InnVest Real Estate Investment Trust
TSX : INN.UN

InnVest Real Estate Investment Trust

November 05, 2014 08:00 ET

InnVest REIT Reports Third Quarter Results

7.8% RevPAR Growth Driven by Investments Made Across the Portfolio

TORONTO, ONTARIO--(Marketwired - Nov. 5, 2014) - InnVest Real Estate Investment Trust ("InnVest" or the "REIT") (TSX:INN.UN), today announced financial results for the three and nine months ended September 30, 2014.

"Building upon our positive second quarter momentum, we drove continued high performance among all our key metrics during the third quarter, highlighted by same-hotel RevPAR growth of 7.8% and same-hotel GOP margin expansion of 190 basis points. The strength of these key performance measures substantiates the hard work that has been done to reposition the portfolio over the last two years," said Anthony Messina, InnVest's President and Chief Executive Officer. "We believe current industry fundamentals support continued growth driven by improving demand expectations and a low supply-growth outlook."

Third Quarter Operating Highlights

  • Same-hotel RevPAR improved 7.8%;
  • Same-hotel GOP margins improved 190 basis points to 32.7%;
  • GOP improved 1.8% to $48.2 million notwithstanding overall revenue declines of $12.7 million reflecting the sale of non-core hotels;
  • Net income improved to $16.5 million or $0.161 per unit diluted (vs $13.9 million or $0.139 per unit diluted in 2013);
  • FFO per unit improved to $0.278 per unit diluted (vs $0.270 in 2013);

Third Quarter Strategic Highlights

  • Sold three non-core assets for aggregate gross proceeds of $16.4 million ($91.6 million year-to-date) and have commitments to sell five additional hotels for aggregate gross proceeds of over $44 million;
  • Completed an offer to purchase and cancelled $28.8 million of its Series G convertible debentures, and amended certain terms for its remaining Series G convertible debentures; and
  • Subsequent to the end of the quarter, entered into an agreement to acquire a 20% interest in the Fairmont Royal York Hotel in downtown Toronto.

"Our long-term goal at InnVest is to out-perform, through all market cycles. That means having a portfolio that can out-perform and operating partners who can out-perform," commented Edward Pitoniak, InnVest's Managing Director and Trustee. "In the third quarter, we began to see our portfolio and partners out-perform the national averages for RevPAR growth. These results give us confidence that in the long term, we can and will be the Canadian hotel company that leads in growth."

InnVest's Condensed Interim Consolidated Financial Statements and Management's Discussion and Analysis for the three and nine months ended September 30, 2014 and 2013 are available on InnVest's website at www.innvestreit.com.

SELECTED FINANCIAL INFORMATION


($000s except per unit amounts)
Three Months Ended
September 30, 2014
(unaudited)


Three Months Ended
September 30, 2013
(unaudited)


Nine months Ended
September 30, 2014
(unaudited)


Nine months Ended
September 30, 2013
(unaudited)


Revenue
Hotel properties $148,257 $160,912 $408,550 $444,610
Other real estate properties 177 221 546 1,621
$148,434 $161,133 $409,096 $446,231
Gross operating profit (1)
Hotel properties $48,282 $47,380 $100,853 $103,519
Other real estate properties (43 ) (1 ) (275 ) 394
$48,239 $47,379 $100,578 $103,913
Net income (loss) and comprehensive income (loss) $16,508 $13,946 $(13,545 ) $(7,215 )
Reconciliation to FFO
Add / (deduct)
Depreciation and amortization 20,804 20,137 60,259 61,309
Deferred income tax recovery - (22 ) - (344 )
Unrealized changes in the fair value of financial 1,782 (992 ) 9,903 3,827
Distributions included in corporate and administrative expense 36

36

109

109

Gain on sale of assets, net (555 ) (602 ) (4,564 ) (8,702 )
Writedown (recovery) of hotel properties, net 4,955 (999 ) 4,464 2,386
Gain on redemption and amendment of convertible debentures (11,810 ) - (11,628 ) -
Non-recurring costs:
Proxy defense and settlement costs - - 3,594 -
Litigation settlement - - (500 ) -
Funds from operations (2) $31,720 $31,504 $48,092 $51,370
Reconciliation to AFFO
Add / (deduct)
Non-cash portion of mortgage interest expense 1,010 553 2,291 1,606
Non-cash portion of convertible debentures interest and accretion 884
1,166
2,944
3,676
FF&E reserve (6,295 ) (6,741 ) (17,181 ) (18,640 )
AFFO (2) $27,319 $26,482 $36,146 $38,012
Per unit data - Diluted
Net income (loss) and total comprehensive income $0.161 $0.139 ($0.143 ) ($0.077 )
FFO $0.278 $0.270 $0.467 $0.499
AFFO $0.239 $0.226 $0.358 $0.377
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) FFO and AFFO 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, 2014 and 2013 are on a same-hotel basis (112 hotels) and exclude hotels sold since the start of the periods presented.

