Annual Report 2023 IN RESILIENCE STRENGTH
OVERVIEW ii OUR MISSION To provide sustainable and stable returns to our Stapled Securityholders through attractive distributions and long-term capital appreciation. CORPORATE PROFILE ARA US Hospitality Trust Listed on the Singapore Exchange on 9 May 2019, ARA US Hospitality Trust (“ARA H-Trust”) is a hospitality stapled group comprising ARA US Hospitality Property Trust (“ARA H-REIT”) and ARA US Hospitality Management Trust (“ARA H-BT”). ARA H-Trust invests in income-producing real estate assets used primarily for hospitality and/or hospitality-related purposes located in the United States (“U.S.”). Its portfolio currently comprises 36 upscale select-service hotels with a total of 4,700 rooms across 18 states in the United States. ARA H-Trust has a market capitalization of US$176.4 million as at 31 December 2023. For more information, please visit www.araushotels.com. The Managers ARA H-Trust is managed by ARA Trust Management (USH) Pte. Ltd. (“REIT Manager”) and ARA Business Trust Management (USH) Pte. Ltd. (“Trustee-Manager”) (collectively known as the “Managers”). The Managers are wholly-owned subsidiaries of ARA Asset Management Limited (“ARA”). The Sponsor, ARA Real Estate Investors 23 Pte. Ltd., is an indirect wholly-owned subsidiary of ARA. ARA is part of ESR Group (“ESR”), APAC’s largest real asset manager powered by the New Economy and one of the largest listed real estate investment managers globally. With over US$80 billion in fee-related assets under management, our fully integrated fund management and development platform extends across key APAC markets, including China, Japan, South Korea, Australia, Singapore, India, New Zealand and Southeast Asia, with a presence in Europe and the U.S.. We provide a diverse range of real asset investment solutions and New Economy real estate development opportunities across our private funds business, which allow capital partners and customers to capitalise on the most significant secular trends in APAC. Our purpose — Space and Investment Solutions for a Sustainable Future — drives us to manage sustainably and impactfully and we consider the environment and the communities in which we operate as key stakeholders of our business. Listed on the Main Board of The Stock Exchange of Hong Kong, ESR is a constituent of the FTSE Global Equity Index Series (Large Cap), Hang Seng Composite Index and MSCI Hong Kong Index. For more information on ESR, please visit www.esr.com.
22 Operational Review 26 Financial Review 28 Hotel Portfolio 51 Investor Relations Overview Leadership Hotel Portfolio and Performance 54 Corporate Governance Report 84 Statement of Policies and Practices 91 Statement on Composition of the Board of Directors 92 Risk Management 96 Financial Statements 190 Statistics of Stapled Securityholdings 192 Additional Information 196 Corporate Directory Reports 1 Vision, Mission and Corporate Profile 2 Diversified Portfolio 4 Hotel Segment 5 Trust Structure 6 FY2023 Key Highlights 9 Financial Summary 10 Letter to Stapled Securityholders 14 Board of Directors 18 Management Team Contents
OVERVIEW 2 DIVERSIFIED PORTFOLIO California New Mexico Colorado Nebraska Idaho Texas Sacramento Rancho Cordova Albuquerque Airport Boise Towne Square Denver Airport Home2 Suites by Hilton Colorado Springs South Omaha Downtown Old Market San Antonio Six Flags® at The RIM 2 1 1 1 2 1 Legend AC Hotels by Marriott Courtyard by Marriott Hyatt Place Residence Inn by Marriott Home2 Suites by Hilton Hyatt House
ARA US HOSPITALITY TRUST Annual Report 2023 3 as at 31 December 2023 Florida Georgia Kentucky Michigan Tennessee North Carolina Virginia Pennsylvania New York Massachusetts Connecticut New Jersey • Detroit Auburn Hills • Detroit Livonia • Lakeland Center • Tampa Busch Gardens • Atlanta Alpharetta Windward Parkway • Atlanta Norcross Peachtree • Memphis Primacy Parkway • Nashville Brentwood • Nashville Opryland • Cincinnati Airport Florence • Louisville East Fishkill Boston Burlington Richmond Arboretum Shelton Mystic • Richmond Short Pump • Sterling Dulles Airport North Secaucus Meadowlands • Branchburg • Morristown • Parsippany-East • Parsippany Whippany Pittsburgh Airport Philadelphia Plymouth Meeting Charlotte Airport Tyvola Road Raleigh North Hills Raleigh Durham Airport 2 2 3 2 2 3 3 2 1 2 5 1
OVERVIEW 4 HOTEL SEGMENT The U.S. hospitality market is the largest in the world with over 5.6 million rooms as at end FY2023, with over 70% of the industry supply branded and characterised into fullservice, select-service and limited-service segments. The hotel brands can also be classified under chain scales by price levels. ARA H-Trust is focused on owning premium-branded, upscale, select-service hotels in the U.S. The hotels are franchised under three of the world’s largest hotel chains, Marriott International (“Marriott”), Hyatt Hotels Corporation (“Hyatt”) and Hilton Worldwide (“Hilton”). ADDITIONAL INFORMATION ON THE MASTER LEASE AGREEMENTS1 In FY2023, all of the assets owned by ARA H-REIT were leased to either ARA USH Chicago Tenant, LLC, ARA USH Blue Runner Tenant, LLC, or ARA CS Tenant, LLC, all of which are wholly-owned subsidiaries of ARA H-BT. Tenant Industry Percentage of Revenue in FY2023 Expiry2 ARA USH Chicago Tenant, LLC Hospitality 85.6% 31 December 2024 ARA USH Blue Runner Tenant, LLC Hospitality 