InnVest REIT Reports Results for First Quarter 2016

TORONTO, May 12, 2016 /CNW/ - InnVest Real Estate Investment Trust ("InnVest" or the "REIT"); (TSX:INN.UN) announced today its operating and financial results for the three months ended March 31, 2016. The first quarter is historically the REIT's lowest earnings period and is not indicative of annual results.

FIRST QUARTER 2016 HIGHLIGHTS:

  • Completed acquisition of Ottawa Marriott in February 2016 for $115 million;
  • Finalized $54.4 million seven-year mortgage on Ottawa Marriott at fixed 3.87% interest rate;
  • Invested $20.6 million in hotel capital improvements to enhance portfolio;
  • Expanded  non-core properties for sale to 26 hotels with estimated net proceeds of over $135 million;
  • Sold one non-core property for $5.7 million in net proceeds;
  • Positive performance across majority of portfolio impacted by weakness in Alberta market and displacement from ongoing renovation projects;
  • Alberta performance strengthens from Q4 2015;
  • Revenues up marginally on hotel acquisitions, property renovations, and higher quality asset base;
  • RevPAR(1) up 0.9% on gains in room rates;
  • Same-hotel(2) RevPAR impacted by reduced performance in Alberta. Excluding Alberta, same-hotel  RevPAR up 3.1%;
  • GOP(1) declines moderately due to weak Alberta market and displacement from renovations; 
  • Same-hotel GOP declines. Excluding Alberta, same-hotel GOP rises 10.0%;
  • FFO(1)  and AFFO(1)  impacted by lower GOP and one-time corporate expenses;
  • Trailing twelve-month AFFO payout ratio of 86.6%; and
  • Leverage ratio of 62.3%, includes internal funding of Ottawa Marriott acquisition.

(1)        

RevPAR is defined as the product of the average daily rate and the average daily occupancy.  RevPAR measures room revenue and is a commonly used metric within the hotel industry to evaluate hotel operations. Gross operating profit ("GOP"), Funds from operations ("FFO") and Adjusted FFO ("AFFO") are non-IFRS financial measures which do not have a standardized meaning and may not be comparable to similar financial measures used by other organizations. Hotel GOP measures hotel property level results before debt service costs and facilitates comparisons between InnVest and its hotel competitors.  FFO and AFFO are indicators which measure profitability and cash flow after all internal funding requirements including debt service costs and capital reserves.  For further information about InnVest's business and financial results, please refer to the "Management's Discussion and Analysis" section of the REIT's filings on SEDAR.

(2)        

Same-hotel information includes 105 hotel properties and does not include the results of operations for the five properties sold since January 1, 2015.  Additionally, it excludes hotels that the REIT did not own for the entirety of the periods presented (Hotel Saskatchewan in Regina and the Ottawa Marriott Hotel) and hotels in which the REIT owns partial interests (the Fairmont Royal York and Courtyard by Marriott Toronto).

 

"The majority of our hotel portfolio performed well in the quarter, underlining the ongoing benefits of our high quality and diversified property portfolio. Despite the continued weak performance in Alberta in the period, we saw a marked improvement at our Alberta hotels compared to the fourth quarter of last year, and hope results stabilize through the balance of the year," commented Drew Coles, InnVest's President and Chief Executive Officer. "Looking ahead, we believe a high quality hotel property should continue to generate high quality results over the long term.  We remain focused on our ultimate objective to create value from our results."

The following table details occupancy, ADR and RevPAR for the same-hotel portfolio for the three months ended March 31, 2016 and excludes properties sold or acquired since January 1, 2015:

Same-Hotel Portfolio

2016
Occupancy

Variance
to 2015

2016
ADR

Variance
to 2015

2016
RevPAR

Variance
to 2015


Ontario

57.5%

(0.1 pts)

$114.72

2.5%

$65.94

2.3%


Quebec

57.1%

0.4 pts

$115.22

3.3%

$65.83

4.1%


Atlantic

40.9%

(2.8 pts)

$111.34

3.7%

$45.52

(2.9%)


Western

55.5%

(3.3 pts)

$153.45

(2.0%)

$85.13

(7.5%)

Total

54.5%

(1.2 pts)

$124.25

1.0%

$67.77

(1.2%)

Note: Gross hotel revenues on a same-hotel basis (105 hotels), excluding hotels which were sold or acquired during the periods presented

 

OPERATIONS REVIEW
Revenues increased 1.7% for the three months ended March 31, 2016 compared to the same period last year due primarily to contributions from acquisitions completed since January 1, 2015, partially offset by the sale of five non-core properties over the same period, weakness in the REIT's Alberta portfolio, and displacement from ongoing hotel renovation programs. Same-hotel revenues declined marginally due to weaker performance at the REIT's Alberta properties. Not including the Alberta properties, same-hotel revenues increased 3.7% in the quarter.

