MENU

Why having pubs in your portfolio may not be the best way to enjoy them

Owning a slice of pubs is mighty tempting, but how do they stack up as investments?

Australian Leisure & Entrtmt Pty Mgt Ltd (ASX: LEP)

With 86 pubs across the country, including Young & Jacksons in Melbourne, Breakfast Creek in Brisbane and the Sail & Anchor in Fremantle, LEP owns some of the most iconic convivial meeting places in the land. All hotel properties are leased to operator ALH (75% owned by Woolworths, 25% owned by the billionaire pub entrepreneur Bruce Mathieson). Leases are for 25 years with regular rent increases. Apart from land tax, assets carry no development / operational risks as improvements, repairs and all outgoings are lessee funded.

This reads like a good prospect for income conscious investors – long leases, reliable well capitalised tenants, nothing significant in the way of further capital expenditure (all improvements revert to the lessor) and operating in an industry with longevity.

However there is a caution – operational earnings are insufficient to support the current level of distributions which benefit from a $22m extraordinary profit with the closing out of a hedge position. As a result distributions are likely to decline after 2016.

Income investors have chased LEP up to $3 (net tangible assets approximately $2.10) in recent weeks and in my view this price represents poor value.

Hotel Property Investments Ltd (ASX: HPI)

Listed in December 2013 Hotel Property Investments owns 41 pubs and 7 detached bottle shops – most of the assets are located in Queensland. With 95% of properties leased to Coles the business enjoys 100% occupancy (the balance is leased to TABs and complementary businesses). With the exception of Queensland land tax all outgoings are paid by the lessee; however HPI is responsible for structural repairs or any redevelopments costs (there is a considerable percentage of excess land in the portfolio). The earliest lease expiry occurs in 2021, and all leases are subject to regular rent increases.

Selling at $2.10, the forecast 2015 distribution yield is 7.57%. Net tangible assets per security are $1.90. The high exposure to Queensland is an ongoing positive for this group and in my view Hotel Property Investments is a fair value buy for investors seeking a reliable and growing income situation.

Discover our top dividend stock for 2014-2015

Every year, Motley Fool investment advisor Scott Phillips hand-picks 1 ASX dividend stock with outstanding potential. Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool contributor Peter Andersen doesn't own shares in the companies mentioned

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.