InnVest REIT Reports Improved First Quarter 2015 Performance

Same-Hotel Results Strengthen, Renewed Focus on Growth

TORONTO, May 11, 2015 /CNW/ – InnVest Real Estate Investment Trust (“InnVest” or the “REIT”) (TSX:INN.UN), today announced financial results for the three months ended March 31, 2015.  

FIRST QUARTER 2015 HIGHLIGHTS:

• Internalized asset management team and appointed a new CEO
• Acquired 20% interest in Toronto’s Royal York Hotel for $37.3 million
• Sold two non-core assets for gross proceeds of $15.3 million
• Reduced leverage to 60.7% from 62.0% at December 31, 2014 and 66.9% at March 31, 2014
• Same-hotel RevPAR up 2.3% through a combination of rate and occupancy gains
• Same-hotel GOP up 10.4% with same-hotel margin up 120 basis points to 14.4%
• Overall GOP increased 12.4% and GOP margins improved 200 basis points due to strategic sale of low yield assets 
• 58 Comfort Inns renovated since 2013 grew room revenue by 15.2% and Hotel GOP by 74.4% 
• Despite 26% increase in weighted average number of Units outstanding, FFO per Unit and AFFO per Unit show 41% and 46% improvement, respectively, over prior year’s first quarter due to stronger same-hotel performance, contribution from acquisitions, and sale of low yield non-core properties.  

 

“Over the last two years, we have demonstrated significant progress in our two key objectives of strengthening and re-positioning our property portfolio and enhancing the REIT’s financial position,” commented Drew Coles, InnVest’s President and Chief Executive Officer.  “Looking ahead, we will continue to focus on these two key objectives. In addition, we will focus on accelerating growth in cash flows through improved operating performance, continued investments in our core hotel properties, and increasing the size and scale of our property portfolio through prudent and accretive acquisitions.”

SELECTED FINANCIAL INFORMATION

 

The first quarter is historically InnVest’s lowest earnings period.  Given the impact of seasonality on our portfolio, the first quarter is not reflective of anticipated results for the annual period.  Revenues are typically higher in the second and third quarters due to business and leisure travel trends as compared to the first and fourth quarters.

InnVest’s Condensed Interim Consolidated Financial Statements and Management’s Discussion and Analysis for the three months ended March 31, 2015 are available on InnVest’s website at www.innvestreit.com. 

The following operating results detail RevPAR for the same-hotel portfolio (107 hotels or over 95% of total portfolio rooms) and exclude properties sold or acquired since January 1, 2014.

 

OPERATIONS REVIEW

Overall revenues declined 3.2% in the first quarter of 2015 compared to the prior year’s first quarter due primarily to the strategic sale of twenty-one non-core low yield properties since the beginning of 2014 (two in 2015 and 19 in 2014), partially offset by the acquisition of one property in December 2014. Same-hotel revenues rose 1.0% in the quarter compared to the comparable prior-year period due to higher occupancies and average daily rates (ADR) in the current year which was offset by reduced non-room revenues. RevPAR on a same-hotel basis rose 2.3% in the quarter compared to last year. Of note, room revenue growth achieved from the Comfort Inn assets renovated in 2013 and 2014 grew 15.2% in the three months ended March 31, 2015 compared to the prior year period.  

For the three months ended March 31, 2015 Hotel Gross Operating Profit (GOP) improved 12.6% due primarily to the disposition of non-core low yield assets since the beginning of 2014. Same-hotel GOP increased 10.4% due to higher occupancies and ADR in the period. Despite the lower overall revenues in the quarter compared to last year, overall hotel GOP margin improved by 190 basis points due to the strategic sale of low yielding assets. Same-hotel GOP margin increased 120 basis points to 14.4% from 13.2% in the first quarter of 2014.

Corporate and administrative expenses declined 42.6% in the first quarter of 2015 due to the inclusion of a $3.6 million settlement charge in the prior year, partially offset by increased costs in the current year related to the hiring of a new CEO in January 2015 and the internalization of the REIT’s asset management team.

Higher mortgage interest expense for the three months ended March 31, 2015 reflects the new mortgage associated with the Hyatt Regency acquisition in December 2014 and the funding of a new loan in April 2014. These increases were partially offset by the net repayment of mortgage debt from asset sales.  Convertible debenture interest savings reflect the redemption of InnVest’s $70 million Series C debentures in early June 2014, the purchase for cancellation of $28.8 million of its Series G debentures on July 31, 2014, and the early redemption of the $36.4 million Series D debentures on March 3, 2015.

