ARA US Hospitality Trust

Price target:

DBS Group Research ‘buy’ 55 US cents

‘Best poised’ to ride US travel demand

DBS Group Research analysts Tabitha Foo, Geraldine Wong and Derek Tan are keeping their “buy” call on ARA US Hospitality Trust with an unchanged target price of 55 US cents (74.17 cents) as they see the trust having a “break out” year ahead.

“With the pent-up travel demand likely to sustain into 2023, ARA Hospitality Trust is well positioned to capture the recovery with its pricing power, leaner operating model, and positive operating leverage,” the analysts write. They also see the trust, a portfolio comprising 36 Hyatt and Marriott-branded hotels across the US, as being the “best poised” among S-REITs to ride the uptrend in the country’s travel demand.

On Feb 23, the trust reported a distribution per share (DPS) of 1.627 US cents for the 2HFY2022 ended Dec 31, 2022, 4.6 times higher y-o-y. The trust’s FY2022 DPS of 3.054 US cents aligned with the analysts’ expectations. ARA US Hospitality Trust’s FY2022 net property income (NPI), which grew by 66.4% y-o-y to US$41.4 million, also exceeded the analysts’ expectations.

“We believe the market severely underestimates consumers’ desire to travel and ARA Hospitality Trust’s recovery potential. Despite recessionary fears, we also believe that the worst is truly over and that ARA Hospitality Trust will continue to deliver robust operating metrics, with corporate travel the next swing factor, to catalyse a share price re-rating,” the analysts add. They have cut their DPS estimates for FY2023 by 10% to 4.59 US cents due to lower margins and higher capital expenditure (capex) reserves.

Further to their report, the analysts like the trust’s portfolio optimisation strategy, seeing it underpins long-term growth. “ARA Hospitality Trust actively manages its portfolio by divesting underperforming assets and redeploying capital into acquisitions with strong underlying market fundamentals. Its maiden acquisition of three Marriott-branded hotels has exceeded expectations in terms of recovery and sets the stage for future acquisition targets,” the analysts write. “We see this as a testament to the manager’s asset management strategy and is key to building a more diversified and resilient portfolio primed for long-term growth.”

At its current unit price levels, ARA Hospitality Trust is trading at an “attractive” 0.5x P/NAV against dividend yields of 11.9% and 13.8% for FY2023 and FY2024, respectively. Key risks against their positive outlook include a lower-than-expected surge in travel demand in the future and higher cost pressures. —