ARA Asset Management Limited, also known as ARA, announced yesterday (2 May 2019) that it is launching a hospitality real estate investment trust (REIT) – ARA US Hospitality Trust – focused on Hyatt-branded hotels in the US. This is going to be the first pure-play US upscale select-service hospitality REIT to be listed in Singapore. The public offer opened at 9 p.m. on 2 May 2019 and closes at 12 noon on 7 May 2019. Units of the REIT are expected to begin trading at 2pm on Thursday 9 May.
The IPO will receive strong sponsor support from ARA Real Estate Investors 23 Pte Ltd, a wholly-owned subsidiary of ARA. Recall that back in November 2016, ARA was taken private at S$1.78 per share by founder and CEO John Lim and a consortium of investors including Cheung Kong Property [under CK Asset Holdings Ltd (HKG: 1113)] and Straits Trading Company (SGX: S20). ARA still continues to manage five REITs; Suntec REIT (SGX: T82U) and Cache Logistics Trust (SGX: K2LU), both listed in Singapore, and Fortune REIT (SGX: F25U), Hui Xian REIT (HKG: 87001) and Prosperity REIT (HKG: 0808), listed in Hong Kong. Note that Fortune REIT is dual-listed in both Singapore and Hong Kong.
Here are seven things to take note of for this upcoming IPO.
1. The REIT’s initial portfolio will consist of 38 upscale select-service hotels with a total appraised value of US$719.5 million. The hotels will be geographically diversified across 21 states in the US and contain a total of 4,950 rooms.
2. 27 of the hotels are franchised under the Hyatt Place brand (an upscale select service) while the remaining 11 hotels are franchised under the Hyatt House brand (upscale extended-stay). Select service hotels don’t offer an extensive array of facilities, services, and amenities compared to full-service hotels, and therefore enjoy higher gross operating profit margins.
3. The portfolio will be managed by Aimbridge Hospitality, LLC, which is the largest independent hotel management company in the US. In fiscal year 2018 (FY 2018), the initial portfolio outperformed the national average on a few metrics; occupancy rate was 77% for the portfolio, above the national average of 66%. Meanwhile, revenue per available room (RevPAR) was US$94 compared with the national average of US$88.
4. According to a CBRE Independent market research report, gross operating profit (i.e. revenue less operating expenses) margins for upscale select-service branded hotels stood at 51.6%, compared to select-service branded hotels at 42.5% and full-service branded hotels at 39.3%.
5. The offer price for the IPO is US$0.88 per unit. At this price, the REIT offers an attractive annualised distribution yield of 8.0% for the forecast period 2019 (1 May 2019 till 31 December 2018) and an expected distribution yield growth of 2.1% for the full calendar year 2020.
6. The Trust’s policy is to distribute 100% of its distributable income for forecast periods 2019 and 2020, and at least 90% of its income thereafter. Distributions will be made semi-annually and will be declared in US dollars but investors can elect to receive their distributions in either US dollars or Singapore dollars.
7. The Trust intends to grow by leveraging its sponsor’s extensive network to originate deals, as well as launch asset enhancement initiatives to further improve returns from the properties within the initial portfolio. It aggregate gearing ratio remains conservative at 33.4% as of the listing date, which is below the statutory requirement of 45% for REITs.
Overall, the ARA REIT IPO looks fairly interesting as it offers investors exposure to a new asset class (i.e. select-service hotels) which is currently not available here. The distribution yield is also enticing at first glance, although investors should note that this is based on a 100% distribution payout policy. The yield would drop to around 7.2% (for the forecast period 2019) should the payout be reduced to 90%.
With the track record which ARA has built up as a sponsor and manager for five REITs, investors can be fairly confident that their money will be in safe hands.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Royston Yang owns shares in Suntec Real Estate Investment Trust.