ARA US HOSPITALITY TRUST (SGX:XZL)
ARA US Hospitality Trust - Ready To Fly; Initiate Coverage With BUY
- ARA US Hospitality Trust is riding on anticipated robust recovery in the US travel sector post COVID-19.
- Positioned in the select-service subsector with a proven history of operational efficiency and flexibility.
- Attractive dividend yield in excess of 10% once recovery takes hold.
Initiating coverage on ARA US Hospitality Trust (SGX:XZL) with BUY.
- Even though the COVID-19 pandemic has created unprecedented challenges for the hospitality industry, we project a steady recovery trajectory for ARA US Hospitality Trust (SGX:XZL) in the coming 2 years as travel normalises.
- While active cost mitigation measures during the COVID-19 pandemic has enabled ARA US Hospitality Trust to weather the crisis well, the rollout of the COVID-19 vaccines in the coming months should see travel restarting. We project RevPAR to rebound to 61% of pre-COVID-19 levels in FY21F (45% growth y-o-y), 92% in FY22F (+30%) and 99% in FY23F (+7%) for ARA US Hospitality Trust. The stock offers robust FY21F and FY22F yields of 5.9% and 12.8% respectively.
Diversified portfolio across the US, with higher concentration in regions with stronger economic prospects.
- ARA US Hospitality Trust is a stapled group, which comprises ARA US Hospitality Property Trust (ARA H-REIT) and ARA US Hospitality Management Trust (ARA H-BT) with a portfolio of 41 hotels valued at US$793.6m as of 31 December 2019.
- In our view, the portfolio is positioned to capture the strong economic growth within the US with more than 50% of its rooms in the South and West regions in the US with higher GDP growth and 31.9% from higher nominal GDP per capita Northeast region. Located in regions with stronger economic prospects suggests that the hotels should continue to benefit from accommodation demand from transient, corporate travel activities and leisure travel.
Operated by reputable hotel operators offering consistency in quality and experience to guests.
- A key attribute of a Hyatt branded portfolio is the consistency in quality, image and experience that guests will get. According to JLL, Hyatt is one of the fastest growing brands in the USA and the Hyatt House and Hyatt Place products are the 4th largest in their respective upscale select-service and upscale extended-stay segments. The brands are newer compared to more established peers.
- In addition, through Hyatt, the properties also gain direct access to over 16 million members worldwide in the World of Hyatt loyalty program. Marriott is the largest hotel chain with 30 brands across 7,003 properties in 131 countries. It has the leading concentration in the top hotel tier with a strong guest loyalty base. The Marriott Bonvoy Loyalty Program has 125 million members worldwide with 1.5 million new members every month (pre-COVID). Members represent approximately 50% of the paid room nights in Marriott branded hotels.
Brand diversification a future direction.
- ARA US Hospitality Trust’s portfolio now has 41 hotels with 5,340 rooms, diversified across 22 US states. Brand diversification will continue to be a long-term strategy for ARA US Hospitality Trust, giving the Trust the flexibility to select the best hotel brand and hotel managers for each location/property and creating greater leverage among the brands when negotiating franchise and management agreements.
Targeted exposure to the upscale select-service and upscale extended-stay hotel segment which offers better profitability and resilience.
- The portfolio is positioned in the upscale select-service and upscale extended-stay segments which enjoy higher operating margins and thus, higher profitability and resilience. This is due to its more efficient cost structure and focus on room revenues with limited F&B and ancillary offerings which are lower margin parts of the hospitality businesses.
- Its upscale positioning also means that the target segment of guests tends to be less price sensitive and thus the portfolio enjoys higher relative RevPAR compared to other select-service peers.
Backed by Sponsor with track record in REIT management, private funds, acquisitions and intensive asset management.
- ARA US Hospitality Trust’s Sponsor is a wholly owned subsidiary of ARA Asset Management, a premier global integrated real assets fund manager headquartered in Singapore. As of 30 June 2020, the gross assets under management by ARA Group and its associates is approximately S$110bn and is diversified across a variety of real estate products including REITs and private funds.
- We understand that the historical performance of upscale select-service and upscale extended-stay hotels have been resilient over market cycles with their lower operating cost structure where a higher variable component provides flexibility in managing costs when the economy turns soft. We believe this gives the portfolio a competitive edge and positions ARA US Hospitality Trust to weather the COVID-19 crisis well..
Key risks
- Resurgence of COVID-19 pandemic. Another wave of infections may force renewed lockdown measures, affecting occupancy rates.
- Further softening in the US economy. As the demand for hotels is closely intertwined with US GDP, any continued weakness could mean downside to RevPAR growth.
- Potentially riskier earnings structure. The structure of ARA US Hospitality Trust is different from existing hospitality REIT peers where the REITs derive their revenues through a revenue structure that includes a fixed base. ARA US Hospitality Trust offers investors a “pass-through” earnings structure which means that a pro-longed downturn in operational performance may negatively impact returns.
Valuation
ARA US Hospitality Trust’s share price performance has closely tracked its US hospitality peers and SG hospitality S-REITs since the start of the year.
- While prices have declined by up to 50% due to the pandemic, most have recovered to about 60%-70% of pre-COVID-19 levels, as of 24 December 2020. We note that the US Hospitality REITs have underperformed the SG hospitality S-REITs year to date. We believe it is due to the latter’s more stable income structure (income supported by fixed rents) with income support from the Singapore government’s quarantine business since March 2020 that have helped to cushion occupancy rates.
- ARA US Hospitality Trust's share price performance has closely tracked selected US Hospitality REITs (namely Apple Hospitality REIT, Chatham Lodging Trust and Summit Hotel Properties) but its recovery since Nov 2020 on the back of positive developments on the vaccine front have lagged its peers, which we attribute to ARA US Hospitality Trust’s smaller market cap and being under-researched.
- Looking ahead, we believe that the hospitality S-REITs are on the way to earnings normalcy in the coming 2 years. As ARA US Hospitality Trust’s portfolio is largely positioned to domestic travel demand, we believe that the pace of recovery will be ahead of its peers. With potential distribution yields of 5.9% (FY21F) and 12.8% (FY22F), higher than US hospitality REITs, we believe that investors are well compensated to take a position in ARA US Hospitality Trust.
- We have derived ARA US Hospitality Trust's target price using the discounted cash flow valuation method, given its relatively stable and visible cashflows from being focused on the upscale select and extended service industry. See PDF report attached below for the DCF valuation details.
- See ARA US Hospitality Trust Share Price; ARA US Hospitality Trust Target Price; ARA US Hospitality Trust Analyst Reports; ARA US Hospitality Trust Dividend History; ARA US Hospitality Trust Announcements; ARA US Hospitality Trust Latest News.
- Our target price reflects a normalised risk-free rate of 2.0%, SG market return of 9.4% and a beta of 1.1x (similar to SG-listed peers with overseas exposure but slight premium to pure SG-focused hospitality REITs). Our 7.62% WACC reflects 10.1% cost of equity and a 3.69% after-tax cost of debt. Based on 1.50% terminal growth rate, our target price implies FY21F and FY22 yields of 5.9% and 12.8% respectively.
See the 39-page PDF report attached below for complete analysis on ARA US Hospitality Trust (SGX:XZL).
Singapore Research Team
DBS Group Research
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Geraldine WONG
DBS Research
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Derek TAN
DBS Research
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https://www.dbsvickers.com/
2021-01-07
SGX Stock
Analyst Report
0.69
SAME
0.69
