ARA US Hospitality has won the foot race to become the first pure play US Hospitality REIT to be listed in Singapore. The IPO prospectus has been fully lodged with MAS and here are my initial thoughts.
Offering Overview
Property Portfolio
The IPO portfolio consists of 38 hotels, all within the Hyatt brand portfolio. 27 of them are Hyatt Place hotels, a upscale select-service hotel brand, and 11 of them are Hyatt House hotels, a upscale extended stay hotel brand.
Select service hotels defer from full service hotels in that they are focused mainly on lodging with limited banqueting and F&B outlets. Extended stay hotels are similar to serviced apartments in that they cater to guests who stay for 1 week or more. Upscale means the offering is more luxurious than normal, which I assume to be at least some F&B outlets within the hotel.
The portfolio is spread out across the whole of the US, with a significant concentration in the South and North-east regions of the country. Most of the properties are freehold except for 2 properties which still have more than 50 years left of their leases.
Renovations have also been done relatively recently for most properties between 2013-2017, as such there should not be any major capex requirements in the next few years. The financial disclosures indicate 3.3m of capital commitments at present, which is not very significant compared to portfolio value.
Operational Statistics & Property Valuation
Operational statistics disclosed were largely confined to Occupancy and RevPAR, which are superior to national average. That said, Revenue Generation Index (RGI) was not disclosed. As such, I am unable to determine if the hotels are outperforming their direct competitors or not.
In terms of property valuation, the properties are valued at 719.5 million as at 1 Dec 2018. This is likely to be the price that ARA Asset Management paid for the portfolio back in December 2018 according to this article.
Interestingly, there were 2 valuations performed on the property portfolio, 1 by HVS and the other by Cushman & Wakefield. The HVS valuation worked out to be US$719.5 million while the Cushman valuation worked out to be US$711.9 million. The Cushman valuation generally valued the North-east region hotels at a higher valuation than HVS, while valuing the rest of the portfolio at a lower valuation than HVS.
Something to consider when determining unit price valuation.
Sponsor & Fee Structure
The Sponsor is ARA Asset Management, a quite well-known sponsor in Singapore. Investors will know them for being the sponsor and manager for some S-REITs like Cache Logistics Trust, Fortune REIT and Suntec REIT.
Personally, I don’t own any of these REITs so I’m not very familiar with management capability. If I were to use unit price as a quick proxy for management capabilitiy, 4 of the 5 REITs they manage have performed well since the GFC, with the exception of Cache Logistics Trust. As such, I would assume they are at least decent REIT managers and sponsors.
Their management fee structure is as follows:
- Base Management fee – 10% of Distributable income
- Performance Management fee – 25% of y-o-y increase in DPU
- Acquisition fee – 1% of acquisition value
- Divestment fee – 0.5% of divestment value
- Managers have committed to receiving their fees 50% in cash, 50% in units. As such, there is some financial engineering here to prop up yields.
Cornerstone Investors
The Cornerstone investors have committed to take up about 25% of the offering. These investors comprise of Gordon & Celine Tang (Singhaiyi major shareholders), ICH Capital, and various private banking clients from Bank of Singapore, DBS Bank, Credit Suisse and UOB.
At the least the IPO has decent support at launch.
Financial Highlights & Valuation
Looking at the historical distributable income over the past 3 years, the distribution yields based on IPO price ranges from 7.5% to 7.7%. As such, if we were skeptical investors, we should reasonably expect at least a 7.5% yield instead of the 8% optimistic projection provided.
The IPO has been priced at a slight premium to book, which is fair I guess. Gearing stands at about 33.56%, giving the REIT ample debt headroom for further acquisitions post IPO.
My thoughts
Positives about the IPO
- Branded portfolio – Being part of the Hyatt system allows the hotels to benefit from Hyatt’s scale in marketing and their World of Hyatt loyalty program.
- Decent cornerstone investor support – helps stabilise unit prices post IPO
- Reputable sponsor – ARA Asset Management is a familiar name in the Singapore REIT scene
- Positive outlook – While the US market is quite mature, the economic fundamentals in the US is still the strongest in the world and supportive of travel demand.
- Debt headroom – The REIT has sufficient debt headroom to fund further acquisitions.
What I don't like about the IPO
- Missing disclosures – Certain details that I would like to see like RGI and Debt maturities were not disclosed
- Complex tax and leasing structure – The group is structured in a complicated manner for tax avoidance reasons. These tax rules can changed anytime which may affect further distributions
- High Base / Performance management fee – 10% / 25% fees seem high
- Fair valuation – Price to book of 1.02 leaves no margin of safety
- Relative inexperience in the US – As far as I can tell, this portfolio of hotel assets is ARA’s maiden venture into the US market. This inexperience may lead to future missteps.
In conclusion
Overall, I will give ARA US Hospitality REIT a pass on IPO due to fair valuation and lack of transparency on certain financial metrics. Add to that the cyclical nature of hospitality assets, I will probably need a decent margin of safety before investing.
Invest only if you have cash that you are willing to lose and if you cannot find a better investment opportunity.
Past IPO write-ups
Koufu Group
Spotify
No Signboard Holdings
If you missed my previous article
Portfolio @ April 2019
Happy Hunting,
KK
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