DBS Group Research analysts Tabitha Foo, Derek Tan and Geraldine Wong have maintained their “buy” call on ARA US Hospitality Trust (ARAHT), noting that the REIT is resilient in its operational performance for the 1HFY2023 ended June 30.
However, they’ve lowered their target price from 55 US cents (60.67 cents) to 45 US cents, on the basis of slower-than-expected corporate travel recovery and higher cost of debt weighing on distribution per unit.
ARAHT is the first pure-play US upscale select-service hospitality trust to be listed in Singapore and Asia with a portfolio of 37 branded hotels geographically diversified across the US. With pent-up travel demand sustaining into 2H2023, ARAHT is well positioned to capture the recovery with its pricing power, leaner operating model and positive operating leverage, say the analysts.
ARAHT’s 1HFY2023 net property income (NPI) came in at US$22.0 million, 4% higher y-o-y, and its distribution per unit (DPU) came in at 1.501 US cents, 5% higher y-o-y. Both were below the analysts’ estimates.
Regardless, Foo, Tan and Wong say that ARAHT’s portfolio optimisation strategy will underpin its long-term growth. ARAHT’s maiden acquisition of three Marriott-branded hotels and a recent Hilton acquisition have exceeded their expectations in terms of recovery and set the stage for future acquisition targets, they note.
“We see this as a testament to the manager’s asset management strategy and the key to building a more diversified and resilient portfolio that is primed for long-term growth,” they say.
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ARAHT’s 1HFY2023 revenue per available room (RevPAR) came in at US$95 (1HFY2022: US$80), while occupancy was at 68.9% (1HFY2022: 62.7%). For this quarter alone, the REIT’s RevPAR has exceeded pre-Covid-19 levels, reaching US$108 and surpassing 2QFY2019’s RevPAR of US$105.
While 2QFY20223 occupancy of 76.0% was still short of 2QFY2019 occupancy of 82.8%, they note that ARAHT had a record average daily room rate (ADR) of US$142 in 2QFY2023 (2QFY2019: US$126).
The analysts believe that the market is severely underestimating consumers’ desire to travel and ARAHT’s recovery potential. Despite recession fears, they believe that ARAHT will continue to deliver robust operating metrics to catalyse a share price rerating.
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In addition, the analysts expect higher room rates on the horizon, as consumers are more conditioned to embrace higher prices, leading to more upside potential to be driven by corporate travel.
Finally, Foo, Tan and Wong say that ARAHT’s operating leverage and active asset management will be key drivers of higher margins.
The REIT’s gearing increased slightly to 39.7% in 1HFY2023 from 39.4% in 2HFY2022, and its average cost of debt increased to 4.6% in 1HFY2023 from 3.8% in 2HFY2022, with a weighted average debt expiry of one year. 75.2% of its debt is hedged to fixed interest rates, while its refinanced loans are ahead of maturity. Upon assumed completion in 3QFY2023, the weighted average debt maturity will extend to about three years.
“We also anticipate the improvements in margins to sustain on the back of ARAHT’s positive operating leverage (better flow-through on every incremental dollar of revenue) and active asset management (divesting underperforming properties with lower margins and acquiring higher yield properties),” they say.
However, this might be partly offset by cost increases, especially from wages.
The REIT announced a proposed sale of Hyatt Place Oklahoma City Airport for US$8 million on June 30, one of the hotels identified as non-core with declining performance exacerbated by Covid-19, and they believe that more will follow as part of ARAHT’s portfolio rejuvenation plan.
“We revise our estimates downwards by 14%-22% as corporate travel recovery remains slower than expected and as the higher cost of debt weighs on DPU. However, this is partly offset by higher gross operating profit margins,” they say. “ARAHT’s valuations are attractive, at less than 0.5x price to net asset value with 11.1%/11.6% FY2023/FY2024 yields.”
As at 2.25pm, shares in ARA US Hospitality Trust are trading flat at 35 US cents.
