Monday, April 29, 2019

ARA Hospitality Trust - Preliminary Prospectus IPO

After my previous article on Eagle Hospitality Trust (EHT), this would be another prospecting on a US hospitality trust which is slated to go public upon approval of listing from MAS. 

Like EHT, ARA-HT is claiming to be the very first US pure-play hospitality to be listed in SGX. I guess we’ll have to see who has the claim of rights to say this first depending on the timeline they go public. 

I’ll try to make this a narrative comparison against EHT as much as possible, so if you have not read the previous article on EHT, I’d recommend you read them first here

Hotel’s Portfolio

The initial portfolio of ARA-HT comprises of 38 properties, which further broken down into 27 Hyatt Place Hotels and 11 Hyatt House Hotels located in the US, with a total of 4,950 hotel rooms. 

The Reit’s portfolio is valued at US$719.5 million, so that’s one-third smaller than the US$1.27b we have when comparing with EHT. 

Unlike EHT which has most of their hotels concentrated on the West coast of the region, ARA-HT has a nice balance spread across the entire US states.




Out of the 38 properties, 27 of them are Hyatt hotels, which are upscale hotels with full services catered to both business and leisure travellers both domestic and foreign tourists. 

The rest of the 11 are Hyatt houses, which are typically known as service apartment as it caters to extended stay travellers which offers more communal spaces such as kitchenette and bigger living rooms to cater for families. These are typically located in suburban and airport areas. 

Like EHT, most of the properties are freehold in nature, which is common in the US, with exception to the 2 properties. 

Hyatt Place Secaucus Meadowlands is one of them, with leasehold expiring in Jun 2071 and Hyatt Place Lakeland Center is another, with leasehold expiring in Jul 2073. 

Sponsor & Management Fees Structure 

The sponsor is a global integrated real assets fund manager, ARA Group, which manage assets over $80b across 23 countries. 

Cornerstone investors include Bank of Singapore (BOS), DBS Bank, UOB and Credit Suisse. They also include SingHaiyi’s controlling shareholders Gordon Tang and Celine Tang, and investment firm ICH Capital. 

The cornerstone tranche makes up around 25% of the total offering so this is clearly stronger than what EHT has on their cornerstone investors. 

The management fees structure is similar to what we have for EHT. The management fees structure is a base fee of 10% of the distributional income and an annual performance fee of 25% of growth in DPS over the preceding financial year. 

The distributional income should be easy to hit for as long as they keep on growing and adding properties into the portfolio but the 25% could be difficult to hit in an uprising year. Still, the fact that the nature of the lumpiness in the hospitality industry means they could have 1 very bad year as a base and the following year they could already see the “growth” in DPS.

Investment Thesis

The investment thesis is not different from what was already discussed in the EHT’s article so I am not going to repeat it too much again. 

Basically, management is optimistic about the arrivals of international tourists in the next 2 to 3 years given the weaker US dollars and demand from both domestic and international to trump over the existing supply, so they are expecting their Revenue Per Available (Revpar) rate to increase. Still, looking at the average occupancy rate over the last 10 years should give enough indication that there are rooms to maneuver for capacity play.


The one interesting thing to note here is that there are no indications for Revenue Generation Index (RGI) for the 38 properties in comparison against the average market out there. 

Since both EHT and ARA-HT are using Jones Lang LaSalle (JLL) as their independent market research, it doesn’t make sense that EHT provides this information in their prospectus and ARA-HT does not. 

My guess is the RGI for the properties could be lower than 100, hence it is better not to disclose it or they are excluding it because of competitive reasons. 

Still, I find that the EHT prospectus is much more transparent on how they are providing information, including how the properties performed during the GFC in 2009, which ARA-HT did not provide. 

Capital Structure and Prospective Yield (%)

As at the listing date, ARA-HT is expected to have an aggregate leverage of 33.4%. 

In terms of gearing, ARA-HT will have a higher debt headroom to grow as compared to EHT. 

The effective interest rates on the loans, including upfront debt establishment costs is approximately at 4.6% per annum. This is not low given the environment of the US credit market over there. 

The Reit is likely to debut with an indicative yield of about 7.8%, which is rather similar to what EHT yield would be. 

Conclusion

The profile for ARA-HT is very similar to EHT, given the prospective yield they will be prospecting in the next 2 to 3 years. 

With the yield of 8% and a freehold nature of properties, one might think that all it takes is 9 years (72/8) to breakeven on your capital. It’s hard to think that they will no longer be around after 9 years. 

Still, the key to watch is the amount of capex they will spend in order to renovate and refurbish the buildings and rooms, this will play a big part in computing the properties on a roi basis. 

Again, due to nature of the industry they are operating, I’m likely to give this a miss on it’s debut and is likely to get interested only on higher grounds of safety when there are bad news priced in.

Thanks for reading.


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7 comments:

  1. ARA Hospitality Trust looks pretty promising investment to me. I would definitely consider it for my next investment. Thanks for the heads up.

    ReplyDelete
  2. Its dumping lousy assets in the south. Who will go to Alabama etc? DYDD.

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