InnVest Real Estate Investment Trust
TSX : INN.UN

InnVest Real Estate Investment Trust

August 09, 2013 08:00 ET

InnVest REIT Reports Second Quarter Results

Continued Progess in Executing Strategic Plan

TORONTO, ONTARIO--(Marketwired - Aug. 9, 2013) - InnVest Real Estate Investment Trust ("InnVest") (TSX:INN.UN), today announced financial results for the three and six months ended June 30, 2013.

"We continue to make progress in accordance with our strategic plan to improve our portfolio quality and strengthen our balance sheet. So far this year, we have actively planned and are presently executing several capital investment projects including the revitalization program of our Comfort Inns. In addition, we have generated over $80 million in gross sale proceeds at attractive capitalization rates, representing more than 40% of our stated two-year divestiture objective," said Anthony Messina, InnVest's President and Chief Executive Officer. "Looking ahead, fundamentals for our portfolio remain positive, driven by a favourable industry outlook, upside from capital investments and our ability to accretively redeploy capital from asset sales to higher return alternatives."

Second Quarter Highlights

  • Completed the sale of one non-core asset during the second quarter and announced the closing of an additional property on July 2, 2013. Year-to-date, InnVest has completed the sale of three properties for aggregate gross proceeds of $81.4 million;
  • 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;
  • Revenue per available room ("RevPAR") on a same-hotel basis improved 1.8% benefitting from gains in occupancy and average daily rate ("ADR"). Second quarter performance was impacted by disruption caused by floods in Calgary in late June. Without this disruption it is estimated that the same-hotel RevPAR improvement would have been 2.9%;
  • Same-hotel revenue growth was offset by the lost contribution from asset divestitures. Overall, total revenues were relatively unchanged;
  • Cost efficiencies implemented contributed to a $1.9 million or 4.6% improvement in gross operating profit ("GOP");
  • Realized an adjusted net income of $25.1 million compared to $22.7 million in the prior year (excludes non-cash items such as unrealized losses on liabilities presented at fair value, deferred income taxes, gain on asset sales, net writedown of hotel properties and depreciation and amortization). This compares to a presented net income of $20.5 million compared to $2.0 million in the prior year;
  • Funds from operations and distributable income improved $1.9 million and $2.2 million, respectively; and
  • Invested $18.5 million in the capital program through the first half of the year with additional commitments of $18.8 million as at June 30, 2013.

InnVest's Condensed Interim Consolidated Financial Statements and Management's Discussion and Analysis for the three and six months ended June 30, 2013 and 2012 are available on InnVest's website at www.innvestreit.com.

SELECTED FINANCIAL INFORMATION
Three Months Ended Three Months Ended Six months Ended Six months Ended
June 30, 2013 June 30, 2012 June 30, 2013 June 30, 2012
($000s except per unit amounts) (unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Hotel properties $ 160,680 $ 160,303 $283,698 $289,281
Other real estate properties 596 846 $1,400 $1,678
$ 161,276 $ 161,149 $285,098 $290,959
Gross operating profit (1)
Hotel properties $ 43,236 $ 41,232 $56,455 $58,145
Other real estate properties 193 295 $395 $547
$ 43,429 $ 41,527 $56,850 $58,692
Net income (loss) and comprehensive income (loss) $ 20,505 $ 1,989 $ (21,161 ) $ (28,182 )
Reconciliation to funds from operations (FFO)
Add / (deduct)
Depreciation and amortization 20,460 23,824 41,172 47,793
Deferred income tax recovery (expense) (40 ) 673 (322 ) (9,661 )
Unrealized changes in the fair value of financial liabilities (12,409 ) (2,327 ) 4,819 11,823
Distributions included in corporate and administrative expense 37 37 73 73
Gain on sale of assets (6,841 ) (1,320 ) (8,100 ) (1,320 )
Writedown of hotel properties, net 3,385 (114 ) 3,385 (114 )
SIFT transition expenses - 408 - 628
Funds from operations (2) $ 25,097 $ 23,170 $ 19,866 $ 21,040
Reconciliation to distributable income
Add / (deduct)
Non-cash portion of mortgage interest expense 529 510 1,053 1,194
Non-cash portion of convertible debentures interest and accretion 1,272 1,019 2,510 2,011
FF&E reserve (6,724 ) (6,718 ) (11,899 ) (12,139 )
Distributable income (2) $ 20,174 $ 17,981 $11,530 $12,106
Per unit data
Net income (loss) and comprehensive income (loss) - diluted $0.189 $0.021 $0.226 ($0.301 )
FFO - diluted $0.223 $0.228 $0.211 $0.224
Distributable income - diluted $0.180 $0.178 $0.123 $0.129
Distributions declared $0.0999 $ 0.0999 $0.1998 $ 0.1998
(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 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 measures used by other organizations.

