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DBS cuts ARAHT target price despite 80% higher net property income in 3QFY2022

Jovi Ho
·2-min read

Despite margin pressure, DBS Group Research forecasts an “attractive” 14% yield in FY2023 from ARA US Hospitality Trust (ARAHT).

Despite margin pressure, DBS Group Research forecasts an “attractive” 14% yield in FY2023 from ARA US Hospitality Trust (ARAHT).

In a Nov 8 note, DBS Group Research analysts Tabitha Foo, Derek Tan and Geraldine Wong are maintaining “buy” on ARAHT with a lower target price of 55 US cents (77 cents) from 70 US cents previously. Despite the trimmed forecast, the new target price represents 55% upside against its traded price of 35.5 US cents on Nov 4.

“We revise our estimates downwards, as we see higher cost pressures weighing on margins and distribution per unit (DPU) going forward. With a shortage in staff, ARAHT has been turning to contract labour to support occupancy levels, which has contributed to higher expenses and lower margins. We expect this to continue in the medium term, as the unemployment rate remains low and the labour market remains tight,” say DBS analysts.

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ARAHT is a Singapore-listed stapled security comprising ARA US Hospitality Property Trust (ARA H-REIT) and ARA US Hospitality Management Trust (ARA H-BT). The trust is the first pure-play US upscale select service hospitality trust to be listed in Singapore and Asia.

ARAHT announced 38% higher y-o-y gross revenue to US$130.0 million for 3QFY2022 ended September. It also reported net property income of US$33.0 million, 80% higher y-o-y.

ARAHT’s US hotel portfolio is “best poised” among the S-REITs to ride on the US travel demand uptrend, write Foo, Tan and Wong, propelling an uplift in revenue per available room (RevPAR), which they think will drive a share price re-rating.

“We continue to like hotels in this inflationary environment, as the daily repricing of room rates acts as a natural inflation hedge. Higher cost pressures to weigh on margins. Labour costs have increased significantly in the US due to a tight job market,” note the DBS analysts

While ARAHT’s select-service operating format helps alleviate some wage pressures, it is not spared from the heightened costs of labour, which will negatively impact margins going forward, add the analysts.

ARAHT also faces some slight impact from rising interest rates. “With no refinancing requirements for the remainder of FY2022 and FY2023 and 82.0% of debt hedged to fixed rates mostly till FY2024F, we will likely see a marginal increase in the cost of debt in the next year or two.”

DBS thus raises ARAHT’s FY2022/FY2023/FY2024 borrowing costs to 3.9%/4.2%/4.5% respectively to account for the rising interest rates for the company’s remaining floating debt.

As at 1.09pm, units in ARAHT are trading flat at 37 US cents.

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