InnVest Real Estate Investment Trust
TSX : INN.UN

InnVest Real Estate Investment Trust

August 10, 2012 08:00 ET

InnVest REIT Reports Second Quarter Results

TORONTO, ONTARIO--(Marketwire - Aug. 10, 2012) - InnVest Real Estate Investment Trust ("InnVest") (TSX:INN.UN) today announced financial results for the three and six months ended June 30, 2012. All dollars are in thousands of Canadian dollars unless otherwise specified.

"We continue to see improvement in the Canadian lodging industry's fundamentals. Our portfolio achieved rate growth across all regions this quarter led by strength in western Canada which is benefitting from a strong resource sector and targeted renovations undertaken," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "Recent proactive capital management initiatives have strengthened our balance sheet by extending our debt maturities and lowering our overall cost of debt."

Second Quarter Highlights

  • Revenue per available room ("RevPAR") on a same-hotel basis increased 2.9% driven by a 3.0% increase in average daily rate ("ADR");
  • Gross operating profit generated from hotel operations ("Hotel GOP") increased 0.9% to $41.2 million. Hotel GOP improvement of 1.8% in InnVest's same-hotel portfolio was offset by reduced Hotel GOP following asset sales and the closure of one hotel for a portion of the quarter;
  • Net income was relatively unchanged at $2.0 million. Excluding non-cash charges required by IFRS (unrealized gains and losses on liabilities presented at fair value and finance costs relating to the presentation of certain equity instruments as liabilities under IFRS), deferred income taxes, non-recurring other income and depreciation and amortization, InnVest realized an adjusted net income of $22.7 million compared to $22.2 million in the prior period;
  • Funds from operations ("FFO") of $0.228 per diluted unit compared to $0.240 per diluted unit in the prior period. Distributable income was $0.178 per unit diluted as compared with $0.192 in the prior period. The declines reflect the one-time benefit of $2.1 million in interest earned in the prior year; and
  • During the quarter, InnVest refinanced a $166.3 million mortgage which was scheduled to expire in November 2012. InnVest is in the process of finalizing the renewal of its remaining 2012 mortgage maturities totaling $12.4 million.

InnVest's Consolidated Condensed Financial Statements and Management's Discussion and Analysis for the three and six months ended June 30, 2012 and 2011 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,
2012
June 30,
2011
June 30,
2012
June 30,
2011
($000s except per unit amounts) (unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Hotel properties $ 160,303 $ 158,103 $ 289,281 $ 284,377
Franchise business $ 3,109 $ 2,730 $ 5,222 $ 4,575
Other real estate properties $ 846 $ 900 $ 1,678 $ 1,815
$ 164,258 $ 161,733 $ 296,181 $ 290,767
Gross operating profit (1)
Hotel properties $ 41,208 $ 40,838 $ 58,095 $ 56,586
Franchise business $ 885 $ 763 $ 1,484 $ 1,294
Other real estate properties $ 293 $ 400 $ 545 $ 754
$ 42,386 $ 42,001 $ 60,124 $ 58,634
Net income (loss) and comprehensive income (loss) $ 1,963 $ 1,965 $ (28,234 ) $ (18,070 )
Reconciliation to funds from operations (FFO)
Add / (deduct)
Depreciation and amortization 23,824 24,936 47,793 48,466
Deferred income tax expense (recovery) 673 1,693 (9,661 ) (9,001 )
Unrealized (gain) loss on liabilities presented at fair value (2,327 ) (4,717 ) 11,823 (2,243 )
Finance costs - distributions 37 621 73 2,346
Gain on sale of hotel properties (1,320 ) - (1,320 ) -
Reversal of previous impairment (801 ) - (801 ) -
Writedown of hotel property 687 - 687 -
SIFT transition expenses 408 - 628 -
Funds from operations (2) $ 23,144 $ 24,498 $ 20,988 $ 21,498
Reconciliation to distributable income
Add / (deduct)
Non-cash portion of mortgage interest expense 510 681 1,194 1,342
Non-cash portion of convertible debentures interest and accretion 1,019 980 2,011 1,876
Reserve for replacement of furniture, fixtures and equipment and capital improvements (6,718 ) (6,672 ) (12,139 ) (11,951 )
Distributable income (2) $ 17,955 $ 19,487 $ 12,054 $ 12,765
Per unit data
Net income (loss) and comprehensive income (loss)- diluted $ 0.021 $ 0.021 $ (0.302 ) $ (0.197 )
FFO - diluted $ 0.228 $ 0.240 $ 0.224 $ 0.233
Distributable income - diluted $ 0.178 $ 0.192 $ 0.128 $ 0.138
Distributions declared $ 0.0999 $ 0.1251 $ 0.1998 $ 0.2502
(1) Gross operating income ("GOP") is defined as revenues less hotel, franchise 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, 2012 are on a same-hotel basis and exclude four hotels which were sold in 2012 and one hotel which was closed for a portion of the periods presented.

