InnVest REIT Reports Continuing Solid Progress in Second Quarter 2015

Same-Hotel Results Strengthen, Renewed Focus on Growth

TORONTO, Aug. 10, 2015 /CNW/ - InnVest Real Estate Investment Trust ("InnVest" or the "REIT"); (TSX:INN.UN) today announced financial results for the three and six months ended June 30, 2015.  

SECOND QUARTER 2015 HIGHLIGHTS:

  • Same-hotel RevPAR up 4.0% through a combination of rate and occupancy gains;
  • Same-hotel GOP up 12.7% with same-hotel GOP margin up 250 basis points to 30.5%;
  • Overall GOP increased 18.3% and GOP margins improved 430 basis points primarily due to the strong performance of the renovated Comfort Inn portfolio, the Hyatt Regency Vancouver acquisition, and the strategic sale of non-core assets;
  • 58 Comfort Inns renovated since 2013 grew room revenue by 8.8% and Hotel GOP by 23.5%;
  • AFFO per diluted unit of $0.189, up 25.2% over prior year's second quarter due to stronger same-hotel performance, contribution from acquisition, and disposition activity;
  • Reduced leverage to 60.0% at June 30, 2015 from 62.0% at Dec. 31, 2014 and 66.4% at June 30, 2014;
  • In July, announced an agreement to acquire the Hotel Saskatchewan, which is well positioned in the Regina market and is undergoing rebranding to a Marriott Autograph Collection hotel;
  • In July agreed to acquire a 33% interest in the Courtyard by Marriott, Toronto, a high quality asset located in the core of Canada's largest city; and
  • On July 15, 2015 completed bought-deal equity offering, including over-allotment option, raising gross proceeds of $48.3 million to fund the REIT's growth and acquisition activity.

 

"This quarter we maintained our focus on enhancing and re-positioning our property portfolio and strengthening the REIT's financial position," commented Drew Coles, InnVest's President and Chief Executive Officer.  "Our high quality portfolio of newly renovated hotels and recent acquisition, the Hyatt Regency Vancouver, are driving strong year over year growth."  Mr. Coles said, "Looking ahead, we continue to focus our efforts on improved operating performance, continued re-investment, and lowering interest cost, while increasing the size and scale of our property portfolio through prudent and accretive acquisitions. We have already announced two key acquisitions subsequent to the end of the second quarter, and consistent with our growth strategy will continue to evaluate additional growth opportunities going forward."


SELECTED FINANCIAL INFORMATION




              Three Months

             Six Months

Periods ended June 30,               

($,000 except per Unit and RevPAR amounts)

2015

2014

2015

2014






Revenues

148,698

146,231

259,496

260,662

Gross Operating Profit (GOP)

46,146

39,004

61,492

52,657

GOP Margin                                         

31.0%

26.7%

23.7%

20.2%

Funds from Operations (FFO)

29,433

20,765

26,029

16,190

FFO per Unit diluted

$ 0.224

$ 0.190

$ 0.215

$ 0.171

Adjusted Funds from Operations (AFFO)

24,910

16,450

19,710

8,827

AFFO per Unit diluted

$ 0.189

$ 0.151

$ 0.162

$ 0.093






Weighted Average Units Outstanding

122,265,716

94,433,893

120,466,242

94,147,664

Same-Hotel Portfolio:






Room Revenues

102,643

98,651

180,013

174,389


RevPAR

$ 87.05

$ 83.67

$ 76.81

$ 74.34


GOP

40,446

35,894

54,716

48,826


GOP Margin

30.5%

28.0%

23.6%

21.6%











 

InnVest's Condensed Interim Consolidated Financial Statements and Management's Discussion and Analysis for the three and six months ended June 30, 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.

The following table details same hotel Occupancy, Average Daily Rates (ADR) and Revenue per Available Room (RevPar):



Three
months
ended
June 30,
2015

Variance
to 2014

Six months
ended
June 30,
2015

Variance
to 2014

Occupancy





Ontario

69.3%

0.7 pts

63.5%

0.5 pts


Quebec

69.1%

3.6 pts

63.0%

3.1 pts


Atlantic

60.5%

-1.1 pts

52.0%

-1.1 pts


Western

67.0%

0.5 pts

62.0%

0.8 pts

Total

67.4%

1.0 pts

61.2%

0.8 pts






ADR






Ontario

$115.95

3.6%

$114.14

3.6%


Quebec

$123.82

3.8%

$119.04

2.5%


Atlantic

$124.03

4.1%

$117.11

2.9%


Western

$167.27

-1.0%

$162.07

-1.4%

Total

$129.13

2.4%

$125.41

1.9%






RevPAR






Ontario

$80.39

4.7%

$72.47

4.3%


Quebec

$85.58

9.6%

$74.95

7.7%


Atlantic

$75.03

2.3%

$60.93

0.9%


Western

$112.09

-0.1%

$100.41

-0.2%

Total

$87.05

4.0%

$76.81

3.3%

Note: Gross hotel revenues on a same-hotel basis (107 hotels), excluding hotels which were sold or acquired during the periods presented

