KGI starts ARA US Hospitality Trust at Outperform

U.S. five dollar currency notes bills; taken September 2018.

KGI started ARA US Hospitality Trust at Outperform, with a target price of US$0.96, pointing to the relatively strong growth rate  and higher margins of the REIT’s  upscale select-service hotel sector.

The select-service segment is estimated to post a four-year revenue per available room compound annual growth rate of 2.0 percent, compared with 1.3 percent for full-service hotels, the brokerage said in a note on 2 October.

“Operating margins at select-service hotels are better insulated from rising labor costs in the current economic environment, given that their operations are significantly less labor intensive than their full-service peers,” KGI said.

“Also owing to a smaller range of other services provided by select-service hotels, it is less dependent and thus less affected by the more variable revenue streams from segments such as food and beverage or event hosting, as the case may be for full-service hotels,” the brokerage added. “Select-service hotels are also increasingly coveted especially among younger, millennial, and business travelers, as prices
are more affordable.”

The Hyatt brand, which covers all of ARA US Hospitality Trust’s 38-hotel portfolio, also provides a premier hotel branding and a solid loyalty base, with a loyalty program of 16 million members as of 2018, KGI said, adding the trust was also eyeing adding Marriott and Hilton properties.

The US$0.96 target price incorporates a dividend yield of 8.1 percent, KGI estimated.

The unit price ended Friday at US$0.88, up 2.33 percent.

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