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Steve Ladurantaye is The Globe and Mail's real estate reporter. (Deborah Baic/Deborah Baic/The Globe and Mail)
Steve Ladurantaye is The Globe and Mail's real estate reporter. (Deborah Baic/Deborah Baic/The Globe and Mail)

Hotels

Hotel industry woes felt by REITs Add to ...

Royal Host REIT saw its annual profit increase by 304 per cent in the past five years, but investors have been focusing on the future as they push the company's units lower to reflect the deep challenges facing the hotel industry.

The company - which owns and operates hotels across the country - is facing some of the most difficult conditions in the industry's history, putting pressure on its units and driving its yield above 20 per cent.

Smith Travel Research said occupancy at Canadian hotels fell in the last week of June by 11.2 per cent year over year, while revenue per available room swooned 19.7 per cent.

"It's really been a silent contraction in the hotel industry since so little attention has been paid to it," said Rossa O'Reilly, an analyst at CIBC World Markets.

"New passport requirements for U.S. tourists returning to their country after visiting Canada, heightened concerns among travellers over the H1N1 virus and a 12-per-cent increase in the value of the Canadian dollar have been overlaid on U.S. travellers' tendency to vacation closer to home during the current recession."



Take a look: in 2008



Here's a closer look at Royal Host - which ranked No. 1 in the recent ROB 1000 listings for annual profit growth from 2003 to 2008.

What does it do

Royal Trust's core holdings consist of 37 properties - comprised of 4,500 guest rooms in hotels branded under the Best Western, Country Inns & Suites, Hilton, Holiday Inn, Ramada, Super 8, Thriftlodge and Travelodge banners.

It also owns several unbranded properties, such as the Chimo Hotel in Ottawa.

It also manages properties for other hoteliers, and owns the franchise rights for Travelodge and Thriftlodge in Canada. There are more than 100 franchises.

The company also has an investment division, which at the end of last year owned 14 per cent of rival InnVest REIT and 19.7 per cent of Holloway Lodging REIT.

Last year it recorded a $20.4-million profit, although in the first quarter of this year, it booked a $1.5-million loss as its revenue per available room slipped 9.3 per cent.



Take a look:



"The first quarter is traditionally a weaker quarter in the lodging cycle and should not be indicative of full-year performance," said Scotia Capital analyst Mario Saric. "However, we remain overall bearish on hotel fundamentals and anticipate a challenging year ahead for the Canadian lodging sector as corporations continue cutbacks on travel expenditures and conference activity."

What has its stock done

While the company's units are down about 7 per cent year to date, Mr. Saric suggested it could have been worse if management hadn't been voraciously buying back shares.

He said the company likely accounted for 40 per cent of the admittedly thin trading volume in the first quarter - spending $3.5-million to buy 1.2 million units (6 per cent) and another $1.5-million to purchase convertible debentures.

Royal Host is trading at about seven times 2009 estimated adjusted funds from operations, a measure commonly used to value REITs. InnVest REIT trades at 4.9 times, while the broader sector trades at an average 9.2 times.



Take a look:

"We think a more substantial discount [to the sector average]could be warranted given high leverage on its balance sheet in a challenging environment," Mr. Saric said.

Seven analysts follow the shares, according to Bloomberg, and all seven maintain "sell" ratings, with an average price target of $2.42. The shares hit a 52-week high of $6.90 in August, and a low of $2.06 in March.

The payout payoff

With a yield of 21.6 per cent, investors are pricing in the likelihood of lower payouts in the future (higher yields always indicate higher risk).



Take a look:

Executive vice-president Brad Cann defended the 66-cent annual payout in May's first-quarter conference call, but left the door open for a cut if conditions worsen.

"Sustaining our distribution continues to be front of mind and we've decided at the present time not to cut or suspend," he said.

"At the same time, our goal is not to overdistribute in 2009."

Mr. O'Reilly said the company is already paying out more than it is taking in, and expects a cut to come relatively soon.

"Simply put, they are paying out more than they should be," he said.

"They are paying 66 cents. We think they'll make about 30 cents. This is an industry where profits are fluctuating - hotel REITs were never set up to provide reliable, forever-growing distributions."

Fastest growing companies in the ROB Top 1,000

Rank

Company

Year-end

Annual profit growth 2003-08 (%)

288

Royal Host REIT

Dec. 08

304

53

Yamana Gold

Dec. 08

237

285

Calvalley Petroleum

Dec. 08

173

296

Heroux-Devtek

May 08

162

90

Methanex Corp.

Dec.08

161

263

Neo Material Technologies

Dec. 08

139

51

Yellow Pages Income Fund

Dec. 08

132

279

CE-Franklin

Dec. 08

120

52

Crescent Point Energy Trust

Dec. 08

119

12

Research In Motion

Feb. 09

109

 
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