Three months ended
June 30, 2012
Variance
to 2011
Six months ended
June 30, 2012
Variance
to 2011
Occupancy
Ontario 62.1 % (0.9 pts ) 57.0 % (1.6 pts )
Quebec 65.9 % 0.3 pts 60.1 % 1.0 pts
Atlantic 61.7 % (0.7 pts ) 55.3 % (0.7 pts )
Western 68.0 % 2.1 pts 64.2 % 2.5 pts
Total 64.0 % - 58.8 % (0.1.pts )
ADR
Ontario $ 107.69 2.4 % $ 107.24 2.1 %
Quebec $ 118.98 0.4 % $ 112.85 (0.3 %)
Atlantic $ 118.26 0.8 % $ 113.11 0.1 %
Western $ 152.08 7.3 % $ 150.01 6.3 %
Total $ 120.44 3.0 % $ 117.86 2.6 %
RevPAR
Ontario $ 66.83 0.9 % $ 61.11 (0.8 %)
Quebec $ 78.37 0.7 % $ 67.83 1.4 %
Atlantic $ 72.98 (0.3 %) $ 62.52 (1.3 %)
Western $ 103.36 10.6 % $ 96.35 10.7 %
Total $ 77.03 2.9 % $ 69.26 2.4 %

FINANCIAL REVIEW

Three months ended June 30, 2012

For the three months ended June 30, 2012, total revenues increased by 1.6% to $164.3 million.

Revenues generated by hotel operations increased 1.4% or $2.2 million to $160.3 million. Same-hotel RevPAR over this period increased 2.9% based on a 3.0% increase in ADR. RevPAR growth was driven by strength in Western Canada led by over 20% improvement at the Fairmont Palliser in Calgary. Modest growth through the balance of the portfolio was offset by pockets of softness in southwestern Ontario, Montreal (weak demand) and Prince Edward Island (special event held in the prior year).

InnVest generated gross operating profit from hotel operations ("Hotel GOP") of $41.2 million, up 0.9% as compared to the prior period. Growth of 1.8% in InnVest's same-hotel portfolio during the second quarter was offset by reduced Hotel GOP following asset sales ($83) and the closure of one hotel ($269) for 7 weeks during the quarter due to an electrical malfunction. This hotel reopened in late July 2012. InnVest expects to recover lost earnings at this hotel through a business interruption claim. No insurance proceeds were recognized during the second quarter of 2012. Hotel GOP margins declined 10 basis points to 25.7% during the second quarter.

During the second quarter, InnVest completed the sale of three hotels (405 rooms) for gross proceeds of $19.2 million resulting in a $1.3 million gain on sale. Net proceeds after closing costs and debt repayment totaled $9.4 million.

The second quarter of 2012 generated distributable income of $18.0 million ($0.178 per unit diluted) and FFO of $23.1 million ($0.228 per unit diluted) each showing modest year-over-year declines owing to the prior period benefit of $2.1 million in interest earned related to GST/HST tax credits.

Six months ended June 30, 2012

For the six months ended June 30, 2012, total revenues increased by 1.9% to $296.2 million.

Revenues generated by hotel operations increased 1.7% or $4.9 million to $289.3 million. Same-hotel RevPAR over this period increased 2.4% based on a 2.6% increase in ADR. The RevPAR growth was driven by strength in Western Canada.

InnVest generated Hotel GOP of $58.1 million, up 2.7% as compared to the prior period. Growth of 3.5% in InnVest's same-hotel portfolio was offset by reduced Hotel GOP following asset sales and the closure of one hotel during a portion of the second quarter. For the six months ended June 30, 2012, Hotel GOP margins increased 20 basis points to 20.1%.

