• ARA US Hospitality Trust (SGX:XZL)'s results came in below expectations. DPU of 3.13 US cents represents 67% of our FY19 (8-month forecast).
• Although the portfolio has again outperformed comp set (106.4% RevPAR index), it looks certain to face supply-headwinds that may impact RevPAR growth, at least temporarily.
• ARA US Hospitality Trust has also proposed acquiring three Marriot hotels for US$84.5m, which is expected to be yield accretive (boost pro forma DPU by 8.1%).
• Maintain BUY with lower target of S$1.16 (previously US$1.21).

Results

DPU of 3.13 US cents for the period (9 May – 30 Sep 19); below ARAUS’ forecast by 5.7%.

• ARA US HOSPITALITY TRUST (SGX:XZL)’s gross revenue and NPI for the period (9 May – 30 Sep 19) came in at US$75.7m and US$23.4m respectively, which were 5.5% and 13.9% below the company’s forecast.
• The lower top-line is primarily attributable to the new supply in various markets, which resulted in portfolio RevPAR coming in 5.1% below forecast at US$101.
• NPI was dragged lower by higher-than-expected insurance premiums under Aimbridge’s master insurance programme (based on claims history of other hotels managed by Aimbridge that were affected by natural disasters).

Results below our expectations.

• Results below our expectations, with DPU of 3.13 US cents for the period (9 May - 30 Jun19) representing 67% of our full-year (9 May-31 Dec 19) estimate. The second and third quarters are seasonally stronger in the calendar year.

Stock Impact

RevPAR Index of 106.4% reflects superior performance and attractiveness of the assets,

• as compared to their respective comp sets in the various sub-markets. The index is weighted by revenue contribution, and a reading exceeding ( > 100) indicates outperformance vs peers. By brands, Hyatt House and Hyatt Place outperformed RevPAR of comparable hotels by 15.9% and 2.5% respectively.
• Hyatt House (extended-stay brand) also outperformed, as a result of fewer direct natural competitor brands, and insulation from new supply (due to their larger square footage, which is less economical in layout).

New supply headwinds to impact RevPAR growth, at least temporarily.

• For 9M19, Upscale select-service experienced supply growth of 4.7% (vs 2% for US hotels) outpacing demand growth at 3.7% (vs 2% for US hotels).
• Management noted that developers continue to favour select-service hotels, because of their superior demand profile driven by customer preference. As a result of the temporary demand-supply imbalance, Upscale select-service RevPAR has declined 0.5% y-o-y.
• As the year progresses, STR industry forecasts (for overall US hotels) have also been revised downwards (from 1.9% RevPAR 2020F in Jan 19) to 1.1% RevPAR 2020F in Aug 19.
• Management believes the impact of new supply is temporary, and will wear off once introductory rates of new hotels are burnt off (as most new US hotels are funded with 65- 75% debt, and will require certain pricing to meet their debt-service).
• Management guided that the opening of a new select-service hotel (e.g. 150 rooms) will require absorption time of around 9-15months (vs 2-3 years for full-service hotel, as a result of the larger inventory).

Exacerbated by property-level manager turnover and exogenous events.

• Despite new supply coming on-stream, management is confident the effect is still shielded by the appeal of its Hyatt-branded portfolio. In some instances, management turnover could result in the property losing momentum. The portfolio was also indirectly affected by exogenous events (eg Hurricane Dorian), which resulted in less travel.

Remedies to temporary disruptions.

• In terms of pricing optimisation, management is taking a step further to use revenue managers who are adept, pre-dominantly focused on Hyatt-platform. This is done with the understanding that managers with inter-portfolios (ie across Marriot, Hilton, Hyatt) are less efficient, due to the different software platforms across hotel brands.
• Other initiatives include better sales deployment (targeting group sales), better cost management (productivity improvements and detailed expenses review), asset enhancement (eg internet upgrades, LED lighting installation).

Proposed acquisition of three premium Marriot-branded upscale, select-service, FH hotels (ie totalling 390 keys) for US$84.5m.

• One of them is AC by Marriot Raleigh North Hills (ACR/135 rooms) located in Raleigh/Durham market. Courtyard San Antonio at The Rim (CSA/124 rooms) and Residence Inn San Antonio at The Rim (RSA/131 rooms) are located adjacent to each other in San Antonio.

Acquisition is expected to be yield-accretive; boost pro-forma (9 May – 30 Sep 19 DPU) by 8.1%.

• The portfolio has 8.0% NPI yield. Portfolio assets also outperformed its comp set (RevPAR index between 120%-146%), with strong occupancies and GOP margins ( > 45%).
• The acquisition cost of US$88.8m (comprising US$84.5m purchase consideration, US$0.8m acquisition fee, US$3.5m professional and transaction fees) will be funded by debt and internal cash resources. We will factor in the acquisition on its completion.

New linkages with Marriot Chain (and Concord Hospitality).

• The acquisition marks ARA US Hospitality Trust’s first foray to diversify beyond Hyatt with another major hotel brand Marriot. The expanded brand affiliation with Marriot also brings access to its Marriot Bonvoy Loyalty program with 125m members (vs Hyatt’s World of Hyatt: 16m members).
• Marriot members account for about half of the paid room nights in Marriot branded hotels. The acquisition expands its affiliation with another experienced hotel management company, Concord Hospitality (which manages 102 hotels across North America); another potential source for future acquisition pipelines.

Earnings Revision / Risk

• We have trimmed 2019-21F DPU marginally by 5-6%, factoring in lower ADRs (ie as a result of increased supply).

Valuation / Recommendation

• Maintain BUY with a lower target price of US$1.16 (previously S$1.21).
• Our valuation is based on DDM (required return: 6.75% and terminal growth: 1.0%).

Share Price Catalyst

• Positive newsflow on the US economy, hotel room rates, and occupancy.
• Future accretive acquisitions which will augment portfolio.

Source: UOB Kay Hian Research - 7 Nov 2019