InnVest Real Estate Investment Trust

TSX : INN.UN


InnVest Real Estate Investment Trust

March 20, 2014 08:00 ET

InnVest REIT Reports Fourth Quarter Results

Execution of Strategic Plan Contributing to Improved Earnings

TORONTO, ONTARIO--(Marketwired - March 20, 2014) - InnVest Real Estate Investment Trust ("InnVest") (TSX:INN.UN), today announced financial results for the three months and year ended December 31, 2013.

"2013 saw us embark on year one of our two-year plan to reposition InnVest's portfolio, strengthen its balance sheet and increase long-term profitability. We are encouraged by the progress achieved including the completion of a number of significant renovations in key assets and markets as well as confirmed or committed transactions representing more than 75% of our divestiture objectives" said Anthony Messina, InnVest's President and Chief Executive Officer. "The accretive nature of our divestiture program contributed to improved operating performance during the quarter. Building on this progress, InnVest recently announced a number of important corporate changes as it looks to accelerate its strategic plan and position itself as the leading growth platform in Canada's hospitality industry."

Fourth Quarter Highlights

  • Revenue per available room ("RevPAR") on a same-hotel basis improved 2.4%. Excluding assets under renovation during the quarter or recovering from renovations undertaken earlier in the year, same-hotel RevPAR growth would have approximated 4.5%;
  • Same-hotel revenues improved 3.1%. Overall revenues declined $7.8 million or 5.3% reflecting asset sales. Notwithstanding the revenue decline, GOP improved $1.0 million, or 3.3%, to $29.8 million, highlighting the low yielding nature of assets sold as well as reflecting improved same-hotel portfolio margins; and
  • Funds from operations and distributable income improved to $12.5 million ($0.127 per unit diluted) and $8.2 million ($0.086 per unit diluted).

Full Year Transaction Highlights

  • Entered into agreements to refinance $251.8 million of 2014 mortgage maturities, lowering InnVest's average interest costs and significantly extending its term to maturity;
  • Sold eight non-core assets for aggregate gross proceeds of $113.1 million. Subsequent to the end of the year, management has sold, or entered into commitments to sell, eight additional assets for aggregate gross proceeds of $28.1 million; and
  • Redeemed its $75.0 million Series B 6.0% convertible debentures following the issuance of $115.0 million Series G 5.75% convertible debentures in the first quarter.

InnVest's Consolidated Financial Statements and Management's Discussion and Analysis for the years ended December 31, 2013 and 2012 are available on InnVest's website at www.innvestreit.com.

SELECTED FINANCIAL INFORMATION


Three Months Ended December 31, 2013

Three Months Ended
December 31, 2012

Year Ended December 31, 2013
Year Ended
December 31,
2012
($000s except per unit amounts) (unaudited) (unaudited)
Revenue
Hotel properties $ 140,478 $ 147,651 $ 585,088 $ 609,510
Other real estate properties 189 848 1,810 3,319
$ 140,667 $ 148,499 $ 586,898 $ 612,829
Gross operating profit (1)
Hotel properties $ 29,841 $ 28,488 $ 133,834 $ 136,484
Other real estate properties (90) 305 304 1,105
$ 29,751 $ 28,793 $ 134,138 $ 137,589
Net (loss) income and comprehensive (loss) income $ (47,741) $ 146,498 $ (54,956) $ (103,156)
Reconciliation to funds from operations (FFO)
Add / (deduct)
Depreciation and amortization 21,225 22,094 82,534 93,683
Deferred income tax (recovery) expense (1,741) (165,363) (2,085) 20,840
Unrealized changes in the fair value of financial liabilities
8,941

(4,033)

