DBS Group Research is keeping its "buy" call on ARA US Hospitality Trust (ARAHT) with a higher target price of 79 US cents from 69 US cents previously.
In a July 9 report, lead analyst Geraldine Wong says, "We believe that ARAHT is on the verge of an operational breakout. Recent sector-wide data shows a front-end loaded recovery unfolding as summer break works its magic this holiday season. ARAHT’s US hotel portfolio is the most favourably poised amongst the S-REITs to ride on this uptrend, with a turnaround in profits likely to be unveiled in the upcoming quarters."
Luckily for US, domestic demand has been historically made up of about 85% of total travel and tourism spending. And now with US internal border restrictions largely being called off, an increasing vaccine coverage and strong pent-up demand, Wong sees a positive travel sentiment taking shape.
See also: DBS maintains Sasseur REIT at 'buy' on Chinese luxury market boom and increased tenant sales
According to data from travel industry consultant STR, weekly US hotel tracker shows occupancy is reverting to prepandemic high of 70%, with daily rates back to normalised levels. With pricing power now back in the hands of hoteliers, some 95% of hotels are at least at breakeven, with three-quarters turning in profits.
For ARAHT, Wong believes that it is poised to capture profits as its portfolio of select-service hotels is 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%).
On the other hand, as the trust's mid-year revaluation is coming up, the analyst believes that investors' worries on the trust's high gearing will dissapate. "We understand that management will be looking at a mid-year review in valuations, following a 13.5% portfolio devaluation in FY2020, which we think will come in positive given the broader hotel sector recovery. This will substantially dissipate fears of gearing (currently 48%) breaking the 50% MAS bracket and the need for equity fund-raising and reinstate ARAHT’s financial fluidity," says Wong.
For more stories about where the money flows, click here for our Capital section
"With substantial recent data optimistic for ARAHT, we see that there is clearer income visibility of recovery for ARAHT," says Wong.
Units in ARAHT closed 3.6% higher on July 9 at 58 US cents, giving it a FY2021 price-to-book ratio of 0.9 times with a distribution yield of 4.5%.
Photo: Bloomberg
