InnVest Real Estate Investment Trust
TSX : INN.UN

InnVest Real Estate Investment Trust

November 08, 2013 08:09 ET

InnVest REIT Reports Third Quarter Results

Solid Progress Against Strategic Plan and 2014 Mortgages Refinanced

TORONTO, ONTARIO--(Marketwired - Nov. 8, 2013) - InnVest Real Estate Investment Trust ("InnVest") (TSX:INN.UN), today announced financial results for the three and nine months ended September 30, 2013.

"We continue to make progress against our strategic plan to improve our portfolio quality and strengthen our balance sheet. We have been active on our capital investment program including significant renovations underway at two important full-service hotels during the quarter as well as the ongoing revitalization program for our Comfort Inn portfolio. In addition, we have generated over $93 million in gross sale proceeds at attractive capitalization rates, representing more than 50% of our stated two-year divestiture objective," said Anthony Messina, InnVest's President and Chief Executive Officer. "Excluding renovation activity during the quarter, our portfolio realized improvements across all profitability measures. Looking ahead, fundamentals for our portfolio remain positive, driven by an improving industry outlook, upside from capital investments and our ability to accretively redeploy capital from asset sales to higher return alternatives."

Third Quarter Highlights

  • Revenue per available room ("RevPAR") on a same-hotel basis was relatively unchanged to the prior year. Excluding hotels impacted by renovations during the quarter, RevPAR growth would have exceeded 2%;
  • The lost contribution from asset divestitures contributed to an overall total revenue decline of $12.2 million. Excluding asset sales, total revenues were relatively unchanged;
  • Gross operating profit ("GOP") declined $2.6 million, or 5.1%, during the quarter;
  • Realized an adjusted net income of $31.5 million compared to $30.5 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 $13.9 million compared to a loss of $221.5 million in the prior year;
  • Funds from operations and distributable income each improved to $31.5 million and $26.5 million, respectively;
  • Completed the sale of four non-core assets during the third quarter. Year-to-date, InnVest has completed the sale of six properties for aggregate gross proceeds of $93.1 million;
  • Invested $41.2 million in the capital program through the first nine months of the year with additional commitments of $18.2 million as at September 30, 2013. Significant renovations in process during the third quarter of 2013 included guestroom, lobby and meeting space renovations at the Delta Winnipeg and Sheraton Calgary Suites Eau Claire. Year-to-date, 24 Comfort Inn hotels have been renovated as part of InnVest's revitalization program for the brand; and
  • On October 9, 2013, InnVest announced the refinancing of $251.8 million of 2014 mortgage maturities, lowering InnVest's average interest costs and significantly extending its term to maturity.

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

SELECTED FINANCIAL INFORMATION

($000s except per unit amounts) Three Months Ended
September 30, 2013
(unaudited)
Three Months Ended
September 30, 2012
(unaudited)
Nine Months Ended
September 30, 2013
(unaudited)
Nine Months Ended
September 30, 2012
(unaudited)
Revenue
Hotel properties $ 160,912 $ 172,578 $444,610 $461,859
Other real estate properties 221 793 $1,621 $2,471
$ 161,133 $ 173,371 $446,231 $464,330
Gross operating profit (1)
Hotel properties $ 47,538 $ 49,851 $103,993 $107,996
Other real estate properties (1) 253 $394 $800
$ 47,537 $ 50,104 $104,387 $108,796
Net income (loss) and comprehensive income (loss) $ 13,946 $ (221,472) $ (7,215) $ (249,654)
Reconciliation to funds from operations (FFO)
Add / (deduct)
Depreciation and amortization 20,137 23,796 61,309 71,589
Deferred income tax (recovery) expense (22) 195,864 (344) 186,203
Unrealized changes in the fair value of financial liabilities (992) 2,364 3,827 14,187
Distributions included in corporate and administrative expense 36 36 109 109
Gain on sale of assets (602) 890 (8,702) (430)
(Reversal of) writedown of hotel properties, net (999) 29,081 2,386 28,967
SIFT transition expenses - 352 - 980
Funds from operations (2) $ 31,504 $ 30,911 $ 51,370 $ 51,951
Reconciliation to distributable income
Add / (deduct)
Non-cash portion of mortgage interest expense 553 571 1,606 1,765
Non-cash portion of convertible debentures interest and accretion 1,166 1,032 3,676 3,043
FF&E reserve (6,741) (7,227) (18,640) (19,366)
Distributable income (2) $ 26,482 $ 25,287 $38,012 $37,393
Per unit data
Net income (loss) and comprehensive income (loss) - diluted $0.139 ($2.368) ($0.077) ($2.669)
FFO - diluted $0.270 $0.293 $0.499 $0.531
Distributable income - diluted $0.226 $0.239 $0.377 $0.390
Distributions declared $0.0999 $ 0.0999 $0.2997 $ 0.2997
(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 and nine months ended September 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 September 30, 2013 Variance to 2012 Nine months ended September 30, 2013 Variance to 2012
Occupancy
Ontario 70.8% 0.2 pts 63.2% 0.8 pts
Quebec 72.8% 1.0 pts 63.9% (0.6 pts)
Atlantic 74.6% (3.0 pts) 60.6% (2.2 pts)
Western 69.1% (2.8 pts) 66.9% (0.6 pts)
Total 71.5% (0.7 pts) 63.6% (0.2 pts)
ADR
Ontario $108.59 (0.3%) $107.87 (0.9%)
Quebec $117.29 0.6% $113.20 1.0%
Atlantic $125.36 1.9% $118.51 1.1%
Western $165.33 3.1% $160.99 2.4%
Total $123.23 0.8% $120.78 0.5%
RevPAR
Ontario $76.90 (0.1%) $68.17 0.3%
Quebec $85.43 2.1% $72.36 0.1%
Atlantic $93.56 (2.0%) $71.80 (2.4%)
Western $114.22 (0.9%) $107.78 1.5%
Total $88.16 (0.2%) $76.81 0.1%

