ARA US Hospitality Trust (ARA H-Trust) is a stapled group comprising ARA US Hospitality Property Trust (ARA H-REIT) and ARA US Hospitality Management Trust (ARA H-BT). ARA H-Trust invests in income-producing real estate assets used primarily for hospitality purposes located in the US. As at April 24, its portfolio comprises 37 select-service hotels with a total of 4,826 rooms across 19 states in the US.
1. Please describe ARA H-Trust’s recent financial performance.
ARA H-Trust delivered a sterling performance for FY2022 ended December 2022. Distribution per stapled security (DPS) for FY2022 was 3.054 US cents (4 Singapore cents), beating the street estimate.
We achieved higher revenue of US$169.0 million in FY2022, up 29.3% y-o-y. The gross operating profit (GOP) and net property income (NPI) rose to US$57.3 million and US$41.4 million for the same period, respectively, up by 41.6% and 66.4% compared to FY2021.
Distributable income for FY2022 increased significantly to US$17.5 million from US$2.0 million in FY2021 on the back of stronger operating performance. The 2H2022 DPS of 1.627 US cents was paid on March 30.
2. What were the considerations behind the recent acquisition of “Home2 Suites”?
How will the acquisition create more value for your portfolio? Home2 Suites is a strong performing asset that is well-located in a growing sub-market with a consistent and well supported demand base. It is a relatively new-build hotel which has rapidly achieved stabilisation and has outperformed its competitive set benchmarks. Most importantly, it is immediately accretive based on the FY2022 NPI yield.
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The acquisition underscores our focus and capability in executing our portfolio optimisation and rebalancing strategy. It is a core part of our strategy to redeploy capital into core assets to increase returns, profits and distributions for ARA H-Trust and its stapled security holders.
3. What are some key highlights and milestones achieved by ARA H-Trust in recent months?
We achieved a few high notes in FY2022 with the continued recovery from Covid-19, and remain optimistic that the recovery momentum will continue into FY2023. Having delivered strong financial and portfolio performance for FY2022, ARA H-Trust’s balance sheet was fortified with the increase in portfolio value of its 36 upscale select-service hotels to US$747.8 million, representing an increase of 9.4% y-o-y on a comparable basis. The portfolio aggregate leverage ratio stood at 39.4% as of Dec 31, 2022, below the regulatory limit of 50%.
During the year, we saw an opportune time to execute our portfolio optimisation and rebalancing strategy. Riding on the tailwinds of recovery in the US lodging sector and liquid investment market, we disposed five non-core Hyatt Place properties in the third quarter of 2022 and redeployed the bulk of the net proceeds in acquiring the Home2 Suites by Hilton Colorado Springs South, which is immediately accretive at the NPI yield of approximately 9.0% over its purchase price of US$29.0 million. This marks a significantly higher NPI yield than the five disposed hotels.
4. How has the Trust’s occupancy and room rates improved/ declined since the re-opening?
What is the outlook for the US travel industry? The operating and financial performance of ARA H-Trust has seen a positive y-o-y growth in NPI in every quarter of 2022. There is seasonality in the earnings stream, where second and third quarters are high seasons relative to the first and fourth quarters in the year.
The lodging sector, emerging from Covid-19, continues to be resilient in the current period of heightened volatility. We believe that the outlook for the US lodging market remains optimistic, outweighing economic uncertainty and geopolitical risks.
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The US hotel market revenue per available room (RevPAR) growth is projected to taper in 2023, but it is expected to remain positive y-o-y for the next three years. With US hotel RevPAR now firmly above pre-Covid 19 levels, the projected recovery of business and group travel represents further upside.
5. Tell us more about your portfolio optimisation and rebalancing strategy.
It is a key strategy that all reputable REIT/business trust managers employ as part of their ongoing asset management strategy, with the objective of driving more revenue and cash flow from all assets within the portfolio. For ARA H-Trust, it is a two-step approach.
First, adopt a bottom-up approach to identify assets that rank lowest in profitability, cash flow and yield metrics; are located in sub-markets with deteriorating demand and skilled labour availability; and require a disproportionately high amount of capital improvement needs relative to value.