12.0% 16 January 2025 ARA CS Tenant, LLC Hospitality 2.4% 30 April 2028 As at 31 December 2023, the weighted average lease expiry (“WALE”) is 1.1 years 1 All master lease agreements of ARA H-Trust are internal master lease arrangements between ARA H-REIT and ARA H-BT within ARA H-Trust 2 As ARA H-REIT owns the assets, while ARA H-BT is the master lessee which manages and operates these assets, it is expected that the master leases will be renewed as long as ARA H-REIT and ARA H-BT remain stapled Hotel Segment Attributes Hotel Segment and Chain Scale Classification LIMITED-SERVICE SELECT-SERVICE FULL-SERVICE Luxury Full-Service LimitedService Not affiliated with Brand Select-Service Upper Upscale Upscale Upper Midscale Midscale Economy Independent • 100% rooms revenue • Few facilities and amenities • Lowest operating costs • Minimal labour force • 90–95% rooms revenue • Selected facilities which include reduced F&B offerings and smaller meeting places • Optimal operational efficiency at smaller room inventory with lower operational costs • Smaller and flexible labour force • 50–75% rooms revenue • Expansive facilities with full array of services and amenities at high service levels • Higher operational costs • Larger fixed labour force Our hotels operate in the upscale select-service segment
ARA US HOSPITALITY TRUST Annual Report 2023 5 TRUST STRUCTURE ARA H-Trust is a stapled group comprising ARA H-REIT and ARA H-BT. ARA H-REIT is set up to hold the underlying hotels. ARA H-BT is an active business trust set up to own the operational assets of the hotels. ARA H-BT extends shareholders’ loans to the hotel holding companies to facilitate the repatriation of cashflows to Singapore. The ARA Hotel Manager oversees the operations, management, and maintenance of the Portfolio. The ARA Hotel Manager uses third-party hotel managers (Aimbridge, Avion, Chartwell, and Concord) for direct, day-to-day operations of the hotels. The hotels are affiliated with various brands of Marriott, Hyatt, and Hilton through franchise agreements. 1 Please refer to the section “Important Notice Regarding the Ownership of Stapled Securities” in the Prospectus 2 ARA USH REIT, Inc. qualified as a real estate investment trust for U.S. federal income tax purposes (“US REIT”) for the year 2023. A US REIT is not subject to U.S. federal income tax on its net income distributed as dividends Master Lease Agreement ARA Hotel Manager ARA H-BT ARA H-REIT Management Services Management Services and acts on behalf of ARA H -BT Securityholder Loans REIT Manager Manager US Sub US Partnership ARA Hotel Management Agreement Singapore USA Portfolio Stapled Securityholders1 REIT Trustee Acts on behalf of ARA H-REIT Securityholder Trustee Manager Cayman Islands Third Party Hotel Managers Hotel Management Agreements Hyatt / Marriott Franchise Agreements ARA US Hospitality Trust PropCos OpCos or Master Lessee ARA US REIT2 SingCo Cayman Co or Loan Subsidiary
OVERVIEW 6 FY2023 KEY HIGHLIGHTS Unlocked about US$8 million in net disposal proceeds from disposal of Hyatt Place Oklahoma City Airport in FY2023 Acquired Home2 Suites by Hilton Colorado Springs South, a newly-built select-service, extendedstay hotel with 119 keys at a NPI yield of approximately 9.0%1 in FY2023 Pending sale of Hyatt Place Pittsburgh Airport, a non-core asset, for S$7.7 million with proceeds used to pare down existing bank borrowings. 0.5% y-o-y increase in portfolio valuation to US$751.4 million as at 31 December 2023 1 Based on trailing 12-month NPI for FY2022 7.5% decrease in Net Asset Value per Stapled Security to US$0.74 CAPITAL MANAGEMENT Proportion of Fixed Rate Debt 74.5% Interest Coverage Ratio 2.7x Weighted Average All-in Cost of Debt 4.8% 41.5% Aggregate Leverage; 40.0% Net Gearing OPERATIONAL & FINANCIAL PERFORMANCE RECOVERY Occupancy Rate 69.3% 12.9% y-o-y increase in RevPAR to US$96 12.3% increase in DPS to 3.430 US cents in FY2023 PORTFOLIO OPTIMISATION VALUATION
ARA US HOSPITALITY TRUST Annual Report 2023 7
OVERVIEW 8
ARA US HOSPITALITY TRUST Annual Report 2023 9 FINANCIAL SUMMARY For the Financial Year Revenue1 (US$ million) 2022 175.5 169.0 2023 2021 130.7 Gross Operating Profit (“GOP”) (US$ million) 2022 2021 62.0 57.3 40.5 2023 Net Property Income (“NPI”) (US$ million) 2022 2021 47.7 41.4 24.9 2023 Distributable Income (US$ million) 2022 2021 19.8 17.5 2.0 2023 Distribution per Stapled Security (“DPS”) (cents) 2021 2022 3.430 3.054 0.355 2023 Distribution Yield2 (%) 2022 2021 11.2% 8.7% 0.7% 2023 Balance Sheet as at 31 December 2023 2022 2021 Property, Plant and Equipment (US$ million)3 745.0 749.3 724.5 Total Assets (US$ million) 791.8 826.4 764.1 Total Loans and Borrowings (US$ million) 325.0 325.9 338.1 Stapled Securityholders’ Funds (US$ million) 427.6 459.7 399.7 Number of Stapled Securities in issue (million) 580.1 569.2 567.3 Financial Ratios as at 31 December 2023 2022 2021 Net Asset Value per Stapled Security (US$) 0.74 0.80 0.70 Aggregate Leverage (%) 41.5 39.4 44.3 Net Gearing4 (%) 40.0 35.4 42.8 Interest Coverage Ratio5 (x) 2.7 2.6 2.0 Proportion of Fixed Debt (%) 74.5 82.0 79.1 Weighted Average All-in Cost of Debt (%) 4.8 3.8 3.4 Weighted Average Debt Maturity (years) 2.5 1.5 2.0 1 FY2021, FY2022 and FY2023 comprises 41 hotels, 36 hotels and 36 hotels, respectively. 2 Based on the closing price on the last trading day of the year 3 The portfolio hotels are presented as property, plant and equipment and measured at fair value in the financial statements of ARA H-Trust in accordance with the applicable accounting standards 4 Computed based on total debt less cash and cash equivalents over total assets less cash and cash equivalents 5 Computation excluded interest expense on lease liabilities. It is regarded as a component of finance cost under SFRS(I)16 which is an accounting classification and does not have a bearing on debt servicing ability. The adjusted Interest Coverage Ratio (as defined in the Code on Collective Investment Schemes issued by the Monetary Authority of Singapore (“CIS Code”)) is the same as the reported Interest Coverage Ratio, as no hybrid securities have been issued to date