OPERATIONS REVIEW

Three months ended September 30, 2013

Third quarter hotel revenues decreased $11.7 million as compared to the prior period. Hotel sales contributed $10.5 million of the decline. Same-hotel RevPAR was relatively flat to the prior period with growth across the portfolio offset by displacement caused by renovation activity. Excluding hotels impacted by renovations during the quarter, RevPAR growth would have exceeded 2%.

Hotel property expenses during the three months ended September 30, 2013 decreased $9.4 million or 7.6%. Excluding asset sales, expense growth was limited to 0.4%, benefitting from operational enhancements implemented in the first quarter. Notwithstanding limited growth in operating expenses, Hotel GOP declined $2.3 million or 4.6% reflecting the impact of flat same-hotel RevPAR achieved. Same-hotel Hotel GOP margins declined 1.0% to 29.3%.

Mortgage interest expense declined $1.9 million owing to the year-to-date repayment of $61.7 million of mortgage debt following asset sales, as well as regular principal repayments. Interest expense related to InnVest's convertible debentures reflect 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.

Third quarter results include gain on sales and the reversal of previous impairment totaling $1.6 million along with $0.8 million of lease income related to the oversight of one hotel following its sale.

The third quarter generated FFO of $31.5 million ($0.270 per unit diluted) and distributable income of $26.5 million ($0.226 per unit diluted) up $0.6 million and $1.2 million, respectively, from the prior periods. The year-over-year improvements reflect interest expense reductions achieved following asset sales which offset lower Hotel GOP generated.

Nine months ended September 30, 2013

For the nine months ended September 30, 2013 hotel revenues decreased $17.2 million, or 3.7% owing to $16.2 million of reduced contribution from asset divestitures. Same-hotel RevPAR over this period was relatively unchanged. Year-to-date RevPAR reflects the impact of renovation activity during the third quarter as well as 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 in Q2). InnVest expects to recover lost earnings at its two Calgary hotels through a business interruption claim. No insurance proceeds related to these claims have been recognized to-date in 2013.

InnVest generated Hotel GOP of $104.0 million, down $4.0 million or 3.7% 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 nine months ended September 30, 2013, Same-hotel Hotel GOP margins decreased 1.0% to 23.8%.

For the nine months ended September 30, 2013, InnVest generated FFO of $51.4 million ($0.499 per unit diluted) and distributable income of $38.0 million ($0.377 per unit diluted), down $0.6 million and up $0.6 million from the prior periods, respectively.

PORTFOLIO REPOSITIONING PROGRAM

To date in 2013, InnVest has completed the sale of six non-core assets for gross proceeds of $93.1 million (net proceeds of approximately $18.1 million) and has entered into separate agreements to sell six additional non-core properties for gross proceeds of $33.5 million. Eleven additional hotels are actively being marketed.

CAPITAL INVESTMENT PROGRAM

Capital expenditures during the nine months ended September 30, 2013 totalled $41.2 million compared to the notional FF&E Reserve of $18.6 million. At September 30, 2013, InnVest has additional committed capital of $18.2 million.

Capital investments undertaken in 2013 reflect the rollout of InnVest's Comfort Inn revitalization program as well as the start of renovations at select full-service hotels including the Delta Winnipeg (lobby, meeting space and guestrooms) and the Sheraton Suites Calgary Eau Claire (lobby, meeting space and guestrooms). Currently, 24 Comfort Inn hotels have been substantially renovated. By the end of 2013, InnVest expects to have completed 30 Comfort Inn renovations.

BALANCE SHEET

In early October 2013, InnVest announced the refinancing of $251.8 million of 2014 mortgage debt maturities. Incremental proceeds achieved will be used to partially repay remaining 2014 mortgage maturities. Proforma these refinancing transactions, InnVest will have a weighted average mortgage interest rate of approximately 5.4% and a weighted average term of 4.5 years.

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 September 30, 2013, InnVest had $29.1 million of cash (including restricted cash) and $36.6 million of capacity on its undrawn credit facility. InnVest's leverage at September 30, 2013 including convertible debentures was 64.0% (43.0% excluding convertible debentures), compared to 64.5% at December 31, 2012.

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 fourth quarter.

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.

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

Through the end of 2014, InnVest expects to divest of 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 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 Friday November 8, 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 November 8th, beginning at 1:00 pm through to November 22nd, 2013. To access the recording please call 905-694-9451 or 1-800-408-3053 and use the reservation number 4079005#.

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 131 hotels across Canada representing over 16,500 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
    Chantal Nappert
    Vice President, Finance and Investor Relations
    (905) 624-7806
    (905) 206-7114 (FAX)
    www.innvestreit.com