Company Results

InnVest REIT Second Quarter GOP Declines

Asset sales contributed to a decline in overall gross operating profit of $4.4 million to $38.8 million. Excluding asset sales and hotels under renovations, GOP would have improved approximately 3%.

InnVest REIT

InnVest Real Estate Investment Trust (TSX:INN.UN), today announced financial results for the three and six months ended June 30, 2014.

"Since implementing our strategic plan in early 2013, InnVest has generated over $188 million of gross sale proceeds, exceeding our original divestiture objectives. While renovation activity is contributing to short-term operating disruptions across the portfolio, targeted investments in our core portfolio are expected to positively contribute to InnVest's long-term operating performance as demonstrated by preliminary results from investments completed in the prior year," said Anthony Messina, InnVest's President and Chief Executive Officer.

Second Quarter Operating Highlights

  • Revenue per available room ("RevPAR") on a same-hotel basis improved 2.2% through a combination of rate and occupancy gains. Excluding hotels under renovation during the quarter or recovering from renovations recently undertaken, same-hotel RevPAR growth would have approximated 4%;
  • Same-hotel revenues improved 2.3%. Overall revenues declined $15.0 million reflecting the sale of non-core hotels;
  • Asset sales contributed to a decline in overall gross operating profit ("GOP") of $4.4 million to $38.8 million. Excluding asset sales and hotels under renovations, GOP would have improved approximately 3%.
  • The portfolio of 31 Comfort Inns renovated in 2013 grew room revenue by 11.7% and Hotel GOP by 31.2%;
  • Generated net income of $4.8 million compared to $20.5 million in the prior period, due to non-cash variances as compared to the prior period;
  • Funds from operations ("FFO") and adjusted funds from operations ("AFFO") decreased $4.3 million and $3.7 million, respectively reflecting the lower GOP achieved; and
  • Sold nine non-core assets (including three leaseholds) for aggregate gross proceeds of $60.9 million.

Second Quarter Strategic Highlights

  • Management announced its intention to internalize InnVest's executive and asset management function and completed amendments to its hotel management agreement with Westmont;
  • During the quarter, InnVest entered into a subordinated loan agreement with KingSett for $50.0 million, with access to an additional $50.0 million. Proceeds were used to redeem InnVest's $70.0 million Series C convertible debentures; and
  • Subsequent to the end of the quarter, InnVest completed an offer to purchase for cancellation $28.8 million of its Series G convertible debentures, and amended certain terms for its remaining Series G convertible debentures including increasing the conversion price from $5.80 to $7.50.

Edward Pitoniak, InnVest's Managing Director and Trustee said, "We implemented a number of exciting initiatives during the quarter including initiating the process to fully internalize InnVest's corporate and asset management functions, reducing our reliance on dilutive securities and executing several portfolio repositioning transactions. These efforts demonstrate our progress towards growing unitholder value and positioning InnVest as the leading growth platform in Canada's hospitality industry."

InnVest's Condensed Interim Consolidated Financial Statements and Management's Discussion and Analysis for the three and six months ended June 30, 2014 and 2013 are available on InnVest's website at www.innvestreit.com.

SELECTED FINANCIAL INFORMATION
Three Months Ended Three Months Ended Six months Ended Six months Ended
June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
($000s except per unit amounts) (unaudited) (unaudited) (unaudited) (unaudited)
Revenue
Hotel properties $ 146,058 $ 160,680 $ 260,293 $ 283,698
Other real estate properties 173 596 369 1,400
$ 146,231 $ 161,276 $ 260,662 $ 285,098
Gross operating profit (1)
Hotel properties $ 38,964 $ 43,078 $ 52,571 $ 56,139
Other real estate properties (119 ) 193 (232 ) 395
$ 38,845 $ 43,271 $ 52,339 $ 56,534
Net income (loss) and comprehensive income (loss)
$ 4,818 $ 20,505 $ (30,053 ) $ (21,161 )
Reconciliation to FFO
Add / (deduct)
Depreciation and amortization 19,229 20,460 39,455 41,172
Deferred income tax recovery - (40 ) - (322 )
Unrealized changes in the fair value of financial 50 (12,409 ) 8,121 4,819
Distributions included in corporate and administrative expense 37 37 73 73
Gain on sale of assets, net (2,953 ) (6,841 ) (4,009 ) (8,100 )
Writedown of hotel properties (Reversal of previous 84 3,385 (491 ) 3,385
impairment), net
Non-recurring costs:
Proxy defense and settlement costs - - 3,594 -
Litigation settlement (500 ) - (500 ) -
Funds from operations (2) $ 20,765 $ 25,097 $ 16,190 $ 19,866
Reconciliation to AFFO
Add / (deduct)
Non-cash portion of mortgage interest expense 715 529 1,281 1,053
Non-cash portion of convertible debentures interest 1,094 1,272 2,242 2,510
and accretion
FF&E reserve (6,124 ) (6,724 ) (10,886 ) (11,899 )
AFFO (2) $ 16,450 $ 20,174 $ 8,827 $ 11,530
Per unit data - Diluted
Net income (loss) and comprehensive income (loss) $ 0.051 $ 0.189 $ (0.319 ) $ (0.226 )
FFO $ 0.190 $ 0.223 $ 0.171 $ 0.211
AFFO $ 0.151 $ 0.180 $ 0.093 $ 0.123
Distributions declared $ 0.0999 $ 0.0999 $ 0.1998 $ 0.1998