For the three months ended March 31, 2015, InnVest generated an FFO loss of $3.4 million ($0.029 loss per unit diluted) compared to a $4.6 million loss ($0.049 loss per unit diluted) in the prior year’s first quarter. The $1.2 million improvement primarily reflects higher GOP. AFFO was a loss of $5.2 million ($0.044 loss per unit diluted) compared to $7.6 million loss ($0.081 loss per unit diluted) last year. The $2.4 million improvement reflects the higher FFO and the non-cash portion of mortgage interest expense. The REIT generated a net loss of $23.2 million ($0.196 per unit diluted) compared to a net loss of $34.9 million ($0.372 per unit diluted) in the first quarter of 2014. Per Unit amounts in 2015 were impacted by the 26.5% increase in the weighted average number of Units outstanding.

PORTFOLIO REPOSITIONING PROGRAM
Over the last two years the REIT has sold 29 non-core low yielding properties to optimize overall asset performance and ensure it owns a well-diversified portfolio comprised of highly competitive assets in its chosen markets that will outperform through all economic cycles. Proceeds from such asset sales are re-invested to improve the overall quality and further grow and diversify the REIT’s Core Portfolio.

During the first quarter of 2015 two non-core assets were sold for gross proceeds of $15.3 million (net proceeds of $6.0 million). Five remaining non-core properties are expected to generate further gross proceeds of approximately $30 million (net proceeds of approximately $10 million).

CAPITAL INVESTMENT PROGRAM
Capital investments in the REIT’s Core Portfolio help to ensure performance is optimized and assets are competitive within their markets. The REIT has made significant investments in its Core Portfolio over the last two years, including renovations of InnVest’s 58 Core Comfort Inn hotels. Capital investments completed in early 2015 include the final phase of room renovations at Calgary’s Fairmont Palliser and the Sheraton Suites Eau Claire.  In addition, renovations were initiated as part of license renewals at the Delta London Armouries and Moncton’s Delta Beausejour. The prior period included significant activity related to the Comfort Inn portfolio revitalization. Management expects to invest between $60 million and $80 million in its Core Portfolio in 2015.

The following table summarizes operating results for the REIT’s Core Portfolio and serves to highlight the profitability impact while renovations are underway, as well as the growth achieved-to-date following the completion of renovations. In aggregate, the renovated Comfort Inn portfolio experienced Hotel GOP growth of 74.4% during the first quarter of 2015 reflecting the significant operating leverage of strong revenue growth. This growth rate significantly exceeds results achieved in our remaining portfolio, highlighting the return opportunities provided by internal investments within the existing portfolio.

The profitability reduction across other Core hotels is largely reflective of oil-related market declines as well as reduced performance in Quebec City owing to lower group demand as compared to the prior year. Excluding hotels in these markets, Hotel GOP from other Core hotels would have improved 3.6% during the three months ended March 31, 2015.

 

FINANCIAL POSITION
At March 31, 2015 InnVest had total current liquidity of $77.6 million.  

Financing initiatives in 2014 and 2015 have diversified InnVest’s funding and liquidity sources, lowered weighted average interest costs and reduced InnVest’s overall leverage, including reducing its reliance on dilutive securities.  At March 31, 2015 InnVest’s leverage ratio was 60.7% compared to 62.0% at December 31, 2014 and 66.9% at March 31, 2014. Management is targeting a near-term leverage ratio below 60% with further reduction contemplated over the longer term.

In early 2015, management elected not to exercise a one year option to extend mortgage debt of approximately $155 million, resulting in the elimination of the remaining related deferred financing fees during the fourth quarter of 2014. As a result, InnVest has approximately $218 million of mortgages (excluding $8.3 million offset by a lease receivable) with a weighted average interest rate of 5.2% maturing in 2015. Management expects to refinance this debt on advantageous terms including lower interest rates and further extending the term to maturity. 

In April 2015, management completed the refinancing of the Hyatt Regency Vancouver for $80.0 million at a fixed interest rate of 3.75% for a 10-year term. This financing replaced a $70.0 million, 3 year floating rate mortgage completed as part of the acquisition of the property.  Incremental proceeds from the refinancing will be used to fund capital investments, to repay debt and for general corporate purposes. 

