SGX Market Strategist, Equity & Fixed Income, Singapore Exchange Ltd (SGX)

Geoff Howie

SGX Market Strategist, Equity & Fixed Income

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Equity Bottom-Up

ARA US Hospitality Trust / Equity Bottom-Up

These equity research reports are not written by the SGX. SGX supports the distribution of the research reports by external contributors. Please refer to the Disclaimer in the attached report.
<h2>ARA US Hospitality Trust (ARAUS SP)</h2>
A strategically superior, high yielding, pure-play REIT 
<ul>
<li>ARA US Hospitality Trust (ARA) is a pure-play U.S. hospitality REIT, with a recently refurbished portfolio of 38 Hyatt-branded upscale select-service hotels. This segment of the industry has been seeing a relatively strong growth rate due to its ability to fetch higher margins.</li>
<li>The select-service segment is projected to see a four year RevPAR compound annual growth rate (CAGR) of 2.0%, as compared to 1.3% for full-service hotels, as well as projected four year demand CAGR of c. 3.2%, as compared to 2.0% for full-service hotels.</li>
<li>We initiate coverage on ARA with an OUTPERFORM recommendation. Our target price of US$0.96 represents a total upside of 16.7%, inclusive of FY19F dividend yield of 8.1%.</li>
</ul>
Investment Thesis 
A win-win proposition. Made up of upscale, branded, selectservice hotels, ARA’s hotel model tends to offer the highest gross profit margins for operators, as revenue is less affected by labour wages, food &amp; beverage (F&amp;B) expenses, and other non-essential service offerings such as recreational facilities. Select-service hotels are also increasingly coveted especially among younger, millennial, and business travellers, as prices are more affordable. Amenities or F&amp;B options offered by full-service hotels are also easily replaceable by cheaper and/or better alternatives elsewhere.
Premier hotel branding with a solid loyalty base. Although select-service hotels may offer fewer amenities and facilities, the Hyatt branding may provide for an added assurance of accommodation experience, room quality and comfort. The World of Hyatt loyalty program has also grown by 6 million members, from 10 million in 2017 to 16 million in 2018. With its sights also set on other premium brands such as Marriott and Hilton, we believe that there may be much more for ARA to leverage on and be privy to.
Geographically rewarding portfolio. Of its entire portfolio across the United States, more than 50% of its portfolio is in the economically-stronger South and West regions, with the latter achieving real GDP CAGR of 1.0% higher than the national rate. A large portion of its portfolio is also located in the densely-populated Northeast area, where the region’s cornerstone, New York’s Wall Street, and multiple worldrenowned hospitals reside. While the lack of land for new developments in the Northeast might result in slightly sluggish economic growth, this also inadvertently translates into being able to command higher average daily room rates (ADRs) due to constrained supply, boosting margins further. Management has also indicated its desire to expand further into aforementioned South and West regions, to increase its portfolio weightage in areas of stronger economic growth.

These equity research reports are not written by the SGX. SGX supports the distribution of the research reports by external contributors. Please refer to the Disclaimer in the attached report.
ARA US Hospitality Trust (ARAUS SP)
A strategically superior, high yielding, pure-play REIT 

ARA US Hospitality Trust (ARA) is a pure-play U.S. hospitality REIT, with a recently refurbished portfolio of 38 Hyatt-branded upscale select-service hotels. This segment of the industry has been seeing a relatively strong growth rate due to its ability to fetch higher margins.
The select-service segment is projected to see a four year RevPAR compound annual growth rate (CAGR) of 2.0%, as compared to 1.3% for full-service hotels, as well as projected four year demand CAGR of c. 3.2%, as compared to 2.0% for full-service hotels.
We initiate coverage on ARA with an OUTPERFORM recommendation. Our target price of US$0.96 represents a total upside of 16.7%, inclusive of FY19F dividend yield of 8.1%.

Investment Thesis 
A win-win proposition. Made up of upscale, branded, selectservice hotels, ARA’s hotel model tends to offer the highest gross profit margins for operators, as revenue is less affected by labour wages, food &amp; beverage (F&amp;B) expenses, and other non-essential service offerings such as recreational facilities. Select-service hotels are also increasingly coveted especially among younger, millennial, and business travellers, as prices are more affordable. Amenities or F&amp;B options offered by full-service hotels are also easily replaceable by cheaper and/or better alternatives elsewhere.
Premier hotel branding with a solid loyalty base. Although select-service hotels may offer fewer amenities and facilities, the Hyatt branding may provide for an added assurance of accommodation experience, room quality and comfort. The World of Hyatt loyalty program has also grown by 6 million members, from 10 million in 2017 to 16 million in 2018. With its sights also set on other premium brands such as Marriott and Hilton, we believe that there may be much more for ARA to leverage on and be privy to.
Geographically rewarding portfolio. Of its entire portfolio across the United States, more than 50% of its portfolio is in the economically-stronger South and West regions, with the latter achieving real GDP CAGR of 1.0% higher than the national rate. A large portion of its portfolio is also located in the densely-populated Northeast area, where the region’s cornerstone, New York’s Wall Street, and multiple worldrenowned hospitals reside. While the lack of land for new developments in the Northeast might result in slightly sluggish economic growth, this also inadvertently translates into being able to command higher average daily room rates (ADRs) due to constrained supply, boosting margins further. Management has also indicated its desire to expand further into aforementioned South and West regions, to increase its portfolio weightage in areas of stronger economic growth.

Non-SGX Report: ARA US Hospitality Trust (ARAUS SP): A Strategically Superior, High Yielding, Pure-Play REIT

Singapore

ARA US Hospitality Trust is a Singapore-listed stapled trust. It owns upscale select-service hotels in the US.

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Non-SGX Report: ARA US Hospitality Trust (ARAUS SP): A Strategically Superior, High Yielding, Pure-Play REIT

These equity research reports are not written by the SGX. SGX supports the distribution of the research reports by external contributors. Please...

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