ARA US Hospitality Trust Analysis @ 1 July 2020

Basic Profile & Key Statistics

ARA US Hospitality Trust (ARAHT) is a Singapore-listed stapled security which comprises ARA US Hospitality Property Trust (ARA H-REIT) and ARA US Hospitality Management Trust (ARA H-BT). It was listed on SGX on 9 May 2019, just merely a year ago. Due to current COVID situation, hospitality sector take a great hit. Its share price has dropped from high of US$ 0.895 to current price, which its market cap is dropped to US$ 0.23 billions.

Lease Profile

At this moment, there is no standardized way for SREITs to present REVPAU value, some would include master lease and some don't. I've tried using the general formula of Revenue/Total Rooms, but not able to get close to value presented most of the time. WALE for master lease of 4.75 years is short as compared to other hospitality SREITS. Majority of it's properties is freehold.

Debt Profile

Gearing level of 41% is no.3 highest in SREITs. Cost of debt is high as compared to other SREITs with US properties. Fixed rate debt is high at 83%. Unsecured debt and Interest cover are at the low side. WADE is long at 3.8 years. Around 72% debt will be matured in 2024, which posts a high concentrated debt maturity risk. 

Diversification Profile

Its 41 properties are spread out in 22 states of US, which is geographical diversified. Its top revenue property - Hyatt House Boston Burlington only contribute  4.5% of gross revenue. However, all of its properties are leased to only 1 tenant under master lease, which is ARA USH Chicago Tenant, LLC, a wholly-owned subsidiary of ARA H-BT. This arrangement is like ARAHT (Stapled) having management contract with ARA H-BT. 

Key Financial Metrics

Property yield is in SREITs median level. Management fees over distribution is low at 10.5% which translate into US$ 9.50 dividends for every dollar paid. Distribution on capital is high at 5%. Distribution margin of 21.2% is the lowest among SREITs (exclude Eagle Hospitality Trust), management should really look into its expenses and trim it.

DPU & NAV Trend

The DPU for 2Q 2019 is based on annualized value quarterly. DPU reported was 1.36 cents for 2 months, annualized it to quarter will get 2.04 cents. As ARAHT only listed for a year, trend is less useful. We can expect the downtrend continue due to COVID situation.

Fundamental Valuation

Favorable	Less Favorable
Majority Freehold Properties	Gearing
WADE	Cost of Debt
Geographical Diversification	Unsecured Debt
Property Diversification	Interest Cover
Management Fee	Tenant Diversification
Distribution on Capital	Concentrated Debt Maturity
	Distribution Margin

I believe we have yet to see the full impact of COVID on its fundamentals.

Relative Valuation

i) Average Dividend Yield

Dividend of 16.3% is based on annualized DPU for past 1 year. Apply annualized DPU of 6.52 cents will get US$ 0.87, which is quite close to 52 weeks high.

ii) Average Price/NAV 

Average value is at 0.98, apply latest NAV of US$0.80 will get S$ 0.785

Author's Opinion

Hospitality Trust is a different species, they can choose to lease out properties under master lease, or have management contract with operators. Since hospitality trusts are listed as stapled in SREITs which consists of REIT and Business Trust entities. This means that Business Trust entity can take over as master lessee to REIT entity, which is currently practiced by ARAHT. 

In current COVID situation, despite the recent acquisition of 3 Marriott-branded hotels, it would still be a very challenging task for ARAHT to perform. For valuation, we get:

i) Fundamental Intrinsic Value = (Removed)

ii) Relative Valuation - Dividend Yield = US$ 0.87

iii) Relative Valuation - Price/NAV = US$ 0.785

Relative valuation is less meaningful for hospitality trusts at this moment. It is currently undervalued in a fundamental point of view. However, we have yet to see the full impact of COVID on hospitality trust. 

*Disclaimer: Materials in this blog are based on my research and opinion which I don't guarantee the accuracy, completeness, and reliability. It should not be taken as financial advice or statement of fact. I shall not be held liable for errors, omissions as well as loss or damage as a result of the use of the material in this blog. Please always do your own due diligence before any decision is made.