Legacy Hotels Real Estate Investment Trust $8.05 – Toronto symbol LGY.UN

LEGACY HOTELS REAL ESTATE TRUST $8.05 (Toronto symbol LGY.UN; SI Rating: Extra risk) owns 24 luxury hotels with over 10,000 guestrooms in Canada and the United States, including The Fairmont Royal York in Toronto and the Fairmont Le Château Frontenac in Quebec City. Fairmont Hotels & Resorts Inc. (see box) owns roughly 24% of Legacy, and manages all of Legacy’s hotels.

In the third quarter of 2005, Legacy earned $0.19 a unit, up 46.2% from $0.13 a year earlier, while cash flow per unit rose 26.8%, to $0.38 from $0.30. Revenue grew 5.9%, to $221.6 million from $209.3 million, as a 3.6% rise in occupancy offset a slight drop in the average daily room rate.

Legacy’s Canadian hotels get about a third of their revenue from foreign travelers, mainly from the United States. The 8% rise in the Canadian dollar against the U.S. dollar in the first nine months of 2005 has hurt the flow of U.S. tourists to Legacy’s hotels, and cut into its revenue.

The trust has sufficient cash flow and access to credit to maintain its $0.32 a unit cash distribution rate, payable quarterly, which yields 4.0%. However, Legacy will probably have to wait until tourism levels improve before it increases the distribution.

The units now trade at 11.3 times the $0.71 a unit that Legacy should earn in 2006. That’s cheap in light of its high quality properties, which should help it withstand any economic downturn. It could also benefit from potential asset sales by Fairmont, or by converting some of its hotels into condominiums.

Legacy is a buy for income and growth.

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