DBS Group Research is keeping its “buy” recommendation on ARA US Hospitality Trust (ARAHT) with an unchanged target price of 70 US cents (97 cents), as recent sector-wide data shows a front-ended loaded recovery unfolding as summer break works its magic this holiday season.
In a June 14 report, analysts Geraldine Wong and Tabitha Foo write: “ARAHT’s US hotel portfolio is best poised amongst the S-REITs to ride on this uptrend, with a turnaround in profits likely to be unveiled in the upcoming quarters. This is on the back of an uplift in revenue per available room (RevPAR) which we think will drive a share price re-rating.”
“We believe that ARAHT will likely see an uplift in RevPAR ahead as we turn more positive on travel demand and on the back of inflationary pressures as well as higher willingness to spend,” they say, while adding that they are bullish on the trust’s top and bottom lines for the second quarter of 2022.
The way the analysts see it, the trust is set to ride on the summer optimism alongside sector-wide operational breakeven. Data and analytics insights firm STR’s weekly US hotel tracker shows occupancy at a pandemic-level high of 70%, with daily rates back to normalised levels. With pricing power now back in the hands of hoteliers, about 95% of hotels are at least at breakeven, with three-quarters turning in profits.
“With travel demand ahead looking more optimistic than expected, we see potential for ARAHT to increase room rates,” say the analysts.
According to Wong and Foo, ARAHT’s portfolio of select-service hotels is well situated in well-vaccinated states and poised to capture the reopening on all fronts – leisure demand (22% exposure), airport demand (20%), and corporate demand (36%).
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To that end, the “bleisure” trend is on the rise – a combination of business and leisure travel – as many are extending work trips for leisure, especially in an era of hybrid working. “In this context, we believe that this travel demand could have been spurred by ‘bleisure’ demand in addition to just pure leisure demand,” say Wong and Foo.
Meanwhile, the trust’s lean select service model is expected to ensue profitability.
Select service hotels have proven to be more efficient and profitable, as they clock in gross operating profits of 51.6% as compared to 39.3% for full-service branded hotels. “ARAHT’s select service offering has proven to be more financially lean, and a potential revenue upside this summer break will likely flow through to net income,” write the analysts.
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As at 11.40am, units in ARAHT are up 1.05% to trade at 48 US cents, giving it a FY2022 P/B of 0.7x with a distribution yield of 9.7%.
Photo: Hyatt Corporation