The operating statistics relating to gross room revenues for the three and six months ended June 30, 2013 and 2012 are on a same-hotel basis and exclude hotels sold and one hotel which was closed for a portion of the periods presented.

Three months ended Variance to Six months ended Variance to
June 30, 2013 2012 June 30, 2013 2012
Occupancy
Ontario 64.6 % 1.4 pts 59.2 % 1.2 pts
Quebec 66.4 % 0.5 pts 59.4 % (0.7 pts )
Atlantic 60.9 % (0.8 pts ) 53.4 % (1.9 pts )
Western 69.0 % 0.5 pts 65.4 % 0.7 pts
Total 65.2 % 0.7 pts 59.5 % 0.2 pts
ADR
Ontario $108.01 (0.7 %) $106.67 (1.5 %)
Quebec $120.17 1.0 % $114.49 1.5 %
Atlantic $118.71 0.4 % $113.65 0.5 %
Western $161.25 3.0 % $157.36 2.0 %
Total $122.40 0.7 % $119.29 0.3 %
RevPAR
Ontario $69.78 1.5 % $63.19 0.7 %
Quebec $79.78 1.8 % $68.01 0.3 %
Atlantic $72.25 (1.0 %) $60.74 (2.8 %)
Western $111.25 3.8 % $102.85 3.0 %
Total $79.83 1.8 % $70.93 0.7 %

OPERATIONS REVIEW

Three months ended June 30, 2013

Second quarter hotel revenues increased 0.2% as compared to the prior period. Same-hotel growth was offset by the sale of eight hotels since 2012 (seven in 2012 and one in 2013). Same-hotel RevPAR grew 1.8% benefitting from growth in occupancy and ADR.

Hotel revenues achieved were impacted by disruption caused by the closure of InnVest's two full-service hotels in downtown Calgary due to the floods in late June (estimated $2.0 million hotel revenue loss). Excluding these two hotels, it is estimated that second quarter same-hotel RevPAR growth would have been 2.9%. InnVest expects to recover lost earnings at its two Calgary hotels through business interruption claims. No insurance proceeds related to these claims were recognized during the second quarter.

Hotel and other real estate properties expenses during the three months ended June 30, 2013 decreased $1.8 million or 1.5%. Excluding asset sales, expense growth was limited to 0.9% benefitting from operational efficiencies implemented in the first quarter. For the three months ended June 30, 2013, Hotel GOP improved $2.0 million or 4.9% benefitting from same-hotel margin improvement of 0.7% to 26.7%.

Second quarter results include a $6.8 million gain related to the sale of an office and retail complex. Other expenses include the $2.5 million reversal of a prior impairment and a non-cash impairment charge of $5.9 million relating to six properties (triggered by a structural building allowance relating to one asset and adjustments to sale proceed expectations). While management does not expect its divestiture program to result in an overall loss on sale, accounting rules require management to recognize impairment charges on assets based on their estimated recoverable amount, unlike gains, which can only be recognized upon sale.

The second quarter generated FFO of $25.1 million ($0.223 per unit diluted) and distributable income of $20.2 million ($0.180 per unit diluted) up $1.9 million and $2.2 million, respectively, from the prior year primarily reflecting higher Hotel GOP achieved during the period.