 

OPERATIONS REVIEW
Overall revenues increased 1.7% in the second quarter of 2015 compared to the prior year due primarily to the strong performance of the REIT's renovated hotel portfolio, a full quarter's contribution from the Hyatt Vancouver acquisition completed in December 2014, partially offset by the strategic sale of non-core hotels (the "hotels sold") since the beginning of 2014.   Same-hotel revenues rose 3.6% in the second quarter compared to the prior-year due to higher occupancies and average daily rates. RevPAR on a same-hotel basis rose 4.0% in the second quarter compared to last year. For the six months ended June 30, 2015, overall revenues declined 0.4% compared to the comparable prior year period as a result of the hotels sold. Same hotel revenues for the first six months of 2015 increased 2.5% due to higher occupancies and ADR. RevPAR on a same-hotel basis rose 3.3% for the six months ended June 30, 2015 compared to the same period last year.    

For the three months ended June 30, 2015 Gross Operating Profit (GOP) improved 18.3% as the result of the acquisition of the Hyatt Vancouver and strong operating leverage, generating a high percentage flow through of same-hotel revenue increases to the bottom line. Same-hotel GOP increased 12.7% due to higher occupancies and ADR in the period. Overall hotel GOP margin improved by 430 basis points. Same-hotel GOP margin increased 250 basis points to 30.5% from 28.0% in the second quarter of 2015, highlighting the positive operating leverage experienced from revenue increases. For the six months ended June 30, 2015 hotel GOP improved 16.7% while same-hotel GOP increased 12.1% due to higher occupancies and ADR in the period. Overall hotel GOP margin improved by 350 basis points for the first six months of 2015. Same-hotel GOP margin increased 200 basis points to 23.6% from 21.6% in the first six months the prior year.

Corporate and administrative expenses have increased in 2015 due primarily to the addition of a full-time executive function at the REIT and costs associated with the internalization of the REIT's asset management team.  Included in expenses for the six-month period ended 2014 is a $3.6 million settlement charge.

Higher mortgage interest expense for the six months ended June 30, 2015 reflects the new mortgage associated with the Hyatt Regency Vancouver 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 the hotels sold.  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 conversion and early redemption of the $36.4 million Series D debentures on March 3, 2015.

For the three months ended June 30, 2015, InnVest generated FFO of $29.4 million ($0.224 per unit diluted) compared to $20.8 million ($0.190 per unit diluted) in the prior year's second quarter. For the six months ended June 30, 2015 FFO was $26.0 million ($0.215 per unit), up from $16.2 million ($0.171 per unit) in the same prior year period. The increases are due primarily to the increase in hotel GOP in 2015.

AFFO was $24.9 million ($0.189 per unit diluted) in the second quarter of 2015 compared to $16.5 million ($0.151 per unit diluted) last year. For the six months ended June 30, 2015. AFFO was $19.7 million ($0.162 per unit diluted) compared to $8.8 million ($0.093 per unit diluted) in the same period last year. The increases reflect the higher FFO in 2015 and the non-cash portion of mortgage interest expense. Per Unit amounts in the second quarter and first six months of 2015 were impacted by the 29.5% and 28.0% increase, respectively, in the weighted average number of Units outstanding due to the November 2014 equity offering and the conversion of $32.7 million of Series D Convertible Debentures in the first quarter. For the trailing twelve months ended June 30, 2015 the AFFO payout improved to 80.6% compared to 88.4% for the twelve months ended December 31, 2014. Due to the seasonality of InnVest's revenues, management believes a trailing twelve month AFFO is a more appropriate measure of its ability to sustain its unit distributions.

PORTFOLIO REPOSITIONING PROGRAM
Since the beginning of 2014, the REIT has sold 21 non-core low cash flow yielding hotels, in order to optimize overall asset performance and ensure that it owns a well-diversified portfolio comprised of highly competitive assets in its various markets that are positioned to 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 hotels were sold for gross proceeds of $15.3 million (net proceeds of $6.0 million). Five remaining non-core properties slated for sale are expected to generate further gross proceeds of approximately $25 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 to date in 2015 include the completion of room renovations at Calgary's Fairmont Palliser and the Sheraton Suites Eau Claire. In addition, renovations are underway at the Delta London Armouries and Moncton's Delta Beausejour. The prior period included significant activity related to the Comfort Inn portfolio revitalization. The REIT has invested $17.6 million in capital programs through the first six months of 2015, and expects to invest approximately $60 million in its Core Portfolio in 2015, including capital improvements related to the two pending acquisitions announced in July 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 36.3% through the first six months of 2015 reflecting the significant operating leverage resulting from 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.














