ARA US Hospitality Trust - UOB Kay Hian 2019-08-01: 2Q19 Beyond The Seasonal Uplift

ARA US HOSPITALITY TRUST (SGX:XZL) | SGinvestors.io ARA US HOSPITALITY TRUST (SGX:XZL)

ARA US Hospitality Trust - 2Q19 Beyond The Seasonal Uplift

  • ARA US HOSPITALITY TRUST (SGX:XZL)'s results came in above expectations. DPU of 1.36 US cents represents 30% of our FY19 (8-month) forecast.
  • More than a seasonally strong 2Q19, portfolio properties outperformed respective comp-sets, achieving a RevPAR index of 106.8%. The strong results were also due to astute execution in cost management and lower interest rates.
  • On acquisitions, management is looking to close 1-2 deals (S$60m range) in the next 3-9 months.
  • Maintain BUY with a higher target price of S$1.21.



2Q19 RESULTS


DPU of 1.36 US cents; exceeding ARAUS’ expectations by 3.8%.

  • ARA US HOSPITALITY TRUST (SGX:XZL)’s 2Q19 gross revenue came in 1.3% below the company’s forecast, while NPI was above by 0.4% due to lower property expenses (from various cost management initiatives, including productivity improvement in labour management, and energy expense savings through procurement and operating initiatives).
  • The higher NPI and lower borrowing costs led to distributable income and DPU (S cents) exceeding ARA US Hospitality Trust’s forecasts by 3.2% and 3.8% respectively.
  • Results above our expectations, with DPU of 1.36 US cents for the period (9 May-30 Jun 19) representing 30% of our full-year (9 May-31 Dec 19) estimate. The second and third quarters are seasonally stronger in the calendar year.


STOCK IMPACT


RevPAR Index of 106.8% reflects superior performance (and attractiveness of the assets)

  • vs their respective comp sets in the various sub-markets. The index is weighted by revenue contribution, and a reading exceeding 100 indicates outperformance vs peers.
  • By brands, Hyatt House and Hyatt Place outperformed RevPAR of comparable hotels by nd 3.9% respectively.

Acquisition-led growth on robust pipeline.

  • Management is evaluating both off-market and marketed transactions (and has narrowed their search to five deals). Currently, US select-service properties are trading at cap rates of 7-8.5%. Management is brand agnostic (with other institutional brands, like Marriot and Hilton, under consideration), and looking to conclude 1-2 of these deals (in the US$60m range) via a debt headroom (US$180m) in the next three to nine months.
  • As the largest lodging market, the US provide a lot of depth in terms of acquisition opportunities (5.3m room stock) and liquidity (transaction volume of US$5.6b in 1Q19). Management has also flagged interest in expanding into under-represented markets (the Western region).

Proactive asset management (and enhancement initiatives).

  • Management remains positive on asset management strategies to optimise revenue management, improve sales production and labour management (productivity), expense management initiatives and asset preservation.
  • On AEI works, management will refurbish selected hotels during off-peak periods to meet guest expectations (and improve the marketability of the hotels) so as to achieve higher RevPAR. They also plan to reconfigure existing guestrooms by splitting larger rooms, which will create new leasable areas in the hotels and yield positive returns.

Gearing declined to 31.9% (vs 33.4% at IPO); lowest among S-REITs.

  • During the quarter, US$7.5m of revolving credit line was paid off. Interest rate also came in lower at 3.95% (vs 4.2% forecasted). About 82.9% of the debt has been hedged on fixed rates, providing certainty on interest expense.

US select-service to see pricing improvements gradually amid new supply concerns.

  • As a reflection of strong customer-preference for select-service, demand has enjoyed superior growth at 3.7% (vs 1.9% for US lodging demand growth). However, supply has grown faster at 4.8% due to interest from hotel brands and developers.
  • This has resulted in occupancy decreasing to 76.9% (-1.0% y-o-y) and impacted ADR growth. With the new supply’s introductory rates to burning off (and absorption to occur), management expects pricing power to gradually improve.


EARNINGS REVISION/RISK

  • We raise our 2019-21 DPU forecasts by 4-5%, factoring in lower financing costs (ie lower interest rates).


VALUATION/RECOMMENDATION

  • Maintain BUY with a higher target price of US$1.21 (previously S$1.15).
  • Our valuation is based on DDM (required return: 7.25%, terminal growth of 1.5%).


SHARE PRICE CATALYST

  • Positive newsflow on the US economy, hotel room rates and occupancy
  • Future accretive acquisitions which will augment portfolio.





Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-08-01
SGX Stock Analyst Report BUY MAINTAIN BUY 1.21 UP 1.150



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