12,768

10,154
Distributions included in corporate and administrative expense
36

36

145

145
Gain on sale of assets (3,202) (1,026) (11,904) (1,456)
Writedown of hotel and other real estate properties, net
28,454 13,556 30,840 42,523
SIFT transition expenses - - - 980
Lease surrender cost 6,500 - 6,500 -
Funds from operations (2) $ 12,472 $ 11,762 $ 63,842 $ 63,713
Reconciliation to distributable income
Add / (deduct)
Non-cash portion of mortgage interest expense 532 624 2,138 2,389
Non-cash portion of convertible debentures interest and 1,141 1,059 4,817 4,102
FF&E reserve (5,972) (6,219) (24,612) (25,585)
Distributable income (2) $ 8,173 $ 7,226 $46,185 $44,619
Per unit data - Diluted
Net (loss) income and comprehensive (loss) income ($0.509) $1.219 ($0.586) ($1.103)
FFO $0.127 $0.125 $0.625 $0.660
Distributable income $0.086 $0.077 $0.462 $0.471
Distributions declared $0.0999 $ 0.0999 $0.3996 $ 0.3996
(1) Gross operating income ("GOP") is defined as revenues less hotel and other real estate properties expenses.
(2) Funds from operations and distributable income are non-IFRS financial measures of earnings and cash flow commonly used by industry analysts. Non-IFRS financial measures do not have a standardized meaning and are unlikely to be comparable to similar financial measures used by other organizations.

The operating statistics relating to gross room revenues for the three months and year ended December 31, 2013 and 2012 are on a same-hotel basis (128 hotels) and exclude hotels sold during the periods presented.


Three months ended December 31, 2013 Variance to 2012 Year ended December 31, 2013 Variance to 2012
Occupancy
Ontario 59.3% 1.4 pts 62.4% 1.7 pts
Quebec 57.0% (2.5 pts) 62.6% (0.9 pts)
Atlantic 51.0% (0.7 pts) 58.2% (1.8 pts)
Western 64.8% 2.1 pts 66.4% 0.1 pts
Total 58.4% 0.3 pts 62.5% 0.3 pts
ADR
Ontario $ 105.41 (0.2%) $ 107.55 (0.7%)
Quebec 112.11 (0.2%) 113.16 0.4%
Atlantic 113.23 2.1% 117.35 1.3%
Western 163.50 5.4% 161.61 3.1%
Total $ 119.92 1.8% $ 120.97 0.7%
RevPAR
Ontario $ 62.49 2.2% $ 67.12 2.1%
Quebec 63.89 (4.3%) 70.79 (1.0%)
Atlantic 57.74 0.7% 68.26 (1.8%)
Western 106.00 9.0% 107.33 3.3%
Total $ 70.09 2.4% $ 75.58 1.2%

OPERATIONS REVIEW

Three months ended December 31, 2013

Same-hotel revenues during the fourth quarter improved 3.1% led by strength in the Ontario and the Western regions. Overall revenues declined $7.8 million or 5.3%, with asset sales (including one early lease surrender) contributing $11.3 million of reduced revenues. During the fourth quarter, InnVest recognized $1.2 million of business interruption insurance revenue related to Calgary floods in late June.

Same-hotel RevPAR increased 2.4% led by a 1.8% growth in ADR and modest growth in occupancy. Excluding assets under renovation during the quarter, or recovering from renovations undertaken earlier in the year, same-hotel RevPAR growth would have approximated 4.5%.

Notwithstanding the revenue decline, overall GOP improved $1.0 million, or 3.3%, to $29.8 million, reflecting improved same-hotel portfolio margins as well as highlighting the low yielding nature of assets sold.

Mortgage interest expense declined $1.0 million owing to the year-to-date repayment of $72.4 million of mortgage debt in 2013. Higher interest expense related to InnVest's convertible debentures reflects the issuance of $115.0 million of Series G 5.75% Debentures on February 27, 2013 and the early redemption of its $75.0 million 6.0% Series B Debentures on April 1, 2013.

During the fourth quarter, InnVest entered into an early lease surrender agreement with the landlord of one of its leasehold hotels which resulted in a one-time charge of $6.5 million.

Corporate and administrative expenses declined year-over-year reflecting the prior period inclusion of a one-time $1.1 million charge relating to an executive departure.

During the fourth quarter, InnVest recognized net gains on sales of $3.2 million as well as the reversal of prior period impairments totalling $1.3 million. As part of its impairment review at December 31, 2013, InnVest completed internal valuations for each of its properties. An external third party hotel valuation firm completed a limited scope appraisal review on an individual hotel-by-hotel basis to support management's internal valuations. At December 31, 2013, total aggregate hotel property values exceeded its net book value. InnVest's accounting policy requires management to recognize impairment charges on individual assets based on their estimated recoverable amount, unlike gains, which can only be recognized upon sales. As a result, fourth quarter results include a $29.8 million non-cash impairment charge relating to 13 properties.

