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 twelve months ended December 31, 2010.
"We are long-term investors in quality hotel real estate. Many of the
initiatives undertaken this year are investments in our future success. These
have included notable profit-improving capital expenditures in key markets and
assets, organizational enhancements to help focus our people on driving
revenues, and adapting our corporate structure to protect cash flows for our
unitholders," commented Kenneth Gibson, InnVest's President and Chief Executive
Officer. "We have seen consistent improvement through the year led by occupancy
gains and expect average daily rate gains to follow as demand and confidence
continue to improve."
InnVest has postponed its previously scheduled conference call to follow the
closing of its outstanding public offering of stapled convertible debentures and
stapled units. Details of the revised conference call are included below.
Fourth Quarter Highlights
-- Subsequent to the year end, InnVest announced an agreement to issue
$50.0 million 5.75% stapled convertible debentures due in 2018 and $25.2
million in equity at a price of $7.00 per stapled unit;
-- Completed an internal reorganization to become a Qualifying REIT on
December 31, 2010;
-- Revenue per available room ("RevPAR") increased 3.0% led by a 1.8 point
improvement in occupancy which offset a modest 0.2% decline in average
daily rate ("ADR"). Excluding the displacement caused by renovations at
two full-service hotels, RevPAR growth would have approximated 4.0%;
-- Hotel operating income ("HOI") was down 2.0% to $27.2 million. Excluding
the renovation displacement and non-recurring hotel expenses incurred,
HOI would have increased 6.6%;
-- Net income totaled $164.1 million compared to a net loss of $24.8
million in the prior period. The variance primarily reflects the benefit
of a non-cash future income tax recovery of $187.6 million following
InnVest's reorganization to a Qualifying REIT;
-- FFO and distributable income were down $3.2 million and $2.0 million,
respectively, reflecting the lower HOI achieved as well as higher
interest expense given higher convertible debenture debt balances
outstanding during the quarter; and
-- Invested $15.3 million in the portfolio in profit-improving projects in
key markets and assets.
SELECTED FINANCIAL INFORMATION
-------------- --------------
(unaudited) ($000s Three Months Three Months Twelve Twelve
except per unit Ended Dec Ended Dec Months Ended Months Ended
amounts) 31, 2010 31, 2009 Dec 31, 2010 Dec 31, 2009
----------------------------------------------------------------------------
Hotel revenues $ 148,429 $ 144,625 $ 609,566 $ 607,139
Hotel operating
income(1) $ 27,219 $ 27,779 $ 137,150 $ 141,511
Net income (loss) and
comprehensive income
(loss) $ 164,084 ($24,802) $ 147,457 ($30,923)
-------------------------------------------------------
Reconciliation to
funds from
operations (FFO)
Add / (deduct)
Depreciation and
amortization 23,635 22,966 94,678 91,195
Future income tax
recovery (187,580) (16,162) (189,497) (24,547)
Non-cash executive
and trustee
compensation 65 48 212 268
Net (gain on sale)
writedown of assets
held for sale - (273) (327) 226
Writedown of hotel
properties and
intangible assets 5,907 29,751 5,907 36,489
SIFT transition
expenses 2,246 - 2,756 -
-------------------------------------------------------
Funds from operations
(1)(2) $ 8,357 $ 11,528 $ 61,186 $ 72,708
-------------------------------------------------------
Reconciliation to
distributable income
Add / (deduct)
Amortization of
deferred financing
costs - - - 23
Non-cash portion of
mortgage interest
expense 675 458 2,209 1,680
Reserve for
replacement of
furniture, fixtures
and equipment and
capital
improvements (6,116) (5,982) (25,081) (25,085)
Non-cash portion of
convertible
debentures interest
and accretion 976 (121) 3,791 2,142
Deferred land lease
expense and retail
lease income, net 24 26 98 56
-------------------------------------------------------
Distributable income
(1) $ 3,916 $ 5,909 $ 42,203 $ 51,524
-------------------------------------------------------
Per unit data
FFO - basic $ 0.093 $ 0.135 $ 0.690 $ 0.941
FFO - diluted $ 0.093 $ 0.131 $ 0.673 $ 0.939
Distributable income
- basic $ 0.044 $ 0.069 $ 0.476 $ 0.667
Distributable income
- diluted $ 0.044 $ 0.069 $ 0.469 $ 0.666
Distributions per
unit (3) $ 0.1251 $ 0.1251 $ 0.5004 $ 0.6668
-------------- --------------
(1) Hotel operating income, funds from operations and distributable income
are non-GAAP measures of earnings and cash flow commonly used by
industry analysts. Non-GAAP financial measures do not have a
standardized meaning and are unlikely to be comparable to similar
measures used by other organizations.