OVERVIEW 10 LETTER TO STAPLED SECURITYHOLDERS Dear Stapled Securityholders, On behalf of the Board of the Managers of ARA H-Trust, we are pleased to present the annual report of ARA H-Trust for the financial year ended 31 December 2023 (“FY2023”). OVERVIEW OF 2023 The U.S. Gross Domestic Product (“GDP”) expanded 2.5% in 2023, driven primarily by consumer spending, which was supported by declining inflation rates and a strong jobs market, marked by historically low unemployment rates. Although inflation, measured by the Consumer Price Index (“CPI”), rose by 3.4% for the period ending December 2023, remaining above the Federal Reserve target of 2%, robust consumer spending and low unemployment rates have allayed recession fears. The U.S. hotel Industry continued to recover in 2023 with the growth in U.S. lodging demand closely correlated to the strong performance of the U.S. economy. Lodging demand stayed resilient, underpinned by robust leisure travel demand, recovering group demand, modest recovery in business transient travel and the return of international visitors. The increasing emphasis on hybrid work arrangement contributed to the rise in “bleisure” demand, as employees organize their travel schedules to combine business trips with leisure travel, thereby further boosting lodging demand. Whilst occupancy rates have not reached pre-pandemic levels due to lagging business travel demand, robust average daily room rate (“ADR”) growth boosted revenue per available room (“RevPAR”) growth to exceed pre-pandemic levels. However, the rate of growth has slowed in 2023 due to moderating inflation and reduced leisure demand, partly influenced by a shift towards outbound tourism. RevPAR for the U.S. hotel industry reached US$98, marking a 5% yearon-year increase (approximately 12.6% above the 2019 levels). Both the U.S. hotel occupancy and ADR experienced slight upticks in 2023, reaching 63.0% and US$155, respectively, compared to 62.7% and US$149, respectively, in 2022. Hence, the recovery outlook for the U.S. lodging market remains positive, albeit trending toward slower, normalizing performance in the long-term. STEADILY PROGRESSING STEPHEN RAY FINCH AND LEE JIN YONG Chairman & Chief Executive Officer
ARA US HOSPITALITY TRUST Annual Report 2023 11 According to JLL Research1, investors are increasingly attracted to the U.S. select-service and extended stay sector due to its strong returns relative to other commercial real estate classes. Although investment volume for U.S. lodging declined in 2023 compared to 2022, primarily due to elevated interest rates and tight credit markets, select-service and extended-stay hotels have stood out given their consistent performance driven by broad consumer appeal and inherently lean operating model. PERFORMANCE HIGHLIGHTS ARA H-Trust’s portfolio performance in FY2023 mirrored the continued recovery of the U.S. lodging industry. Our portfolio’s occupancy increased four percentage points from 65.3% in FY2022 to 69.3% in FY2023 and RevPAR improved 12.9% from US$85 to US$96. With pro-active asset management, our GOP margin improved by 1.4 percentage points year-on-year to 35.3%. This resulted in revenue and net property income (“NPI”) of US$175.5 million and US$47.7 million, respectively, an increase of 3.8% and 15.1%, respectively, from the year before. Consequently, ARA H-Trust’s DPS for the year was 3.43 US cents, 12.3% higher than the DPS achieved in FY2022. ACTIVE OPTIMIZATION STRATEGY IMPROVES PORTFOLIO VALUATION As part of our pro-active asset management strategy, the Managers adopt a bottoms-up approach to identify non-core hotels to rebalance and rejuvenate the portfolio. The multi-prong approach seeks to allocate capital efficiently to hotels that exemplify greater profitability and valuation growth potential and/or to pare down debt to strengthen our balance sheet. In 2022, we disposed of five assets, yielding net proceeds of approximately US$38 million. In April 2023, we deployed US$29 million of the net proceeds to acquire Home2 Suites by Hilton Colorado Springs South, a newly built selectservice, extended-stay hotel, at an NPI yield of approximately 9% (based on its trailing 12-month NPI), which was immediately accretive to DPS. In September 2023, we disposed of the Hyatt Place Oklahoma City for US$8 million 1 JLL Research, U.S. select-service and extended-stay hotel trends and outlook, January 2024 “As we continue our recovery trajectory, our steadfast commitment to hands-on asset management and optimal portfolio management will drive returns and value to our Stapled Securityholders.”
