InnVest Real Estate Investment Trust
TSX : INN.UN

InnVest Real Estate Investment Trust

March 11, 2011 08:00 ET

InnVest REIT Reports Fourth Quarter Results

TORONTO, ONTARIO--(Marketwire - March 11, 2011) - InnVest Real Estate Investment Trust (the "REIT") and InnVest Operations Trust ("IOT"), collectively "InnVest" (TSX:INN.UN), today announced financial results for the three and twelve months ended December 31, 2010.

"We are long-term investors in quality hotel real estate. Many of the initiatives undertaken this year are investments in our future success. These have included notable profit-improving capital expenditures in key markets and assets, organizational enhancements to help focus our people on driving revenues, and adapting our corporate structure to protect cash flows for our unitholders," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "We have seen consistent improvement through the year led by occupancy gains and expect average daily rate gains to follow as demand and confidence continue to improve."

InnVest has postponed its previously scheduled conference call to follow the closing of its outstanding public offering of stapled convertible debentures and stapled units. Details of the revised conference call are included below.

Fourth Quarter Highlights

  • Subsequent to the year end, InnVest announced an agreement to issue $50.0 million 5.75% stapled convertible debentures due in 2018 and $25.2 million in equity at a price of $7.00 per stapled unit;
  • Completed an internal reorganization to become a Qualifying REIT on December 31, 2010;
  • Revenue per available room ("RevPAR") increased 3.0% led by a 1.8 point improvement in occupancy which offset a modest 0.2% decline in average daily rate ("ADR"). Excluding the displacement caused by renovations at two full-service hotels, RevPAR growth would have approximated 4.0%;
  • Hotel operating income ("HOI") was down 2.0% to $27.2 million. Excluding the renovation displacement and non-recurring hotel expenses incurred, HOI would have increased 6.6%;
  • Net income totaled $164.1 million compared to a net loss of $24.8 million in the prior period. The variance primarily reflects the benefit of a non-cash future income tax recovery of $187.6 million following InnVest's reorganization to a Qualifying REIT;
  • FFO and distributable income were down $3.2 million and $2.0 million, respectively, reflecting the lower HOI achieved as well as higher interest expense given higher convertible debenture debt balances outstanding during the quarter; and
  • Invested $15.3 million in the portfolio in profit-improving projects in key markets and assets.

SELECTED FINANCIAL INFORMATION

(unaudited) ($000s except per unit amounts) Three Months Ended Dec 31, 2010   Three Months Ended Dec 31, 2009   Twelve Months Ended Dec 31, 2010   Twelve Months Ended Dec 31, 2009  
Hotel revenues $ 148,429   $ 144,625   $ 609,566   $ 607,139  
Hotel operating income(1) $ 27,219   $ 27,779   $ 137,150   $ 141,511  
Net income (loss) and comprehensive income (loss) $ 164,084     ($24,802 ) $ 147,457     ($30,923 )
Reconciliation to funds from operations (FFO)                        
Add / (deduct)                        
  Depreciation and amortization   23,635     22,966     94,678     91,195  
  Future income tax recovery   (187,580 )   (16,162 )   (189,497 )   (24,547 )
  Non-cash executive and trustee compensation   65     48     212     268  
  Net (gain on sale) writedown of assets held for sale   -     (273 )   (327 )   226  
  Writedown of hotel properties and intangible assets   5,907     29,751     5,907     36,489  
  SIFT transition expenses   2,246     -     2,756     -  
Funds from operations (1)(2) $ 8,357   $ 11,528   $ 61,186   $ 72,708  
Reconciliation to distributable income                        
Add / (deduct)                        
  Amortization of deferred financing costs   -     -     -     23  
  Non-cash portion of mortgage interest expense   675     458     2,209     1,680  
  Reserve for replacement of furniture, fixtures and equipment and capital improvements   (6,116 )   (5,982 )   (25,081 )   (25,085 )
  Non-cash portion of convertible debentures interest and accretion   976     (121 )   3,791     2,142  
  Deferred land lease expense and retail lease income, net   24     26     98     56  
Distributable income (1) $ 3,916   $ 5,909   $ 42,203   $ 51,524  
Per unit data                        
FFO - basic $ 0.093   $ 0.135   $ 0.690   $ 0.941  
FFO - diluted $ 0.093   $ 0.131   $ 0.673   $ 0.939  
Distributable income - basic $ 0.044   $ 0.069   $ 0.476   $ 0.667  
Distributable income - diluted $ 0.044   $ 0.069   $ 0.469   $ 0.666  
Distributions per unit (3) $ 0.1251   $ 0.1251   $ 0.5004   $ 0.6668  
(1) Hotel operating income, funds from operations and distributable income are non-GAAP measures of earnings and cash flow commonly used by industry analysts. Non-GAAP financial measures do not have a standardized meaning and are unlikely to be comparable to similar measures used by other organizations.
(2) For purposes of the calculation of funds from operations, amortization of deferred financing is excluded from depreciation and amortization.
(3) Distributions per unit include cash distributions and distributions arising from the Distribution Reinvestment Plan.

