ARA US Hospitality Trust - DBS Research 2022-11-08: Attractive 14% Yield Despite Margin Pressure

ARA US Hospitality Trust - Attractive 14% Yield Despite Margin Pressure

  • See ARA US Hospitality Trust's announcement dated 04 Nov 2022 for its 3Q22 operational update.
    • ARA US Hospitality Trust (SGX:XZL)'s 3Q22 revenue of US$48.7m is higher than in 2Q22 but gross operating profit (GOP) comes in lower at US$17.3m, and the gross operating profit margin declined to 35.6% from 38.9%.
    • 3Q22 net property income (NPI) of US$11.9 and NPI margin of 24.4% are below estimates.
    • 3Q22 registered firm RevPAR of US$97, sustaining the momentum from 2Q22.
    • 82.0% of ARA US Hospitality Trust's debt is hedged on fixed interest rates, thereby mitigating the impact of rising interest rates.
    • ARA US Hospitality Trust's gearing declined slightly to 43.3% as at Sep 2022 from 43.5% as at Jun 2022. Average cost of debt increased slightly to 3.7% as at Sep 2022 from 3.6% as at Jun 2022, with a weighted average debt expiry of 1.8 years.
    • No refinancing requirement for ARA US Hospitality Trust in the remainder of FY22 and FY23.
  • We revise our estimates for ARA US Hospitality Trust downwards, as we see higher cost pressures weighing on margins and DPU going forward.
  • With a shortage in staff, ARA US Hospitality Trust has been turning to contract labour to support occupancy levels, which has contributed to higher expenses and lower margins. We expect this to continue in the medium term, as the unemployment rate remains low and the labour market remains tight.
  • We also raise FY22F/FY23F/FY24F borrowing costs to 3.9%/4.2%/4.5% to account for the rising interest rates for ARA US Hospitality Trust’s floating debt and raise the risk-free rate to 3.5%.
  • However, despite the margin pressure, valuations are attractive at 0.5x price to net asset value with 14% FY23 yield and ARA US Hospitality Trust’s US hotel portfolio remains the best poised amongst the S-REITs to ride on the US travel demand uptrend. We continue to like hotels in this inflationary environment, as the daily repricing of room rates acts as a natural inflation hedge.
  • Maintain BUY recommendation on ARA US Hospitality Trust. Our lower DCF-based target price of US$0.55 for ARA US Hospitality Trust is based on a WACC of 7.79% and terminal growth rate of 2.25%.

Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @

Tabitha FOO DBS Group Research | Derek TAN DBS Research | Geraldine WONG DBS Research | 2022-11-08
SGX Stock Analyst Report BUY MAINTAIN BUY 0.55 DOWN 0.700

Previous report by DBS Research:
2022-08-17 ARA US Hospitality Trust - Shooting For The Stars!

Relevant links:
ARA US Hospitality Trust Analyst Report,
ARA US Hospitality Trust Target Price,

ARA US Hospitality Trust Share Price History,
ARA US Hospitality Trust Announcements,
ARA US Hospitality Trust Dividends/ Corp Actions,
ARA US Hospitality Trust News Articles


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