Three months ended Nine months ended
September 30, 2014 Variance to 2013 September 30, 2014 Variance to 2013
Occupancy
Ontario 73.9% 2.8 pts 66.5% 2.1 pts
Quebec 73.9% 0.3 pts 64.6% (0.7 pts)
Atlantic 79.9% 5.4 pts 62.1% 2.6 pts
Western 71.3% 4.1 pts 64.6% (0.2 pts)
Total 74.3% 2.9 pts 65.0% 1.1 pts
ADR
Ontario $114.97 2.7% $111.53 0.9%
Quebec $127.45 5.6% $120.09 3.6%
Atlantic $127.67 4.0% $119.79 2.9%
Western $172.07 2.7% $167.28 3.1%
Total $130.19 3.6% $125.17 2.1%
RevPAR
Ontario $84.93 6.6% $74.13 4.1%
Quebec $94.18 6.1% $77.53 2.4%
Atlantic $102.03 11.5% $74.42 7.5%
Western $122.66 9.0% $108.07 2.8%
Total $96.73 7.8% $81.42 3.9%

OPERATIONS REVIEW

Three months ended September 30, 2014

Realized same-hotel RevPAR growth of 7.8%, benefitting from a combination of rate and occupancy gains.

Same-hotel revenues during the three months ended September 30, 2014 improved $10.0 million or 7.3%. Notably, revenue from the Comfort Inn assets which were renovated in 2013 grew 17.9% as compared to the prior year and are up 6.5% as compared to 2012. Same-hotel growth was offset by hotel divestitures completed since 2013 (16 in 2014 and eight in 2013) and resulted in the overall hotel revenue decline.

Notwithstanding the overall hotel revenue reduction of $12.7 million, Hotel GOP during the third quarter improved $0.9 million, or 1.9%, driven by growth achieved following renovations which offset reduced contributions from assets sold. Overall Hotel GOP margins improved during the quarter, benefiting from the divestiture of low yielding assets as well as same-hotel margin improvements of 190 basis points to 32.7%.

Higher corporate and administrative costs largely reflect the addition of an interim Managing Director and a dedicated chief financial officer during the second quarter as well as higher charges relating to planned changes to the trustee compensation plan and costs incurred in the search for a permanent chief executive officer for the REIT.

Third quarter results include non-cash gains on the early settlement and amendments to the Series G debentures totaling $11.8 million, a $5.3 million non-cash impairment charge relating to four properties as well as net gain on sales of $0.6 million and the reversal of prior impairments totaling $0.3 million

For the three months ended September 30, 2014, InnVest generated FFO of $31.7 million ($0.278 per unit diluted) and AFFO of $27.3 million ($0.239 per unit diluted), improving 0.7% and 3.2% respectively, as compared to the prior year.

Nine months ended September 30, 2014

Same-hotel RevPAR grew 3.9% during the nine months ended September 30, 2014. Same-hotel revenues achieved were impacted by disruption caused by renovations at select hotels during the periods or recovering from renovations recently undertaken.

Hotel divestitures completed since 2013 contributed to the hotel revenue decline of $36.1 million, or 8.1%. Other real estate revenues also declined $1.1 million owing to an office complex sale in May 2013.

GOP margins improved 130 basis points to 24.6%, largely benefiting from the divestiture of low yielding assets. Same-hotel GOP margins were stable at 25.8%, reflecting the impact of renovation displacement at a number of hotels. Limited cost savings are achieved during renovation periods given the high fixed-cost nature of expenses. Hotel GOP margins for the Comfort Inn hotels renovated in 2013 improved 4.0 points year-to-date through the third quarter, highlighting the positive operating leverage from improving revenue performance.

As part of a proxy contest settlement reached in March 2014, InnVest incurred $3.6 million in non-recurring costs, including the reimbursement of customary transaction costs incurred by the parties involved. These costs contributed to the higher corporate and administrative expenses as compared to the prior year.

For the nine months ended September 30, 2014, InnVest generated FFO of $48.1 million ($0.467 per unit diluted) and AFFO of $36.1 million ($0.358 per unit diluted), declining $3.3 million and $1.9 million.

RECENT DEVELOPMENTS

On October 28, 2014, InnVest announced that it had entered into an agreement to acquire a 20% interest in the 1,363-room Fairmont Royal York in Toronto (the "Royal York Hotel") through a joint venture with KingSett Real Estate Growth LP No. 5 and Ivanhoé Cambridge. The joint venture will acquire the Royal York Hotel for an aggregate price of $186.5 million, or $137,000 per key, with InnVest's 20% share being approximately $37.3 million. The joint venture expects to finance the acquisition with conventional mortgage financing. InnVest intends to fund its proportionate share of the acquisition equity with available cash and capacity under its existing credit facilities. The transaction is expected to close January 30, 2015 and is subject to customary closing conditions. The joint venture believes the Royal York Hotel has substantial long- term potential and plans to invest over $50 million of additional funds for renovations over the 24 months following the acquisition (InnVest's share being $10.0 million).

