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SI Research: ARA US Hospitality Trust – A New Player To The Game

ARA US Hospitality Trust (ARAHT) made its debut on the Singapore Exchange (SGX) on 9 May 2019 at an initial public offering price of US$0.88 a unit. The offering was approximately 1.1 times over-subscribed with valid applications for 54.7 million units vying for 51.1 million units available for public offer. Following the introduction of this new hospitality trust, income investors now have another option to consider when looking for high-yielding counters to add into their portfolio. This issue, we explore what are the investment merits that ARAHT has got to offer.

Exposure To Hospitality Sector In The US

With an initial portfolio of 38 upscale select-service hotels valued at US$719.5 million located across 21 states in the United States (US), ARAHT offers investors with a unique opportunity to invest in the hospitality sector across key growth regions of the US.

According to data compiled by STR, the US is the largest lodging market in the world consisting 5.3 million hotel rooms as at December 2018 which constituted around 30 percent of global hotel rooms inventory.

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Historically, the US lodging demand growth is highly correlated with the US real Gross Domestic Product (GDP) growth, as personal income growth raises discretionary spending for leisure travel while increased business activities also drive corporate and group travel. Since 2010, the US economy has undergone a strong expansion with real GDP growing at a compounded annual growth rate (CAGR) of 2.2 percent till 2017. This was driven by the reduction in both personal and corporate tax rate which in turn stimulate consumer spending and corporate profits.

Meanwhile, supply growth is expected to be subdued going forward due to the rising construction costs as a result of increasing costs of raw materials and labour costs. According to data from CBRE, supply growth in the US lodging market grew at a CAGR of 1.8 percent from 1988 to 2018 and it estimated that net new supply in the near future will be consistent with the long run CAGR. As can be seen, demand growth clearly outpaced supply which bodes well for the US hospitality market outlook.

Underpinned by consistent demand growth, the US lodging market has been posting positive Revenue Per Available Room (RevPAR) growth in the last nine consecutive years. Going forward, annual RevPAR is projected to grow at a CAGR of 1.8 percent in the next few years considering that market demand and supply dynamics remain favourable.

ARA US Hospitality Trust_Prospectus
ARA US Hospitality Trust_Prospectus

Source: ARA US Hospitality Trust’s Prospectus

About The Sponsor

The sponsor, ARA Real Estate Investors 23, is an indirect wholly-owned subsidiary of ARA Asset Management, a premier global integrated real assets fund manager which managed close to $80.1 billion worth of assets across 100 cities in 23 countries as at 31 December 2018. Avid REITs investors would not be unfamiliar with ARA Group, as it also manages Suntec REIT and Cache Logistics Trust listed in Singapore as well as Fortune REIT, Hui Xian REIT and Prosperity REIT listed in Hong Kong. Given ARA Group’s extensive network and expertise in the REIT sector, investors may be well assured of the potential for future growth that ARAHT promises.

In addition, all the hotels in ARAHT’s portfolio are branded under the Hyatt Place or Hyatt House brand and operate under franchise agreements with Hyatt. Notably, Hyatt is one of the largest and well-established global hotel brands in the world with 19 brands covering more than 850 properties in 60 countries as at December 2018.

On top of that, ARAHT has appointed Aimbridge Hospitality (Aimbridge) – the largest independent hotel management company in the US – as the operator to fully manage its hotels. Aimbridge has a history of operating consistency and an unmatched success in operating hotels and resorts under globally recognized brands. It currently manages over 800 hotels and more than 100,000 rooms across the US, Canada and the Caribbean.

Portfolio Performances

Out of all the 38 hotels in ARAHT’s portfolio, 36 of them are freehold properties while the two leasehold properties – Hyatt Place Secaucus Meadowlands and Hyatt Place Lakeland Center – each has remaining leasehold tenure of more than 50 years assuming that the PropCo exercises its right to renew the initial lease. This no doubt provides the much-desired stability and certainty to the trust’s rental income streams.

ARAHT has enjoyed stable occupancy and RevPAR in the last three years, with occupancy standing at 77 percent which is significantly higher than the national average of 66 percent while RevPAR at US$94 also stood high in comparison to the national average of US$86. Total revenue and net property income (NPI) rose 2.2 percent and 1.8 percent respectively in FY17 from a year ago following the renovations and enhancement works at several of the Hyatt House properties. However due to the loss in occupancy attributable to the disruptive marketing and sales process of the portfolio by the previous owner, revenue and NPI declined 2.6 percent and 7.6 percent in FY18.

ARA US Hospitality Trust_Prospectus2
ARA US Hospitality Trust_Prospectus2

Source: ARA US Hospitality Trust’s Prospectus

Valuation

ARAHT has announced its distribution policy to distribute a hundred percent of its distributable income for forecast period 2019 and projection year 2020, followed by 90 percent of its distributable income in subsequent years. It has also projected an annualised distribution per unit of US$0.07 for the year 2019 in its prospectus. Based on ARAHT’s last market price of US$0.865 as at 17 May 2019, this translated to a very attractive yield of 8.1 percent as compared to the other hospitality trusts listed on the SGX having yields of around five to six percent. Assuming that ARAHT’s management is correct in their projections, we feel that the trust’s current price would not be an expensive price to pay.

ARA US Hospitality Trust_valuations
ARA US Hospitality Trust_valuations

Source: Singapore Exchange, updated 17 May 2019