Key Arguments:

  • Maintain BUY with higher TP of US$0.79. We believe that ARA US Hospitality Trust (ARAHT) is on the verge of an operational breakout. 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 the most favourably poised amongst the S-REITs to ride on this uptrend, with a turnaround in profits likely to be unveiled in the upcoming quarters. Our TP is raised as we roll forward valuations. 
  • ARAHT’s portfolio is positioned to capture the recovery. STR’s weekly US hotel tracker shows occupancy is reverting to the pre-pandemic 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 a 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%). 
  • Mid-year revaluation may quell gearing fears. We understand that management will be looking at a mid-year review in valuations, following a 13.5% portfolio devaluation in FY20, which we think will come in positive given the broader hotel sector recovery. This will substantially dissipate fears of gearing (currently 48%) breaking the 50% MAS bracket and the need for equity fund-raising and reinstate ARAHT’s financial fluidity.

Valuation:
Our TP of US$0.79 reflects a normalised risk-free rate of 2.0%, SG market return of 9.4% and a beta of 1.1x (similar to SGlisted peers with overseas exposure but slight premium to pure SG-focused hospitality REITs). Our 7.52% WACC reflects 10.1% cost of equity and a 3.60% after-tax cost of debt. Based on 2.25% terminal growth rate, we derived a target price of US$0.79, implying FY21F and FY22 yields of 4.3% and 9.9% respectively.

Where We Differ:
We are more optimistic on ARAHT’s recovery trajectory and we project a multi-year RevPAR growth trend to drive DPU and a four-year normalisation period.

Key Risks: 
Resurgence of COVID-19 pandemic from the current Delta virus strain, which would propel a return of border and travel restrictions.