Overall RevPAR for the first quarter of 2016 increased 0.9% compared to the same prior year period due the contribution from acquisitions, partially offset by the weak Alberta market and displacement from renovation projects. Same-hotel RevPAR declined 1.2% due to the weak Alberta market. Not including the Alberta hotels, same-hotel RevPAR rose 3.1% compared to the first quarter of 2015.

Overall hotel GOP declined 3.1% to $14.9 million in the first quarter of 2016 compared to the same prior year period. Contributions from acquisitions were offset by the decline in operating performance at the Alberta hotels and the reduced contribution from non-core properties sold. Same hotel GOP declined 8.0% due to weaker results in the Alberta properties. Not including Alberta, same-hotel GOP rose 10.0% in the quarter.

Corporate and administrative expenses increased in 2016 due a full quarter's expenses related to the internalized corporate, finance and asset management platform completed through 2015, and certain one-time costs.

Higher mortgage interest expense reflects new mortgages and bridge financing related to acquisitions completed over the last twelve months, partially offset by savings from the early debt redemption of $36.4 million in Series D debentures on March 3, 2015.

For the three months ended March 31, 2016, InnVest generated a funds from operations ("FFO") loss of $4.8 million ($0.036 loss per unit) compared to an FFO loss of $3.4 million ($0.029 loss per unit) in the same prior year period. Approximately $0.005 per diluted unit relates to one-time costs included in corporate and administrative expenses and another $0.005 per diluted unit relates to the write-off of deferred financing costs associated with mortgage debt repaid in Q1 on two hotels planned for disposition. Adjusted Funds from Operations ("AFFO") was a loss of $7.4 million ($0.055 loss per unit) for the quarter ended March 31, 2016 compared to an AFFO loss of $5.2 million ($0.044 loss per unit) in the same period in 2015. The increase in the FFO and AFFO loss was due to the lower GOP in the current period and higher corporate and administrative expenses. The first quarter of the year is historically the weakest and is not indicative of annual results. Per unit amounts in the first quarter of 2016 were impacted by the 12.8% increase in the weighted average number of units outstanding due to the July 2015 equity offering and the portfolio's seasonality. For the twelve months ended March 31, 2016 the REIT's AFFO payout was 86.6% compared to 81.2% for the twelve months ended March 31, 2015.  Management expects its payout ratio to normalize on an annual calendar basis.

PORTFOLIO REPOSITIONING PROGRAM
During the quarter the REIT expanded its portfolio of non-core properties slated for sale to 26 hotels. The sale of properties is expected to generate net aggregate proceeds of over $135 million. Proceeds from these asset sales are expected to be re-invested to improve the overall quality and diversification of the REIT's core portfolio, reduce debt, and fund further growth.   In the first quarter the REIT sold one non-core hotel for net proceeds of $5.7 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. During the first quarter of 2016 the REIT invested approximately $17.9 million in its owned portfolio, and $20.6 million including participation in joint venture hotel investments. Projects underway include the addition of a gold floor executive product at the Fairmont Macdonald in Edmonton (anticipated completion in June), room renovations at Moncton's Delta Beausejour (anticipated completion in May), and room and public space renovations at Toronto's Courtyard Marriott Hotel (anticipated completion in May).

FINANCIAL POSITION 
At March 31, 2016 InnVest had liquidity of $28.2 million, down from the prior year end due to the internal funding of the Ottawa Marriott acquisition in the quarter and the seasonal nature of our portfolio, which typically draws on the operating line during the first quarter. Liquidity is before the impact of possible divestiture and financing activities which, if successful, could generate aggregate liquidity of over $100 million.  Consequently, to the extent these activities are successful, liquidity would be greatly enhanced. 

At March 31, 2016 InnVest's leverage ratio was 62.3%, up from 58.2% at December 31, 2015 due primarily to the internal funding of the Marriott acquisition in the quarter and the seasonal nature of our portfolio, which typically draws on the operating line during the first quarter. The REIT's weighted average interest rate improved to 4.9% at March 31, 2016 from 5.0% at December 31, 2015, with a weighted average term to maturity of 4.1 years. Excluding the temporary financing from the REIT's operating line used to fund the acquisition of the Marriott Ottawa Hotel, the weighted average term to maturity was 4.6 years.

