ARA US Hospitality Trust (ARA H-Trust) has proposed to sell two Hyatt House hotels to a New Jersey-based hotel management company, GHM Properties, for a total consideration of US$31 million, slightly below the total valuation.
The managers said that ARA H-Trust has entered into two conditional purchase and sale agreements, through its indirectly wholly owned subsidiary ARA USH Chicago, on Thursday (May 9).
Both properties are extended-stay hotels on freehold land, located in Connecticut and Pennsylvania, respectively.
While the sale consideration for Hyatt House Philadelphia Plymouth Meeting represents a 3.4 per cent discount to its valuation, the total consideration represents a 1.3 per cent discount to the independent valuation of both properties, which stood at US$31.4 million as at Dec 31, 2023.
On a pro forma basis, assuming the proposed sale was completed on Jan 1, 2023, distribution per stapled security (DPS) would be dragged down 4.4 per cent to US$0.03278, from US$0.0343. If it was completed on Dec 31, 2023, net asset value (NAV) would be 0.7 per cent lower at US$424.4 million, compared with US$427.6 million.
The managers said that despite the proposed sale being slightly dilutive to the DPS and NAV on a historical pro forma basis, it would provide ARA H-Trust with additional debt headroom to embark on its long-term, accretive growth strategy.
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The managers said they intend to use the net proceeds to pare down existing bank borrowings to improve ARA H-Trust’s aggregate leverage ratio, and/or for general working capital requirements.
“The proceeds may also be redeployed to acquire accretive, higher yield properties, should such opportunities be identified in time,” they added.
The trust’s aggregate leverage would be reduced to 39.6 per cent from 41.5 per cent, assuming the proposed divestment was completed on Dec 31, 2023, and the net proceeds were used to repay bank borrowings.
The managers added that Hyatt House Philadelphia, ranking in the bottom quartile of ARA H-Trust’s portfolio in terms of contribution to both valuation and net property income, is a non-core asset with outsized capital expenditure needs. Its divestment is in line with the managers’ proactive portfolio optimisation strategy to divest non-core assets at or near valuation.
While the other property, Hyatt House Shelton, is a performing asset, the managers noted a limited upside for its future revenue growth and value appreciation. This is on top of the hotel’s stone facade exterior and a subterranean car park which require outsized maintenance.
“Such capital investment does not provide a return on investment,” said the managers, adding that ARA H-Trust has spent US$2 million on total capital investments for the hotel to date.
“Completion of the divestment of each of the properties is expected to be in the third quarter of 2024,” the managers noted.
ARA H-Trust is a stapled group comprising ARA US Hospitality Property Trust, a real estate investment trust, and ARA US Hospitality Management Trust, a business trust. Its portfolio currently comprises 36 upscale select-service hotels across 18 states in the US.
In its latest business update, its first-quarter net property income rose marginally to US$6.4 million, with portfolio occupancy falling 2.2 percentage points to 59.5 per cent.
Stapled securities of ARA H-Trust : XZL 0% closed on Wednesday down 1.8 per cent, or US$0.005, at US$0.275.
