As the grounded aviation sector takes to the skies once again, ARA US Hospitality Trust (A-HTrust) is “ready to fly” with its portfolio of 41 upscale hotels eager to welcome guests post-Covid-19, say DBS Group Research analysts Geraldine Wong and Derek Tan.
In a Jan 7 note, the analysts initiated coverage on the Singapore-listed stapled security, which comprises ARA US Hospitality Property Trust (ARA H-REIT) and ARA US Hospitality Management Trust (ARA H-BT). Wong and Tan are recommending investors to accumulate on the Trust with a "buy" rating and a target price of 69 US cents (91 cents).
“With the progressive rollout of Covid-19 vaccines in the US, we believe that the worst for the Trust is over and investors are not pricing in its ability to double its earnings over the next two years. We are attracted by AUHT’s potential to generate normalised yields of more than 15% from FY2023 as earnings recover,” they write.
The Trust is the first pure-play US upscale select-service hospitality Trust to be listed in Singapore and Asia. It was listed on the Singapore Stock Exchange on May 9, 2019.
While the US is still grappling with worsening Covid-19 outbreaks, Wong and Tan believe US hotels are entering this industry recession in a position of strength and a much more profitable position than past recessions. “According to CBRE Research, occupancy levels had reached another record high in 2019 and profit margins were 450 bps greater than the long-run average,” they note.
See: ARA US Hospitality Trust could raise equity to strengthen capital position
Hence, Wong and Tan believe the Trust is well-positioned in a segment with “strong growth potential”. “AUHT is positioned mainly in the upscale select-service hotels subsector which has proven to have more efficient operational metrics with better operating margins,” say the analysts, citing gross operating profit of 51.6% as compared to 39.3% for full-service branded hotels.
“This means AUHT has the ability to maintain profitability at lower room rates while peers are likely to remain in the red in the current nascent recovery period,” they add.
Location, location
Overall, AUHT’s portfolio now counts 41 hotels with 5,340 rooms, diversified across 22 US states.
In addition, the location of AUHT’s hotels are also a boon for the Trust.
Wong and Tan note that more than 50% of its rooms are located in the South and West regions in the US, which enjoy higher GDP growth, and 31.9% in the Northeast region – a highly liquid investment market with high barriers to entry.
“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,” they add.
“With over 80% of the Trust’s assets either in high-growth or net demand markets, it sets the stage for growth.”
Brand name
The brand names of the hotels in question, including Hyatt and Marriott, are also another bright spot for the Trust. “A key attribute of a Hyatt branded portfolio is the consistency in quality, image and experience that guests will get,” say Wong and Tan.
The analysts note that Hyatt is one of the fastest growing brands in the USA and the Hyatt House and Hyatt Place products are the fourth largest in their respective upscale select-service and upscale extended-stay segments. The brands are also 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.
Aside, 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-19. Members represent approximately 50% of the paid room nights in Marriott-branded hotels.
“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,” say the analysts. “We believe this gives the portfolio a competitive edge and positions AUHT to weather the Covid-19 crisis well.”
Sponsors and outlook
The Sponsor of AUHT is ARA Real Estate Investors 23 Pte. Ltd., an indirect wholly owned subsidiary of ARA. ARA is a premier global integrated real asset fund manager headquartered in Singapore. As at Jun 30, 2020, the gross assets under management by ARA Group and its associates is approximately $110 billion across 28 countries.
Looking ahead, Wong and Tan believe that the hospitality S-REITs are on the way to earnings normalcy in the coming two years. “As AUHT’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% (FY2021F) and 12.8% (FY2022F), higher than US hospitality REITs, we believe that investors are well compensated to take a position in AUHT.”
“We project a multi-year RevPAR [revenue per available room] growth trend and 4-year normalisation period in our projections, delivering FY2021F and FY2022F yields of 5.9% and 12.8% respectively. A swing towards pre-Covid-19 RevPARs in the medium term implies AUHT can offer dividend yields at close to approximately 15%, one of the highest among peers.”
As at 11.28am, units in ARA US Hospitality Trust are trading at 2.5 US cents higher, or 5.15% up, at 51 US cents.