For the six months ended June 30, 2012, InnVest generated distributable income of $12.1 million ($0.128 per unit diluted) and FFO of $21.0 million ($0.224 per unit diluted) each showing modest year-over-year declines owing to the second quarter shortfall.

BALANCE SHEET REVIEW

Year-to-date in 2012, InnVest executed a number of transactions to strengthen its balance sheet including:

  • During the second quarter of 2012, InnVest completed the renewal of a $166.3 million mortgage which was scheduled to expire in November 2012. The mortgage, secured by forty limited-service hotels, has a five-year term at an interest rate of 6.0%.
  • During the first quarter of 2012, InnVest completed the renewal of a $151.9 million mortgage which was scheduled to expire in March 2013. The mortgage, secured by six full-service hotels, has an interest rate of 5.3% and has a three year term with two one-year extensions, at InnVest's option.
  • As part of the above mentioned renewals, InnVest has access to a loan facility for up to $25.0 million to fund 65% of capital expenditures incurred at certain of its hotels. No proceeds were drawn against this facility at June 30, 2012. Subsequent to the end of the quarter, InnVest drew $2.7 million on this facility, such amounts being added to the mortgages payable relating to the applicable hotels.
  • During the first quarter, InnVest amended its existing credit agreement to increase the maximum amount available under its line of credit on a seasonal basis. The credit line was increased from $40.0 million to $50.0 million through June 15, 2012 and to $45.0 million through August 31, 2012. Thereafter, the line of credit will return to the $40.0 million level. At June 30, 2012, InnVest qualifies for $43.9 million of the $45.0 million base availability under the line of credit, inclusive of the $5.0 million temporary increase.
  • For the balance of 2012, InnVest has two remaining mortgage maturities totaling $12.4 million at an average interest rate of 6.8%. InnVest is finalizing the closing of five-year extensions for both maturities at an expected interest rate of 5.1% and anticipates generating incremental proceeds of approximately $2.9 million. Following completion of these refinancings, InnVest will not have any mortgage maturities until April of 2014.

As of June 30, 2012, InnVest had approximately $24.9 million of cash (including restricted cash) and $38.2 million drawn on its credit facility.

At June 30, 2012, InnVest's leverage including convertible debentures was 61.1% (43.9% excluding convertible debentures).

Capital expenditures during the six months ended June 30, 2012 totaled $19.5 million. These investments reflect a number of profit-improving projects designed to increase cash flow and improve profitability including room renovations at the Delta Centre-Ville and brand upgrades at a number of our Holiday Inn and Hilton hotels.

INCOME TAX DEFERRAL

For 2012, InnVest estimates that the non-taxable portion of the distributions made to unitholders during the year will approximate 40% (2011 - 60%).

CORPORATE REORGANIZATION

On July 3, 2012, InnVest completed an internal reorganization to unwind the stapled unit structure (the "2012 Reorganization"), which was approved by InnVest's unitholders at a special meeting on February 23, 2012.

InnVest pursued the 2012 Reorganization in response to announced changes to the federal income tax rules applicable to issuers of stapled securities, which were expected to apply to InnVest as of July 20, 2012. The 2012 Reorganization has resulted in, among other things, the transfer of substantially all of IOT's assets and liabilities to the REIT and the unwinding of the stapled structure of InnVest so that IOT became a wholly-owned subsidiary of the REIT.

OUTLOOK

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

Looking ahead, we are focused on driving internal growth within our existing portfolio. In 2011, we began an important multi-year capital program to enhance our product offering at a number of our hotels. These targeted investments are expected to improve our hotels' competitive positioning and operating performance through increased occupancies and rates. An enhanced product, coupled with improving demand and constrained new supply should enable InnVest to realize cash flow growth. The ultimate extent and timing of planned capital investments will be dependent on business levels and capital availability.

QUARTERLY CONFERENCE CALL

Management will host a conference call on Friday August 10, 2012 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 10th beginning at 1:00 pm through to 11:59 p.m. on August 24th. To access the recording please call (905) 694-9451 or (800) 408-3053 and use the reservation number 7573534#.

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 and competition. These and other factors are discussed in InnVest's 2012 annual information form which is available at www.sedar.com or www.innvestreit.com. InnVest 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 140 hotels across Canada representing approximately 18,200 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.B, INN.DB.C, INN.DB.D, INN.DB.E and INN.DB.F.

Contact Information

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