OVERVIEW 12 and used the proceeds to pare down debt. In November 2023, we announced the proposed divestment of Hyatt Place Pittsburgh Airport for US$7.7 million, which is pending completion. As at 31 December 2023, the ARA H-Trust portfolio comprised 36 select-service hotels with a total of 4,700 rooms across 18 states in the U.S. The portfolio value as at the end of the financial year was US$751.4 million, a marginal increase of 0.5% from last year’s portfolio value despite an increase in capitalization rates resulting from higher interest rates. The portfolio valuation is underpinned by the positive outlook of the U.S. lodging market and the recovery in cash flows across the portfolio. Looking ahead, it is anticipated that gains in hotel operational performance over the next 12 months will primarily come from ADR growth, underpinned by limited growth in hotel supply. Green Street forecasts2 that the high construction cost and elevated interest rates will limit hotel development activity over the next three years. As hotels have a unique ability to re-set rents on a daily basis, the lower supply growth pressure will benefit hotel’s pricing power and therefore, also support underlying valuations. DISCIPLINED CAPITAL MANAGEMENT ARA H-Trust’s financial position remains healthy. On 26 September 2023, we completed the refinancing of the new loan facilities amounting to US$287.5 million. All debts maturing in 2024 have been refinanced and the weighted average debt maturity now stands at 2.5 years. As at 31 December 2023, the portfolio average leverage ratio stood at 41.5%. With a cash balance of US$20.1 million, net gearing excluding cash and cash equivalents was lower at 40.0%. Notably, the interest coverage ratio increased to 2.7x, raising the permissible aggregate leverage limit to 50%. Despite higher interest rates, the average cost of debt was 4.8% in FY2023 compared to 3.8% in FY2022, cushioned by a high percentage of our debt being hedged to fixed rates. SUSTAINABILITY Sustainability remains a key priority as we continue to explore opportunities and initiatives to integrate sustainable practices into the management of our hotels. ARA H-Trust is committed to contributing to the social and environmental well-being of our stakeholders while delivering sustainable and stable returns over the long term. The Managers mapped the material factors to the most relevant United Nations Sustainability Development Goals (SDGs) to identify the most impactful actions from its operations, as well as to show the commitment to collaborate with its stakeholders to achieve these common goals. Additionally, reducing the environmental footprint of our assets and operations remains a priority. We have progressively introduced new energy saving initiatives across our hotel portfolios such as the installation of Verdant Smart Thermostats, which automatically adjust to real-time occupancy patterns to optimize energy consumption, on-demand water heaters to reduce energy consumption and continued with LED lighting upgrades across our portfolio. In addition, our waste reduction initiatives include donation of old furniture to local charities and reconditioning of furniture for use at other hotels within our portfolio. ARA H-Trust’s environmental, social and governance (“ESG”) policies, practices and performances will be thoroughly outlined in the FY2023 Sustainability Report, which is aligned with the recommendations from The Task Force on Climate-related Financial Disclosures (“TCFD”) and adhere to Global Reporting Initiative (“GRI”) Universal Standards 2021. This year, we will introduce a new GRI topic under our employment material factor. The FY2023 sustainability report is scheduled to be released by the end of April 2024. 2 Green Street, Lodging & Gaming Sector update, 28 November 2023 LETTER TO STAPLED SECURITYHOLDERS
ARA US HOSPITALITY TRUST Annual Report 2023 13 IN CLOSING The global outlook for 2024 remains clouded by many exogeneous factors including geopolitical turmoil in the Middle East and Europe, national elections in several countries including the U.S. presidential election in November, the ability for governments globally to tame inflation, as well as the outlook for interest rates, China’s economic trajectory, climate change and many more. The International Monetary Fund (“IMF”)3 recently upgraded its forecast for the U.S. GDP growth to 2.1% in 2024 versus an earlier estimate of 1.5% in October 2023. The upgrade was on the back of fiscal support and strong consumer spending. With U.S. inflation getting under control, expectations are for the U.S. Federal Reserve to begin lowering interest rates gradually in the second half of 2024. Whilst this would be a benefit to us, this outcome is far from certain, and we will remain vigilant with our interest rate hedging policy. As for the lodging market, STR and U.S. Tourism Economics4 project U.S. hotel market occupancy to remain steady at 64%, with modest growth in ADR and RevPAR at 3% and 4%, respectively, by 2025, as the lodging market stabilizes. U.S. Tourism Economics predicts demand growth will stem from households prioritizing travel, a continued rebuilding of business travel and group events, and a rebound in international tourism. Given that ARA H-Trust’s portfolio is orientated towards domestic transient leisure and business travellers, with minimal dependence on international demand, we are optimistic about the Trust’s performance in the upcoming year, barring unforeseen circumstances. As we continue our recovery trajectory, our steadfast commitment to hands-on asset management and optimal portfolio management will drive returns and value to our Stapled Securityholders. We remain committed to execute on our portfolio optimization and rebalancing strategy, to build cashflow resilience over the long-term, thereby ensuring sustainable returns to our Stapled Securityholders. IN APPRECIATION We wish to thank the Board of Directors for their steadfast counsel and guidance. We also wish to extend our appreciation to our management teams in the U.S. and Singapore for their hard work and dedication. Above all, we would like to also thank our Stapled Securityholders, Trustee and stakeholders for their continued support and trust. STEPHEN RAY FINCH LEE JIN YONG Chairman Chief Executive Officer 21 March 2024 21 March 2024 3 IMF, World Economic Outlook Update, January 2024 4 STR and Tourism Economics, January 2024
LEADERSHIP 14 BOARD OF DIRECTORS RANDY ALLAN DANIELS STEPHEN RAY FINCH Chairman and Independent Non-Executive Director Independent Non-Executive Director STEPHEN RAY FINCH Chairman and Independent Non-Executive Director Mr. Stephen Ray Finch is an Independent Non-Executive Director of the Managers and the Chairman of the Board. He was appointed as director of the REIT Manager on 1 January 2019 and as director of the Trustee-Manager on 12 April 2019. Mr. Finch is currently the Managing Partner of Colfaxridge LLP, a business consultancy firm. Prior to this, Mr. Finch served as Chief Executive Officer of SRE Capital Pte Ltd from 2015 to 2017, and as Chief Executive Officer of APN Funds Management (Asia) Pte Ltd (formerly known as ARA Strategic Capital I Pte. Ltd.) from 2006 to 2014, where he managed the ARA Asian Income Fund and the APN Asian REIT Fund. Prior thereto, Mr. Finch has served as Managing Director and Head of Debt Capital Markets at DBS Bank Ltd., where he was responsible for both the fixed income and real estate investment trust origination business from 2000 to 2006. Mr. Finch also advised on several real estate investment trust listings at the firm. He evaluated, structured, priced and marketed primary and secondary offerings of real estate investment trusts and local and international debt securities offerings, including convertible bonds, asset securitisations and business trusts. Prior thereto, Mr. Finch served as Head of Asian Debt Origination at ANZ Investment Bank from 1997 to 2000, focusing on emerging market debt at the firm, and in various divisions at Citibank from 1984 to 1997. Mr. Finch graduated with a Bachelor of Science degree in Geography from Texas A&M University in 1980 and received a Master of Business Administration from Harvard Business School in 1984. RANDY ALLAN DANIELS Independent Non-Executive Director Mr. Randy Allan Daniels is an Independent Non-Executive Director of the Managers. He was appointed as a director of the Managers on 12 April 2019. Mr. Daniels currently serves as the Chairman of BWC Terminals Inc. and as independent director of JP Morgan Real Estate Income Trust, Inc.. His present directorships include serving as a Non-Executive Director of JP Morgan Real Estate Income and Growth Fund and Southwest Water Company since 2012 and 2011 respectively. Prior to this, he served as a Director at JP Morgan International Infrastructure Board from 2007 to 2018, and as Chairman of the New York State Real Estate Board, which is the regulatory board that oversees more than 250,000 real estate brokers in New York state. Mr. Daniels was also previously the Managing Director of Pickwick Capital Partners LLC, a company which specialises in the private placement of foreign investment in real estate development projects in the United States, and was Vice Chairman of Gilford Securities Inc, specialising in real estate investment from 2007 to 2015. From 2001 to 2006, Mr. Daniels was a Senior Government Official of the New York State, Department of State where he managed 17 divisions, 2,000 employees, a US$1 billion annual budget and reviewed and approved all waterfront developments. Mr. Daniels was a Registered Representative, Series 7 and 63 licensed by the Financial Industry Regulatory Authority, 2007–2019. He is a Certified Director of the National Association of Corporate Directors (“NACD”) and serves as a senior Board Leadership Fellow of NACD. Mr. Daniels received a Bachelor of Science in Political Science and Broadcast Journalism from Southern Illinois University, United States of America, in 1973.
