ARA US Hospitality Trust is a “buy” as recovery is within reach, with the potential to double its earnings over the next two years, says DBS Group Research analysts Geraldine Wong and Derek Tan. 

The analysts are maintaining their recommendation with a target price of 69 US cents, which represents a 28% upside. 

“With the rollout of Covid-19 vaccines in the US, we believe that the worst for the Trust is over but investors are not pricing in its ability to double its earnings over the next two years. We project a multi-year revenue per available room (RevPAR) growth trend and 4-year normalisation period, delivering FY2021F and FY2022F yields of 5.9% and 12.8% respectively,” note the analysts. 

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

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“A swing towards pre-Covid-19 RevPARs in the medium term implies AUHT can offer dividend yields at close to approximately 15%, one of the highest among peers,” note Wong and Tan.

AUHT is positioned mainly in the upscale select-service hotels subsector, which has proven to have more efficient operational metrics with better operating margins, notes DBS Group Research. The segment’s gross operating profit of 51.6% easily trumps 39.3% for full-service branded hotels.

“This means AUHT has the ability to maintain profitability at lower room rates while peers are likely to remain in the red in the current nascent recovery period,” they add. 

See: ARA H-Trust reports net property loss of US$2 mil for 1H2020 due to pandemic

AUHT’s portfolio fully resumed hotel operations in July 2020. Proactive measures, such as having a leaner staffing model and scaling down service offerings, have helped to minimise expenses and optimise profits in a low-revenue environment. AUHT has had a positive gross operating profit margin since June 2020 and a 16.2% margin for FY2020, outperforming the US hotel industry.

The focus on AUHT’s Hyatt and Marriott brand hotels implies consistent brand quality, note the analysts. “We believe that the psychological impact on consumer travel behaviour as a result of Covid-19 will be long-lasting. Cleanliness ratings are likely to become a new key standard in the lodging market in a post Covid-19 world, which guests could more likely associate with trusted brands like Hyatt and Marriott.”

See also: 'Ready to fly' once travel resumes: DBS on ARA US Hospitality Trust

That said, portfolio devaluation is a concern, say analysts.

“On a like-for-like basis, AUHT’s portfolio valuation retreated 13.5% y-o-y. Gearing for FY2020 ended at 48.2%, which is the highest among Singapore-listed peers in the hospitality sector and almost reaching the 50% limit set by the Monetary Authority of Singapore.”

Funding restrictions may be imposed, should the limit breach the 50% mark, note Wong and Tan. “As such, we think that AUHT will be handicapped in terms of acquisitions or additional debt-raising this year. A rebound in valuation will be essential to ease financial fluidity for the REIT come end-2021 and will be much dependent on recovery prospects along the way.”

“With that said, the US has historically 90% domestic demand within the travel industry, which should see a strong V-shaped recovery when travel returns.”

As at 3.38pm, units in AUHT are trading at 1.5 US cents lower, or 2.70% down, at 54 US cents.