Second, capital from disposing these assets is redeployed to acquire new accretive assets that ultimately enhance long-term yield for investors.
The managers execute capital improvement plans for assets with greater profitability and valuation growth potential, as well as strengthen the balance sheet by reducing existing bank borrowings.
6. What are the mid to longterm expansion plans for ARA H-Trust?
We actively evaluate potential acquisitions with the objective of adding value to the existing portfolio to enhance long-term returns to security holders. Our objective since listing has been to grow and scale up, although Covid-19 disrupted that in the last two years.
While we recognise that our share price continues to be impacted by the mixed economic signals and the progressive Fed rate hikes, ARA H-Trust’s focus remains on improving its performance post Covid-19 with portfolio optimisation and longer-term growth strategies in mind.
7. Who is ARA H-Trust’s sponsor?
The sponsor, ARA Real Estate Investors 23, is an indirect wholly-owned subsidiary of ARA Asset Management (ARA). ARA is now part of the ESR Group (ESR), which is listed on the mainboard of the Hong Kong stock exchange and is a constituent of the FTSE Global Equity Index Series (Large Cap), Hang Seng Composite Index and MSCI Hong Kong Index. ESR is APAC’s largest real asset manager and the third largest listed real estate investment manager globally, with a diverse range of real asset investment solutions and New Economy real estate development opportunities. With US$46 billion in total assets under management (AUM) in Asia Pacific, it is the largest sponsor and manager of REITs in the region.
Its fully integrated development and investment management platform extends across key Asia Pacific markets, including China, Japan, South Korea, Australia, Singapore, India, New Zealand and Southeast Asia, representing over 95% of GDP in Asia Pacific, including an expanding presence in Europe and the US.
8. While travels are resuming, strong macroeconomic headwinds remain. What is the management’s guidance for investors in 2023?
We believe that long-term fundamentals for the sector are positive despite macroeconomic headwinds that could affect lodging demand in the short term.
Amid the uncertain economic outlook and barring any unforeseen circumstances, we are cautiously optimistic that the operating metrics for ARA H-Trust will further strengthen in 2023 and 2024.
Improvements in portfolio occupancy and RevPAR will also stem from our ongoing portfolio optimisation efforts in redeploying capital into higher-yielding core assets as outlined above.
9. What are some ESG factors that are material to ARA H-Trust and how will that create long-term value for your stakeholders?
ARA H-Trust is committed towards achieving first-rate sustainable management of its hotels by contributing to the social and environmental well-being of its stakeholders, whilst focusing on its mission to deliver sustainable and stable returns to its stapled security holders.
In FY2022, we established an environmental risk management framework to identify, address and monitor climate-related risks, and subsequently conducted a qualitative climate risk assessment to determine the climate related risks and opportunities for the Trust. This framework follows the Monetary Authority of Singapore’s guidelines on environmental risk management and the Singapore Exchange’s phased approach on climate disclosures, and are generally aligned with the recommendations of the Task Force on Climate-related Financial Disclosures.
10. Why should investors take a closer look at ARA H-Trust?
We believe that ARA H-Trust offers a strong value proposition to investors. The share price is trading below the net asset value (NAV) per stapled security of US$0.80 as at Dec 31, 2022 and a forward yield of over 13% based on analyst forecast DPS for FY2023.
We are glad to have resumed regular distributions in FY2022. Established as an active business trust, the management structure underpinning ARA H-Trust allows for full benefit of recovery and upside in cash flows to stapled security holders post-Covid-19. ARA H-Trust is the first pure-play US upscale select-service hospitality trust listed in Asia, and offers an attractive, tax-efficient platform for non-US investors.
We believe that upscale select-service hotels are the fastest-growing segment in the US lodging industry. The growth in demand and pricing strength for the upscale segment, combined with the highly efficient cost model of select-service hotels, offer value and resilience over the long term than full-service hotels, and are more institutional in quality for investors than limited-service hotels.
Candace Li is a research analyst with the Singapore Exchange