Could there be other offers for HOT.un????
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nationalpost.com
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Saturday, May 29, 1999
Royal, CHIP REIT marriage made in heaven Paul Bagnell Financial Post
It was perhaps the worst-kept secret in the Canadian hotel industry. Two real estate investment trusts, both significant owners of mid-market hotels in Canada, were reported to be heading for a marriage of some sort. With a maturing Canadian hotel industry and a capital market that had turned cool to issues of new units by REITs, observers of both Royal Host REIT and Canadian Hotel Income Properties REIT believed a combination of the two entities would prove a winner. On May 19, the expectations were proven correct, when Royal Host announced plans for a $339-million hostile bid for all units of CHIP. Calgary-based Royal Host is proposing to offer 1.19 units of Royal Host for each unit of CHIP, an offer that would value CHIP units at $9.52 based on yesterday's closing price of $8 for Royal Host units (RYLun/TSE). Units of CHIP (HOTun/TSE) closed yesterday down 10¢ at $9.50. CHIP has not yet responded in detail to the offer, which is expected to be sent to unitholders when Royal Host obtains a CHIP mailing list. If the deal is completed it will create Canada's largest hotel-owning REIT, with a market capitalization of about $500-million. Royal Host says its offer would give CHIP unit holders an 11% premium, given the average unit prices of both REITs in the 20 days prior to May 19. The Royal Host initiative comes after another mid-market hotel owner-operator, UniHost Corp., was taken private by a large private hotelier based in New York. W-Westmont Corp. will pay $7 a share for 37.9 million shares of UniHost, a Mississauga-based company best known for its Quality and Comfort inns. And on May 21, RioCan REIT, a large owner of community shopping centres, took over competitor RealFund REIT in a $412-million deal. Both Royal Host and CHIP own 36 hotels in Canada. Royal Host's properties include 15 Travelodge hotels, seven Super 8 Motels and seven Country Inn Suites. It also owns the Grand Okanagan Resort in Kelowna, British Columbia. Of the 36 Royal Host hotels, 17 are in Ontario. CHIP also owns 36 hotels and is strongest in the Alberta market. CHIP's well-known names include Radisson hotels in Calgary, Canmore, Saskatoon, Winnipeg, Quebec City and Seattle. CHIP also owns six Imperial 400 hotels in Saskatchewan, the Citadel Inn in Halifax, the Holiday Inn Fredericton and the Mayfield Inn in Edmonton. Royal Host says the deal would result in an increase in both cash flow and distributable income to both sets of unitholders in 2000. Unitholders of Royal Host would get a boost in distributable income of between 8¢ and 14¢ a unit next year, the REIT says. CHIP unitholders would see distributable income climb by between 17¢ and 23¢ a unit. In 1998, Royal Host paid out 92¢ a unit, and it predicts $1.20 a unit in distributions for 1999. CHIP paid out $1.20 a unit in 1998. The gains in distributable income would arise out of the $7-million to $10-million in annual savings Royal Host believes it can achieve for the next five years on things like administration, management staffing levels and bulk purchasing. "They are obvious," Greg Royer, Royal Host's executive vice-president, marketing, says of the cost-cutting opportunities. "If they are not taken advantage of by the present unitholders of the two companies, they will be taken advantage of by somebody else." A bigger REIT, he says, would be better able to capture the attention of equity markets when the deep-freeze now gripping the world of hotel financings thaws. Frank Mayer, a real estate analyst at HSBC Securities in Toronto, applauds the plan. There are too many publicly traded real estate entities in Canada, Mr. Mayer says, and consolidation is overdue. "Moves like this are ones that capital markets will respond positively towards," he says. In general, Mr. Mayer says larger companies enjoy numerous advantages, including better management and lower costs of capital. There are already clear signs institutional investors are paying more attention to RioCan REIT, which became Canada's first REIT to have a market capitalization of about $1-billion with its takeover of RealFund. On Friday, more than one-million RioCan units changed hands -- a daily trading level almost unheard of in the past. Alam Pirani, managing director of Colliers International Hotel Realty in Toronto, also is a fan of the proposed takeover. "Because of the synergies that the two companies have, it will enhance shareholder value," Mr. Pirani says. He also says the deal makes sense because there is little geographical overlap between the two hotel portfolios. In particular, CHIP unitholders would benefit by having their exposure to the Western Canadian economy reduced, he says. One critic of the proposal is David Vanderwood, a small-cap equity analyst with Odlum Brown Ltd. in Vancouver. Mr. Vanderwood believes Royal Host's offer is much too low. "The bid is excessively cheap," he says. ROYAL HOST REIT CEO: Randy Royer Ticker: RYLun Listed: Toronto Stock Exchange Head office: Royco Hotels & Resorts Ltd. 209, 5940 Macleod Trial, South Calgary, Alberta. T2W 2G4 Telephone: (403) 258-5600 INCOME STATEMENT 12.31.98 Operating revenue $000s 78,012 Net income $000s 8,262 Earnings per share $ 0.46 Dividends - cash $ 0.93 Cash flow operations $000s 18,882 RATIOS 12.31.98 Net profit margin 10.59 Return on equity n.a. Return on assets n.a. Current ratio 0.30 P/E ratio: 17.17 Dividend yield: 13.29 (at 5/27/99) |