The operating statistics relating to room revenues are on a same-hotel basis and exclude one hotel which is classified as an operating lease and hotels whose operating performance have not been included in the full periods presented.

  Three months ended December 31, 2010    Variance to 2009   Twelve months ended December 31, 2010   Variance to 2009  
Occupancy                
  Ontario 56.5 % 4.4 pts   58.8 % 2.5 pts  
  Quebec 55.5 % 0.7 pts   61.0 % 1.3 pts  
  Atlantic 53.0 % (0.3 pts ) 61.0 % 0.1 pts  
  Western 57.1 % (1.4 pt ) 61.1 % (1.2 pts )
Total 55.9 % 1.8 pts   60.1 % 1.2 pt  
ADR                
  Ontario $105.18   (1.4 %) $107.43   (1.4 %)
  Quebec $114.12   1.9 % $113.67   0.1 %
  Atlantic $109.87   1.1 % $115.65   (0.2 %)
  Western $135.99   0.3 % $137.62   0.2 %
Total $113.79   (0.2 %) $115.98   (0.7 %)
RevPAR                
  Ontario $59.42   7.0 % $63.17   2.9 %
  Quebec $63.35   3.3 % $69.39   2.4 %
  Atlantic $58.20   0.5 % $70.52   (0.1 %)
  Western $77.66   (2.1 %) $84.13   (1.7 %)
Total $63.58   3.0 % $69.68   1.2 %

FINANCIAL REVIEW

Three months ended December 31, 2010

RevPAR trends have consistently improved through the last three quarters of 2010, led by occupancy gains. For the three months ended December 31, 2010, hotel revenues increased by 2.6% to $148.4 million. Over this period, RevPAR increased 3.0% with a 1.8 point increase in overall occupancy offsetting a modest 0.2% ADR decline. Operating results during the quarter were negatively affected by renovation displacement as a result of ongoing room renovations at the Fairmont Palliser in Calgary and the start of room renovations at the Hilton Quebec. Excluding these two hotels, fourth quarter RevPAR growth would have approximated 4.0%. Renovations at both hotels are expected to be completed in the second quarter of 2011.

Room revenues during the quarter increased $2.8 million, or 2.6%, to $109.4 million. Ontario experienced the strongest growth led by the Greater Toronto Area which saw RevPAR increase over 13%. The Toronto downtown core continues to benefit from strong corporate demand. Increases were experienced across the Quebec region led by growth in both occupancy and rate. Results in Atlantic Canada were relatively unchanged with strength in New Brunswick and Newfoundland offsetting declines in Prince Edward Island. The decline in Western Canada was driven by displacement at the Fairmont Palliser which saw its RevPAR down approximately 15% during the quarter.

For the three months ended December 31, 2010, non-room revenues totalled $39.0 million, up $1.0 million or 2.6% compared to the prior year reflecting the increased occupancy achieved.

