ARA US Hospitality Trust: Breakout year ahead
- FY22 NPI and DPU in line with our estimates at US$41.4m and 3.054 UScts
- Portfolio valuation up c.9% y-o-y to US$747.8m (excluding disposed hotels); gearing declined to 39.4%
- Cut FY23F DPU estimate by 10% to 4.59 UScts on lower margins and higher capex reserves; attractive 12% yield
- Maintain BUY and unchanged TP of US$0.55
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FY22 results highlights
- FY22 revenue grew 29.3% y-o-y to US$169.0m from US$130.7m in FY21
- FY22 GOP/NPI of US$57.3m/US$41.4m in line with our estimates, representing 41.6%/66.4% growth y-o-y
- GOP/NPI margins improved to 33.9%/24.5% in FY22 from 31.0%/19.0% in FY21
- FY22 distributable income grew a whopping 767.6% y-o-y to US$17.5m from US$2.0m in FY21; full-year DPU lifted to 3.054 UScts compared to 0.355 UScts in FY21, in line with our estimates
- FY22 RevPAR came in at US$85, while occupancy was at 65.3% and ADR was US$31
- Portfolio valuation up c.9% to US$747.8m as at Dec 2022, excluding five disposed Hyatt Place hotels in 3Q22
- Gearing declined to 39.4% as at Dec 2022 from 43.5% as at Jun 2022
- Average cost of debt increased to 3.8% as at Dec 2022 from 3.6% as at Jun 2022, with a weighted average debt expiry of 1.5 years
- 0% of debt hedged to fixed interest rates
- No refinancing requirements for FY23
Our thoughts
Overall, ARAHT’s FY22 results met expectations and its recovery appears promising, with its financial performance coming through. We truly believe that the worst is over and that valuations have bottomed out; good time to BUY!
FY22 operating metrics were inspiring, with the outperformance in ADR partially mitigating occupancy that has not fully recovered due to corporate travel. Full-year RevPAR of US$85 represents c.90% of pre-COVID levels as ADR of US$131 has already surpassed pre-COVID levels, but occupancy of 65.3% is still lagging. We expect occupancy to play catch-up, reaching a weighted average of c.71% in FY23F, and also expect ADR strength to continue, with RevPAR growing to US$103, partly boosted by the acquisition of Home2 Suites by Hilton Colorado Springs South.
While FY22 revenue grew 29.3% y-o-y, we note that GOP and NPI increased by 41.6% and 66.4%, respectively, reflecting the positive operating leverage in the portfolio that we mentioned previously. We believe that the outsized bottom-line growth relative to top-line growth will be a recurring theme for FY23F as the pent-up travel demand sustains its momentum.
ARAHT saw a valuation boost of c.9% for its portfolio, excluding the five disposed Hyatt Place hotels, and gearing fell to a healthier 39.4% as at 31 December 2022 compared to 44.3% as at 31 December 2021. We also note, encouragingly, that valuations for the Hyatt portfolio of 33 hotels, excluding the five disposed hotels, are only c.3% lower than IPO valuations, while there has been a c.24% uplift in the valuations of the Marriott portfolio since acquisition. This reiterates our confidence in the manager’s portfolio rejuvenation strategy of divesting non-core assets and adding accretive assets. We look forward to the completion of the acquisition of the new Hilton hotel in 1Q23, which will be funded largely from divestment proceeds. Given an estimated 9% cap rate, the hotel will likely be immediately accretive.
Although 82.0% of debt is hedged to fixed interest rates and this helps to mitigate the impact of rising rates, the average cost of debt increased to 3.8% as at 31 December 2022. We raise our cost of debt assumptions to 4.5%/5.0% for FY23F/24F. The manager shared that they have started refinancing talks with an aim to spread out its debt profile to limit the concentration on refinancing over time.
Revisions
We now factor in the Hilton hotel acquisition but lower our GOP margin assumptions from 38-39% to 35-36% and NPI margin assumptions from 29-30% to 26-27% in FY23F-24F as our estimates were previously too high and also to account for the continued wage pressures due to the labour shortage and other cost pressures. We raise our capex reserve assumptions from 4% to 5% of total revenue as well, on the back of deferred capex from COVID-19 and inflationary pressures. Our new FY23F DPU estimate is lowered by c.10%, coming in at 4.59 UScts, while our FY24F DPU estimate is largely unchanged at 5.30 UScts. Valuations are highly attractive at 0.5x price to net asset value with 11.9%/13.8% FY23F/FY24F yields. Maintain BUY and unchanged TP of US$0.55.
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