The last three quarters of 2022 were negatively impacted by inflation, labor shortages and supply chain disruptions. To address these issues, we are continuing to focus on hiring more in-house labor, reducing turnover and improving housekeeping productivity.
Management continued:
While we are making some progress on managing operating expenses, cost pressure and labour issues are expected to remain a challenge for most of 2023. We made steady progress on our leverage reduction goals over the last two years, achieving a decrease in each year and a two-year reduction in leverage by 570 basis point to 52.6% as measured by debt to gross book value.
Valuation
It seems no analyst cover the stock on the OTC, but analysts have a consensus price target for TSX:HOT.UN, which is more liquid. Their consensus 12-month price target for TSX:HOT.UN is CAD$3.30, which suggests a discount of 23% or near-term upside potential of close to 30%.
Yahoo Finance
This price target would be a target P/FFO of about 5.79 on the TSX. Assuming the same multiple for AHOTF, we're looking at a 12-month price target of about US$2.43 versus the recent quotation of US$1.85.
Investor Takeaway
Management seems keen on improving the fundamentals of the business. American Hotel stock trades at a discount and its high cash distribution yield of 9.7% seems sustainable because management took care to reinstate the cash distribution at much lower levels versus the pre-pandemic levels.
However, given the unclear growth outlook of the hotel REIT industry, investors may be better off considering other higher quality stocks. Consequently, we rate the stock, at best, as a "Hold".
References
For further details see:
American Hotel: Why I'm Skipping Its 9.7% Dividend