• ARA US Hospitality Trust's results came below expectations, with NIL distributions in 1H20.
• Despite signs of a performance trough and a fully-reopened portfolio, ARA US Hospitality Trust’s recovery lacks visibility due to a shorter booking window, flattening of US weekly RevPAR recovery in Jul 20, and still absent corporate transient demand.
• Nonetheless, some reprieve may come with supply rationalisation (ie -1.1% in 2021).
• Downgrade to HOLD with a lower US$0.34 target price (previously US$0.69).
• Entry price: US$0.31.

ARA US Hospitality Trust's 1H20 Results

NIL distributions for 1H20 DPU.

• In 1H20, ARA US Hospitality Trust (SGX:XZL)’s gross revenue was US$39.3m (down 58% y-o-y) while NPI registered a loss of US$2.0m, due to the COVID-19 pandemic which resulted in occupancy declines and hotel closures. Both 1H20 portfolio occupancy of 43.2% (1H19: 75.6%) and US$111 ADR (15% lower y-o-y) came in below forecasts.
• After accounting for fixed costs, ARA US Hospitality Trust reported a US$2.0m NPI loss.
• Results came in below expectations.
• After upward adjustments for some non-cash expenses (eg US$12.9m depreciation), ARA US Hospitality Trust still reported NIL distributions.

1H20 RevPAR of US$48 was upended by pandemic impact in 2Q20

• ARA US Hospitality Trust's 1H20 RevPAR of US$48 was upended by pandemic impact in 2Q20, with both occupancy and RevPAR declining to 24.6% (-30.2ppt q-o-q) and US$24 (-62% q-o-q) respectively in 2Q20.
• Management noted their newly acquired Marriot portfolio (S$71 RevPAR) has outperformed the US upscale hotel segment consistently in 1H20, and it is looking to grow portfolio exposure to the sunbelt states in Southern US to ride on its higher economic and demographic growth.

Recovery Is Still Lacking Visibility, Despite Signs of a Performance Trough and Fully Re-opened Portfolio

• Management has gradually re-opened all 30 temporarily-closed hotels, beginning from April (12), May (6), Jun (10), and Jul 20 (2), after assessing that local demand levels and capture-ratios justifies the additional costs to stay open, as well as rising leisure demand and states’ easing of lockdown.
• ARA US Hospitality Trust's portfolio statistics (eg RevPAR, occupancy) have seen a slight uptick trend after significant declines from Mar 20. Although performance dipped slightly in the weeks of 26 April, 17 May, 14 June, and 28 Jun 20, these were due to cluster hotel reopening which required additional time to ramp-up. Extended-stay hotels (eg Hyatt House and Residence Inn) also showed more resilience amid the pandemic with a sustained albeit slight premium in occupancy and RevPAR vs other non-extended stay properties.

A Flattening of US RevPAR Recovery

• Management pointed to STR statistics showing a monthly RevPAR recovery going into Apr/May/Jun 20 (-79.9%/-71%/-60.6% y-o-y) with less severe declines; however, there appears to be a flattening of the recovery in Jul 20 based on weekly statistics (-44.8%/-54.6%/-56%/-54.8% y-o-y). Management attributes the flattening to a second wave of COVID-19 cases seen in mid-Jun 20.
• Corporate transient demand (forming the second layer of demand after leisure transient) also has not decisively returned. Management attributed their lack of demand visibility to a shortened booking window. Anecdotally, they mentioned that a 2-3 week window has been cut to 2 days, as current demand is heavily gravitated to leisure travellers with limited accommodation choices.

Gearing Stabilised at 42.5% (+1.5ppt Q-o-q), Amid Some Risks of Equity Fund-raising Needs

• Management estimates that property valuations need to decline by at least 15% before breaching MAS’s 50% leverage, while noting some uncertainty over the appraisal process. They noted the absence of transactions (ie only six deals larger than US$10m for US hotels in 2Q20) as market comps to gauge valuations. Some on-going sales data may also not be appropriately used as market comps, due to their knocked-off valuations from distressed sellers at a time when most US lending markets have shut out hoteliers.
• On a brighter note, management noted a 12-month loan covenant waiver (from Apr 20 to Mar 21) after positive conversations with some Singapore-based relationship banks. In contrast, some US-peers who are put on CMBS debt have no relief as these are being held by bond-holders.

Outlook: US Hotel Recovery Hinges on COVID-19 Subsiding

• Outlook: US hotel recovery hinges on COVID-19 subsiding, although it may see some reprieve from a more rationalised supply (CBRE: -1.1% in 2021F) as some temporary closures become permanent with conversion to condos/& apartments.
• Management noted US hotel RevPAR grew 2.2% and 1.7% y-o-y in Jan and Feb 20, but this has since been upended by the COVID-19 outbreak. A recovery to pre-recession RevPAR levels may only come by mid-23, according to CBRE projections.

ARA US Hospitality Trust - Valuation & Recommendation

• We reduce our existing 2020/21/22F DPU by 100%/55%/46%, factoring in a steeper RevPAR decline of -61% in 2020 (vs -49% previously), followed by a more gradual recovery in 2021/22.
• Downgrade ARA US Hospitality Trust to HOLD with a lower target price of US$0.34 (previously S$0.69). Our valuation is based on DDM (required return: 9.5% and terminal growth: 1.0%).
• Share price catalyst: Positive newsflow on the US economy, hotel room rates, and occupancy.

Source: UOB Kay Hian Research - 6 Aug 2020