The fourth quarter generated FFO of $12.5 million ($0.127 per unit diluted) and distributable income of $8.2 million ($0.086 per unit diluted), improving $0.7 million and $0.9 million, respectively. The year-over-year improvements reflect higher Hotel GOP achieved combined with lower corporate expenses.

Year ended December 31, 2013

For the year ended December 31, 2013 hotel revenues decreased $24.4 million, or 4.0% owing to $29.9 million of reduced contribution from asset divestitures. Same-hotel revenues improved 1.0% or $5.5 million.

Annual hotel revenues achieved were also impacted by disruption caused by renovations at select hotels throughout the year including the Delta Winnipeg, Sheraton Calgary Suites Eau Claire and 31 Comfort Inn hotels.

Same-hotel RevPAR for the year improved 1.2% with renovation activity limiting the annual growth achieved. Excluding hotels impacted by renovations, same-hotel RevPAR growth would have approximated 3%.

Notwithstanding the hotel revenue reduction of $24.4 million, Hotel GOP in 2013 declined less than $2.7 million, or 1.9%, highlighting the low yielding nature of divestitures completed. Assets sold contributed approximately $2.5 million of the Hotel GOP decline.

For the year ended December 31, 2013, InnVest generated FFO of $63.8 million ($0.625 per unit diluted) and distributable income of $46.2 million ($0.462 per unit diluted), improvements of 0.2% and 3.5%, respectively. For the year, InnVest's payout ratio was 81.1%.

PORTFOLIO REPOSITIONING PROGRAM

In 2013, InnVest sold eight non-core assets for gross proceeds of $113.1 million (net proceeds of approximately $28.4 million). Three assets were sold subsequent to the end of the year for gross proceeds of $11.8 million and five hotels are currently under purchase and sale agreements for aggregate gross proceeds of approximately $16.3 million.

During the fourth quarter of 2013, InnVest entered into an agreement with the landlord of one of its leasehold hotels, the 328-room National Hotel and Suites located in Ottawa, for an early lease surrender effective December 31, 2013, by which time the hotel ceased operations. InnVest negotiated the early lease surrender as part of its strategic review and efforts to reposition its portfolio towards higher return properties. This leasehold hotel contributed negative cash flow of $3.3 million in 2013. As part of the lease surrender agreement, InnVest recognized a charge of $6.5 million during the fourth quarter, representing an early termination fee payable to the landlord, as well as employee severance obligations related to the closure of the hotel.

CAPITAL INVESTMENT PROGRAM

Capital expenditures during the year ended December 31, 2013 totalled $60.2 million. Capital investments reflect the rollout of InnVest's Comfort Inn revitalization program which included the renovation of 31 Comfort Inn hotels throughout the year with an additional 30 to be considered in 2014. Other significant projects underway in 2013 included the start of multi-year renovations at select full-service hotels including the Delta Winnipeg and the Sheraton Suites Calgary Eau Claire.

Planned investments in 2014 include completing guestroom upgrades at the Delta Winnipeg, Delta Prince Edward and Fairmont Palliser, as well as the continuation of phased renovations at the Sheraton Suites Eau Claire in Calgary.

BALANCE SHEET

At December 31, 2013, InnVest has total liquidity of $85.2 million (including cash, restricted cash and availability under InnVest's operating line of credit and capital expenditure loan facility).

In October 2013, InnVest completed the refinancing of a $183.8 million mortgage for a 67-month term through May 2019, with two additional one-year renewal options through May 2021. The mortgage, secured by 42 properties, will carry its then-existing weighted average interest rate of 6.0% through May 2014 (the original maturity date) and approximately 5.1% thereafter.

In January 2014, InnVest completed the refinancing of the Sheraton Eau Claire, Calgary for $68.0 million at a fixed interest rate of 5.33% for a 10-year term. Incremental proceeds of $36.4 million will be used to partially repay a $45.4 million mortgage maturity in April 2014.

Proforma these transactions, InnVest reduced its weighted average cost of mortgage debt to 5.5% and lengthened its average term of maturity from 3.0 years to 4.3 years.

