ARA US Hospitality Trust (SGX: XZL) and Eagle Hospitality Trust (SGX: LIW) are two real estate investment trusts (REITs) that just went public. ARA US Hospitality Trust started trading on 9 May, while Eagle Hospitality Trust began trading on 24 May. Which REIT could be a better buy for investors right now? Let’s explore.
On Tuesday (4 June), ARA US Hospitality Trust closed at US$0.865, down from its initial public offering (IPO) price of US$0.88. In comparison, Eagle Hospitality Trust ended at US$0.695 on Tuesday, also down from its IPO price of US$0.78.
At its IPO price of US$0.88, ARA US Hospitality Trust had a distribution yield of 8% for its forecast period 2019 (1 May 2019 till 31 December 2019). The yield is expected to rise to 8.2% for the whole of 2020.
Meanwhile, Eagle Hospitality Trust, at its IPO price of US$0.78, had a slightly higher distribution yield of 8.2% for the 2019 forecast period. This should rise to 8.4% for the 2020 full year.
With the higher distribution yield at IPO and steeper fall in unit price, Eagle Hospitality Trust currently offers better value than its counterpart in terms of distribution yield.
The price-to-book (P/B) ratio is computed by taking a REIT’s last traded price and dividing it by its latest reported net asset value (NAV) per unit. The NAV (also known as book value) of a REIT is calculated with the simple equation of total assets minus total liabilities. A P/B ratio below 1 shows that a REIT is trading at a discount to its NAV.
ARA US Hospitality Trust had a NAV per unit of US$0.86 based on data as of its listing date, giving it a P/B ratio of 1 at the unit price of US$0.865. In comparison, Eagle Hospitality Trust’s NAV per unit stood at US$0.88 as of the listing date. This translates to a P/B ratio of 0.79.
In terms of P/B ratio, Eagle Hospitality Trust looks more valuable than ARA US Hospitality Trust since it’s 20% cheaper.
Gearing and interest coverage ratios
The gearing ratio and interest coverage ratio reveal the financial strength of a REIT.
The gearing ratio is calculated by dividing the total debt of a REIT by its total assets. ARA US Hospitality Trust’s aggregate gearing ratio was 33.4% as of the listing date. In comparison, as of the listing date, the aggregate gearing ratio of Eagle Hospitality Trust was 38%.
The interest coverage ratio is derived by dividing a REIT’s net property income by its finance costs. The higher the ratio, the better the REIT looks. Based on the forecast financial statements, ARA US Hospitality Trust has an interest cover of around 6, while Eagle Hospitality Trust’s is around 3.
In terms of balance sheet strength, ARA US Hospitality Trust looks like the better buy.
Eagle Hospitality Trust seems to offer better value with its higher distribution yield and lower P/B ratio. However, ARA US Hospitality Trust looks like the safer REIT with a lower gearing and higher interest coverage ratio. As an investor, I rank safety highly, so I would be more inclined to further investigate ARA US Hospitality Trust. Investors who are keen to buy Eagle Hospitality Trust should consider other aspects of the REIT such as how it derives its revenue, its growth potential, and so on, before committing any capital.
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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 Sudhan P doesn’t own shares in any companies mentioned.