InnVest Real Estate Investment Trust (TSX:INN.UN) last week announced financial results for the three months ended March 31, 2014.
"We have announced a number of exciting changes for InnVest in the last few months including expanding our capital partners, initiating a process to build a dedicated management team and amending existing agreements to enhance flexibility and alignment," said Edward Pitoniak, InnVest's Managing Director and Trustee. "These efforts demonstrate our commitment to growing unitholder value and positioning InnVest as the leading growth platform in Canada's hospitality industry."
First Quarter Highlights
- Revenue per available room ("RevPAR") on a same-hotel basis improved 0.5% driven by rate gains and stable occupancies. Excluding hotels under renovation during the quarter or recovering from renovations recently undertaken, RevPAR growth would have exceeded 3.5%;
- Same-hotel revenues improved 1.2% over the prior year. Overall revenues declined $9.4 million reflecting asset sales. Notwithstanding the revenue decline, gross operating profit ("GOP") improved 1.7% to $13.5 million and margins increased 110 basis points;
- Realized an improved net loss of $34.9 million compared to a loss of $41.7 million in the prior period, benefitting from lower non-cash charges. InnVest typically incurs a loss in the first quarter given the seasonality of the portfolio;
- Funds from operations ("FFO") and adjusted funds from operations ("AFFO") improved 12.5% and 11.8% respectively;
- Sold four non-core assets for aggregate gross proceeds of $14.3 million and have commitments to sell six additional hotels for aggregate gross proceeds of $23.9 million;
- Refinanced one mortgage for $68.0 million with incremental proceeds available to repay mortgage maturities in April 2014;
- Subsequent to the end of the quarter, InnVest entered into subordinated loan agreements with KingSett Capital ("KingSett") for $50.0 million including InnVest's option to draw an additional $50.0 million. Subsequently, InnVest called its $70.0 million Series C convertible debentures for early redemption on June 3, 2014; and
- Management also announced its intention to internalize InnVest's asset management function and completed amendments to its hotel management agreement with Westmont.
"The accretive nature of our divestiture program continues to positively contribute to our operating performance. Our active capital investment program is expected to further improve long term cash flow and profitability metrics across the portfolio," said Anthony Messina, InnVest's President and Chief Executive Officer.
The first quarter is historically InnVest's lowest earnings period. Given the seasonality of the 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, 2014 and 2013 are available on InnVest's website at www.innvestreit.com.
SELECTED FINANCIAL INFORMATION
The operating statistics relating to gross room revenues for the three months ended March 31, 2014 and 2013 are on a same-hotel basis (124 hotels) and exclude hotels sold since the start of the periods presented.
|to 2013||to 2013||to 2013|
|Three Months Ended||Three Months Ended|
|March 31, 2014||March 31, 2013|
|($000s except per unit amounts)||(unaudited)||(unaudited)|
|Other real estate properties||196||804|
|Gross operating profit (1)|
|Other real estate properties||(113||)||202|
|Net loss and comprehensive loss||$||(34,871||)||$||(41,666||)|
|Reconciliation to funds from operations (FFO)|
|Add / (deduct)|
|Depreciation and amortization||20,226||20,712|
|Deferred income tax recovery||-||(282||)|
|Unrealized changes in the fair value of financial liabilities||8,071||17,228|
|Distributions included in corporate and administrative expense||36||36|
|Gain on sale of assets, net||(1,056||)||(1,259||)|
|Reversal of previous impairment||(575||)||-|
|Proxy defense and settlement costs||3,594||-|
|Funds from operations (2)||$||(4,575||)||$||(5,231||)|
|Reconciliation to adjusted funds from operations (AFFO)|
|Add / (deduct)|
|Non-cash portion of mortgage interest expense||566||524|
|Non-cash portion of convertible debentures interest and accretion||1,148||1,238|
|Per unit data - Diluted|
|Net loss and comprehensive loss||$||(0.372||)||$||(0.445||)|
Three months ended March 31, 2014
Excluding hotels impacted by renovations during the quarter, same-hotel RevPAR growth would have exceeded 3.5% with growth across all regions. Same-hotel RevPAR grew 0.5% during the three months ended March 31, 2014.
Hotel divestitures completed since 2013 contributed to the hotel revenue decline of $8.8 million, or 7.1%. Other real estate revenues also declined $0.6 million owing to an office complex sale in May 2013.
Notwithstanding the revenue declines, overall GOP improved 1.7% to $13.5 million, contributing to GOP margins improvement of 110 basis points and highlighting the low yielding nature of assets sold. Utility expenses were up $1.6 million as compared to the prior year, as a result of unusually cold temperatures and higher utility rates during the quarter.
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 quarter of 2014.
