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 nine months ended September 30, 2011. All dollars are in
thousands unless otherwise specified.
"Strength through the early part of the quarter was somewhat offset by growing
concerns relating to the global economic environment. These factors are
affecting consumer confidence and contributing to a slower recovery for our
industry. Notwithstanding, we were able to realize modest rate and RevPAR growth
during the quarter," commented Kenneth Gibson, InnVest's President and Chief
Executive Officer. "The current environment faced by InnVest and our desire to
conserve liquidity to fund profit-improving capital investments contributed to
our decision to reduce distributions. We are committed to enhancing unitholder
value and believe that today's distribution announcement represents a prudent
capital management decision."
Third Quarter Highlights
-- Revenue per available room ("RevPAR") on a same hotel basis increased
1.2% benefitting from a
0.9% improvement in average daily rate ("ADR") and a 0.2 point growth in
occupancy;
-- Hotel revenues improved 1.0% to $174.8 million;
-- Hotel operating income ("HOI") was relatively unchanged at $50.8
million;
-- InnVest realized net income of $66.9 million compared to a net loss of
$4.4 million in 2010. Excluding non-cash charges relating to the IFRS
implementation, deferred income taxes and a non-cash impairment charge
during the quarter, InnVest's net income improved to $10.7 million
compared to $7.7 million in the prior period; and
-- Funds from operations and distributable income each improved reflecting
the benefit of lower interest charges.
InnVest's Consolidated Financial Statements and Management's Discussion and
Analysis for the three and nine months ended September 30, 2011 and 2010 are
available on InnVest's website at www.innvestreit.com.
SELECTED FINANCIAL INFORMATION
----------- -----------
Three Three Nine Nine
Months Months Months Months
Ended Ended Ended Ended
(unaudited)($000s except per September September September September
unit amounts) 30, 2011 30, 2010 30, 2011 30, 2010
Hotel revenues $174,832 $173,022 $465,703 $461,727
Hotel operating income (1) $50,774 $50,823 $109,470 $110,023
Net income (loss) and
comprehensive income (loss) $66,929 ($4,432) $48,859 ($144,458)
--------------------------------------------
Reconciliation to funds from
operations (FFO)
Add / (deduct)
Depreciation and amortization 22,668 24,125 71,134 70,719
Deferred income tax expense
(recovery) 7,186 (5,443) (1,815) (8,475)
Unrealized (gain) loss on
liabilities presented at fair
value (71,434) 17,486 (73,677) 115,898
Finance costs - distributions 46 45 2,392 18,383
Gain on sale of asset held for
sale - (327) - (327)
SIFT transition expenses 589 510 589 510
Writedown of hotel properties 7,711 - 7,711 -
--------------------------------------------
Funds from operations (1) $33,695 $31,964 $55,193 $52,250
--------------------------------------------
Reconciliation to distributable
income
Add / (deduct)
Non-cash portion of mortgage
interest expense 667 640 2,009 1,534
Non-cash portion of
convertible debentures
interest and accretion 952 1,104 2,828 2,815
Reserve for replacement of
furniture, fixtures and
equipment and capital
improvements (7,186) (7,101) (19,138) (18,965)
--------------------------------------------
Distributable income (1) $28,128 $26,607 $40,892 $37,634
--------------------------------------------
Per unit data
FFO - diluted $0.314 $0.324 $0.565 $0.572
Distributable income - diluted $0.262 $0.270 $0.425 $0.414
Distributions per unit (2) $0.1251 $0.1251 $0.3753 $0.3753
----------- -----------
(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 Nine months
ended ended
September Variance to September Variance to
30, 2011 2010 30, 2011 2010
Occupancy
Ontario 67.6% (1.0 pt) 61.5% 1.7 pts
Quebec 73.6% 2.5 pts 63.8% 1.2 pts
Atlantic 79.4% 0.6 pts 63.9% 0.2 pts
Western 67.9% 0.1 pts 62.3% (0.2 pts)
----------------------------------------------------------------------------
Total 70.7% 0.2 pts 62.5% 1.0 pts
ADR
Ontario $106.58 (0.4%) $105.67 (2.1%)
Quebec $118.16 1.7% $114.85 0.6%
Atlantic $124.04 (0.8%) $117.63 0.3%
Western $142.17 3.3% $140.17 1.5%
----------------------------------------------------------------------------
Total $118.60 0.9% $116.05 (0.5%)
RevPAR
Ontario $72.10 (1.7%) $65.02 0.6%
Quebec $86.95 5.2% $73.31 2.6%
Atlantic $98.44 (0.1%) $75.16 0.7%
Western $96.57 3.5% $87.31 1.2%
----------------------------------------------------------------------------
Total $83.89 1.2% $72.57 1.2%
----------------------------------------------------------------------------
FINANCIAL REVIEW
Three months ended September 30, 2011
For the three months ended September 30, 2011, hotel revenues increased 1.0%, to
$174.8 million. RevPAR over this period increased 1.2%, benefitting from a 0.9%
increase in ADR and a 0.2 point improvement in occupancy. Strength in the Quebec
and Western regions following recent renovations offset declines in Ontario.
