InnVest Real Estate Investment Trust
TSX : INN.UN

InnVest Real Estate Investment Trust

August 12, 2011 08:00 ET

InnVest REIT Reports Second Quarter Results

TORONTO, ONTARIO--(Marketwire - Aug. 12, 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 six months ended June 30, 2011. All dollars are in thousands unless otherwise specified.

"Second quarter results highlight continued improvement in demand to our portfolio. This was particularly encouraging given challenging circumstances during the quarter which included the federal election and its impact on government-related travel in April, weak leisure demand due to poor weather and high gasoline prices, and revenue displacement caused by renovations. These factors, in addition to the prior period benefit from the G8 and G20 meetings held in the Toronto area, limited year-over-year growth in funds from operations and distributable income," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "Our strategy through the first half of the year was focused on driving occupancy to the portfolio. We expect rate growth to follow during the busier summer season, aided by recent renovations at two of our largest hotels."

Second Quarter Highlights

  • Revenue per available room ("RevPAR") on a same hotel basis declined 1.2% with a 2.1% drop in average daily rate ("ADR") offsetting gains in occupancy;
  • Overall, hotel revenues declined 0.4% to $162.6 million;
  • Hotel operating income ("HOI") was down 1.6% to $42.9 million;
  • InnVest realized net income of $2.0 million compared to a net loss of $41.3 million in 2010. Excluding non-cash items relating to IFRS and deferred income taxes, InnVest realized a net loss of $438 compared to net income of $916 in the prior period;
  • Funds from operations and distributable income each improved modestly reflecting lower interest charges; and
  • During the second quarter, $8.5 million was invested in the portfolio including the completion of room renovations in two key assets and markets. These investments are expected to contribute to improved hotel performance in future periods.

InnVest's Consolidated Financial Statements and Management's Discussion and Analysis for the three and six months ended June 30, 2011 and 2010 are available on InnVest's website at www.innvestreit.com.

SELECTED FINANCIAL INFORMATION

(unaudited) Three Months Ended Three Months Ended Six Months Ended Six Months Ended
($000s except per unit amounts) June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010
Hotel revenues $ 162,552 $ 163,260 $ 290,871 $ 288,705
Hotel operating income(1) $ 42,948 $ 43,658 $ 58,696 $ 59,200
Net income (loss) and comprehensive income (loss) $ 1,965 $ (41,317 ) $ (18,070 ) $ (140,026 )
Reconciliation to funds from operations (FFO)
Add / (deduct)
Depreciation and amortization 24,936 23,340 48,466 46,594
Deferred income tax expense (recovery) 1,693 (3,445 ) (9,001 ) (3,032 )
Unrealized gain (loss) on liabilities presented at fair value (4,717 ) 38,299 (2,243 ) 98,412
Finance costs - distributions 621 7,379 2,346 18,338
Funds from operations (1) $ 24,498 $ 24,256 $ 21,498 $ 20,286
Reconciliation to distributable income
Add / (deduct)
Non-cash portion of mortgage interest expense 681 412 1,342 894
Reserve for replacement of furniture, fixtures and equipment and capital improvements (6,672 ) (6,710 ) (11,951 ) (11,864 )
Non-cash portion of convertible debentures interest and accretion 980 1,096 1,876 1,711
Distributable income (1) $ 19,487 $ 19,054 $ 12,765 $ 11,027
Per unit data
FFO - diluted $ 0.240 $ 0.264 $ 0.233 $ 0.230
Distributable income - diluted $ 0.192 $ 0.205 $ 0.138 $ 0.125
Distributions per unit (2) $ 0.1251 $ 0.1251 $ 0.2502 $ 0.2502
(1) Hotel operating income, 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.
(2) 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.