ARA US HOSPITALITY TRUST Annual Report 2023 15 WONG CHOONG MANN STEFANIE YUEN THIO Independent Non-Executive Director, Chairperson of the Audit and Risk Committee Independent Non-Executive Director STEFANIE YUEN THIO Independent Non-Executive Director, Chairperson of the Audit and Risk Committee Ms. Stefanie Yuen Thio is an Independent Non-Executive Director of the Managers. She was appointed as a director of the Managers on 12 April 2019. Ms. Yuen Thio is the Joint Managing Partner of TSMP Law Corporation and heads its corporate practice. Admitted to the Singapore Bar in 1994, she has over 30 years of legal experience in mergers and acquisitions, equity capital markets, corporate transactions and regulatory advice. Her clients range from listed corporates to international companies, including in real estate, the hospitality industry, and REITs. She is regularly named by legal journals as a leading practitioner in her areas of specialisation. Ms. Yuen Thio is the Chairperson of ESR Funds Management (S) Limited, the manager of ESR-REIT. Ms. Yuen Thio has more than 16 years of experience as a director of listed entities on the SGX-ST, including as member of audit committees, and has the necessary accounting and financial expertise and experience. Ms. Yuen Thio was appointed by the Monetary Authority of Singapore to the Corporate Governance Council 2017 to review the Code of Corporate Governance and is a Fellow of the Singapore Institute of Directors. From 2014 to 2017, she was a member of the Expert Panel, Centre for Cross-Border Commercial Law in Asia. She was also a member of the Singapore Governance and Transparency Index Advisory Panel from June 2016 to May 2018. She is the Chairperson of SG Her Empowerment Ltd (SHE) a women’s empowerment charity and Institution of Public Character which she founded in 2022. She has also served on a number of charities over the past 20 years. Ms. Yuen Thio holds a Bachelor of Law (Honours) from the National University of Singapore. She is also an Advocate and Solicitor of The Supreme Court of Singapore. WONG CHOONG MANN Independent Non-Executive Director Mr. Wong Choong Mann is an Independent, Non-Executive Director of the Managers. He was appointed as a director of the Managers on 15 January 2020. Mr. Wong joined the Singapore Police Force in 1980 as an Inspector and rose to the rank of Assistant Commissioner of Police. He had been working in a managerial capacity in criminal investigation until he retired from the Singapore Civil Service on 28 November 2017. Prior to his retirement, he was Director (Investigations) at the Corrupt Practices Investigation Bureau (“CPIB”) under the Prime Minister’s Office and conducted investigations into offences of corruption in both the public and private sectors. Prior to his posting to the CPIB, he was the Deputy Director of the Criminal Investigation Department, Singapore Police Force, from June 2008 to September 2010. After retiring from the Singapore Civil Service, Mr. Wong was appointed as an adjunct trainer by the Singapore Civil Service College in December 2017, and by the Nanyang Centre for Public Administration in June 2018.
LEADERSHIP 16 BOARD OF DIRECTORS CHERYL SEOW BEE LIAN MOSES K SONG Non-Independent Non-Executive Director Non-Independent Non-Executive Director MOSES K SONG Non-Independent Non-Executive Director Mr. Moses K Song is a Non-Independent Non-Executive Director of the Managers. He was appointed as a director of the Managers on 29 August 2018. Mr. Song is the Chief Executive Officer of ARA, part of the ESR Group. He is responsible for leading ARA’s diversified real assets platform covering APAC, Europe and the US. Mr. Song oversees strategy, business and product development, capital raising and all investment management activities involving ARA. In addition, Mr. Song serves on ARA’s Board, Executive Committee and Private Markets Investment Committee, as well as ESR’s Group Investment Committee. Mr. Song joined ARA in 2009 and led the firm’s business development efforts and expansion strategies into new markets. During his tenure as Group CEO & Chief Investment Officer and Director of Business Development, ARA’s gross assets under management grew by over 12 times to US$100+ billion. Prior to joining ARA, he held senior positions with leading investment management firms and global investment banks in Tokyo, Seoul, Hong Kong and Singapore. Mr. Song holds a Juris Doctor from Vanderbilt University School of Law and a Bachelor of Science in Economics from Centre College. He is a member of the State Bar of Texas (inactive status). CHERYL SEOW BEE LIAN Non-Independent Non-Executive Director Ms. Cheryl Seow Bee Lian is a Non-Independent NonExecutive Director of the Managers. She was appointed as a director of the Managers on 29 August 2018. Ms. Seow was previously the Group Chief Financial Officer of ARA, and in her 20-year tenure, oversaw ARA’s Group Finance, Business Division Support and Corporate Projects functions. Prior to joining ARA, Ms. Seow established and ran her own boutique consultancy firm providing accounting and consultancy services to small and medium enterprises. She also held senior finance positions in various companies listed on the SGX-ST. She was Deputy Financial Controller and Company Secretary of L.C. Development Ltd and was with Royal Sporting House and Lum Chang Holdings Limited. Ms. Seow began her career with Deloitte Touche Tohmatsu, Singapore in 1988. Ms. Seow holds a Bachelor of Accountancy from the National University of Singapore and is a Chartered Accountant with the Institute of Singapore Chartered Accountants.
