ARA US Hospitality Trust - UOB Kay Hian 2020-11-10: 3Q20 Respites Amid Harsh Realities


ARA US Hospitality Trust - 3Q20 Respites Amid Harsh Realities

  • ARA US Hospitality Trust has recovered q-o-q, returning to profitability at the gross operating profit level. Drive-to-leisure demand has underpinned the early days of a US hospitality sector recovery, while air travel showed only mild improvements.
  • The outlook remains challenged, given the magnitude of the demand fall-off, and the next wave of recovery will be contingent on corporate travel returning.
  • Maintain HOLD on ARA US Hospitality Trust with unchanged target price of US$0.34. Entry price: US$0.30.

ARA US Hospitality Trust's 3Q20 business update.

  • During its recent analyst call on 6 Nov 20, ARA US Hospitality Trust (SGX:XZL)'s management shared that their fully-reopened portfolio of 41 hotels is seeing a steady q-o-q recovery - and has since returned to profitability at the gross operating profit level.

Return to profitability.

  • ARA US Hospitality Trust reported 3Q20 revenue of US$20.4m (+168.4% q-o-q), largely on the back of improved occupancies of 39.2% (+14.6ppt q-o-q).
  • The higher top-line has led to gross operating profit turning positive at US$3.9m (19.3% margin), from a US$2.3m loss in 2Q20. Although net property income (NPI) still came in at a loss of US$1.3m, this was due to property tax invoices of US$0.9m and US$1.2m relating to 4Q20 and 1H21 respectively which had to be recorded to 3Q20 under IFRS standards. Excluding this, NPI would have been at US$0.8m in 3Q20.

Limited/Select-Service hotels positioned to lead recovery – underpinned by drive-to leisure demand.

  • ARA US Hospitality Trust cited positive Smith Travel Research (STR) data points, which showed gradual improvements with monthly y-o-y RevPAR declines becoming less steep in 3Q20 (-52%/-47.3%/-46.1%) respectively. Limited/Select-Service hotels have over 90% of their rooms opened, which we opine is due to their lower breakeven-occupancies from the lower fixed-overheads embedded in their cost structure.

Management is seeing early days of a demand comeback, led by leisure demand

  • ARA US Hospitality Trust's management is seeing early days of a demand comeback, led by leisure demand, with travellers favouring automobile travel (ie recovered close to levels seen in the same period last year in Oct 19) as people try to avoid mass transit. Airport passenger count has improved as well, although still well below 50% of 2019 levels.
  • Management lauded its diversified US exposure in riding out the uneven pace of recoveries across different states, and limited urban market footprint in providing exposure to early waves of demand come-back from the drive-to and leisure demand generators.

Long-stay brands, Hyatt House and Residence Inn, have outperformed

  • Long-stay brands, Hyatt House and Residence Inn, have outperformed, seeing RevPAR q-o-q increases of 75% (vs Hyatt portfolio: 65.2%) and 61% (vs Marriot portfolio: 35.1%) respectively. Hyatt House saw improved bookings from guests displaced due to natural disasters (eg hurricanes), while Residence Inn was boosted by contract business from the military; which will see block-bookings until end-20 with the potential for extensions.

Gearing likely to exceed MAS’ 50% leverage, if valuations decline by more than 15% at year-end.

  • Management ballparked a 20%+ valuation impairment, but this will vary across locations. They also noted uncertainties on the appraisal processes, relating to the dearth of recent sales comparison data and assumptions on rental growth rates (%) and investment metrics (eg cap rates). Hotel sales activity may remain low with a wide bid-ask spread, as owners try not to sell at the bottom of the cycle.
  • Lack of debt capital available for hotel financing at this point will also impact capitalisation rates. Regardless, according to MAS guidelines, the aggregate leverage limit waives any breaching due to depreciation of asset value, although it would be prohibitive to take on new loans after exceeding the 50% limit.
  • For existing loan covenants, ARA US Hospitality Trust last reported a 12-month waiver (Apr 20-Mar 21) which should tide them through this period.

Recovery hinged on shift to corporate travel; any permanent loss of demand for longer term disputed.

  • According to Room-Nights-Sold data for its 38 Hyatt hotels in 3Q20, Transient Leisure/Corporate/Group/Contracts have returned to 64th/37th/22th/65th percentiles of 3Q19 levels (vs 2Q20: 22th/17th/6th/30th percentiles of 2Q19 levels) respectively. While we have seen weekend leisure coming back, management guided that the next wave of recovery will depend on the shift to Corporate Travel, followed by Extended Leisure, and Meetings, Incentives, Conferencing, Exhibitions/Group Travel.
  • Shift to corporate travel is hinged on the availability of vaccine widespread testing capabilities, resumption of essential business travel and improved economic outlook. Management disputes that there will be permanent loss of demand for the longer term from any sub-segments due to the pandemic, especially on corporate transients due to the essential need to attend in-person sales/meetings.

Earnings revision

Peihao LOKE UOB Kay Hian Research | Jonathan KOH CFA UOB Kay Hian | https://research.uobkayhian.com/ 2020-11-10
SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.340 SAME 0.340