DBRS Confirms Legacy Hotels REIT at STA-4 (low)
ConsumersDominion Bond Rating Service (DBRS) has today confirmed the stability rating of Legacy Hotels Real Estate Investment Trust (Legacy, or the Trust) at STA-4 (low).
Legacy’s steadily improving financial results have accelerated in 2006, driven by both improved occupancy levels and average daily rates, largely from higher business group travel. Year-to-date hotel EBITDA increased by 42% as a result of growth in revenue per available room (RevPAR) of 10.2% as the hotel sector in Canada continues to exhibit signs of a sustained recovery. Although the pace of growth will likely slow over the second half due to more difficult comparisons, the outlook remains favourable as strength in business group travel is expected to support further growth through the rest of 2006.
The strong first half of 2006 has translated into a much improved payout ratio of 65% for the LTM to June 30, 2006. Despite the improvement, Legacy’s recovery has been dampened to some extent by continued strength in the Canadian dollar, given its exposure to U.S. travellers. From January to May 2006, the volume of trips by U.S. travellers to Canada declined 8.1% year over year as leisure travel in particular has been soft. This has placed limits on an otherwise strong recovery within the Canadian hospitality sector based on improved fundamentals including a solid economy and constrained supply.
However, another positive factor that has benefited Legacy is the strength of the energy sector in western Canada. RevPAR grew by 14.8% for the 6 months to June 30, 2006, in Alberta, Saskatchewan and Manitoba, mainly driven by the Calgary market, and British Columbia achieved strong growth of 15.8%.
The rating confirmation also reflects the following considerations:
(1) Legacy is expected to continue to generate improved financial results in 2006 driven by positive industry trends, which should drive higher occupancy and room rates. Legacy’s high operating leverage with its high fixed costs should translate into solid growth in cash flow.
(2) However, Legacy is relatively more dependent on cross-border travel given the location of its hotels, exposing it to soft U.S. leisure travel demand from the strong Canadian dollar.
(3) Legacy’s payout ratio in 2005 was 108% of cash available for distribution after reflecting a reserve for maintenance capex of 4.3% of revenues. The payout exceeded 100% due to a weaker-than-expected first half in 2005, although this trend has reversed in 2006 as shown by the payout ratio of 65% for the LTM to June 30, 2006. Overall, DBRS expects growth in cash flow to result in a payout ratio of approximately 70% in 2006, the lowest level in many years. The recent acquisition of the 398-room Delta Bow Valley in Calgary for $53.5 million is expected to be accretive to cash flow.
Looking forward, Legacy will continue to look at ways to improve utilization of its hotel space including conversion of portions of hotels to condos/corporate residences to improve returns. This includes Toronto, where competition is likely to increase with new luxury hotels planned for downtown.
Note:
All figures are in Canadian dollars unless otherwise noted.
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