The operating statistics relating to gross room revenues for the three and six months ended June 30, 2014 and 2013 are on a same-hotel basis (115 hotels) and exclude hotels sold since the start of the periods presented.

Three months ended June 30, 2014 Variance to 2013 Six months ended June 30, 2014 Variance to 2013
Occupancy
Ontario 68.1 % 2.4 pts 62.6 % 1.9 pts
Quebec 65.0 % (1.5 pts ) 59.6 % (1.3 pts )
Atlantic 61.6 % 1.8 pts 53.1 % 1.3 pts
Western 66.5 % (1.3 pts ) 61.2 % (2.4 pts )
Total 66.2 % 0.8 pts 60.3 % 0.3 pts
ADR
Ontario $110.37 - $108.78 (0.3 %)
Quebec $117.79 1.5 % $114.66 2.1 %
Atlantic $119.15 1.8 % $113.76 1.8 %
Western $168.89 2.8 % $164.45 3.1 %
Total $124.16 0.9 % $121.27 0.9 %
RevPAR
Ontario $75.21 3.7 % $68.09 2.8 %
Quebec $76.62 (0.7 %) $68.34 -
Atlantic $73.35 4.8 % $60.39 4.3 %
Western $112.25 0.8 % $100.65 (0.7 %)
Total $82.20 2.2 % $73.12 1.5 %

OPERATIONS REVIEW

Three months ended June 30, 2014

Excluding hotels impacted by renovations during the quarter, same-hotel RevPAR growth would have approximated 4%, led by improvements to hotels renovated during 2013. Same-hotel RevPAR grew 2.2% during the three months ended June 30, 2014.

Hotel divestitures completed since 2013 (13 in 2014 and eight in 2013) contributed to the hotel revenue decline of $14.6 million, or 9.1%. Other real estate revenues also declined $0.4 million owing to an office complex sale in May 2013.

Divestitures contributed to reduce Hotel GOP by $3.8 million during the quarter. Same-hotel GOP declined modestly owing to renovation displacement at a number of hotels (refer to Capital Investment Program). Limited cost savings are achieved during renovation periods given the high fixed-cost nature of expenses. Excluding asset sales and hotels under renovations, Hotel GOP growth would have approximated 3%.

Higher corporate and administrative costs reflect the addition of executive resources during the quarter as well as costs incurred to initiate the search for a permanent Chief Executive Officer for the REIT.

For the three months ended June 30, 2014, InnVest generated FFO of $20.8 million ($0.190 per unit diluted) and AFFO of $16.5 million ($0.151 per unit diluted), declining $4.3 million and $3.7 million owing primarily to reduced GOP achieved following divestitures.

Six months ended June 30, 2014

Same-hotel RevPAR grew 1.5% during the six months ended June 30, 2014. Same-hotel hotel revenues achieved were impacted by disruption caused by renovations at select hotels during the period or recovering from renovations recently undertaken.

Hotel divestitures completed since 2013 contributed to the hotel revenue decline of $23.4 million, or 8.2%. Other real estate revenues also declined $1.0 million owing to an office complex sale in May 2013.