During the first quarter of 2016, the REIT completed a $54.4 million seven-year mortgage financing of its recently acquired Marriott Ottawa Hotel with a fixed interest rate of 3.87%. In January 2016, the REIT partially funded this acquisition with a bridge loan of $52.0 million. On March 31, 2016, $42.0 million of the bridge loan was repaid from the proceeds of the new mortgage on the property.

On May 2 2016, InnVest and KingSett completed a 2-year mortgage financing on the Courtyard by Marriott Toronto hotel for $82.0 million at an interest rate of either (i) the Canadian bank prime rate plus 1.75%, or (ii) the Canadian Bankers' Acceptance rate plus 2.75%.  InnVest's portion of the financing totaled $27.3 million. Proceeds were used to repay the balance of the bridge loan and for general corporate purposes, including to fund capital investments.  

In December 2016 approximately $47 million of mortgage debt bearing an interest rate of 5.8% matures on two hotel properties. InnVest is proceeding in the normal course to refinance its 2016 maturities.    

SUBSEQUENT EVENT 
On May 10, 2016, the REIT and Bluesky Hotels and Resorts Inc., ("Bluesky"), a privately-held Canadian company, announced that they have entered into an arrangement agreement  pursuant to which Bluesky will acquire all the issued and outstanding units of InnVest for $7.25 in cash per unit, pursuant to a court-approved plan of arrangement (the "Arrangement"), representing a 37% premium over the 30-day volume-weighted average price of $5.28 and valuing InnVest at approximately $2.1 billion, including the assumption of InnVest's net debt. The Arrangement has received the unanimous approval of the Board of Trustees of InnVest and has the full support of InnVest's management team. The Arrangement is subject to a number of customary conditions, including the approval of InnVest unitholders, and Canadian regulatory approvals, under the Investment Canada Act and the Competition Act. The Arrangement will be considered by unitholders at the upcoming annual meeting to be held on June 28, 2016, and will require the approval of at least 66 2/3% of the votes cast by unitholders at the meeting. The transaction is expected to close in the third quarter of 2016.

QUARTERLY CONFERENCE CALL 
Management will host a conference call on Thursday, May 12 2016, at 11.00 a.m. Eastern time to discuss the First Quarter 2016 results.  Investors are invited to access the call by dialing 416-764-8688 or toll free 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 through to May 26, 2016.  To access the recording please call 416-764-8677 or toll free 1-888-390-0541 and use the reservation number 500463#. 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.

FINANCIAL AND OPERATING HIGHLIGHTS 
InnVest's Condensed Interim Consolidated Financial Statements and Management's Discussion and Analysis for the three months ended March 31, 2016 are available on InnVest's website at www.innvestreit.com


Three Months Ended March 31,


2016

2015

Consolidated Performance:



Number of hotel properties - end of the period

107

108

Number of rooms - end of the period

14,041

13,860




Occupancy (%)

54.7%

55.6%




ADR

$125.96

$122.70

RevPAR

$68.91

$68.27

Revenues

$111,960

$110,066

Gross operating profit (GOP) (1)

14,873

15,346

Gross operating margin

13.3%

13.9%

Net loss and comprehensive loss

(29,274)

(23,233)

Funds from operations (FFO) (1)

(4,799)

(3,404)

Adjusted funds from operations (AFFO)(1)

(7,402)

(5,172)

Distributions declared

13,401

11,932

Capital Expenditure

$17,936

$10,081




Same Hotel Performance:



Number of hotel properties

105

105

Occupancy (%)

54.5%

55.7%

ADR

$124.25

$123.07

RevPAR

$67.77

$68.58

Room Revenues

$80,208

$80,477

GOP

$14,321

$15,567

GOP margin

13.8%

14.9%




Per diluted unit:



Net loss and comprehensive loss

($0.218)

($0.196)

FFO

($0.036)

($0.029)

AFFO 

($0.055)

($0.044)

Distributions per unit

$0.0999

$0.0999

FFO and AFFO - Weighted average units outstanding - basic

134,063,906

118,646,773

FFO and AFFO - Weighted average units outstanding - diluted

134,428,652

119,199,754




As at:

March 31, 2016

December 31, 2015




Total assets

1,432,302

1,314,052

Gross mortgages and other debt

957,098

804,626

Convertible debentures

211,220

211,220

Weighted average term to maturity (2)

4.1 years

4.7 years

Weighted average interest rate (2)

4.9%

5.0%

Total debt to gross asset value (leverage ratio) (3)(4)

62.3%

58.2%

Total debt to total capitalization (3)(4)

62.5%

59.7%

Debt service coverage ratio (times) (3)(4)

1.9 x

1.9 x

Interest coverage ratio (times) (3)

2.5 x

2.6 x

Floating rate debt as % of total debt

23.0%

12.5%

Total potential liquidity (5)

31,392

92,308

Twelve-month trailing AFFO payout ratio

86.6%

81.2%

Twelve-month trailing AFFO payout ratio (including DRIP)

71.0%

68.8%




(1) Refer to Non-IFRS Financial Measures and Additional IFRS Financial Measures.

