Checking into a New Asset Class: Select service hotels in the US

Select-service hotels in the US have over 35 years of history. This hotel segment is booming, with demand growth outpacing the overall national hotel average by three times in the last 20 years. For the first time in Singapore, investors can incorporate this unique asset class into their investment portfolio through ARA US Hospitality Trust (SGX ticker: XZL) which was listed on the SGX on 9 May 2019.

Lee Jin Yong, CEO of the Managers of ARA US Hospitality Trust, shares more about the select-service hotel sector which is relatively new to the Asian market.

Select-service hotels are not commonly known in Asia. Can you tell us more about them? How are they different from full-service hotels?

The select-service hotel concept was first introduced in the US in 1983 by Marriott with the launch of the Courtyard hotel. The brand was designed with frequent business travellers in mind, featuring smaller, more efficient hotels offering facilities and services most value by frequent travellers: ample work desks, separate seating areas, internet access and a quality breakfast. Amenities such as multiple F&B outlets and expansive meeting and function space which are not utilised or valued were excluded. Shortly after in 1987, Marriott Residence Inn, the first extended-stay concept in the US that provided apartment-style accommodation for hotel guests who required longer-term stays, was launched.

The new hotel concepts revolutionised the lodging market in the US. By scaling down on services not needed by frequent travellers, select-service hotels offer higher value at lower price points. Furthermore, by focusing on the highest-margin businesses (i.e. renting of hotel rooms), the hotels present fewer staffing challenges, higher room density and lower operating and labour costs than full-service hotels. For example, a full-service hotel room takes 30 minutes to turn over, as compared to just 10 minutes for an extended-stay hotel room!

Hyatt Place and Hyatt House, which are Hyatt’s answer to Courtyard and Residence Inn respectively, make up the initial portfolio of ARA US Hospitality Trust.

What makes ARA US Hospitality Trust a good investment?

ARA US Hospitality Trust presents a unique opportunity for investors to gain access to the most developed hotel market in the world. Since 2010, demand growth has consistently outpaced supply growth in the US hotel market, resulting in nine consecutive years of Revenue Per Available Room (RevPAR) growth as of 20182.

With a high-quality initial portfolio of 38 upscale select service hotels, ARA US Hospitality Trust’s properties comprise 27 Hyatt Place hotels and 11 Hyatt House hotels, which are in the select-service and extended-stay space respectively. Branded under one of the largest global hotel brands, Hyatt, majority of these hotels have been recently refurbished and are managed by Aimbridge, the largest independent hotel management company in the US. The portfolio, whose hotel guests comprise mostly domestic travellers, is also geographically-diversified across 21 states, enhancing its resilience in an economic slowdown. The hotels have also performed above the national average, with a higher occupancy rate of 77% and RevPAR of US$94 compared to the national averages of 66% and US$86 respectively in 20183.

ARA US Hospitality Trust enjoys strong support from its Sponsor4, ARA Asset Management, a premier global integrated real assets fund manager and a highly reputable REIT manager. With a strong sponsor, as well as an experienced Board and management team, the Trust enjoys good access to the debt and equity capital markets and a healthy acquisition pipeline to fuel its future growth.

What are your growth plans for ARA US Hospitality Trust over the next five years?

We will diligently focus on organic growth opportunities through active asset management, and will look to expand the portfolio through accretive investments to deliver stable cashflows and enhance value for our securityholders.

In line with ARA’s investor-operator philosophy, the team will also work closely with our hotel operator to optimise asset performance. We will focus on controlling expenses via green programs to reduce energy costs and increasing RevPAR through effective revenue management, optimising guest mix and distribution channel management.

Leveraging our Sponsor’s established partnerships, ARA US Hospitality Trust will pursue a disciplined acquisition growth strategy to bolster its portfolio with other premium branded select-service hotels.

Footnotes:

1 Based on the Offering Price of US$0.88 and the forecast distribution per Stapled Security for the Forecast Period 2019, as defined in the IPO Prospectus

2,3 JLL, Independent Market Research Report as published in the IPO Prospectus

4 ARA US Hospitality Trust’s Sponsor is ARA Real Estate Investors 23 Pte. Ltd., an indirectly wholly-owned subsidiary of ARA Asset Management Limited

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