REIT watch: ARA US Hospitality Trust could raise equity to strengthen capital position

Both Sasseur REIT and ARA US Hospitality Trust could experience revaluation losses this year if their total rental revenues continue to fall. However, the negative impact will affect ARA US Hospitality Trust a lot more.

Sasseur REIT’s rental income comprises a fixed rent from its sponsor and a variable rent pegged to turnover rent. In 1QFY2020 ended March, the fixed rent portion rose 3.4% y-o-y to RMB102.4 million ($20.1 million) but variable rent fell more than 50% to RM24.8 million. This caused total rental revenue to fall by 18.2% to $25.3 million from a year ago.

However, Sasseur REIT has a relatively low gearing at 28.5%, based on the value of its properties in its FY2019 financials. That is because the discount rates it used for valuation ranged from 10% to 12%, a modest level for secondand third-tier cities in China. Therefore, if valuations were to decline, Sasseur REIT still has a lot of buffer as the gearing ceiling is 50%, should discount rates rise to more reasonable levels commensurate with third-tier cities.

On the other hand, ARA US Hospitality Trust’s gearing in 1QFY2020 ended March was 41% based on valuations for FY2019. In 1QFY2020, gross revenue fell 24% to US$31.7 million ($44.1 million) from a year ago while average occupancy fell to 54.8% due to the Covid-19 pandemic and demonstrations in the US. Therefore, a decline in the value of its properties by around 10% could cause gearing to rise towards the ceiling.

In response to questions from investors during ARA US Hospitality Trust’s AGM, its manager raised the likelihood of an equity raising to boost the trust’s coffers. If there is a need to strengthen ARA US Hospitality Trust’s capital position through an equity fund raising, the manager said “it will make timely announcements to keep stapled securityholders updated and seek stapled securityholders’ approval as required”.