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Wednesday, July 01, 2020

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.

2 comments:

  1. Hi there. Good work on the analysis. Can i check how you compute the fundamental intrinsic value?

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    1. Thanks for compliment. I derived my fundamental intrinsic value from my analysis spreadsheet, which I've shared in Quantifying REITs Fundamental and REITs Valuation posts. You could refer to Categories -> REIT Investing to look for these posts. Hopeful it helps

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