Hotel expenses for the fourth quarter increased $4.4 million or 3.7% when compared to 2009. Hotel expenses include non-recurring operating restructuring charges and sales training initiatives totalling approximately $1.3 million. Excluding this amount, hotel expenses would have increased 2.6% during the quarter reflecting costs associated with increased occupancies of 1.8 points (a 3.3% increase from the prior period).

For the three months ended December 31, 2010, InnVest generated HOI of $27.2 million, down $0.6 million or 2.0% as compared to the prior year. Excluding the renovations displacement and non- recurring hotel expenses incurred, HOI would have increased 6.6%. Fourth quarter hotel operating income margins were down 90 basis points to 18.3%.

Other income and expenses for the fourth quarter decreased $18.4 million as compared to the prior year. Fourth quarter expenses include a non-cash $5.9 million writedown relating to one hotel which may not renew its existing license agreement, as compared to a $29.8 million writedown of hotel properties in the prior period. Excluding this non-cash variance, other expenses increased $5.5 million reflecting $2.2 million in costs associated with the SIFT transition and $2.2 million in increased interest expenses given higher convertible debenture balances outstanding. During the third quarter of 2010, InnVest refinanced one mortgage which included a $95.0 million mortgage paydown. Yield maintenance costs related to the early repayment are being expensed evenly to February 2011, the original maturity date. This has largely offset the incremental interest savings realized from the mortgage reduction.

During the fourth quarter, InnVest became a Qualifying REIT pursuant to the SIFT rules and, accordingly, reversed $187.6 million of future income tax expense previously recognized.

The fourth quarter of 2010 contributed distributable income of $3.9 million ($0.044 per unit diluted) and FFO of $8.4 million ($0.093 per unit diluted).

Twelve months ended December 31, 2010

For the twelve months ended December 31, 2010, hotel revenues are relatively unchanged at $609.6 million. Year-to-date, RevPAR increased 1.2% with a 1.2 point increase in overall occupancy offsetting a 0.7% decline in ADR.

For the year, InnVest generated HOI of $137.2 million, down 3.1% or $4.4 million as compared to the prior year. Limited revenue growth was offset with increased operating costs including a number of non- recurring charges in the fourth quarter and one-time savings recognized in the prior period. For the year, hotel operating income margins declined 80 basis points to 22.5% reflecting the lower ADR achieved combined with non-recurring operating costs incurred.

InnVest generated annual FFO of $61.2 million ($0.673 per unit diluted) and distributable income of $42.2 million ($0.469 per unit diluted). InnVest's payout ratio for the year approximated 105.2% (101.2% excluding the DRIP).

BALANCE SHEET REVIEW

At December 31, 2010, InnVest has cash on hand totalling $12.8 million and $32.6 million available under its credit facility.

InnVest had mortgages payable of $834.0 million with a weighted average term of 2.8 years and a weighted average interest rate of 6.0%. InnVest has no mortgage maturities until September 2011.

During the third quarter of 2010, InnVest successfully completed the early one-year extension of a mortgage originally scheduled to mature in February 2011. As part of the early refinancing, InnVest repaid $95.0 million of mortgage principal plus yield maintenance and other fees funded by cash on hand. This early renewal enabled InnVest to secure its one-year extension interest rate on the remaining principal of $170.0 million beginning February 28, 2011 at a rate of 3.51%. The mortgage includes one additional one-year extension (to February 28, 2013), at InnVest's option, subject to certain minimum thresholds at the time of maturity.

At December 31, 2010, InnVest's gross book value leverage excluding and including convertible debentures was 38.3% and 50.0%, respectively.

Capital expenditures during the year totalled $39.4 million compared to the FF&E reserve of $25.1 million. Investments reflect a number of profit-improving projects, including guestroom renovations at the Fairmont Palliser in Calgary as well as the completion of meeting space renovations and the beginning of room renovations at the Hilton Quebec City. In addition, investments included Holiday Inn's brand re- launch at a number of hotels, as well as the conversion of one hotel to the Holiday Inn brand.

