RE: INN.UN Just to make you smile I increased your rating to 3. Anyway.... here are post conference call notes from Scotia Capital. They hold the target at $5 but see the room to increase it if INN's reorganization will go as plan.
Rating: Sector Perform Target 1-Yr: C$5.00 ROR 1-Yr: 20.5%
Risk Ranking: High
Valuation: 13x AFFO (NTM estimate)
Key Risks to Target: Double dip recession, rising interest rates, credit crunch.
Event
¦ Full update post strategic plan conference call.
Implications
¦ Currently negotiating on $100M of the target $185M in asset sales.
INN is hoping to close the $100M in the next 6-9 months. Potential
buyers include families (smaller hotels) and opportunity investors
(considering alternate uses); existing debt markets appear supportive, or
at least not an obstacle, to completing transactions.
¦ Targeting higher quality and profitability, at lower leverage. Selling
assets at a 5% cap and redeploying into 12%+ capital upgrade returns
should be very profitable if executed properly. Leverage may decline
200bp-300bp, but will remain relatively high through 2014, in our view.
¦ Estimates unchanged for now, but upside exists. Successful capital
redeployment could add $0.03-$0.04 of FFOPU upon stabilization,
while retention of its REIT status could add another $0.02-$0.03/un to
our 2013E FFOPU. We think it is too early to adjust estimates for
either, but a recovering Canadian hotel market and successful capital
allocation could drive attractive AFFOPU growth through 2014. Margin
expansion on the existing portfolio remains a key driver.
Recommendation
¦ Maintain SP rating. We reiterate our view that the strategic plan is a step
in the right direction. INN trades at a wider-than-avg. discount to the
sector on both implied cap rate and AFFO, a discount we believe should
narrow as room rate growth accelerates (driving margin expansion).
....we believe the announced strategic plan was
informally discussed in the past (in much less detail), but it
was good to see the formal release of a strategic vision early
in the new management's tenure (see our note "CEO Retires
and New CFO Announced"), in addition to implicit reaffirmation
of its existing $0.40/un distribution, in our view.