(2) For purposes of the calculation of funds from operations, amortization
of deferred financing is excluded from depreciation and amortization.
(3) 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 and hotels whose
operating performance have not been included in the full periods presented.
----------------------------------------------------------------------------
Three months Twelve
ended months ended
December 31, Variance to December 31, Variance to
2010 2009 2010 2009
Occupancy
Ontario 56.5% 4.4 pts 58.8% 2.5 pts
Quebec 55.5% 0.7 pts 61.0% 1.3 pts
Atlantic 53.0% (0.3 pts) 61.0% 0.1 pts
Western 57.1% (1.4 pt) 61.1% (1.2 pts)
----------------------------------------------------------------------------
Total 55.9% 1.8 pts 60.1% 1.2 pt
ADR
Ontario $105.18 (1.4%) $107.43 (1.4%)
Quebec $114.12 1.9% $113.67 0.1%
Atlantic $109.87 1.1% $115.65 (0.2%)
Western $135.99 0.3% $137.62 0.2%
----------------------------------------------------------------------------
Total $113.79 (0.2%) $115.98 (0.7%)
RevPAR
Ontario $59.42 7.0% $63.17 2.9%
Quebec $63.35 3.3% $69.39 2.4%
Atlantic $58.20 0.5% $70.52 (0.1%)
Western $77.66 (2.1%) $84.13 (1.7%)
----------------------------------------------------------------------------
Total $63.58 3.0% $69.68 1.2%
----------------------------------------------------------------------------
FINANCIAL REVIEW
Three months ended December 31, 2010
RevPAR trends have consistently improved through the last three quarters of
2010, led by occupancy gains. For the three months ended December 31, 2010,
hotel revenues increased by 2.6% to $148.4 million. Over this period, RevPAR
increased 3.0% with a 1.8 point increase in overall occupancy offsetting a
modest 0.2% ADR decline. Operating results during the quarter were negatively
affected by renovation displacement as a result of ongoing room renovations at
the Fairmont Palliser in Calgary and the start of room renovations at the Hilton
Quebec. Excluding these two hotels, fourth quarter RevPAR growth would have
approximated 4.0%. Renovations at both hotels are expected to be completed in
the second quarter of 2011.
Room revenues during the quarter increased $2.8 million, or 2.6%, to $109.4
million. Ontario experienced the strongest growth led by the Greater Toronto
Area which saw RevPAR increase over 13%. The Toronto downtown core continues to
benefit from strong corporate demand. Increases were experienced across the
Quebec region led by growth in both occupancy and rate. Results in Atlantic
Canada were relatively unchanged with strength in New Brunswick and Newfoundland
offsetting declines in Prince Edward Island. The decline in Western Canada was
driven by displacement at the Fairmont Palliser which saw its RevPAR down
approximately 15% during the quarter.
For the three months ended December 31, 2010, non-room revenues totalled $39.0
million, up $1.0 million or 2.6% compared to the prior year reflecting the
increased occupancy achieved.
Hotel expenses for the fourth quarter increased $4.4 million or 3.7% when
compared to 2009. Hotel expenses include non-recurring operating restructuring
charges and sales training initiatives totalling approximately $1.3 million.
Excluding this amount, hotel expenses would have increased 2.6% during the
quarter reflecting costs associated with increased occupancies of 1.8 points (a
3.3% increase from the prior period).
For the three months ended December 31, 2010, InnVest generated HOI of $27.2
million, down $0.6 million or 2.0% as compared to the prior year. Excluding the
renovations displacement and non- recurring hotel expenses incurred, HOI would
have increased 6.6%. Fourth quarter hotel operating income margins were down 90
basis points to 18.3%.
Other income and expenses for the fourth quarter decreased $18.4 million as
compared to the prior year. Fourth quarter expenses include a non-cash $5.9
million writedown relating to one hotel which may not renew its existing license
agreement, as compared to a $29.8 million writedown of hotel properties in the
prior period. Excluding this non-cash variance, other expenses increased $5.5
million reflecting $2.2 million in costs associated with the SIFT transition and
$2.2 million in increased interest expenses given higher convertible debenture
balances outstanding. During the third quarter of 2010, InnVest refinanced one
mortgage which included a $95.0 million mortgage paydown. Yield maintenance
costs related to the early repayment are being expensed evenly to February 2011,
the original maturity date. This has largely offset the incremental interest
savings realized from the mortgage reduction.