On February 22, 2011, InnVest announced an agreement to issue $50.0 million aggregate principal amount of 5.75% stapled convertible unsecured subordinated debentures due March 30, 2018 and 3,600,000 stapled units at a price of $7.00 per Unit for gross proceeds of $25.2 million. Net proceeds will be used to fund capital improvements, to fund potential future acquisitions and for general trust purposes. Closing is expected to occur on or about March 15, 2011.

INCOME TAX DEFERRAL PERCENTAGE

For 2010, 67.0% of unitholder distributions will not be taxable to unitholders.

QUALIFYING REIT PROCESS

On December 31, 2010, the REIT completed an internal reorganization in order to become a Qualifying REIT under Canadian income tax rules applicable to specified investment flow-through entities ("SIFT"s). The purpose of the reorganization was to increase unitholder value by adopting a structure that allows the REIT to continue to flow through its income to unitholder without being subject to entity-level taxation.

Under the reorganization, the REIT transferred all of its directly and indirectly held operating assets to IOT, a newly-formed taxable investment trust. Following this transaction, IOT holds the operating assets, earns revenues from hotel customers and pays rent to the REIT (the owner of the hotels). IOT also indirectly holds a 50% interest in Choice Hotels Canada Inc. and earns revenues from franchising fees.

On December 31, 2010, each REIT unitholder received one non-voting IOT unit for each REIT unit held. Each issued and outstanding REIT unit now trades together with a non-voting IOT unit on a "stapled" basis on the Toronto Stock Exchange (the "TSX") under the symbol INN.UN.

INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

As previously disclosed, InnVest intends to revalue its hotel properties as at January 1, 2010 under the deemed cost election available under IFRS. InnVest expects that the impact of the deemed cost election will be a reduction in the carrying value of its IFRS opening balance sheet hotel properties as at January 1, 2010 of approximately $200 to $230 million.

The fair value adjustment upon conversion to IFRS as at January 1, 2010, as well as the elimination of the accumulated depreciation balance, will adversely impact InnVest's leverage ratio. Although there is no increase in actual debt outstanding, the adjustment will result in an increase to InnVest's reported gross book value leverage. As a result, InnVest expects to amend its Declaration of Trust to address its leverage restrictions. Interest and debt coverage ratios are not expected to be materially impacted.

QUARTERLY CONFERENCE CALL

Due to disclosure restrictions relating to the pending closing of its public offering on March 15, 2011, management has postponed its conference call previously scheduled for Friday March 11, 2011 at 11:00am. Management will now host a conference call on Wednesday March 16, 2011 at 11:00 a.m. Eastern time. Investors are invited to access the call by dialing 416-340-2216 or 1-877-240-9772. A recording of this call will be made available March 16th beginning at 1:00 pm through to 11:59 p.m. on March 30, 2011. To access the recording please call 905-694-9451 or 1-800-408-3053 and use the reservation number 2460727#.

INNVEST PROFILE

InnVest Real Estate Investment Trust (the "REIT") is an unincorporated open-ended real estate investment trust which owns a portfolio of 144 hotels across Canada representing approximately 19,000 guest rooms operated under internationally recognized brands. The REIT leases its hotels to InnVest Operations Trust ("IOT"), a taxable investment trust. IOT directly and indirectly holds all of the hotel operating assets, earns revenues from hotel customers and pays rent to the REIT. IOT also holds a 50% interest in Choice Hotels Canada Inc., one of the largest franchisor of hotels in Canada, and earns revenues from franchising fees.

Each issued and outstanding REIT unit trades together with a non-voting unit of IOT as a "stapled unit" on the Toronto Stock Exchange (the "TSX") under the symbol INN.UN. The REIT's convertible debentures trade on the TSX under the symbols INN.DB.B, INN.DB.C, INN.DB.D and INN.DB.E.