(2) Mortgages and other debt

(3) Calculated on a trailing 12 month basis.

(4) Total debt consists of mortgage, other debt and convertible debentures on a proportionate consolidated basis.

(5) Total potential liquidity is defined as cash on hand, the availablity under credit facilities and restricted cash.

 

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 with over 14,500 rooms across Canada operated under internationally recognized brands. 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.

In the interest of providing InnVest unitholders and potential investors with information regarding InnVest, certain statements contained in this press release constitute forward-looking statements within the meaning of applicable securities laws.  These statements include, but are not limited to, statements made concerning InnVest's investment approach, objectives, its strategies to achieve those objectives, assumptions and forecasts of future results from acquisitions and divestitures as well as other statements with respect to management's beliefs, plans, estimates and intentions, and similar statements concerning anticipated future events, results, circumstances and performance or expectations that are not historical facts.  Forward-looking information typically contains statements with words such as "outlook", "objective", "may", "could", "continue", "anticipate", "believe", "expect", "estimate", "plan", "intend", "forecast", "project" or similar expressions suggesting future outcomes or events.  Such forward-looking statements reflect management's current beliefs and are based on certain factors, assumptions and analyses made by InnVest in light of information currently available to management, management's experience and perception of historical trends, current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances, including those factors set out below. 

These forward-looking statements are not guarantees of future events or performance and, by their nature, are based on InnVest's estimates and assumptions, which are subject to risks and uncertainties, including those detailed in InnVest's filings with applicable securities regulators, including InnVest's Annual Information Form and its annual audited management discussion and analysis and financial statements and the notes thereto.  Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur.  By its nature, InnVest's forward-looking information involves numerous assumptions, inherent risks and uncertainties, which may cause InnVest's actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements.  Factors that could cause actual results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the inability to complete the planned acquisition by Bluesky Hotels and Resorts, Inc.; the status of InnVest as a real estate investment trust for Canadian federal income tax purposes in any year; achievement of plans to develop an optimal asset portfolio through completion of acquisitions, divestitures, and reinvestments within the timeframes necessary to generate the desired return on investment; maintain adequate liquidity; successfully achieve planned liquidity activities; extent of realized benefits from the internalization of asset management functions; ability to refinance debt maturities as planned; ability to achieve and maintain a lower debt leverage target; ability to reduce payout ratio; ability to sustain the current level of unit distributions; ability to fund acquisitions at a capital cost and equity/debt mix as desired; lender concentration; general global credit market conditions including currency and interest rate fluctuations; general global economic and business conditions; variable regional economic conditions including dependence on manufacturing, oil or other resource markets; failure to effectively understand and respond to changing guest demands and/or failure to meet guest needs; failure to effectively manage relationships with hotel brands including failure to comply with the appropriate standards and contractual requirements; failure to effectively manage relationships with operators including operator managed employee satisfaction, morale, and effectiveness; medical or terrorist concerns relating to travel and/or specific destinations; reliance on entities that provide management services to InnVest, including pursuant to the Master Hotel Management Agreement; the impact of lower oil prices and the decline in the Canadian dollar compared to the U.S. dollar on travel; the effects of competition and pricing pressures from multiple bidders for acquisitions; development and opening of new hotel properties; aggressive marketing, and service or product quality improvements by competitors; extent of industry overcapacity; changes in the level of cross-border travel by Americans to Canada and other possible shifts in market demands; adverse changes in laws and regulations, including environmental and taxation; failure to leverage technological innovation to achieve or sustain financial and operational efficiency, competitive advantage, and deliver better quality services to guests; potential increases in maintenance and operating costs; possible variances in the amount and timing of completion for planned capital or maintenance projects; failure of planned capital projects to result in desired shift in business mix; uncertainties of litigation; labour disputes; various events which could disrupt operations;  reliance on information systems and associated security risks; the effect of a data breach or significant disruption of hotel information technology networks as a result of cyber attacks and technological changes including impact of direct internet reservation systems and potential impact of new disruptive hospitality offerings in the market.

Although InnVest believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will be consistent with these forward-looking statements. The forward-looking statements contained in this press release are made as of the date of this press release.

SOURCE InnVest Real Estate Investment Trust

For further information: Chantal Nappert, Vice President Finance and Investor Relations, Tel: (416) 607-2331, Fax: (416) 607-2353, Website: www.innvestreit.com

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