ARA US HOSPITALITY TRUST Annual Report 2023 17 LIN DAQI Non-Independent Non-Executive Director Mr. Lin Daqi is a Non-Independent Non-Executive Director of the Managers. He was appointed as a director of the Managers on 15 January 2020. Mr. Lin is currently the Investment Manager of Haiyi Holdings Pte Ltd, responsible for the evaluation and execution of the group’s investments across industries and geographies. Mr. Lin started his career in the financial industry in 2009 as an equity research analyst with Citigroup Global Markets, covering the offshore & marine sector. Subsequently, Mr. Lin served in various capacities within the Strategic Advisory and Mergers & Acquisitions team in DBS from 2010 to 2017, where he advised on some of the most prominent and high-profile public takeovers on the SGX. Mr. Lin graduated from the National University of Singapore in 2008 with a Bachelor of Business Administration (Honours) majoring in Finance. LIN DAQI Non-Independent Non-Executive Director
LEADERSHIP 18 MANAGEMENT TEAM RYAN IKEMEIER JAMES S. JUNG LISA SWAIN LEE JIN YONG Chief Executive Officer Director, Investments Director, Asset Management Assistant Director, Asset Management LIM KAI LUN CHERYL CHOR DAWN LEE Head of Finance Senior Accountant Investor Relations Manager
ARA US HOSPITALITY TRUST Annual Report 2023 19 LEE JIN YONG Chief Executive Officer Mr. Lee Jin Yong is the Chief Executive Officer of the Managers and is based in the U.S. Mr. Lee has full executive responsibilities over the business directions and operational decisions in the day-to-day management of the Managers. He has more than 30 years of relevant hotel management and investment experience, personally closing over US$4.0 billion in hotel and real estate transactions in his career. Mr. Lee received a Bachelor of Science in Hotel Administration from Cornell University, New York, U.S. and a Masters of Business Administration from the University of California, Irvine, U.S. Mr. Lee is also licensed with the US Financial Industry Regulatory Authority as a registered representative for private securities transactions. JAMES S. JUNG Director, Investments Mr. James S. Jung is the Director, Investments of the Managers and is based in the U.S. Mr. Jung works with the Chief Executive Officer to identify and evaluate potential acquisitions and related investments or divestments with a view to enhance the Trust's portfolio. Mr. Jung has over 15 years of experience in the full lifecycle of hospitality acquisition, asset management and disposition. Prior to joining the Managers, Mr. Jung has reviewed over US$10 billion in asset valuation and was personally involved in closing a US$2 billion acquisition/divestment in partnership with institutional U.S. capital. Mr. Jung holds a Masters of Management in Hospitality (concentration in Real Estate Finance) from Cornell University, New York, U.S. and a Bachelor of Science/ Masters of Business Administration from the University at Albany, State University of New York, U.S. LISA SWAIN Director, Asset Management Ms. Lisa Swain, is the Director, Asset Management under the employment of the ARA Hotel Manager and is based in the U.S. Ms. Swain has over 30 years of experience and operational expertise in revenue management, sales and e-commerce. Prior to joining the ARA Hotel Manager, Ms. Swain was Vice President of Asset Management at Clarion Partners and oversaw a portfolio of 26 select-service and 6 full-service hotels. Ms. Swain also has additional experience in hotel real estate investment consulting and property-level hotel management. Ms. Swain holds a Bachelor in Business Administration (Hotel, Restaurant and Tourism Administration) from the University of South Carolina. RYAN IKEMEIER Assistant Director, Asset Management Mr. Ryan Ikemeier is the Assistant Director, Asset Management and is based in the U.S. Mr. Ikemeier has over 25 years of hospitality industry experience with expertise in hotel operations, revenue management, and sales. Prior to joining the ARA Hotel Manager, he was Vice President of Operations at Aimbridge Hospitality, the largest third party hotel management firm in the U.S. In this position, he had direct oversight and accountability for a portfolio of 80+ hotels and 15+ ownership groups. Mr. Ikemeier holds a Bachelor of Arts (Hospitality, Meeting and Travel Administration) from the Metropolitan State College of Denver in Colorado, U.S.
LEADERSHIP 20 MANAGEMENT TEAM LIM KAI LUN Head of Finance Mr. Lim Kai Lun is the Assistant Finance Director of the Managers and is based in Singapore. Mr. Lim assists the Finance Director with the finance function of ARA H-Trust. He has more than 15 years of experience in the accounting, finance and audit industry. Prior to joining the Managers, he held various finance and managerial positions in public listed companies, including Singapore Post Limited, ARA Asset Management Limited and SIA Engineering Company Limited. Mr. Lim had previously worked on the initial public offering of a public listed REIT and other corporate projects, including acquisitions of public listed equities and debt financing. Mr. Lim graduated from Nanyang Technological University of Singapore with a Bachelor of Accountancy and is a Chartered Accountant with the Institute of Singapore Chartered Accountants. CHERYL CHOR Senior Accountant Ms Cheryl Chor is the Senior Accountant of the Managers and is based in Singapore. Ms Chor assists the Head of Finance with the finance function of ARA H-Trust and she has more than 15 years of experience in the accounting and finance industry. Prior to joining the Managers, she held various finance positions in real estate related and public listed companies, including Mapletree Investments Pte Ltd, Venture Corporation Limited and Singapore Press Holdings Limited. Ms Chor graduated from Ngee Ann Polytechnic with a Diploma in Accountancy. DAWN LEE Investor Relations Manager Ms Dawn Lee is the Investor Relations Manager of the Managers and is based in Singapore. She is responsible for the investor relations of ARA H-Trust and has over 14 years of work experience in the real estate valuation services and government industry. Prior to joining the Managers, she worked in Colliers International and Jurong Town Corporation. Ms Lee holds a Bachelor of Science (Real Estate) degree from the National University of Singapore, a Master of Business Administration from the University of Chicago Booth School of Business, Illinois, U.S. and is a licensed valuer with the Inland Revenue Authority of Singapore.