Six months ended June 30, 2013

For the six months ended June 30, 2013 hotel revenues decreased $5.6 million, or 1.9% owing to $6.6 million of reduced contribution from asset divestitures. Same-hotel RevPAR over this period increased 0.7% with modest growth in occupancy and ADR.

InnVest generated Hotel GOP of $56.5 million, down $1.7 million or 2.9% as compared to the prior period. First quarter results included a restructuring charge of $1.3 million which is expected to be fully recovered through expense savings by the end of the year. For the six months ended June 30, 2013, Hotel GOP margins decreased 0.2% to 19.9%.

For the six months ended June 30, 2013, InnVest generated FFO of $19.9 million ($0.211 per unit diluted) and distributable income of $11.5 million ($0.123 per unit diluted), $1.2 million and $0.6 million year-over-year declines, respectively. The declines reflect lower Hotel GOP achieved over the period which was somewhat offset by reduced interest expense.

PORTFOLIO REPOSITIONING PROGRAM

During the six months ended June 30, 2013, InnVest completed the sales of one leasehold hotel and one office and retail complex. Following the end of the quarter, InnVest closed on the sale of one additional hotel. In aggregate, these asset sales have generated gross proceeds of $81.4 million (net proceeds of approximately $14 million after debt repayment and selling costs).

In addition, InnVest has entered into separate purchase and sale agreements for three additional limited-service hotels which are expected to close in the third quarter. Currently, eight additional hotels are actively being marketed.

CAPITAL INVESTMENT PROGRAM

Capital expenditures during the six months ended June 30, 2013 totalled $18.5 million compared to the allocated FF&E Reserve of $11.9 million. An additional $18.8 million of capital has been committed as at June 30, 2013. These investments largely reflecting the rollout of InnVest's Comfort Inn revitalization program as well as the start of renovations at a number of full-service hotels.

Currently, 13 Comfort Inn hotels have been substantially renovated and an additional five are at various stages of completion. By the end of 2013, InnVest expects to have completed 30 Comfort Inn renovations.

BALANCE SHEET

On February 27, 2013, InnVest issued $115.0 million of Series G - 5.75% convertible debentures with proceeds primarily used to redeem InnVest's $75.0 million Series B - 6.0% convertible debentures on April 1, 2013. Incremental proceeds will be used to fund InnVest's capital investment program.

As at June 30, 2013, InnVest had $21.4 million of cash (including restricted cash) and $38.4 million of capacity on its undrawn credit facility.

InnVest's leverage at June 30, 2013 including convertible debentures was 65.3% (44.9% excluding convertible debentures). InnVest has no debt maturities until 2014 and a weighted average interest rate of 5.6%. Management is proactively working with lenders to address 2014 maturities.

INCOME TAX DEFERRAL

For 2013, InnVest estimates that the non-taxable portion of the distributions made to unitholders during the year will approximate 30% (2012 - 40%). This estimate may change materially based on InnVest's asset disposition activity during the year.

OUTLOOK

Uncertainty in the world economy continues to impact the lodging industry. InnVest's broad, diversified portfolio remains a key advantage in the current environment.

While industry growth has been more modest than expected, Canadian lodging industry fundamentals remain favourable, with improving demand expectations through the balance of the year and a low supply outlook.

Through the end of 2014, InnVest expects to divest of non-core low-yielding assets and reinvest proceeds generated to undertake an extensive capital program to enhance its product offering at a number of select hotels. These targeted investments are expected to improve the portfolio's competitive positioning and operating performance through increased occupancies and rates.

InnVest's strategy to strengthen its balance sheet, 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 Friday August 9, 2013 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing 416-340-8018 or 1-866-223-7781. 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 August 9th, beginning at 1:00 pm through to August 23rd, 2013. To access the recording please call 905-694-9451 or 1-800-408-3053 and use the reservation number 2819013#.

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 134 hotels across Canada representing approximately 17,000 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