CORPORATE UPDATE

Following certain changes to InnVest's Board of Trustees (the "Board") in March 2014, InnVest announced its intention to internalize the asset management of InnVest effective November 30, 2014. As part of this process, the Board appointed Edward Pitoniak as interim Managing Director and is in the process of executing a search for a permanent full-time Chief Executive Officer to be employed by InnVest. During the second quarter, the Chief Financial Officer role became fully dedicated to the affairs of the REIT.

PORTFOLIO REPOSITIONING PROGRAM

During the third quarter of 2014, three non-core assets were sold for gross proceeds of $16.4 million (net proceeds of $11.7 million). Since the start of 2013, management has completed hotel divestitures of almost $205 million, exceeding its original two-year divestiture objectives of $185 million.

Ten additional 'non-core' hotels are being considered for sale with expected proceeds of approximately $75 million (net proceeds of approximately $35 million). Five of these hotels are currently under purchase and sale agreements for aggregate gross proceeds of over $44 million.

CAPITAL INVESTMENT PROGRAM

InnVest expects to invest approximately $70 million across its portfolio in 2014, $57.8 million of which was invested year-to-date through September 30, 2014.

Renovation activity across the portfolio was limited during the third quarter to minimize displacement during the busier summer season. Hotels which have completed recent renovations are exceeding results achieved from hotels which have yet to be renovated, highlighting the return opportunities provided by internal investments within the existing portfolio.

Through the end of the third quarter, 47 Comfort Inn hotels have been renovated (31 in 2013 and 16 in 2014) as part of InnVest's brand revitalization program, representing over 80% of InnVest's core Comfort Inn portfolio. Renovations are currently ongoing at seven Comfort Inn hotels with the balance to start by the end of the year.

Given the extensive renovation and repositioning of the Comfort Inn assets, these hotels are experiencing a transition period following the completion of renovations as our property managers and sales teams reposition the hotels within their competitive sets and shift the business mix to higher rated segments. Based on experience to-date, the typical period for these hotels to fully ramp up from the renovation can be upwards of a year, depending on the market. The 31 Comfort Inns renovated throughout 2013 experienced 17.9% growth in room revenues during the third quarter and 38.3% improvement in Hotel GOP as compared to the prior year.

Full-service hotels under renovations in 2014 included two hotels in Calgary (the Fairmont Palliser and the Sheraton Calgary Eau Claire), the Delta Winnipeg, Delta Prince Edward Island and the London Hotel & Suites (converted to a Holiday Inn in early October).

Since the second quarter of 2013, 63 of InnVest's 103 Core Portfolio hotels have been, or are expected to be, renovated through the end of 2014 or early into 2015 (58 Comfort Inn hotels and 5 full-service hotels). The following table summarizes third quarter operating results across the Core Portfolio and serves to highlight the displacement experienced while work is underway as well as the growth achieved-to-date following the completion of renovations. Moreover, the table below indicates that revenues for renovated Comfort Inn hotels generally take a few quarters to ramp-up as the growth in revenues for the third quarter of 2014 for hotels renovated in 2014 was 1.5% as compared to 17.9% for hotels renovated in 2013.

Three months ended September 30, 2014
# of
hotels
# of
rooms
Room
revenue $
Variance to prior
year comparative
period
Hotel
GOP
Variance to prior
year comparative
period
$ % $ %
Core Comfort Inn Portfolio
Q2 20131 renovations 7 607 $ 4,138 $ 658 18.9% $ 2,068 $ 655 46.4%
Q3 20131 renovations 12 892 6,600 1,318 25.0% 3,161 1,155 57.6%
Q4 20131 renovations 12 1,003 7,667 823 12.0% 3,734 671 21.9%
Renovated in 2013 31 2,502 18,405 2,799 17.9% 8,963 2,481 38.3%
Q1 20141 renovations 4 295 2,784 38 1.4% 1,506 24 1.6%
Q2 20141 renovations 11 687 5,220 232 4.7% 2,362 81 3.6%
Q3 20141 renovations 1 145 496 (146) (22.7%) 105 (147) (58.3%)
Renovated in 2014 16 1,127 8,500 124 1.5% 3,973 (42) (1.0%)
Total renovated 47 3,629 26,905 2,923 12.2% 12,936 2,439 23.2%
To be renovated 11 849 5,426 - - 2,220 (88) (3.8%)
Core Comfort Inn Portfolio 58 4,478 32,331 2,923 9.9% 15,156 2,351 18.4%
Core hotels under renovation in 2014/2013 5 1,475
20,265
1,875 10.2%
8,872
1,653 22.9%
Other Core hotels 40 6,833 61,395 4,080 7.1% 21,782 2,205 11.3%
Total Core Portfolio 103 12,786 $113,991 $ 8,878 8.4% $45,810 $ 6,209 15.7%
1 Based on the period in which substantial completion of renovations were completed.

