Proposed sale of Hyatt Place Chicago Itasca for US$7.75m
What’s new
- Proposed sale of Hyatt Place Chicago Itasca for a consideration of US$7.75m, satisfied wholly in cash
- Valuation at US$7.8m as at 31 December 2021
- Divestment fee of c.US$39,000 (0.5% of sale consideration) to Managers
- Part of strategy to optimise portfolio
- One of the smallest assets in portfolio, accounting for 1.1% of total portfolio value as at 31 December 2021
- Proposed divestment price below asset’s IPO valuation at US$9.8m
- Asset has not attained NPI breakeven in FY21 as one of the recovery laggards in the portfolio
- One of the oldest assets in portfolio, thus will require significant capex
- Located in a market with declining economic conditions exacerbated by COVID-19 pandemic, anticipated to have a longer road to recovery
- FY21 pro forma DPS increased from 0.355 to 0.371 US cents while FY21 pro forma NAV per unit remained unchanged at US$0.70
Our thoughts
We think that the divestment of Hyatt Place Chicago Itasca is a positive for the portfolio given its weak recovery and muted outlook. The property was not NPI positive since the pandemic and up to FY21, while valuations for the property declined y-o-y from FY20 to FY21 even though majority of the hotels’ valuations improved.
This is potentially the start of the portfolio rejuvenation plan for ARAUS, with other non-core or underperforming assets likely to be disposed in the future. We identified two properties with similar metrics to Hyatt Place Chicago Itasca in the Mid-West region, a structurally weaker hospitality market compared to the Southern parts of US:
Potential divestment targets
| Property | Valuation (US$m) | Year commenced operations | ||
| As at 31 Dec 2019 | As at 31 Dec 2020 | As at 31 Dec 2021 | ||
| Hyatt Place Chicago Itasca | 9.8 | 8.0 | 7.8 | 1996 |
| Hyatt Place Cleveland Independence | 10.1 | 8.2 | 7.3 | 1996 |
| Hyatt Place Cincinnati Northeast | 10.1 | 8.7 | 8.3 | 1999 |
Proceeds raised from asset disposals could be used to 1) acquire accretive, higher yield properties or 2) pare down existing debt to improve gearing levels. We think that acquisitions of Marriott or Hilton branded hotels could be on the cards as the three Marriott branded hotels have outperformed the Hyatt House and Hyatt Place hotels. Looking forward, ARAUS will target assets with 7-8% cap rate on stabilised basis. We estimate FY22F gearing to decline from the 42.2% to 41.6% should the full quantum of divestment proceeds be used to pare down debt, and a drastic improvement from ARAUS’s 44.3% leverage ratio as at end FY21.
ARAUS gearing sensitivity with divestment proceeds used to reduce debt
Maintain BUY, with an unrevised target price of US$0.70.