GOP margins improved modestly, highlighting the low yielding nature of assets sold. Costs also reflect higher utility expenses during the first quarter as compared to the prior year, as a result of unusually cold temperatures and higher utility rates.

As part of a proxy contest settlement reached in March 2014, InnVest incurred $3.6 million in non-recurring costs, including the reimbursement of customary transaction costs incurred by the parties involved. These costs contributed to the higher corporate and administrative expenses during the first half of 2014.

For the six months ended June 30, 2014, InnVest generated FFO $16.2 million ($0.171 per unit diluted) and AFFO of $8.8 million ($0.093 per unit diluted), declining $3.7 million and $2.7 million.

CORPORATE UPDATE

In early 2013, InnVest announced a comprehensive two-year strategic plan based on four key initiatives. This 2013 strategic plan is being reviewed and updated following certain changes to InnVest's Board of Trustees (the "Board") in March 2014.

In conjunction with this review, the Board appointed Edward Pitoniak as interim Managing Director in April of 2014 and is in the process of completing a search for a permanent full-time Chief Executive Officer to be employed by InnVest. During the second quarter, the Chief Financial Officer role became fully dedicated to the affairs of the REIT.

Asset management of InnVest will be internalized effective November 30, 2014 at no cost to InnVest. Consequently, InnVest finalized changes to certain agreements with Westmont Hospitality Canada Limited ("Westmont") during the quarter including the termination of asset management services currently provided by Westmont and the amendment and extension of Westmont's hotel management agreement.

PORTFOLIO REPOSITIONING PROGRAM

During the second quarter of 2014, nine non-core assets were sold for gross proceeds of $60.9 million (net proceeds of $49.6 million).

Since the start of 2013, management has completed hotel divestitures of over $188 million (net proceeds of over $85 million), exceeding its original two-year divestiture objectives of $185 million ($60 million net proceeds).

During 2014, nine additional hotels have been considered for sale based on management's ongoing assessment of its portfolio return expectations. For the remaining 12 hotels slated for disposition, management expects gross proceeds of approximately $80 million (approximately $45 million net proceeds).

CAPITAL INVESTMENT PROGRAM

InnVest expects to invest approximately $70 million across its portfolio in 2014, $40.4 million of which was invested in the first half of 2014.

Through the end of the second quarter, 46 Comfort Inn hotels have been renovated (31 in 2013 and 15 in 2014) as part of InnVest's brand revitalization program, representing over 75% of InnVest's core Comfort Inn portfolio. The remaining renovations are planned in the fall, following the busier summer travel season.

Given the extensive renovation and repositioning of the Comfort Inn assets, these hotels are experiencing a transition period following the completion of renovations as our property managers and sales teams reposition the hotels within their competitive sets and shift the business mix to higher rated segments. Based on experience to-date, the typical period for these hotels to fully ramp up from the renovation can be upwards of a year, depending on the market. The 31 Comfort Inns renovated throughout 2013 experienced 11.7% growth in room revenues during the second quarter and 31.2% improvement in Hotel GOP as compared to the prior year.

Full-service hotels under extensive renovations during the quarter included two hotels in Calgary (the Fairmont Palliser and the Sheraton Calgary Eau Claire), the Delta Winnipeg, Delta Prince Edward Island and the London Hotel & Suites. Renovations underway in Calgary offset year-over-year growth achieved following floods experienced in the prior year period. Overall displacement experienced across these hotels was also somewhat offset by growth achieved post renovations, notably in the Delta Prince Edward Island resulting from strong group business booked in anticipation of a renovated product.

63 of InnVest's 103 Core Portfolio hotels have been, or are expected to be, renovated through the end of 2014 or early into 2015. The following table summarizes second quarter operating results across the Core Portfolio and serves to highlight the displacement experienced while work is underway as well as the growth achieved-to-date following the completion of renovations.