Asset sales contributed to the overall mortgage debt repayment of $72.4 million during the year. While leverage did not improve owing to asset impairments recognized and costs associated with the early lease surrender, overall debt service costs were reduced by $2.1 million during the year. InnVest's leverage at December 31, 2013 including convertible debentures was 65.5% (44.0% excluding convertible debentures), compared to 64.5% at December 31, 2012.

INCOME TAX DEFERRAL

For distributions paid in 2013, 28.0% will not be taxable to Canadian resident unitholders through a combination of return on capital and non-taxable portion of capital gains (2012 - 40%).

SETTLEMENT WITH ORANGE CAPITAL AND INTRODUCTION OF KINGSETT CAPITAL AS STRATEGIC CAPITAL PARTNER

On March 13, 2014, InnVest announced that it had reached a settlement (the "Settlement") between InnVest and Orange Capital, LLC ("Orange Capital"), with the support of Westmont Hospitality Group. KingSett Capital, Canada's leading private equity real estate investor and a pre-existing 7.1% owner of InnVest units, played a key role in facilitating the Settlement outcome and has agreed to become a strategic capital partner of InnVest. As a result of this partnership, InnVest has agreed to enter into $50 million of new second-mortgage financing with KingSett, subject to the negotiation and entering into of definitive agreements including the approval of certain of InnVest's senior mortgage lenders. In addition, InnVest will, at its option, have access to $50 million of additional second-mortgage financing from KingSett. In aggregate, this financing would significantly enhance InnVest's liquidity position. Furthermore, KingSett may purchase assets from InnVest at fair market value, subject to the Board of Trustees' approval.

The Settlement was unanimously supported by the Special Committee of the Board of Trustees of InnVest. As part of the Settlement, Orange Capital agreed to withdraw its request for a special meeting of unitholders, which had been scheduled for May 27, 2014.

OUTLOOK

The hospitality industry is highly correlated to the economy and as such, uncertain global and domestic economic conditions continue to impact the Canadian lodging industry. InnVest's broad, diversified portfolio remains a key advantage in the current environment.

Fundamentals for the Canadian lodging industry remain favourable, with improving demand expectations through the coming year and a low supply outlook.

Through the end of 2014, InnVest expects to continue its portfolio repositioning strategy of divesting of low-yielding assets and reinvesting proceeds generated to undertake an extensive capital program to enhance its product offering at a number of select hotels. While impacting near-term operating results caused by displacement, these targeted investments are expected to improve the portfolio's competitive positioning and operating performance through increased occupancies and average daily rates over the longer term.

InnVest's strategy to reduce debt, reposition its portfolio and invest in core assets is expected to enhance the stability and growth of the portfolio's long-term cash flows.

QUARTERLY CONFERENCE CALL

Management will host a conference call on Thursday March 20, 2014 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing 416-340-9432 or 1-800-446-4472. You will be required to identify yourself and the organization on whose behalf you are participating. A recording of this call will be made available March 20, 2014 beginning at 1:00 pm through to April 3, 2014. To access the recording please call 905-694-9451 or 1-800-408-3053 and use the reservation number 7955796#.

FORWARD LOOKING STATEMENTS

Statements contained in this press release that are not historical facts are forward-looking statements which involve risk and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Among the key factors that could cause such differences are real estate investment risks, hotel industry risks, competition and the status of InnVest REIT as a REIT for Canadian federal income tax purposes in any year. These and other factors are discussed in InnVest REIT's annual information form for the year ended December 31, 2012, which is available at www.sedar.com. InnVest REIT disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable securities law.

INNVEST PROFILE

InnVest Real Estate Investment Trust is an unincorporated open-ended real estate investment trust which owns a portfolio of 125 hotels across Canada representing approximately 15,500 guest rooms operated under internationally recognized brands. InnVest also holds a 50% interest in Choice Hotels Canada Inc., one of the largest franchisors of hotels in Canada.

InnVest's units and convertible debentures trade on the Toronto Stock Exchange (the "TSX") under the symbols INN.UN, INN.DB.C, INN.DB.D, INN.DB.E, INN.DB.F and INN.DB.G.

Contact Information

  • InnVest Real Estate Investment Trust
    Chantal Nappert
    Vice President, Finance and Investor Relations
    (905) 624-7806
    (905) 206-7114 (FAX)
    www.innvestreit.com