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HOTEL PORTFOLIO AND PERFORMANCE 22 OPERATIONAL REVIEW U.S. LODGING INDUSTRY OVERVIEW Demand and Performance The U.S. lodging market continued its recovery trajectory in 2023 despite the elevated interest rate environment. U.S. hotel market occupancy and ADR was recorded at 63.0% and US$155 respectively for 2023, up from 62.7% and US$149 respectively for 2022. Consequently, RevPAR registered at US$98, up 5% year-on-year. While economic sentiments have improved, headwinds including the impact of elevated interest rates on business and consumer spending is expected to weigh on GDP growth. Lodging demand has stayed resilient, maintaining its recovery trajectory, buoyed by improvements to group and business travel demand. The rise in hybrid work arrangements carried over from the COVID-19 pandemic has fueled a rise in “bleisure” demand, as guests merge business with leisure travel, extending stays beyond weekdays, consequently boosting lodging demand. While total hotel demand remains below pre-pandemic levels due to the lagging return of corporate travel, strong ADR growth has boosted RevPAR, ending the year approximately 12.6% above the 2019 level of US$87. 0 20 40 60 80 100 120 140 160 ADR and RevPAR (in USD) U.S. Hotel Market RevPAR and Occupancy 0 10% 20% 30% 40% 50% 60% 70% Occupancy (%) 2004 2005 2022 2023 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 RevPAR 53 58 62 66 64 54 56 61 65 69 74 79 81 84 96 87 45 72 93 98 ADR 86 91 98 104 107 98 98 102 106 110 115 120 124 127 130 131 103 125 149 155 Occ 61% 63% 63% 63% 60% 55% 58% 60% 61% 62% 64% 66% 65% 66% 66% 66% 44% 58% 63% 63% U.S. Hotel Market Growth in RevPAR and Occupancy vs 2019 $87 66% 0% 10% 20% 30% 40% 50% 60% 70% 80% $0 $20 $40 $60 $80 $100 $120 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 Jul-23 Dec-23 USD$ RevPAR Revpar 2019 Avg Occupancy Occ% 2019 Avg Occupancy (%)
ARA US HOSPITALITY TRUST Annual Report 2023 23 Investment Market The U.S. hotel transaction volume fell to a 10-year low in 2023 (excluding 2020) driven by capital market dislocation as a result of the Federal Reserve’s ongoing monetary tightening policies. Affected by the high cost of debt, the average deal size shrank to US$31 million in 2023, stimulating a greater appetite for select-service hotels due to their smaller cheque sizes. According to JLL Research, select-service hotels comprise an increasing portion of single-asset transactions volume in 2023 driven by its rising yields and robust operating performance. Looking ahead, the anticipated easing of Federal Reserve policies and interest rate cuts in the second half of 2024 is expected to stimulate transaction activity. U.S. Hotel Investment Volume & Average Deal Size (2008-2023) $- $10 $20 $30 $40 $50 $60 $70 $80 $90 $- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Average deal size (in millions USD) Total hotel transactions volume (in billions USD) Total hotel transaction volume (in billions USD) Average deal size (in millions USD) Source: JLL Research Portfolio Performance ARA H-Trust’s portfolio performance in FY2023 demonstrated resilience and continues to outperform year-on-year, reflecting the continuous recovery of the U.S. lodging industry. Its portfolio of upscale select-service hotels achieved an occupancy rate and RevPAR of 69.3% and US$96, respectively, up from 65.3% and US$85 in FY2022. The year-on-year RevPAR growth of 12.9% was attributed to rises in ADR and improvements in occupancy rate. The performance of the portfolio throughout the year is influenced by seasonality, with the second and third quarters being peak seasons. Portfolio indicators FY2022 FY2023 Change Occupancy (%) 65.3 69.3 4.0pp RevPAR (US$) 85 96 12.9% For FY2023, the Hyatt Place portfolio recorded an occupancy and RevPAR of 64.3% and US$83, respectively, a growth of about four percentage points and 11%, respectively, year-on-year. The Hyatt House portfolio recorded an occupancy and RevPAR of 75.8% and US$109, respectively, a growth of three percentage points and 11%, respectively, year-on-year. The AC Hotel Raleigh North Hills recorded an occupancy and RevPAR of 78.6% and US$174, respectively, a growth of about three percentage points and 8% respectively, year-on-year. The Courtyard by Marriott San Antonio Six Flags® at The RIM hotel recorded an occupancy of 74.4% and RevPAR was lower year-on-year at US$102, respectively. The Residence Inn San Antonio Six Flags® at The RIM hotel recorded an occupancy and RevPAR of 77.0% and US$97, respectively, lower year-on-year. Since its acquisition in April 2023, Home2 Suites by Colorado Springs South hotel recorded an occupancy and RevPAR of 79.6% and US$136, respectively, for FY2023.