Three months ended June 30, 2014
# of hotels # of rooms Room revenue $ Variance to prior year comparative period Hotel GOP Variance to prior year comparative period
$ % $ %
Core Comfort Inn Portfolio
Q2 20131 renovations 7 607 $ 3,400 $ 756 28.6 % $ 1,516 $ 737 94.6 %
Q3 20131 renovations 12 893 5,602 666 13.5 % 2,484 656 35.9 %
Q4 20131 renovations 12 1,003 5,396 87 1.6 % 2,045 43 2.1 %
Renovated in 2013 31 2,503 14,398 1,509 11.7 % 6,045 1,436 31.2 %
Q1 20141 renovations 4 295 1,950 (11 ) (0.6 %) 817 (39 ) (4.6 %)
Q2 20141 renovations 11 691 3,333 (870 ) (20.7 %) 933 (811 ) (46.5 %)
Renovated in 2014 15 986 5,283 (881 ) (14.3 %) 1,750 (850 ) (32.7 %)
Total renovated 46 3,489 19,681 628 3.3 % 7,795 586 8.1 %
To be renovated 12 994 4,983 (51 ) (1.0 %) 1,570 (254 ) (13.9 %)
Core Comfort Inn Portfolio 58 4,483 24,664 577 2.4 % 9,365 332 3.7 %
Core hotels under renovation 5 1,475 17,478 (104 ) (0.6 %) 7,400 (305 ) (4.0 %)
Other Core hotels 40 6,833 53,916 1,278 2.4 % 18,431 (193 ) (1.0 %)
Total Core Portfolio 103 12,791 $ 96,058 $ 1,751 1.9 % $ 35,196 $ (166 ) (0.5 %)

BALANCE SHEET

At June 30, 2014, InnVest has total current liquidity of $159.6 million (including cash and current availability under various debt facilities).

In March 2014, KingSett was introduced as a strategic capital partner of InnVest, providing InnVest with incremental capital sources to support debt and growth initiatives. In April 2014, InnVest entered into and closed a credit agreement with KingSett for a four-year $50.0 million subordinated term loan facility. Proceeds were available to fund the early redemption of InnVest's $70.0 million Series C convertible debentures on June 3, 2014. KingSett also provided InnVest with a facility to draw an additional $50.0 million subordinated non-revolving stand-by liquidity facility.

During the second quarter, InnVest finalized a bridge loan for up to $40.0 million to be used pending permanent financing or the sale of assets.

On July 31, 2014, InnVest completed its previously announced substantial issuer bid to purchase for cancellation $28.8 million of the outstanding principal amount of its Series G convertible unsecured subordinated debentures (the "Series G Debentures") at a purchase price of $1,080 for each $1,000 in principal amount (the "Series G Offer").

In connection with the Series G Offer, at a meeting for holders of the Series C Debentures on July 25, 2014, debenture holders approved certain amendments to the trust indenture governing the Series G Debentures including increasing the coupon interest payable per annum from 5.75% to 6.25% effective as of the commencement of the next interest accrual period, being September 30, 2014; and an increase to the conversion price for each InnVest unit to be issued upon the conversion of one Series G Debenture from $5.80 to $7.50 per unit.

Asset sales over the past year have contributed to overall mortgage debt repayment and interest savings. Pro forma the Series G Offer, InnVest's leverage would have approximated 66.0% at June 30, 2014 (49.8% excluding convertible debentures). InnVest does not have any significant debt maturities until July 2015.

OUTLOOK

The hospitality industry is highly correlated to the economy and as such, uncertain global and domestic economic conditions continue to impact the Canadian lodging industry. InnVest's broad, diversified portfolio remains a key advantage in the current environment. Fundamentals for the Canadian lodging industry remain favourable, with improving demand expectations through the balance of the year and a low supply outlook.

Through the end of 2014, InnVest expects to continue its portfolio repositioning strategy of divesting of low-yielding assets and reinvesting proceeds generated to undertake an extensive capital program to enhance its product offering at a number of hotels. While impacting near-term operating results caused by displacement, these targeted investments are expected to improve the portfolio's competitive positioning and operating performance through increased occupancies and average daily rates over the longer term.

InnVest is committed to enhancing unitholder alignment and growing unitholder value. InnVest's strategy to reduce debt (including reducing InnVest's reliance on dilutive convertible securities), reposition its portfolio and invest in core assets is expected to enhance the stability and growth of the portfolio's long-term cash flows and valuation.

INNVEST PROFILE

InnVest Real Estate Investment Trust is an unincorporated open-ended real estate investment trust which owns a portfolio of 115 hotels across Canada representing over 14,000 guest rooms 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.D, INN.DB.E, INN.DB.F and INN.DB.G.



Logos, product and company names mentioned are the property of their respective owners.

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