Hotel REITs to benefit from fragmented North American market

InnVest owns Canada's largest hotel portfolio, including brands like Comfort Inn, Holiday Inn, Quality Suites/Inn, Radisson, Delta, Travelodge, Hilton, Staybridge, Fairmont, Sheraton, and Best Western

American Hotel Income Properties REIT LP is the perfect investment than InnVest REIT at the moment, says Brad Sturges, analyst at Industrial Alliance Securities, but both investment trusts are expected to benefit from North America’s highly fragmented hotel property market.

“Its northern border American lodging market is highly fragmented with publicly owned hotel owners and operators representing under 6% of total rooms,” he explained. “Over time, this fragmentation may present InnVest and AHIP with opportunities to complete accretive hotel property acquisitions at wide going-in acquisition spreads within the cost of secured debt financing.”

Sturges this week initiated coverage of both stocks, rating AHIP a buy with a $12 price target, representing potential upside of 12 per cent, while InnVest is a hold with a $6 price target, representing an expected return of eight percent.

His buy rating for AHIP is partly in line with the REIT’s greater relative contact with the U.S. hotel market, that is expected to outperform the Canadian hotel market in 2015.

“We feel InnVest and AHIP are well-positioned to profit from forecasted continued improvements in North American hotel property demand fundamentals combined with anticipated limited new supply over the next Twelve months,” Sturges said.

“Everything else being equal, because of the potential operating outperformance people hotels relative to Canadian hotels forecasted in 2015 by various lodging industry experts, we currently prefer Canadian-listed real estate investment trusts (REITs) with US hotel property market exposure.”