During the fourth quarter, InnVest became a Qualifying REIT pursuant to the SIFT
rules and, accordingly, reversed $187.6 million of future income tax expense
previously recognized.
The fourth quarter of 2010 contributed distributable income of $3.9 million
($0.044 per unit diluted) and FFO of $8.4 million ($0.093 per unit diluted).
Twelve months ended December 31, 2010
For the twelve months ended December 31, 2010, hotel revenues are relatively
unchanged at $609.6 million. Year-to-date, RevPAR increased 1.2% with a 1.2
point increase in overall occupancy offsetting a 0.7% decline in ADR.
For the year, InnVest generated HOI of $137.2 million, down 3.1% or $4.4 million
as compared to the prior year. Limited revenue growth was offset with increased
operating costs including a number of non- recurring charges in the fourth
quarter and one-time savings recognized in the prior period. For the year, hotel
operating income margins declined 80 basis points to 22.5% reflecting the lower
ADR achieved combined with non-recurring operating costs incurred.
InnVest generated annual FFO of $61.2 million ($0.673 per unit diluted) and
distributable income of $42.2 million ($0.469 per unit diluted). InnVest's
payout ratio for the year approximated 105.2% (101.2% excluding the DRIP).
BALANCE SHEET REVIEW
At December 31, 2010, InnVest has cash on hand totalling $12.8 million and $32.6
million available under its credit facility.
InnVest had mortgages payable of $834.0 million with a weighted average term of
2.8 years and a weighted average interest rate of 6.0%. InnVest has no mortgage
maturities until September 2011.
During the third quarter of 2010, InnVest successfully completed the early
one-year extension of a mortgage originally scheduled to mature in February
2011. As part of the early refinancing, InnVest repaid $95.0 million of mortgage
principal plus yield maintenance and other fees funded by cash on hand. This
early renewal enabled InnVest to secure its one-year extension interest rate on
the remaining principal of $170.0 million beginning February 28, 2011 at a rate
of 3.51%. The mortgage includes one additional one-year extension (to February
28, 2013), at InnVest's option, subject to certain minimum thresholds at the
time of maturity.
At December 31, 2010, InnVest's gross book value leverage excluding and
including convertible debentures was 38.3% and 50.0%, respectively.
Capital expenditures during the year totalled $39.4 million compared to the FF&E
reserve of $25.1 million. Investments reflect a number of profit-improving
projects, including guestroom renovations at the Fairmont Palliser in Calgary as
well as the completion of meeting space renovations and the beginning of room
renovations at the Hilton Quebec City. In addition, investments included Holiday
Inn's brand re- launch at a number of hotels, as well as the conversion of one
hotel to the Holiday Inn brand.
On February 22, 2011, InnVest announced an agreement to issue $50.0 million
aggregate principal amount of 5.75% stapled convertible unsecured subordinated
debentures due March 30, 2018 and 3,600,000 stapled units at a price of $7.00
per Unit for gross proceeds of $25.2 million. Net proceeds will be used to fund
capital improvements, to fund potential future acquisitions and for general
trust purposes. Closing is expected to occur on or about March 15, 2011.
INCOME TAX DEFERRAL PERCENTAGE
For 2010, 67.0% of unitholder distributions will not be taxable to unitholders.
QUALIFYING REIT PROCESS
On December 31, 2010, the REIT completed an internal reorganization in order to
become a Qualifying REIT under Canadian income tax rules applicable to specified
investment flow-through entities ("SIFT"s). The purpose of the reorganization
was to increase unitholder value by adopting a structure that allows the REIT to
continue to flow through its income to unitholder without being subject to
entity-level taxation.
Under the reorganization, the REIT transferred all of its directly and
indirectly held operating assets to IOT, a newly-formed taxable investment
trust. Following this transaction, IOT holds the operating assets, earns
revenues from hotel customers and pays rent to the REIT (the owner of the
hotels). IOT also indirectly holds a 50% interest in Choice Hotels Canada Inc.
and earns revenues from franchising fees.
On December 31, 2010, each REIT unitholder received one non-voting IOT unit for
each REIT unit held. Each issued and outstanding REIT unit now trades together
with a non-voting IOT unit on a "stapled" basis on the Toronto Stock Exchange
(the "TSX") under the symbol INN.UN.
INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")
As previously disclosed, InnVest intends to revalue its hotel properties as at
January 1, 2010 under the deemed cost election available under IFRS. InnVest
expects that the impact of the deemed cost election will be a reduction in the
carrying value of its IFRS opening balance sheet hotel properties as at January
1, 2010 of approximately $200 to $230 million.
The fair value adjustment upon conversion to IFRS as at January 1, 2010, as well
as the elimination of the accumulated depreciation balance, will adversely
impact InnVest's leverage ratio. Although there is no increase in actual debt
outstanding, the adjustment will result in an increase to InnVest's reported
gross book value leverage. As a result, InnVest expects to amend its Declaration
of Trust to address its leverage restrictions. Interest and debt coverage ratios
are not expected to be materially impacted.
QUARTERLY CONFERENCE CALL
Due to disclosure restrictions relating to the pending closing of its public
offering on March 15, 2011, management has postponed its conference call
previously scheduled for Friday March 11, 2011 at 11:00am. Management will now
host a conference call on Wednesday March 16, 2011 at 11:00 a.m. Eastern time.
Investors are invited to access the call by dialing 416-340-2216 or
1-877-240-9772. A recording of this call will be made available March 16th
beginning at 1:00 pm through to 11:59 p.m. on March 30, 2011. To access the
recording please call 905-694-9451 or 1-800-408-3053 and use the reservation
number 2460727#.
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 directly and
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 and INN.DB.E.
InnVest Real Estate Investment Trust
----------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
(in thousands of dollars) 2010 2009
----------------------------------------------------------------------------
(Restated)
ASSETS
Current Assets
Cash $ 9,001 $ 101,054
Accounts receivable 28,751 22,591
Prepaid expenses and other assets 8,345 7,962
Asset held for sale - 33
----------------------------------------------------------------------------
46,097 131,640
Restricted cash 3,831 3,815
Hotel properties 1,694,210 1,740,642
Other real estate properties 16,955 15,770
Licence contracts 15,221 16,537
Intangible and other assets 18,116 36,120
Future income tax asset 5,603 -
Asset held for sale - 5,685
----------------------------------------------------------------------------
$ 1,800,033 $ 1,950,209
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES
Current Liabilities
Accounts payable and accrued liabilities $ 78,236 $ 67,710
Distributions payable 3,731 3,649
Current portion of long-term debt 82,808 21,326
Liabilities related to asset held for sale - 54
----------------------------------------------------------------------------
164,775 92,739
Long-term debt 758,122 931,685
Other long-term obligations 6,921 6,448
Convertible debentures 241,472 225,918
Future income tax liability 2,537 186,430
----------------------------------------------------------------------------
1,173,827 1,443,220
Non-controlling interest (Note 1) 52,832 -
Commitments and contingencies
UNITHOLDERS' EQUITY 573,374 506,989
----------------------------------------------------------------------------
$ 1,800,033 $ 1,950,209
----------------------------------------------------------------------------
----------------------------------------------------------------------------
InnVest Real Estate Investment Trust
----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
(unaudited)
----------------------------
Three Months Three Months
(in thousands of Ended Ended Year Ended Year Ended
dollars, except per December 31, December 31, December 31, December 31,
unit amounts) 2010 2009 2010 2009
----------------------------------------------------------------------------
(Restated) (Restated)
Total revenues $ 151,963 $ 147,786 $ 622,847 $ 619,115
Hotel revenues $ 148,429 $ 144,625 $ 609,566 $ 607,139
----------------------------------------------------------------------------
Hotel expenses
Operating expenses 102,419 97,881 395,585 389,870
Property taxes, rent
and insurance 13,341 13,289 54,282 52,728
Management fees 5,450 5,676 22,549 23,030
----------------------------------------------------------------------------
----------------------------------------------------------------------------
121,210 116,846 472,416 465,628
----------------------------------------------------------------------------
Hotel operating
income 27,219 27,779 137,150 141,511
----------------------------------------------------------------------------
Other (income) and
expenses
Interest on
mortgages and other
debt 14,306 14,259 57,587 55,955
Convertible
debentures interest
and accretion 4,953 2,767 19,189 13,598
Corporate and
administrative 3,625 1,264 8,005 5,574
Capital tax 18 45 74 193
Other business
income, net (1,492) (1,354) (5,231) (5,184)
Other income (237) (598) (558) (944)
Depreciation and