Hotel expenses for the three months ended September 30, 2011 increased $1.9
million or 1.5% to $124.1 million. Operating expenses increased 2.1% reflecting
inflationary wage increases for hotel staff and higher energy costs during the
quarter.
For the three months ended September 30, 2011, InnVest generated HOI of $50.8
million, unchanged from the prior year. The modest RevPAR gains achieved were
not sufficient to offset inflationary cost increases, resulting in HOI margins
declining 40 basis points to 29.0%.
Other income and expenses for the three months ended September 30, 2011
increased $4.7 million to $47.8 million. InnVest recognized a non-cash
impairment charge of $7.7 million during the quarter, triggered by InnVest's
long-term holding expectation for certain assets. The impairment provision
relates to four hotel properties representing 770 rooms. This charge offset a
$1.9 million net reduction in interest expense due to lower debt balances and
weighted average interest rates as compared to the prior period.
The third quarter of 2011 generated distributable income of $28.1 million
($0.262 per unit diluted) and FFO of $33.7 million ($0.314 per unit diluted),
each showing modest improvements from the prior year reflecting lower interest
charges.
Nine months ended September 30, 2011
For the nine months ended September 30, 2011, hotel revenues increased 0.9%, to
$465.7 million. Through the first nine months of the year, RevPAR increased 1.2%
based on a 1.0 point improvement in occupancy which offset a 0.5% decline in
ADR. Occupancy has improved consistently through the portfolio since early 2010
although pricing power has been limited in most markets driven by a competitive
landscape.
For the nine months ended September 30, 2011, hotel operating income margins
declined 30 basis points to 23.5%. InnVest generated HOI of $109.5 million, down
0.5% or $553 as compared to the prior year. The growth in hotel revenues over
this period was achieved through occupancy gains. The marginal contribution from
this incremental demand was offset by higher operating costs. In addition,
various rooms were taken out of the rental pool as a result of renovations which
resulted in a reduction in hotel operating income of approximately $1.7 million
during the first half of the year. Excluding the renovations displacement, HOI
growth would have approximated 1.0%.
Year-to-date InnVest generated distributable income of $40.9 million ($0.425 per
unit diluted) and FFO of $55.2 million ($0.565 per unit diluted). Over this
period, distributions totalling $34.8 million, or $0.3753 per unit, were
declared.
BALANCE SHEET REVIEW
At September 30, 2011, InnVest has cash on hand of $29.0 million and
availability under its credit facility of up to $39.2 million.
At September 30, 2011, InnVest has mortgages payable of $812.6 million with a
weighted average term of 2.1 years (December 2010 - 2.8 years) and a weighted
average interest rate of 5.6% (December 2010 - 6.0%). Approximately 10.1% of
InnVest's mortgage debt is at floating rate.
During the third quarter of 2011, InnVest extended the maturity of a mortgage
previously scheduled to mature on September 20, 2011 until November 20, 2011.
Management is finalizing a five-year renewal of this $50.7 million mortgage at
comparable terms and conditions. The mortgage is secured by two full service
hotels.
Mortgage maturities in 2012 total $176.5 million at an average interest rate of
7.5%. This includes three separate maturities including one of approximately
$164.1 million with a large Canadian institutional lender. Forty limited service
hotels serve as collateral on this mortgage which matures in November 2012.
InnVest also has a $146.0 million maturity with the same lender in February 2013
(following InnVest's one-year option election) secured by seven full-service
hotels. Management has begun discussions for early extensions of both
maturities.
At September 30, 2011, InnVest's leverage excluding and including convertible
debentures was 45.8% and 63.0%, respectively. This reflects a 70 basis point
leverage reduction since the beginning of the year.
Year-to-date, InnVest has invested $35.6 million in capital expenditures
throughout its portfolio. These investments reflect a number of profit-improving
projects designed to increase cash flow and improve profitability by
capitalizing on changing market conditions and the favorable locations of
InnVest's properties. Significant investments year-to-date include the
completion of renovations to the executive gold floor and rooms at the Fairmont
Palliser in Calgary and room renovations at the Hilton Quebec City. Other
on-going projects include brand upgrades at a number of our Holiday Inn and
Delta hotels. InnVest expects that its capital expenditures for 2011 will
approximate $50.0 million.
PROPOSED CORPORATE REORGANISATION
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) (the "Transition
Period") would cease to be deductible in computing the income of IOT for
Canadian income tax purposes.
After careful consideration of options, the Board of Trustees of InnVest
recommends a merger of IOT into the REIT effective on June 30, 2012. This
reorganization would result in all the former stapled unitholders and stapled
debenture holders of the REIT and IOT holding only units or convertible
debentures, as the case may be, of the REIT. The merged entity would be governed
as a trust. The proposed merger will be subject to unitholder approval.
