Broker's take: KGI initiates coverage on ARA H-Trust, EHT with 'outperform'

KGI Securities has initiated coverage on two Singapore-listed US-focused property trusts - ARA US Hospitality Trust (ARA H-Trust) and Eagle Hospitality Trust (EHT) - with "outperform" recommendations on the back of resilience in the US hospitality sector and attractive valuations.

As at 3pm, units in ARA H-Trust were trading at one US cent or 1.1 per cent higher at US$0.88. Based on Monday's closing price of US$0.87, the brokerage's target price of US$0.96 represents a total upside of 16.7 per cent.

Meanwhile, EHT was trading unchanged at US$0.68. KGI's target price of US$0.84 represents a total upside of 25.6 per cent.

KGI Securities analysts Geraldine Wong and Amirah Yusoff noted that US consumer expenditure has been largely unaffected by the US-China trade war and are supported by a 50-year-low unemployment rate and modest wage growth.

They added that the US lodging sector is underpinned by domestic travellers. They made around 97 per cent of trips taken within the US in 2018 and have been spending more on accommodation.

In a report on Tuesday, KGI said: "ARA H-Trust and EHT are capitalising on the full-service and select-service segment within the US lodging sector respectively. Both portfolios are mostly within the upper segments, with a higher value proposition that is less susceptible to rising labour costs and price competition from Airbnb."

Among the strengths of ARA H-Trust is its ability to maintain a higher gross operating profit margin, due to lower labour requirements and less reliance on ancillary revenues.

"Its 38 hotels are also strategically diversified across economically stronger regions, allowing it to demand higher average daily room rates," the analysts said.

That said, Ms Wong and Ms Amirah wrote that EHT may be "more appealing to conservative investors due to its 100 per cent master lease structure".

"This gives greater visibility to future earnings which is further supported by a rental floor, while stability is further cushioned by diversification across revenue streams segments, brand affiliations and both leisure and corporate demand drivers."

Key risks to KGI's calls are a strong US dollar, which may affect international arrivals to the US, forex risks, regulatory changes to the US tax regime and US recession fears.