BALANCE SHEET

At September 30, 2014, InnVest has total current liquidity of $124.1 million (including cash and current availability under various debt facilities).

On July 31, 2014, InnVest completed a substantial issuer bid to purchase for cancellation $28.8 million of the outstanding principal amount of its Series G convertible unsecured subordinated debentures (the "Series G Debentures") at a purchase price of $1,080 for each $1,000 in principal amount (the "Series G Offer").

In connection with the Series G Offer, debenture holders approved certain amendments to the trust indenture governing the Series G Debentures including increasing the coupon interest payable per annum from 5.75% to 6.25% effective as of the commencement of the next interest accrual period, being September 30, 2014; and an increase to the conversion price for each InnVest unit to be issued upon the conversion of one Series G Debenture from $5.80 to $7.50 per unit.

Financing initiatives completed in 2014 have contributed to diversifying InnVest's funding and liquidity sources, extending InnVest's weighted average mortgage debt maturity, lowering weighted average interest costs and reducing InnVest's reliance on dilutive securities. At September 30, 2014, InnVest's leverage totaled 65.8% (49.7% excluding convertible debentures). Management continues to target leverage reduction as a key priority. InnVest does not have any significant debt maturities until July 2015.

OUTLOOK

The hospitality industry is highly correlated to the economy. The economic and travel outlooks across Canada continue to be positive with further growth anticipated in 2015, driven by improving demand expectations and a low supply-growth outlook for new hotel inventory.

Through the end of 2014 and into 2015, InnVest expects to continue executing its portfolio repositioning strategy of divesting of low-yielding assets and reinvesting proceeds generated both internally, to undertake an extensive capital program to enhance its product offering at a number of hotels, as well as externally through selective asset acquisitions as recently highlighted with the participation in the acquisition of the Royal York Hotel. While impacting near-term operating results caused by displacement, these targeted investments have, and are expected to continue to, improve the portfolio's competitive positioning and operating performance through increased occupancies and average daily rates over the longer term.

InnVest is committed to enhancing unitholder alignment and growing unitholder value. InnVest's strategy to reduce debt leverage (including reducing InnVest's reliance on dilutive convertible securities), reposition its portfolio and invest in core assets is expected to enhance the stability and growth of the portfolio's long-term cash flows and valuation.

QUARTERLY CONFERENCE CALL

Management will host a conference call on Wednesday November 5, 2014 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing 416-340-2216 or 1- 866-225-0198. 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 5, 2014 beginning at 2:00 pm through to November 20, 2014. To access the recording please call 905-694-9451 or 1-800-408-3053 and use the reservation number 8245407#.

INNVEST PROFILE

InnVest Real Estate Investment Trust is an unincorporated open-ended real estate investment trust which owns a portfolio of over 110 hotels across Canada representing approximately 14,000 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.D, INN.DB.E, INN.DB.F and INN.DB.G.

CAUTIONARY AND FORWARD LOOKING STATEMENTS

GOP, FFO and AFFO are additional and non-IFRS financial measures of earnings and cash flow commonly used by industry analysts. Additional and non-IFRS financial measures do not have a standardized meaning and are unlikely to be comparable to similar financial measures used by other organizations.

Statements contained in this press release that are not historical facts are forward-looking statements. These forward-looking statements include statements with respect to assumptions and forecasts of future results for InnVest and the Royal York Hotel. These forward-looking statements are based on current expectations of management and involve risks 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 InnVest's capital requirements and available sources of funds, changes to InnVest's business strategy (including InnVest's ability to divest of assets, its intent to internalize asset management; ability to achieve lower debt leverage target; and return expectations on capital investments completed); real estate investment risks; hotel industry risks; competition and the status of InnVest as a REIT for Canadian federal income tax purposes in any year. These and other factors are discussed in InnVest's annual information form for the year ended December 31, 2013, which is available at www.sedar.com. In making such forward-looking statements, management has relied upon a number of material factors and assumptions, including with respect to: current and future levels of investment in and renovations within its existing portfolio and at the Royal York Hotel; the existing portfolio and the Royal York Hotel's expected future financial performance; general economic and financial conditions; the terms and conditions on which the acquisition of the Royal York Hotel will be completed; and the expected financial impact of the acquisition of the Royal York Hotel on InnVest. Although management of InnVest believes that the expectations with respect to such forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties and, accordingly, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the foregoing list is not exhaustive. The forward-looking statements included herein are made as of the date hereof and 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.

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