InnVest intends to schedule a special meeting of unitholders in the first
quarter of 2012 to approve the merger (the "Special Meeting"). Unitholders will
be provided with a notice of the Special Meeting and management information
circular in respect of the Special Meeting and will be entitled to vote at the
Special Meeting.
Pending completion of the proposed merger, InnVest is restricted from issuing
stapled securities during the Transition Period, subject to certain exceptions.
As a consequence, InnVest suspended its distribution reinvestment plan ("DRIP")
beginning in August 2011 until further notice and will satisfy all Trustee
compensation and the vesting of executive units in cash as opposed to the usual
satisfaction in the form of units.
ADJUSTED MONTHLY DISTRIBUTION
InnVest also declared a distribution of $0.0333 per stapled unit, payable on
December 15, 2011 to the holders of record as at the close of business November
30, 2011. This equates to an annual distribution of $0.40 per unit. The Board of
Trustees unanimously approved the reduction of distributions after careful
consideration of the environment faced by InnVest and its desire to conserve
liquidity to fund profit-improving capital investments throughout the portfolio.
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%.
LITIGATION SETTLEMENT
Subsequent to the end of the quarter, InnVest settled an outstanding lawsuit in
which it was the plaintiff. As a result, InnVest expects to record a gain of
$2.9 million less legal and associated costs, in the fourth quarter of 2011.
OUTLOOK
Current macro environment factors are impacting the global economy and reinforce
the importance of strong operational expertise and regional focus for our
business. InnVest's broad, diversified portfolio remains a key advantage in the
current environment.
Looking ahead, we remain 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 full-service and limited-service 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.
NORMAL COURSE ISSUER BID
The Toronto Stock Exchange (the "TSX") has accepted notice of the intention of
the REIT and IOT to jointly make normal course issuer bids for their stapled
units ("Units") and Series F 5.75% Stapled Convertible Debentures and the
intention of the REIT to make normal course issuer bids for its Series B 6.00%
Convertible Debentures, Series C 5.85% Convertible Debentures, Series D 6.75%
Convertible Debentures and Series E 6.00% Convertible Debentures.
As at November 4, 2011, there were 93,538,022 Units issued and outstanding. The
REIT and IOT may purchase through the facilities of the TSX or other applicable
marketplaces in Canada, up to 8,485,405 Units, representing 10% of the public
float of Units as of such date. Daily purchases of Units will not exceed 49,020
Units, subject to InnVest's ability to make "block" purchases under the rules of
the TSX.
As at November 4, 2011, the REIT had the following principal amount of
convertible debentures outstanding: $74,980,000 of Series B 6.00% Convertible
Debentures; $70,000,000 of Series C 5.85% Convertible Debentures; $36,358,000 of
Series D 6.75% Convertible Debentures; and $75,000,000 of Series E 6.00%
Convertible Debentures. In addition, as of November 4, 2011, the REIT and IOT
had outstanding $50,000,000 aggregate principal amount of Series F 5.75% Stapled
Convertible Debentures.
Under the normal course issuer bids, convertible debentures may be purchased
through the facilities of the TSX or other applicable marketplaces in Canada up
to the following limits:
Limit on Purchases (Principal Amount)
Total Limit(1) Daily Limits(2)
Series B 6.00% Convertible Debentures $7,498,000 $9,638
Series C 5.85% Convertible Debentures $7,000,000 $16,297
Series D 6.75% Convertible Debentures $3,635,800 $41,378
Series E 6.00% Convertible Debentures $7,500,000 $13,191
Series F 5.75% Stapled Convertible
Debentures $5,000,000 $11,045
(1) Represents 10% of the public float of each series of debentures as at
November 4, 2011.
(2) Subject to InnVest's ability to make "block" purchases under the rules
of the TSX.
InnVest believes that, from time to time, the market price of its Units and
convertible debentures may not reflect their underlying value and that the
purchase of Units and convertible debentures may represent an appropriate and
desirable use of its funds. InnVest intends to fund any purchases out of
available cash and undrawn credit facilities.
Purchases under the normal course issuer bids can be made from time to time over
a twelve-month period, commencing on November 15, 2011 and terminating on
November 14, 2012, as appropriate opportunities arise. The price InnVest will
pay for any Units or convertible debentures will be the market price at the time
of acquisition. It is currently expected that Units or convertible debentures
purchased under the bids will be cancelled, other than Units delivered to the
trustees of the REIT in satisfaction of a portion of their annual retainer fee.
The actual number of Units or principal amount of convertible debentures which
may be purchased and the timing of any such purchases will be determined by
InnVest, in accordance with the rules of the TSX.
QUARTERLY CONFERENCE CALL
Management will host a conference call on Friday November 11, 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 November 11th
beginning at 1:00 pm through to 11:59 p.m. on November 18th. 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 2011 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 (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.
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