InnVest Real Estate Investment Trust
 
CONSOLIDATED BALANCE SHEETS
 
(in thousands of dollars) December 31, 2010 December 31, 2009
    (Restated)
ASSETS        
         
Current Assets        
  Cash $ 9,001 $ 101,054
  Accounts receivable   28,751   22,591
  Prepaid expenses and other assets   8,345   7,962
  Asset held for sale   -   33
    46,097   131,640
Restricted cash   3,831   3,815
Hotel properties   1,694,210   1,740,642
Other real estate properties   16,955   15,770
Licence contracts   15,221   16,537
Intangible and other assets   18,116   36,120
Future income tax asset   5,603   -
Asset held for sale   -   5,685
         
  $ 1,800,033 $ 1,950,209
         
LIABILITIES        
         
Current Liabilities        
  Accounts payable and accrued liabilities $ 78,236 $ 67,710
  Distributions payable   3,731   3,649
  Current portion of long-term debt   82,808   21,326
  Liabilities related to asset held for sale   -   54
    164,775   92,739
         
Long-term debt   758,122   931,685
Other long-term obligations   6,921   6,448
Convertible debentures   241,472   225,918
Future income tax liability   2,537   186,430
    1,173,827   1,443,220
Non-controlling interest (Note 1)   52,832   -
Commitments and contingencies        
UNITHOLDERS' EQUITY   573,374   506,989
         
  $ 1,800,033 $ 1,950,209
 
 
InnVest Real Estate Investment Trust
 
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
 
  (unaudited)          
(in thousands of dollars, except per unit amounts) Three Months Ended December 31, 2010   Three Months Ended December 31, 2009   Year Ended December 31, 2010   Year Ended December 31, 2009  
      (Restated)       (Restated)  
   
Total revenues $ 151,963   $ 147,786   $ 622,847   $ 619,115  
Hotel revenues $ 148,429   $ 144,625   $ 609,566   $ 607,139  
   
Hotel expenses                        
  Operating expenses   102,419     97,881     395,585     389,870  
  Property taxes, rent and insurance   13,341     13,289     54,282     52,728  
  Management fees   5,450     5,676     22,549     23,030  
    121,210     116,846     472,416     465,628  
   
Hotel operating income   27,219     27,779     137,150     141,511  
   
Other (income) and expenses                        
  Interest on mortgages and other debt   14,306     14,259     57,587     55,955  
  Convertible debentures interest and accretion   4,953     2,767     19,189     13,598  
  Corporate and administrative   3,625     1,264     8,005     5,574  
  Capital tax   18     45     74     193  
  Other business income, net   (1,492 )   (1,354 )   (5,231 )   (5,184 )
  Other income   (237 )   (598 )   (558 )   (944 )
  Depreciation and amortization   23,635     22,966     94,678     91,165  
  Writedown of hotel properties and intangible assets   5,907     29,751     5,907     36,489  
    50,715     69,100     179,651     196,846  
   
Loss from continuing operations before income tax recovery   (23,496 )   (41,321 )   (42,501 )   (55,335 )
Future income tax recovery   (187,580 )   (16,162 )   (189,497 )   (24,547 )
   
Income (loss) from continuing operations   164,084     (25,159 )   146,996     (30,788 )
   
Net income (loss) from discontinued operations   -     357     461     (135 )
Net income (loss) and comprehensive income (loss) $ 164,084   $ (24,802 ) $ 147,457   $ (30,923 )
   
Income (loss) from continuing operations, per unit                        
  Basic $ 1.832   $ (0.294 ) $ 1.658   $ (0.398 )
  Diluted $ 1.459   $ (0.294 ) $ 1.487   $ (0.398 )
   
Net income (loss) per unit                        
  Basic $ 1.832   $ (0.290 ) $ 1.663   $ (0.400 )
  Diluted $ 1.459   $ (0.290 ) $ 1.492   $ (0.400 )
   
Income (loss) from discontinued operations, per unit                        
  Basic and diluted $ -   $ 0.004   $ 0.005   $ (0.002 )
 