Three months ended Variance to 2010 Six months ended Variance to 2010
June 30, 2011 June 30, 2011
Occupancy
Ontario 62.8 % 1.0 pts 58.4 % 3.0 pts
Quebec 65.4 % 1.5 pts 58.9 % 0.7 pts
Atlantic 62.4 % (0.3 pts ) 56.0 % -
Western 63.6 % (0.6 pts ) 59.4 % (0.4 pts )
Total 63.5 % 0.6 pts 58.4 % 1.5 pts
ADR
Ontario $105.26 (4.1 %) $105.14 (3.2 %)
Quebec $118.05 (0.2 %) $112.74 (0.2 %)
Atlantic $117.29 (0.3 %) $113.02 1.2 %
Western $139.56 (1.5 %) $139.01 0.4 %
Total $116.45 (2.1 %) $114.49 (1.3 %)
RevPAR
Ontario $66.12 (2.6 %) $61.42 2.1 %
Quebec $77.20 2.1 % $66.38 1.0 %
Atlantic $73.22 (0.7 %) $63.33 1.3 %
Western $88.81 (2.3 %) $82.60 (0.2 %)
Total $73.94 (1.2 %) $66.82 1.2 %

FINANCIAL REVIEW

Three months ended June 30, 2011

For the three months ended June 30, 2011, hotel revenues were down 0.4%, to $162.6 million. Over this period, RevPAR decreased 1.2% with a 2.1% decline in ADR offsetting a 0.6 point improvement in occupancy. The second quarter included a difficult comparative period in Ontario due to the G8 and G20 meetings held in the Toronto area in June 2010. Weak leisure trends were experienced during the quarter driven by poor weather and high gasoline prices which deterred demand. The federal election and ongoing renovations in two key markets also negatively impacted performance during the period.

Room revenues for the three months ended June 30, 2011 decreased 1.4%, or $1.8 million, to $125.9 million. The Ontario region contributed the majority of the year-over-year decline owing to the benefit of the G8 and G20 in the prior year.

For the three months ended June 30, 2011, non-room revenues totalled $36.7 million, up $1.1 million, or 3.2%, compared to the prior year. Second quarter non-room revenues include $2.1 million in interest earned related to prior periods' GST/HST input tax credits. Excluding this amount, non-room revenues declined approximately 2.7% primarily reflecting the prior period inclusion of insurance proceeds at one property. Food and beverage revenues were essentially unchanged over the prior period.

Hotel expenses for the three months ended June 30, 2011 were unchanged at $119.6 million with modest increases in operating expenses (reflecting occupancy growth) offset by rent and property tax savings.

For the three months ended June 30, 2011, InnVest generated HOI of $42.9 million, down 1.6% as compared to the prior year. The decline reflects the impact of the negative RevPAR achieved during the quarter. Various rooms were taken out of the rental pool as a result of renovations during the quarter which resulted in a reduction in hotel operating income of approximately $650. Excluding the renovations displacement, HOI would have been relatively flat year-over-year.

The second quarter of 2011 generated distributable income of $19.5 million ($0.192 per unit diluted) and FFO of $24.5 million ($0.240 per unit diluted), each showing modest improvements from the prior year reflecting lower interest charges.

Six months ended June 30, 2011

For the six months ended June 30, 2011, hotel revenues were up 0.8%, to $290.9 million primarily reflecting growth in room revenues driven by improved demand.

Through the first half of the year, RevPAR increased 1.2% based on a 1.5 point improvement in occupancy which offset a 1.3% decline in ADR. Growth achieved in the first quarter was offset by a decline in the second quarter owing to difficult year-over-year comparable results. Occupancy has improved consistently through the portfolio since early 2010 although pricing power has been limited in most markets driven by a competitive landscape.

Hotel expenses for the six months ended June 30, 2011 increased $2.7 million or 1.2% when compared to the same period in 2010 primarily reflecting incremental costs associated with a 2.6% increase in room demand during the period (1.5 point improvement in occupancy).

