Q: I would appreciate your comments regarding their earnings release and the dividend cut. The market did not like the cut in dividend, but I am wondering as to whether this might at some point be a buy. Their payout ratio seemed low for a reit, even with a very high dividend. If the eliminated dividend reduces debt, would they also be a takeover target for a larger reit/
5i Research Answer:
HOT's yield was running at 30%, so the 'temporary' suspension of the distribution shouldn't really be a surprise to investors. The payout ratio though was low, at 40%. The units are certainly cheap at 5X cash flow, but debt is high, operating expenses have risen, and occupancy is declining. It has had a tough 12 months, including fire and ice damage at hotels last December, which resulted in full writeoffs. It does expect insurance claims on these. We would be cautious here for now. Its very small size, economic sensitivity and tax loss selling might see it have more declines. But there are assets here, and if management can right the ship there is potential. But for now we would just wait; we think buyers have time here.