 
InnVest Real Estate Investment Trust
 
CONSOLIDATED STATEMENTS OF CASH FLOWS  
 
  (unaudited)          
(in thousands of dollars) (unaudited) Three Months Ended December 31, 2010   Three Months Ended December 31, 2009   Year Ended December 31, 2010   Year Ended December 31, 2009  
      (Restated)       (Restated)  
OPERATING ACTIVITIES                        
Income (loss) from continuing operations $ 164,084   $ (25,159 ) $ 146,996   $ (30,788 )
                         
Add (deduct) items not affecting operations                        
  Depreciation and amortization   23,635     22,966     94,678     91,165  
  Writedown of hotel properties and intangible assets   5,907     29,751     5,907     36,489  
  Non-cash portion of mortgage interest expense   675     458     2,209     1,680  
  Non-cash portion of convertible debentures interest and accretion   976     (121 )   3,791     2,142  
  Future income tax recovery   (187,580 )   (16,162 )   (189,497 )   (24,547 )
  Non-cash executive and trustee compensation   65     48     212     268  
Changes in non-cash working capital   12,797     7,396     6,581     401  
Discontinued operations   -     (1,867 )   440     (2,089 )
    20,559     17,310     71,317     74,721  
                         
FINANCING ACTIVITIES                        
Repayment of long-term debt   (5,762 )   (2,737 )   (123,710 )   (11,217 )
Proceeds from long-term debt   -     (554 )   3,100     5,979  
Issue of new units, net   -     47,601     -     47,601  
Issue of convertible debentures   -     47,825     71,688     47,825  
Redemption and cancellation of convertible debentures   -     -     (45,678 )   -  
Units repurchased pursuant to normal course issuer bid   -     -     -     (1,166 )
Unit distributions   (11,078 )   (9,748 )   (42,614 )   (49,543 )
Increase in operating loan   7,200     -     7,200     -  
Repayment of bridge loan   -     -     (1,000 )   (2,000 )
Discontinued operations repayment of debt   -     -     -     (4,576 )
    (9,640 )   82,387     (131,014 )   32,903  
                         
INVESTING ACTIVITIES                        
Capital expenditures on hotel properties   (15,251 )   (6,614 )   (39,441 )   (25,280 )
Change in intangible and other assets   (281 )   (382 )   (943 )   (1,795 )
Deposit on lease arrangement   -     -     2,013     -  
Proceeds from sale of discontinued asset, net of costs and mortgages receivable   -     (241 )   6,031     3,164  
Increase in restricted cash   (153 )   (294 )   (16 )   (802 )
    (15,685 )   (7,531 )   (32,356 )   (24,713 )
                         
(Decrease) increase in cash during the year   (4,766 )   92,166     (92,053 )   82,911  
Cash, beginning of year   13,767     8,888     101,054     18,143  
Cash, end of year $ 9,001   $ 101,054   $ 9,001   $ 101,054  
                         
Supplemental disclosure of cash flow information:                        
Cash paid for interest $ 15,885   $ 16,232   $ 69,323   $ 65,365  
Cash paid for income taxes (including capital tax) $ -   $ 107   $ 76   $ 230  

Note 1. Non-controlling Interest

Non-controlling interest represents the InnVest unitholders' interest in IOT through ownership of the IOT non-voting units after giving effect to the reorganization of InnVest. Each non-voting unit of IOT trades together with each issued and outstanding unit of the REIT as an InnVest Unit. On December 31, 2010, IOT directly and indirectly holds all of the hotel operating assets and indirectly holds a 50% interest in Choice Hotels Canada.

Contact Information

  • InnVest Real Estate Investment Trust
    Kenneth D. Gibson
    President and Chief Executive Officer
    (905) 206-7100
    (905) 206-7114 (FAX)
    or
    InnVest Real Estate Investment Trust
    Tamara L. Lawson
    Chief Financial Officer and Corporate Secretary
    (905) 206-7100
    (905) 206-7114 (FAX)
    www.innvestreit.com