amortization 23,635 22,966 94,678 91,165
Writedown of hotel
properties and
intangible assets 5,907 29,751 5,907 36,489
----------------------------------------------------------------------------
----------------------------------------------------------------------------
50,715 69,100 179,651 196,846
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Loss from continuing
operations before
income tax recovery (23,496) (41,321) (42,501) (55,335)
Future income tax
recovery (187,580) (16,162) (189,497) (24,547)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income (loss) from
continuing
operations 164,084 (25,159) 146,996 (30,788)
----------------------------------------------------------------------------
Net income (loss)
from discontinued
operations - 357 461 (135)
----------------------------------------------------------------------------
Net income (loss) and
comprehensive income
(loss) $ 164,084 $ (24,802) $ 147,457 $ (30,923)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income (loss) from
continuing
operations, per unit
Basic $ 1.832 $ (0.294) $ 1.658 $ (0.398)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted $ 1.459 $ (0.294) $ 1.487 $ (0.398)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net income (loss) per
unit
Basic $ 1.832 $ (0.290) $ 1.663 $ (0.400)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Diluted $ 1.459 $ (0.290) $ 1.492 $ (0.400)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Income (loss) from
discontinued
operations, per unit
Basic and diluted $ - $ 0.004 $ 0.005 $ (0.002)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
InnVest Real Estate Investment Trust
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
----------------------------
Three Months Three Months
Ended Ended Year Ended Year Ended
(in thousands of December 31, December 31, December 31, December 31,
dollars) (unaudited) 2010 2009 2010 2009
----------------------------------------------------------------------------
(Restated) (Restated)
OPERATING ACTIVITIES
Income (loss) from
continuing
operations $ 164,084 $ (25,159) $ 146,996 $ (30,788)
Add (deduct) items
not affecting
operations
Depreciation and
amortization 23,635 22,966 94,678 91,165
Writedown of hotel
properties and
intangible assets 5,907 29,751 5,907 36,489
Non-cash portion of
mortgage interest
expense 675 458 2,209 1,680
Non-cash portion of
convertible
debentures interest
and accretion 976 (121) 3,791 2,142
Future income tax
recovery (187,580) (16,162) (189,497) (24,547)
Non-cash executive
and trustee
compensation 65 48 212 268
Changes in non-cash
working capital 12,797 7,396 6,581 401
Discontinued
operations - (1,867) 440 (2,089)
----------------------------------------------------------------------------
20,559 17,310 71,317 74,721
----------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of long-
term debt (5,762) (2,737) (123,710) (11,217)
Proceeds from long-
term debt - (554) 3,100 5,979
Issue of new units,
net - 47,601 - 47,601
Issue of convertible
debentures - 47,825 71,688 47,825
Redemption and
cancellation of
convertible
debentures - - (45,678) -
Units repurchased
pursuant to normal
course issuer bid - - - (1,166)
Unit distributions (11,078) (9,748) (42,614) (49,543)
Increase in operating
loan 7,200 - 7,200 -
Repayment of bridge
loan - - (1,000) (2,000)
Discontinued
operations repayment
of debt - - - (4,576)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(9,640) 82,387 (131,014) 32,903
----------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures
on hotel properties (15,251) (6,614) (39,441) (25,280)
Change in intangible
and other assets (281) (382) (943) (1,795)
Deposit on lease
arrangement - - 2,013 -
Proceeds from sale of
discontinued asset,
net of costs and
mortgages receivable - (241) 6,031 3,164
Increase in
restricted cash (153) (294) (16) (802)
----------------------------------------------------------------------------
(15,685) (7,531) (32,356) (24,713)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(Decrease) increase
in cash during the
year (4,766) 92,166 (92,053) 82,911
Cash, beginning of
year 13,767 8,888 101,054 18,143
----------------------------------------------------------------------------
Cash, end of year $ 9,001 $ 101,054 $ 9,001 $ 101,054
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplemental
disclosure of cash
flow information:
Cash paid for
interest $ 15,885 $ 16,232 $ 69,323 $ 65,365
Cash paid for income
taxes (including
capital tax) $ - $ 107 $ 76 $ 230
Note 1. Non-controlling Interest
Non-controlling interest represents the InnVest unitholders' interest in IOT
through ownership of the IOT non-voting units after giving effect to the
reorganization of InnVest. Each non-voting unit of IOT trades together with each
issued and outstanding unit of the REIT as an InnVest Unit. On December 31,
2010, IOT directly and indirectly holds all of the hotel operating assets and
indirectly holds a 50% interest in Choice Hotels Canada.
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