News Analysis: Proposed sale of four underperforming Hyatt Place hotels for US$32.5m, 3.2% premium to valuation
- Proposed sale of four underperforming Hyatt Place hotels for a consideration of US$32.5m, 3.2% premium to valuation
- Proceeds raised expected to be used to pare down debt, improving gearing levels to low 40% and providing more flexibility for ARAUS
- Likely to continue with active portfolio management, further divestments expected
- No significant impact to DPU
- Maintain BUY; unrevised TP of US$0.70
What’s new
- Proposed sale of four Hyatt Place hotels for a consideration of US$32.5m, satisfied wholly in cash
- 1) Hyatt Place Pittsburgh Cranberry 2) Hyatt Place Birmingham Inverness 3) Hyatt Place Cincinnati Northeast and 4) Hyatt Place Cleveland Independence
- Accounted for c.4.4% of total portfolio value
- Valuation at US$31.5m as at 31 December 2021
- Sale consideration 3.2% premium above market valuation
- Completion of proposed sale expected in 3Q22
- Divestment fee of c.US$162,500 (0.5% of sale consideration) to Managers
- FY21 pro forma DPS increased from 0.355 to 0.495 US cents (39.4% accretion), FY21 pro forma gearing ratio declined to 41.9% from 44.3% while FY21 pro forma NAV per unit remained unchanged at US$0.70
Our thoughts
ARA US Hospitality Trust announced the divestment of four Hyatt Place hotels for US$32.5m, representing 3.2% premium to valuation. We understand that these assets were underperforming and could potentially fall into a structural decline post COVID-19 given their locations in weak sub-markets with deteriorating economic conditions exacerbated by COVID-19. We estimate the exit yield to be c.3%, and c.5-6% on a stabilised basis, below the transaction levels in the US hospitality space. Further, we note encouragingly that ARAUS’s ability to sell their bottom quartile assets at above NAV is a good testament of their real value.
Proceeds raised is expected to be used to pare down existing debt to improve gearing levels to low 40%, giving ARAUS more breathing room and flexibility. Over the next 2 years, the gearing ratio should also naturally come down on the back of a recovery in the US hospitality market and higher cashflows. Given our estimated 3% exit yield, we do not anticipate a material drop in income when used to repay debt which is at similar levels.
With the divestment of these four Hyatt Place hotels shortly after the divestment of Hyatt Place Chicago Itasca in March, we think that the Manager will continue to engage in active portfolio management and further divestments of underperforming assets can be expected. The Manager has also shared that they are constantly looking for acquisition opportunities but will remain prudent, hence a strategic addition to the portfolio is possible but unlikely to be big in size. Given that ARAUS is targeting yields of 7-8%, unitholders will still benefit even if cost of funds is at 3-4%.
Overall, we believe that this portfolio optimisation strategy is a positive for ARAUS to build a more resilient portfolio. Focus remains on the sunbelt, coastal markets where population and economic growth prospects look bright and we look forward to higher RevPAR and NPI numbers this year.
Maintain BUY, with an unrevised target price of US$0.70.