RBC Capital Markets upgraded its rating on shares of Sunstone Hotel Investors Inc. (NYSE: SHO) to "outperform" with above average risk from "sector perform" and increased price target to $14 from $11. The brokerage believes the company's growth and investment outlook has improved and Sunstone shares offer attractive upside potential.
"Backed by strengthening booking trends (group pace tracking up 11.2 percent) and aggressive asset management, we now look for improved organic growth in 2011-12. Elevated investment targeting up to $1.0 billion of purchases should further enhance growth while with plans for gradual de-leveraging and management transition more clearly defined, we expect concerns to dissipate," said Mike Salinsky, an analyst at RBC Capital Markets.
Finally, with valuation attractive following recent pressure, Salinsky believes Sunstone shares offer attractive upside potential. Accordingly, following final review of fourth quarter results, Salinsky upgraded his rating on the company's shares to Outperform, Above Average Risk with a revised 12-month price target of $14/share (versus $11/share previously) supported by his updated forward net asset value outlook.
Against favorable year-over-year comps with 2011 group pace tracking up 11.2 percent (ADR+10 percent at top three group houses), Salinsky expects outsized 2011 RevPAR (revenue per available room) growth from Sunstone's portfolio.
Renovations should have only a moderate impact (about $0.650 million of displaced first quarter of 2011 revenues) while Salinsky expects ADR focus/asset management initiatives to support attractive margin expansion.
Salinsky said the recent acquisitions in NYC and New Orleans should provide meaningful (about $30 million to $32 million of 2011 EBITDA) accretion. Targeting about $1.0 billion of purchases in 2011 with $380 million year-to-date, Salinsky expects activity to remain elevated.
With John Arabia announced as CFO and plans for CEO succession more clearly defined, Salinsky looks for management concerns to dissipate. Gradual de-leveraging with moderate near-term maturities and restructuring completed should improve coverage.
The brokerage raised its 2011 reported funds from operations (FFO) estimate for Sunstone to $0.85 from $0.68 and its 2012 estimate to $1.10 from $0.98. The brokerage also increased its adjusted FFO estimate to $0.61 from $0.46 and its 2012 estimate to $0.84 from $0.73.
"We believe the greatest risk to our rating, price target, and current estimates centers around general economic conditions in the U.S., specifically concerning business and recreational travel, overall economic growth, enplanement levels, GDP growth, consumer confidence, employment growth, the need for meeting space, and demand for high-quality hotel real estate," said Salinsky.
Sunstone shares rose 1.97 percent to trade at $10.87 on the NYSE at 9:54 am EST.