Three months ended June 30, 2015

Six months ended June 30, 2015





Variance to Prior Year
Comparative period


Variance to Prior Year
Comparative period


Number
of Hotels

Number of
rooms

Hotel GOP

$

%

Hotel GOP

$

%

Core Comfort Inn Portfolio:


















Renovated in 2013 1

31

2,502

$6,821

$719

11.8%

$10,343

$2,064

24.9%










Q1 2014 1renovations

4

295

1,021

198

24.1%

1,467

597

68.6%

Q2 2014 1renovations

11

686

1,787

839

88.5%

2,735

1,440

111.2%

Q3 2014 1renovations

1

146

226

93

69.9%

247

39

18.8%

Q4 2014 1renovations

11

842

1,835

376

25.8%

2,425

443

22.4%

Renovated in 2014

27

1,969

4,869

1,506

44.8%

6,874

2,519

57.8%

Renovated Core Comfort Portfolio

58

4,471

11,690

2,225

23.5%

17,217

4,583

36.3%

Full service Core hotels under renovations:









2014 renovations(1)

3

747

3,034

992

48.6%

3,257

1,257

62.9%


2014 and 2015 renovations(1)

2

728

5,258

(100)

(1.9%)

7,519

(250)

(3.2%)


2015 renovations (1)

1

220

152

(272)

(64.2%)

13

(573)

(97.8%)

Other Core hotels

38

6,397

19,576

1,694

9.5%

26,027

405

1.6%

Total Core Portfolio2

102

12,563

$39,710

$4,539

12.9%

$54,033

$5,422

11.2%










1 – Based on the period in which substantial completion of renovations were completed.








2 – Excludes one hotel acquired during the year and five non-core hotels which have been identified for divestiture.

 

FINANCIAL POSITION
At June 30, 2015 InnVest had total current liquidity of $86.5 million.  Financing initiatives in 2015 and 2014 have diversified InnVest's funding and liquidity sources, lowered weighted average interest costs, extended the average term to maturity while reducing InnVest's overall leverage, including reducing its reliance on dilutive securities.  At June 30, 2015 InnVest's leverage ratio was 60.0%, down from 62.0% at December 31, 2014 and 66.4% at June 30, 2014. Management is targeting a near-term leverage ratio below 60% with further reduction contemplated over the longer term.

InnVest has approximately $96 million of remaining mortgages maturing in 2015 with a weighted average interest rate of 5.3%. Management expects to refinance this debt on advantageous terms including lower interest rates and further extending the term to maturity. 

RECENT DEVELOPMENTS
On July 6, 2015 the REIT announced it had signed a definitive agreement to acquire a 100% interest in Hotel Saskatchewan, a full-service, 224-room upscale hotel located in downtown Regina, Saskatchewan. The hotel features a restaurant and lounge, a tea room, 14,000 square feet of meeting space, 3,600 square feet of leased commercial space, and a 92-space adjacent parking lot. The hotel is currently undergoing a repositioning to the Marriott Autograph Collection with Marriott Hotels, which is expected to be completed in late 2015. The hotel is being acquired for a net purchase price of $37 million and the acquisition is expected to be completed in the third quarter of 2015.

On July 6, 2015 the REIT also announced that it had signed a definitive agreement to acquire a 33% interest in the Courtyard by Marriott, a select-service, 575-room hotel located in downtown Toronto. The hotel consists of two towers situated on 1.5 acres of land on Yonge Street, just north of College Street. It features 14,000 square feet of meeting space, two restaurants, 4,600 square feet of leasable retail and a 101-space underground parking garage. InnVest is acquiring a 33% interest in the hotel for a net purchase price of $33 million, KingSett Real Estate Growth LP No. 5 will be acquiring the remaining 67% interest. The acquisition is expected to be completed in the third quarter.

In aggregate, the two properties are being acquired at a weighted average capitalization rate of 8.3% based on 2016 estimated Net Operating Income for both hotels.

On July 20, 2015 the REIT completed a bought-deal equity offering of approximately 9.7 million Trust Units, including an over-allotment option, raising aggregate proceeds of $48.3 million. The proceeds are expected to be used to complete the acquisition of the above two hotels. Funds managed by KingSett Capital and Orange Capital, LLC, two of InnVest's largest unitholders, together with certain trustees and officers of InnVest, purchased an aggregate of approximately $13 million in units at the offering price. KingSett Capital now holds an approximate 18.1% interest in InnVest, with Orange Capital, LLC holding an approximate 9.9% interest.

On June 5, 2015 InnVest completed a $100 million operating, acquisition and capital expenditure line with a syndicate of two major Canadian financial institutions, which is expected to ultimately be secured by 24 hotel properties by the end of August 2015.

On July 27, 2015, InnVest closed on an $82.5 million mortgage loan with a U.S. Financial Institution to finance the Fairmont Palliser in Calgary for a 10-year term, at a fixed interest rate of 4.0%.

QUARTERLY CONFERENCE CALL
Management will host a conference call on Monday, August 10, 2015, 2015 at 10:00 a.m. Eastern time to discuss the second 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 to August 24, 2015.  To access the recording please call 416-764-8677 or 1-888-390-0541 and use the reservation number 867480#. 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 109 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 Fairmont 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

For further information: Denise Achonu, Vice President, Finance, Tel: (416) 607-2333, Fax: (416) 607-2353, Website: www.innvestreit.com

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