HOTEL PORTFOLIO AND PERFORMANCE 24 OPERATIONAL REVIEW Portfolio Valuation As at 31 December 2023, ARA H-Trust’s portfolio comprised 36 upscale select-service hotels with a total of 4,700 rooms across 18 states in the United States. About 94% of the portfolio’s value consists of properties with freehold titles, with the remaining 6% being properties with leasehold titles. The Managers seek to build resilience with its portfolio optimization and rebalancing strategy. In FY2023, the proceeds from the sale of five Hyatt Place hotels, yielding 4.4% NPI, were redeployed to purchase Home2 Suites by Hilton Colorado Springs South hotel, which had an NPI yield of 9%. The hotel is well-located in a growing sub-market which outperformed the Colorado Springs submarket and its competitive set in 2022. In addition, Hyatt Place Oklahoma City Airport was disposed at a sale consideration of US$8.0 million in September 2023. The hotel was a non-core asset located in a market with declining economic conditions exacerbated by the COVID-19 pandemic. As at 31 December 2023, the majority of our portfolio consists of Hyatt Place hotels, accounting for 57%, followed by Hyatt House hotels, Marriott hotels and Hilton hotels. 3% Hilton Portfolio %Keys 32% Hyatt House portfolio 8% Marriott portfolio Hyatt Place portfolio 57% In accordance with the CIS code, the valuation of ARA H-Trust’s portfolio is to be conducted once every year. As at 31 December 2023, independent valuations were carried out by Newmark Valuation & Advisory Services, LLC. Valuation methods used include income method — discounted cash flow approach in determining the fair values of the hotels. The ARA H-Trust’s portfolio of 36 hotels was valued at US$751.4 million, as compared to US$747.8 million a year ago. As at 31 Dec 2023 As at 31 Dec 2022 Hyatt Portfolio US$614.3 mil US$643.9 mil Marriott Portfolio US$105.6 mil US$104.7 mil Acquired Hilton Hotel US$31.5 mil — Portfolio Value US$751.4 mil US$747.8 mil 4% Hilton Portfolio %Valuation 33% Hyatt House portfolio 14% Marriott portfolio Hyatt Place portfolio 49%
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HOTEL PORTFOLIO AND PERFORMANCE 26 FINANCIAL REVIEW DISTRIBUTABLE INCOME After setting aside reserves of US$8.8 million for capital expenditure and paying for borrowing costs and fees in accordance with provisions in the Trust Deeds, distributable income amounted to US$19.8 million for FY2023, representing an increase of 13.3% against that of US$17.5 million in FY2022 as ARA H-Trust’s operating performance continued its recovery trajectory. The reserves for capital expenditure will be utilised for long-term capital asset improvements and refurbishment investments for the portfolio. ASSETS AND LIABILITIES Total assets of ARA H-Trust as at 31 December 2023 were US$791.8 million, with NAV per Stapled Security at US$0.74. The decrease in total assets and NAV were mainly attributed to the disposed hotel properties and the lower appraised values of the Hyatt Portfolio as at 31 December 2023, as well as a decrease in the fair value of derivative financial assets as they near their maturities. Overall portfolio valuation, including the newly acquired Hilton Hotel, stayed relatively flat at US$751.4 million, up 0.5% compared to 31 December 2022 despite increase in capitalization rates resulting from higher interest rates. Total borrowings of ARA H-Trust as at 31 December 2023 amounted to US$325.0 million, comprising bank borrowings of US$323.7 million and lease liabilities of US$1.3 million, comparable to that as at 31 December 2022. On 26 September 2023, ARA H-Trust successfully refinanced US$270.8 million of loan facilities. Through its subsidiaries, the term loan facilities maturing in May 2024 was re-allocated and extended into a US$198.5 million 3-year term loan facility maturing in September 2026 and a US$51.0 million term loan facility maturing in September 2027. In addition, a new US$30.0 million 3-year revolving credit facility maturing in September 2026 was granted to the subsidiaries and the maturity date of an existing US$8.0 million credit facility was extended to September 2026. With the weighted average debt maturity extended to 2.5 years, ARA H-Trust has no immediate debts due for refinancing in FY2024. REVENUE The revenue of ARA H-Trust comprises room revenue and other operating revenue. Room revenue comprises payments for the rental of guestrooms, including charges for cancellation and guaranteed no show at the properties. Other operating revenue comprises F&B sales and revenue relating to ancillary operations including meeting space rental, sundry sales and guest laundry. Total revenue for the financial year ended 31 December 2023 was US$175.5 million, which was 3.8% higher as compared to the previous year, despite dispositions of five Hyatt Place hotels during FY2022. The portfolio continued its recovery trajectory, buoyed by robust group travel demand, continued recovery of business transient travel and return of international visitors, resulting in improvements in both occupancy rate and ADR. Occupancy rate increased by 4.0 percentage points to 69.3% while ADR increased by 5.3% to US$138. Consequently, RevPAR grew by 12.9% to US$96 in FY2023. GROSS OPERATING PROFIT GOP is revenue less operating expenses. Operating expenses comprise room expenses (e.g. housekeeping, guest supplies, laundry, etc.), other operating expenses, administrative and general expenses, sales and marketing expenses, franchise fees, property operations and maintenance expenses, and utilities. Operating expenses for FY2023 were 1.6% higher than FY2022, in line with the increase in business volume and inflationary pressures. Notwithstanding the rise in occupancy rate, the Managers embarked on several costs initiatives to contain the rise in operating costs. As a result, ARA H-Trust’s GOP improved to US$62.0 million in FY2023, up 8.1% as compared to FY2022. NET PROPERTY INCOME NPI is GOP less property expenses. Property expenses comprise hotel management fee, property taxes, insurance and other expenses. Hotel management fee is based on 3% of total revenues. ARA H-Trust reported a NPI of US$47.7 million in FY2023, up 15.1% as compared to FY2022, mainly attributed to higher GOP from higher revenue. Lower property taxes, including property tax refunds received from successful appeals at certain properties, also contributed to the higher NPI.
ARA US HOSPITALITY TRUST Annual Report 2023 27 For FY2023, the all-in cost of debt was 4.8% per annum and bank borrowings were 74.5% hedge to fixed rate as at 31 December 2023, demonstrating the prudence in interest rate risk management by the Managers. Although the average leverage ratio increased to 41.5% as at 31 December 2023, interest coverage ratio based on a trailing 12-month basis improved to 2.7 times, allowing a higher aggregate leverage limit of 50% according to the CIS code. All borrowings of ARA H-Trust are denominated in USD, the functional currency of ARA H-Trust and the currency of its underlying investments and income. ARA H-Trust is not exposed to any foreign currency fluctuations. CASH FLOWS AND LIQUIDITY As at 31 December 2023, ARA H-Trust had cash and cash equivalents of US$20.1 million. Net cash generated from operating activities was US$45.1 million for FY2023. Net cash generated used in investing activities amounted to US$40.5 million, after accounting for the acquisition of Home2 Suites by Hilton Colorado Springs South and capital expenditures. Net cash used in financing activities was US$35.1 million, comprising mainly distributions to the Stapled Securityholders as well as interest payments during the year. As at 31 December 2023, ARA H-Trust had an unutilised revolving facility of US$46.5 million and a letter of credit facility of US$8.0 million in place. Despite the elevated interest rate environment, ARA H-Trust has improved its financial performance and maintained a healthy cash balance. ARA H-Trust remains in a sound financial and liquidity position to meet its operational needs and financial commitments. The Managers will continue to execute proactive hands-on asset management strategies to maximise cashflows and pursue a prudent and disciplined approach in capital management.
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