ARA Hospitality Trust – Riding on summer optimism

Excerpts from DBS Group Research report

ARA US Hospitality Trust (SGX: XZL)

• Summer travel season brings much promise
• ARA US Hospitality Trust (ARAHT) well exposed in highly vaccinated states, with a 42% exposure to leisure and airport regions expected to capture pent up demand.
• Expecting profitability in the upcoming quarters; midyear revaluation may quell woes on gearing

Maintain BUY with TP of US$0.70

Summer holiday magic

Recent sector-wide data shows a front-ended loaded recovery unfolding as summer break works its magic this holiday season. ARAHT’s US hotel portfolio is best poised amongst the S-REITs to ride on this uptrend, with a turnaround in profits likely to be unveiled in the upcoming quarters. This is on the back of an uplift in RevPAR which we think will drive a share price re-rating.

ARA US Hospitality Trust set to ride on the summer optimism alongside sector-wide operational breakeven

STR’s weekly US hotel tracker shows occupancy at a pandemic-level high of 70%, with daily rates back to normalised levels. With pricing power now back in the hands of hoteliers, c.95% of hotels are at least at breakeven, with three-quarters turning in profits. ARAHT’s portfolio of select-service hotels is well 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%).

Lean select service model should ensue profitability

Select service hotels have proven to be more efficient and profitable (GOP of 51.6% as compared to 39.3% for full-service branded hotels). ARAHT’s select service offering has proven to be more financially lean, and a potential revenue upside this summer break will likely flow through to net income.

Recommendation/Valuation

Our TP remains at US$0.70 as we roll forward valuations into FY23, and we recalibrate the risk-free rate for ARAHT to 3.0%, in line with the S-REIT industry re-rating. WACC of 7.62% and terminal growth rate of 2.25% remain unchanged. We are more optimistic on ARAHT’s recovery trajectory, and project a multi-year RevPAR growth trend to drive DPU and a four-year normalisation period. ARA Hospitality Trust share price chart You can find the full report here and the company website here