InnVest REIT Reports Fourth Quarter Results
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).
InnVest Real Estate Investment Trust and InnVest Operations Trust (TSX:INN.UN), 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 except per unit amounts) | Three Months Ended Dec 31, 2010 | Three Months Ended Dec 31, 2009 | Twelve Months Ended Dec 31, 2010 | Twelve Months Ended 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 | |||||
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.
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.