For the six months ended June 30, 2011, InnVest generated HOI of $58.7 million, down 0.9% or $504 as compared to the prior year. Excluding the renovations displacement of approximately $1.7 million over the period, HOI growth would have approximated 1.9%.

Year-to-date InnVest generated distributable income of $12.8 million ($0.138 per unit diluted) and FFO of $21.5 million ($0.233 per unit diluted) each showing modest improvements from the prior year reflecting lower interest charges.

BALANCE SHEET REVIEW

At June 30, 2011, InnVest has cash on hand totalling $31.0 million, of which $4.4 million is restricted for the replacement of furniture, fixtures, and equipment and for capital improvements.

At June 30, 2011, InnVest has mortgages payable of $820.4 million with a weighted average term of 2.3 years and a weighted average interest rate of 5.6%. InnVest has one $50.9 million mortgage maturity in September 2011. This mortgage is secured by two full-service hotels. InnVest expects to extend this maturity on similar terms.

At June 30, 2011, InnVest's leverage excluding and including convertible debentures was 46.3% and 63.5%, respectively.

Year-to-date, InnVest has invested $21.7 million in capital expenditures throughout its portfolio. These expenditures included room renovations at the Fairmont Palliser and the Hilton Quebec City designed to increase cash flow and improve profitability by capitalizing on changing market conditions and the favorable locations of InnVest's properties. Renovations at both of these hotels were completed in the second quarter of 2011.

INCOME TAX DEFERRAL PERCENTAGE

For 2011, InnVest estimates that the non-taxable portion of the distributions made to unitholders during the year will approximate 60%.

RECENT DEVELOPMENTS

On July 20, 2011, the Minister of Finance (the "Minister") announced changes in, among other things, the tax treatment of real estate investment trusts that have issued "stapled" securities. If the Minister's announcement is enacted as proposed and no changes are made to the existing structure of the REIT and IOT, then rents (and certain other amounts) paid by IOT to the REIT after the applicable transition date (expected to be July 20, 2012) would cease to be deductible in computing the income of IOT for Canadian income tax purposes. InnVest is restricted from issuing stapled securities during the transition period, subject to certain exceptions. As a consequence, InnVest has decided to suspend its distribution reinvestment plan ("DRIP") until further notice. The decision to suspend the DRIP will not impact the application of the DRIP to the distribution declared by the trustees of the REIT on July 19, 2011 and payable by the REIT on August 15, 2011.

Management is continuing to review the implications of this announcement for the REIT and IOT and evaluating its options going forward.

OUTLOOK

The global economy has been impacted by a number of significant events in recent weeks. These macro environment factors reinforce the importance of strong operational expertise and regional focus for our business. Our portfolio has benefitted from improving occupancy trends over the last five quarters. Performance has varied by market, highlighting the benefit of a broad, diversified portfolio. We expect this trend to continue with firming occupancies in certain markets leading to improvements in average daily rate through the balance of the year.

InnVest intends to invest in a number of its full-service and limited-service hotels in 2011 and 2012 to improve their competitive positioning and operating performance. These investments are expected to enable hotels to increase rates charged. An enhanced product, coupled with improving demand and constrained new supply should enable InnVest to realize cash flow growth.

QUARTERLY CONFERENCE CALL

Management will host a conference call on Friday August 12, 2011 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing (416) 340-2216 or 1-866- 226-1792. 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 12th beginning at 1:00 pm through to 11:59 p.m. on August 19th. To access the recording please call (905) 694-9451 or (800) 408-3053 and use the reservation number 2565278#.

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 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, INN.DB.E and INN.DB.F.

Contact Information

  • InnVest Real Estate Investment Trust
    Kenneth D. Gibson
    President and Chief Executive Officer
    (905) 206-7100
    (905) 206-7114 (FAX)

    InnVest Real Estate Investment Trust
    Tamara L. Lawson
    Chief Financial Officer and Corporate Secretary
    (905) 206-7100
    (905) 206-7114 (FAX)
    www.innvestreit.com