Royal Host REIT could produce solid yield: extraordinary distributions in 1999 will be difficult to match

Money Digest, March, 2000 by Doug Hawkins

Established in August, 1997, the Royal Host REIT (TSE: RYL. UN; Recent price: $5.15) is a closed-end mutual fund trust that invests in hotel properties. The IPO in October, 1997, raised $126.5 million; $60 million was raised in a special warrant offering in May, 1998.

This is a financial vehicle by which unitholders invest in the operations of the Royal Host group. The REIT is responsible for the strategic direction and ongoing valuation of new investments. Royal Host's objective is to provide stable growing cash distributions and long-term unit value.

Investors benefit from a monthly distribution that is partly tax deferred. Last year, approximately a third of the monthly distribution was taxed as regular income, and the remainder was tax-deferred by reducing the cost base of the initial investment. The Royal Host REIT must distribute at least 90% of its distributable cash, after reserving 3% of gross revenues for capital replacement and improvements. Debt financing is limited to further protect investors.

Benefits of REIT investing include increased liquidity and diversification plus some deferred taxation of cash distributions. A REIT structure also forces a strict market discipline on management, which is required to distribute most of the returns made on the investment to unitholders.

Extraordinary yield

In September, 1999, the Royal Host REIT benefitted from a $10 million private placement that provided some extra financial flexibility. With a total payout of $1.12 per unit last year, Royal Host offers an attractive cash-on-cash yield of 22%, which exceeds its distributable income. This level can be maintained only if operating results and earnings are strengthened significantly.