ARA US Hospitality Trust - UOB Kay Hian 2020-02-20: Domestic Focus Shields Impact From Covid-19

ARA US HOSPITALITY TRUST (SGX:XZL)

ARA US Hospitality Trust - Domestic Focus Shields Impact From Covid-19

ARA US Hospitality Trust's results came in slightly below expectations. DPU of 4.21 US cents represents 95% of our 2019 (8-month forecast).
ARA US Hospitality Trust’s US-focused portfolio caters to a pre-dominantly domestic crowd, therefore faces less disruption from the coronavirus. Select-service hotels continued to be in demand (growing 5.1% in 2019; 2.5x US demand growth), although that is outpaced by supply growth.

Maintain BUY with a higher target price of S$1.25 (from US$1.16), factoring in the Marriot acquisition.

ARA US Hospitality Trust (SGX:XZL)’s gross revenue and NPI for the period (9 May-31 Dec 19) came in at US$115.0m and US$32.6m respectively, or 7.9% and 20.3% below the company’s forecasts.
The lower top-line is primarily attributed to new supply headwinds and introductory pricing by new entrants. This has resulted in a lower US$122 ADR (5.5% below forecast), and US$94 RevPAR (7.7% below forecast).
NPI was dragged by higher-than-expected insurance premiums (under Aimbridge) due to claims history of other hotels managed by Aimbridge (ie affected by natural disasters).

DPU of 4.21 US cents for the period represents 95% of our full-year forecast. Fourth quarter is seasonally weaker for ARA US Hospitality Trust.

RevPAR Index of 106.3% reflects superior performance and attractiveness of the assets, as compared to 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 16.0% and 2.3% respectively.

Management noted the limited number of COVID-19 cases in the US. They also have not seen any impact from the slowdown in international arrivals (and Chinese visitors) on their portfolio.
The coronavirus is expected to hit gateway cities (eg New York, San Francisco) first, at least. In contrast, ARA US Hospitality Trust’s portfolio is mainly located in US secondary cities, pre-dominantly catering to a domestic business and leisure crowd. Hence, management believes the coronavirus-related risk is lower although they continue to monitor the situation and are putting in place measures to minimise risk of virus exposure to their guests and employees.

For 4Q19, demand for the segment grew 5.1% (2.5x US demand growth) although it still lagged supply growth of 5.3%. The temporary imbalance has led to segment RevPAR decreasing 0.6% from occupancy (-0.2ppt) and ADR (-0.4%) declines.
Management considers the situation of new hotels offering introductory pricing to be temporary, which should gradually improve as new supply is absorbed.
Management again highlighted that US lodging demand depends on continued health of the US economy. They noted the strength in the US labour market (3.5% unemployment in Dec 19), which will drive consumption (accounting for 70% GDP growth).

Management highlighted some initiatives to optimise pricing (ADR), enhance group capture, improve digital marketing, improve productivity as well as AEI works (eg television platform upgrades, improved internet access). They believe these will help to defend occupancy in the near term (against newer properties), and accelerate ADR growth as supply-demand returns to equilibrium.

The portfolio comprises AC by Marriot Raleigh North Hills (ACR, 135 rooms) located in the Raleigh/Durham market, Courtyard San Antonio at The Rim (CSA, 124 rooms) and Residence Inn San Antonio at The Rim (RSA, 131 rooms), located adjacent to each other. The acquisition was completed on 17 Jan 20.
The acquisition cost totals US$88.8m (comprising US$84.5m purchase consideration, US$0.8m acquisition fee, US$3.5m professional and transaction fees). Transacted price is fair at 5.5% below independent valuation. The acquisition is expected to be yield-accretive, and boost pro-forma (9 May-30 Sep 19 DPU) by 8.1%.
Portfolio assets also outperformed its comp set (RevPAR index at 120-146%), with strong occupancies and GOP margins ( > 45%).

We raise our 2020-21 DPU forecasts by 8%, factoring in fresh contributions from the portfolio of three Marriot branded hotels.
Maintain BUY with a higher target price of US$1.25 (previously US$1.16), based on DDM (required return: 6.75% and terminal growth: 1.0%).
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Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-20

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