Hospitality S-REITs with US exposures expected to post strong operating results in 1HFY2022: DBS

The analysts from DBS have given both ARAHT and ART "buy" calls with TPs of 70 US cents and $1.40 respectively.

With a summer surge in travel demand on the cards in the US, DBS Group Research analysts Geraldine Wong, Tabitha Foo and Derek Tan are “excited” about the prospects of a rebound in operating metrics in US hospitality properties.

“We see a variety of positive indicators starting from major US airlines raising guidance on higher-than-expected ticket prices and capacity yields, cruise spending now just 10% shy of full recovery, and strong forward booking trends on travel websites,” the analysts write in their June 14 report.

“These encouraging signs point towards the ability of hospitality S-REITs with US exposures [such as] ARA US Hospitality Trust (ARAHT) and Ascott Residence Trust (ART) to post strong operating metrics come 1HFY2022 results,” they add.

Among the hotel Singapore REITs (S-REITs), only ARAHT has 100% exposure to the US market while ART has 20% exposure to the US market.

In their report, the analysts see the rebound slated to begin from 2QFY2022 onwards in summer, which is the peak travel season.

As pricing power returns in the US, more hoteliers such as Marriott, Hyatt and Hilton are optimistic in their forward outlook statements. Most hoteliers are expecting to see a leap in their revenues per available room (RevPAR) in the 2QFY2022 and 3QFY2022 on the back of robust domestic travel demand for both the leisure and corporate travel segments.

“With pricing power back in the hoteliers’ hands, we also note that data company STR and Tourism Economics recently upgraded their recovery timeline forecast for US hotel RevPAR to surpass 2019 (or pre-Covid-19) levels by 2022, which is a positive read for ARAHT and ART,” write the analysts.

“We note that these revisions are inflation-adjusted, implying that the pent-up demand for travel will likely be sustained, despite high inflation rates in the USA,” they add.

On the back of a RevPAR-led recovery underway, the analysts are “confident” that ARAHT and ART will see a re-rating in their share prices.

“Trading at 0.7x P/NAV [for] ARAHT and 1.0x P/NAV [for] ART and offering FY2022 yields ranging from 6%-9%, we remain attracted to remain vested in the multi-year growth story that the hospitality sector offers,” say the analysts.

The analysts are keeping their “buy” call on ARAHT with a target price of 70 US cents (97.33 cents) on the back of conservative recovery estimates.

Bullish on both ARAHT’s top and bottom lines, the analysts are estimating a full RevPAR recovery only in 2024.

“With travel and hotel sector data pointing upwards in unison, we think that 2QFY2022 will register ARAHT’s strongest quarterly performance since the pandemic months, with higher highs y-o-y this year,” they write.

“ARAHT’s select-service operating format will also help alleviate cost pressures from heightened costs of labour and utilities, while riding on the RevPAR momentum pegged to its higher end hotel offering,” they add.

See DBS's full report on ARAHT here.

The analysts are also keeping their “buy” call on ART with a target price of $1.40.

“ART owns three US hotels within New York and will be a key beneficiary of the return of MICE events in the coming quarters,” the analysts write.

“RevPAR for their US hotels ended 1Q22 at US$76, or approximately 33% of 2019 levels, and we expect RevPAR to play a strong game of catch-up in the coming quarters for T’s three US hotels in New York. Management has also guided on stronger international bookings flowing through as city-wide events and leisure demand return,” they add.

As at 3.58pm, shares in ARAHT and ART are trading at 48 US cents and $1.14 respectively.

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