RECENT DEVELOPMENTS
On February 2, 2015 InnVest completed the previously announced acquisition of a 20% interest in the 1,363-room Royal York Hotel in Toronto through an agreement with KingSett Real Estate Growth LP No. 5 and Ivanhoé Cambridge (the “Partnership”). The Partnership acquired the Royal York Hotel for an aggregate price of $186.5 million, or $137,000 per room, with InnVest’s 20% share being approximately $37.3 million.  The Partnership financed the acquisition with an approximate $100 million, 3-year, 3.8% floating rate mortgage.  InnVest funded its proportionate share of the acquisition equity with available cash. The Partnership believes in the long term future success of the Royal York Hotel and expects to invest over $50 million of additional funds for renovations over the next 24 months.

OUTLOOK
According to the Conference Board of Canada, economic growth for Canada is forecast to be 1.9% in 2015 and 2.2% in 2016. While growth is forecast across most provinces in Canada, Alberta’s economy is being negatively impacted by the decline in oil prices. Of note, British Columbia and Manitoba are expected to exceed the national average growth rate in 2015 which would benefit our newest acquisition in Vancouver and our newly renovated full-service hotel in Winnipeg.  The reduction in retail gas prices due to lower oil prices, and the decline in the Canadian dollar compared to the U.S. dollar, are expected, over time, to mitigate the negative impact of low oil prices on the overall Canadian economy as more Canadians choose to travel domestically while it is forecast there will be a 3.5% increase in overnight U.S. travel to Canada in 2015 compared to only a 1.2% increase in 2014. The REIT’s broad, diversified portfolio of quality assets provides appropriate risk mitigation in the face of regional disparities. In addition, industry fundamentals in the Canadian hotel business are expected to strengthen in 2015. According to HVS Global Hospitality Services, Canadian national RevPAR is forecast to grow 3.8% in 2015 with national hotel occupancy rising to 65.4%, up from 63.8% in 2014.

Management expects earnings to continue to grow through the balance of 2015 as renovated hotels benefit from completed capital investments, newly acquired hotels make a full year’s contribution to results, and the core portfolio capitalizes on positive industry fundamentals. However, the continuing impact of low oil prices on the overall Canadian economy could constrain growth over the near term.

Management’s prudent financial management and an improved balance sheet have helped lower the REIT’s cost of capital and better position InnVest to take advantage of potential future growth opportunities.  Management continues to see significant redevelopment and return-on-investment projects within its existing portfolio, and is also evaluating opportunities to further expand, diversify and upgrade the portfolio through accretive acquisitions.

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), and improve return on investments through divestitures, acquisitions and capital investments 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 Monday, May 11, 2015, 2015 at 11:00 a.m. Eastern time to discuss the first quarter 2015 results.  Investors are invited to access the call by dialing 416-764-8688 or 1-888-390-0546.  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 May 11, 2015 beginning at 3:00 pm through to May 27, 2015.  To access the recording please call 416-764-8677 or 1-888-390-0541 and use the reservation number 139461#. A live audio webcast of the conference call will be accessible on InnVest’s website at www.innvestreit.com. A replay will be available on InnVest’s website for 90 days after the conference call.

ABOUT INNVEST REIT
InnVest Real Estate Investment Trust is an unincorporated open-ended real estate investment trust which owns interests in a portfolio of approximately 110 hotels across Canada 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.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, including recent acquisitions.  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 for expected proceeds; achievement of plans to develop an optimal asset portfolio through completion of acquisitions and reinvestments in the portfolio; ability to achieve and maintain lower debt leverage target; and achieve return expectations on acquisitions and capital investments completed); extent of realized benefit from the internalization of senior management and asset management functions; current and future levels of investment in and renovations of the Royal York Hotel; real estate investment risks; the impact of lower oil prices and the decline in the Canadian dollar compared to the U.S. dollar on travel; hotel industry risks; competition; ability to refinance debt on advantageous terms; 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, 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 including recently acquired hotels; the existing portfolio, including recently acquired hotels’, expected future financial performance; general economic and financial conditions. 

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.

SOURCE InnVest Real Estate Investment Trust