For the three months ended March 31, 2014, InnVest generated an FFO loss of $4.6 million ($0.049 per unit diluted) and an AFFO loss of $7.6 million ($0.081 per unit diluted), improving 12.5% and 11.8%, respectively.
In early 2013, InnVest announced a comprehensive two-year strategic plan based on four key initiatives. This 2013 strategic plan is being reviewed as a consequence of certain changes to InnVest's Board of Trustees (the "Board") following the proxy contest settlement (the "Settlement").
In conjunction with this review, the Board has appointed an interim Managing Director and commenced a search for a permanent full-time Chief Executive Officer to be employed by InnVest and the Chief Financial Officer role will become fully dedicated to the affairs of the REIT during the year.
Following the Settlement, InnVest has completed changes to certain agreements with Westmont Hospitality Canada Limited ("Westmont") as follows:
- Asset management of InnVest will be internalized effective November 30, 2014 at no cost to InnVest. As a result, InnVest will no longer pay asset management fees to Westmont effective December 1, 2014;
- Amendment and extension of the hotel management agreement on the following terms:
- The term of the agreement was extended until April 21, 2024;
- Westmont no longer has the exclusive right to manage InnVest's acquired hotels. Westmont was released from its non-compete arrangements;
- InnVest has the ability to terminate Westmont's appointment to manage any or all hotels for any reason on 60 days' prior written notice with respect to any or all of the hotels managed by Westmont, subject to a termination payment;
- Effective April 1, 2014, Westmont's base management fee has been reduced to 2.95% from 3.375% and a new incentive fee structure has been adopted that will allow Westmont to earn up to 3.80% of the gross revenue of managed hotels per year.
PORTFOLIO REPOSITIONING PROGRAM
During the first quarter of 2014, four non-core assets were sold for gross proceeds of $14.3 million (net proceeds of $7.4 million). Six hotels are currently under purchase and sale agreements for aggregate gross proceeds of approximately $23.9 million. Since the start of 2013, management has completed or committed transactions of $151.2 million, representing over 80% of its divestiture objectives through the end of 2014.
CAPITAL INVESTMENT PROGRAM
InnVest expects to invest approximately $70 million across its portfolio in 2014, $18.5 million of which was invested in the first quarter of 2014.
Investments underway during the first quarter of 2014 included completing guestroom upgrades at the Delta Prince Edward and Fairmont Palliser, as well as the continuation of phased renovations at the Sheraton Suites Eau Claire.
Through the end of the first quarter of 2014, 35 Comfort Inn hotels have been renovated as part of InnVest's brand revitalization program. Approximately 75% of InnVest's core Comfort Inn portfolio is expected to be renovated by the end of the second quarter, with the balance expected to be renovated following the busier summer travel season.
Additional planned investments in 2014 include the completion of guestroom upgrades at the Delta Winnipeg and the repositioning of one unbranded hotel.
At March 31, 2014, InnVest has total liquidity of $92.6 million (including cash, restricted cash and availability under InnVest's operating line of credit and capital expenditure loan facility). This amount does not include the $50.0 million subordinated term loan (funded in April 2014), nor InnVest's option to draw an additional $50.0 million subordinated facility, from KingSett.
In January 2014, InnVest completed the refinancing of the Sheraton Eau Claire, Calgary for $68.0 million at a fixed interest rate of 5.33% for a 10-year term. Incremental proceeds of $36.4 million were available to help partially repay a $45.4 million mortgage maturity in April 2014.
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. Furthermore, KingSett may purchase assets from InnVest at fair market value, subject to the Board's approval.
On April 24, 2014, InnVest entered into and closed a four-year credit agreement with KingSett for a $50.0 million subordinated term loan facility. KingSett has also provided InnVest with an option to draw an additional $50.0 million subordinated non-revolving stand-by liquidity facility. The loans are supported by a general security agreement. Annual interest payments are expected to include cash payments of 5.75% and InnVest Units equivalent to 3% for the $50 million subordinated loan facility (3.75% for the $50 million subordinated liquidity facility, if drawn).
Proceeds from this financing will be used for the early redemption of InnVest's $70.0 million 5.85% Series C Debentures on June 3, 2014. Following this redemption, InnVest will not have any significant debt maturities until July 2015.
Asset sales over the past year have contributed to overall mortgage debt repayment and interest savings. Proforma transactions announced or completed following the end of the quarter, InnVest's leverage would have approximated 65.5% at March 31, 2014 (47.7% excluding convertible debentures).
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 select 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 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 Real Estate Investment Trust is an unincorporated open-ended real estate investment trust which owns a portfolio of 124 hotels across Canada representing approximately 15,500 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.C, INN.DB.D, INN.DB.E, INN.DB.F and INN.DB.G.
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