Credit Suisse Bullish On Hotel REITs: 4 Outperform Picks In '20% Club'
On May 26, Credit Suisse published a research note updating its REIT coverage after Q1 2015 earnings with an overall bullish view for REITs in its coverage universe and especially the hotel sector.
Six of the top 11 REITs across all of the sectors covered by Credit Suisse were lodging REITs.
Notably, Pebblebrook Hotel Trust (NYSE: PEB) was upgraded from Neutral to Outperform, joining RLJ Lodging Trust (NYSE: RLJ) as Credit Suisse sector top picks; with Strategic Hotels & Resorts (NYSE: BEE) and Sunstone Hotel Investors (NYSE: SHO) rounding out the top four.
Tale Of The Tape - Past Year
All four of these lodging picks are projected by Credit Suisse to have a total return of over 20 percent during the next 12 months.
Strong Hotel REIT Sector
As a group, Credit Suisse expects the lodging REITs in its coverage universe to deliver 6.5 percent RevPAR growth during the next 12 months and 10 to 12 percent earnings growth as well.
Credit Suisse reduced its target prices slightly to reflect the effect the strong dollar may have on international bookings, noting that this market segment is only ~10 percent of revenues.
Credit Suisse - Lodging Sector Rationale
"1) Lodging recovery is far from over -- with the industry expected to deliver 6% RevPAR growth over the next two years
2) The rate recovery story is just starting to pick up steam. With most US markets well beyond peak occupancy and US unemployment rate below 5.5%, we expect ADR growth to accelerate to 4.5% to 5.5% (nationally), while ADR should account for 80%+ of RevPAR growth—very good for margins
3) Stocks are cheap -- trading at 15% to 20% discounts to NAV-- at these levels, M&A is back on the table.
4) Group will deliver sector leading earnings growth the next two years 12%+ per annum
5) Supply (or lack thereof) will remain a major tailwind for the next 2+ years."
Credit Suisse - Pebblebrook: Upgraded Neutral To Outperform; PT Reduced $51 To $50
The Credit Suisse price target represents a potential ~19.8 percent upside from the prior close of $41.73 per share; along with its 3 percent dividend yield, for a total return of 22.8 percent.
- Credit Suisse based its new $50 PT on blend of 50 percent forward NAV, ($53); 30 percent EV/EBITDA, reducing the multiple from 18x to 17x; and 20 percent from its discounted cash flow (DCF) model.
- Notably, with PEB trading at such a high discount to NAV, Credit Suisse believes this is a good entry point for investors.
- Additionally, Credit Suisse cited the following positives for the stock: a top management team, 65 percent EBITDA derived from the West Coast, significant embedded growth at higher margins and a $100 million redevelopment pipeline.
Credit Suisse - Bottom Line
Recent weakness in lodging REIT share prices, (which reflect concerns about international demand and weakness in NYC), are "largely overblown."
Credit Suisse economists forecast a 10-Yr Treasury note yield of ~2.85 percent by year-end 2015 -- (still viewed as being favorable to REITs).
Catalysts for the REIT sector as a whole include: strength of private market real estate valuations, the amount of sovereign wealth allocated to U.S. real estate and institutional capital "driving down return hurdles in public markets."
Additionally, some of these hotel REITs could be considered M&A targets, which in turn could help support higher valuations.
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