Attractive 14% yield despite margin pressure
Higher cost pressures to weigh on margins
3Q22 Operational Update Summary
- 3Q22 revenue of US$48.7m is higher than in 2Q22 but GOP comes in lower at US$17.3m, and the GOP margin declined to 35.6% from 38.9%
- 3Q22 NPI of US$11.9 and NPI margin of 24.4% are below estimates
- 3Q22 registered firm RevPAR of US$97, sustaining the momentum from 2Q22
- 82.0% of debt hedged on fixed interest rates, thereby mitigating the impact of rising interest rates
- Gearing declined slightly to 43.3% as at Sep 2022 from 43.5% as at Jun 2022
- Average cost of debt increased slightly to 3.7% as at Sep 2022 from 3.6% as at Jun 2022, with a weighted average debt expiry of 1.8 years
- No refinancing requirement for the remainder of FY22 and FY23
We revise our estimates downwards, as we see higher cost pressures weighing on margins and DPU going forward. With a shortage in staff, ARAHT has been turning to contract labour to support occupancy levels, which has contributed to higher expenses and lower margins. We expect this to continue in the medium term, as the unemployment rate remains low and the labour market remains tight.
We also raise FY22F/FY23F/FY24F borrowing costs to 3.9%/4.2%/4.5% to account for the rising interest rates for the company’s floating debt and raise the risk-free rate to 3.5%.
|Distributable income (US$m)||17.2||29.3||30.3|
|Distributable income (US$m)||19.3||32.9||35.7|
Source: DBS Bank estimates
However, despite the margin pressure, valuations are attractive at 0.5x price to net asset value with 14% FY23 yield and ARA’s US hotel portfolio remains the best poised amongst the SREITs to ride on the US travel demand uptrend. We continue to like hotels in this inflationary environment, as the daily repricing of room rates acts as a natural inflation hedge.
Maintain BUY with lower DCF-based TP of US$0.55.