One of my personal joys of travelling overseas is that I get to try out different hotels as part of the overall travel accommodation experience. After all, the hotel is also a way to pamper oneself, whether it’s to get a good night’s rest or enjoy the various amenities the hotel has to offer.
One such company in the hospitality space that owns and runs two of the largest hotel chain brands, like Marriott International and Hyatt Hotels Corporation under a franchise is ARA US Hospitality Trust.
Listed on the Singapore Exchange on 9 May 2019, ARA US Hospitality Trust (SGX Code: XZL) operates 37 upscale select-service hotels in the United States across 19 states with a total of 4,826 rooms. These select-service hotels typically offer limited meeting space, modified recreational and retail amenities, and a limited food and beverage offering. They are one of three types of hotel segments in the US, and it’s a model that offers optimal operational efficiency with lower operational costs.
With the recovery in the US lodging industry, here are 5 things to know about ARA US Hospitality Trust if you are interested in the select service hotel segment.
What are some key highlights and milestones achieved by ARA H-Trust in recent months?
We achieved a few high notes in FY 2022 with the continued recovery from COVID-19, and remain optimistic that the recovery momentum will continue into FY 2023.
Having delivered strong financial and portfolio performance for FY 2022, ARA H-Trust’s balance sheet was fortified with the increase in portfolio value of its 36 upscale select-service hotels to US$747.8 million, representing an increase of 9.4% YoY on a comparable basis. The portfolio aggregate leverage ratio stood at 39.4% as of 31 December 2022, below the regulatory limit of 50%.
During the year, we saw an opportune time to execute on our portfolio optimisation and rebalancing strategy. Riding on the tailwinds of recovery in the U.S. lodging sector and liquid investment market, we disposed five non-core Hyatt Place properties in the third quarter of 2022 and redeployed the bulk of the net proceeds towards acquiring the Home2 Suites by Hilton Colorado Springs South, which is immediately accretive at the NPI yield of approximately 9.0% over its purchase price of US$29.0 million. This marks a significantly higher NPI yield than the five disposed hotels.
To what extent is the Group capitalising on new norms and trends that could be game-changers for it in the future?
COVID-19 has altered the travel mindset and expectation of travellers. Along with work-from-home preferences, consumers are expected to continue to prioritise travel, thereby viewing it as a necessity rather than discretionary pursuit. Travel patterns today are different from pre-COVID times, where the distinction between leisure and business travel is turning nebulous and this has a bearing on the revenue optimisation strategies that we employ to maximise ADR.
Moving forward, there will also be a greater push towards increased technology to meet guest expectations and modernisation, in addition to good sustainability practices that not only appeal to guests but is part of collective efforts to achieve a net-zero 2050 outcome.
Interest rates are expected to stay elevated for the next two years. What impact does this have on the Group’s businesses and how is it managing this risk?
Hotels are optimal inflation-hedge as rents are priced on a daily basis (“Average Daily Rate” or “ADR”), and historically, U.S. hotel ADR growth has generally outpaced inflationary expense increases. Moving forward against a backdrop of elevated inflation, the strength in ADR would partly mitigate the increase in operating cost.
On the capital management front, whilst the average cost of debt for the loan portfolio will be affected by rising interest rates, this is ameliorated by most of our borrowings being well hedged at over 75% through to the first quarter of FY 2024. With interest coverage ratio of 2.6 times, the permissible aggregate leverage limit for ARA H-Trust is at 50%. ARA H-Trust has no refinancing requirement in FY 2023 and intends to proactively manage the refinancing needs of the Trust ahead of the expiry in FY 2024.
What are some ESG factors that are material to ARA H-Trust and how will that create long-term value for your stakeholders?
ARA H-Trust is committed towards achieving first-rate sustainable management of its hotels by contributing to the social and environmental well-being of its stakeholders, whilst focusing on its mission to deliver sustainable and stable returns to its stapled security holders.
In FY 2022, we established an environmental risk management framework to identify, address and monitor climate-related risks, and subsequently conducted a qualitative climate risk assessment to determine the climate related risks and opportunities for the Trust. This framework follows the Monetary Authority of Singapore’s guidelines on environmental risk management and the Singapore Exchange’s phased approach on climate disclosures, and are generally aligned with the Recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).
Why should investors take a closer look at ARA H-Trust?
We believe that ARA H-Trust offers a strong value proposition to investors. The share price is trading below the net asset value (NAV) per stapled security of US$0.80 as at 31 December 2022 and a forward yield of over 13% based on analyst forecast DPS for FY 2023.
We are glad to have resumed regular distributions in FY 2022. Established as an active business trust, the management structure underpinning ARA H-Trust allows for full benefit of recovery and upside in cash flows to stapled security holders post COVID-19.
ARA H-Trust is the first pure-play U.S. upscale select-service hospitality trust listed in Asia, and offers an attractive, tax efficient platform for non-U.S. investors to invest.
We believe that upscale select service hotels are the fastest growing segment in the U.S. lodging industry. The growth in demand and pricing strength for the upscale segment, combined with the highly efficient cost model of select service hotels offer value and resilience over the long term than full-service hotels, and are more institutional in quality for investors than limited-service hotels.
Editor’s Note: Some answers for this article were extracted from the SGX 10 in 10 series published on 25 April 2023 and have been republished with permission. You can read more on ARA US Hospitality Trust on the SGX website.