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Press release from Marketwire

InnVest REIT Reports Fourth Quarter Results

Friday, March 11, 2011

InnVest REIT Reports Fourth Quarter Results08:00 EST Friday, March 11, 2011TORONTO, ONTARIO--(Marketwire - March 11, 2011) - 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 HighlightsSubsequent 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, 2010Three Months Ended Dec 31, 2009Twelve Months Ended Dec 31, 2010Twelve Months Ended Dec 31, 2009Hotel revenues$148,429$144,625$609,566$607,139Hotel operating income(1)$27,219$27,779$137,150$141,511Net income (loss) and comprehensive income (loss)$164,084($24,802)$147,457($30,923)Reconciliation to funds from operations (FFO)Add / (deduct)Depreciation and amortization23,63522,96694,67891,195Future income tax recovery(187,580)(16,162)(189,497)(24,547)Non-cash executive and trustee compensation6548212268Net (gain on sale) writedown of assets held for sale-(273)(327)226Writedown of hotel properties and intangible assets5,90729,7515,90736,489SIFT transition expenses2,246-2,756-Funds from operations (1)(2)$8,357$11,528$61,186$72,708Reconciliation to distributable incomeAdd / (deduct)Amortization of deferred financing costs---23Non-cash portion of mortgage interest expense6754582,2091,680Reserve 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 accretion976(121)3,7912,142Deferred land lease expense and retail lease income, net24269856Distributable income (1)$3,916$5,909$42,203$51,524Per unit dataFFO - basic$0.093$0.135$0.690$0.941FFO - diluted$0.093$0.131$0.673$0.939Distributable income - basic$0.044$0.069$0.476$0.667Distributable income - diluted$0.044$0.069$0.469$0.666Distributions 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 ended December 31, 2010 Variance to 2009Twelve months ended December 31, 2010Variance to 2009OccupancyOntario56.5%4.4 pts58.8%2.5 ptsQuebec55.5%0.7 pts61.0%1.3 ptsAtlantic53.0%(0.3 pts)61.0%0.1 ptsWestern57.1%(1.4 pt)61.1%(1.2 pts)Total55.9%1.8 pts60.1%1.2 ptADROntario$105.18(1.4%)$107.43(1.4%)Quebec$114.121.9%$113.670.1%Atlantic$109.871.1%$115.65(0.2%)Western$135.990.3%$137.620.2%Total$113.79(0.2%)$115.98(0.7%)RevPAROntario$59.427.0%$63.172.9%Quebec$63.353.3%$69.392.4%Atlantic$58.200.5%$70.52(0.1%)Western$77.66(2.1%)$84.13(1.7%)Total$63.583.0%$69.681.2%FINANCIAL REVIEWThree months ended December 31, 2010RevPAR 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, 2010For 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 REVIEWAt 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 PERCENTAGEFor 2010, 67.0% of unitholder distributions will not be taxable to unitholders.QUALIFYING REIT PROCESSOn 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 CALLDue 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 PROFILEInnVest 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 TrustCONSOLIDATED BALANCE SHEETS(in thousands of dollars)December 31, 2010December 31, 2009(Restated)ASSETSCurrent AssetsCash$9,001$101,054Accounts receivable28,75122,591Prepaid expenses and other assets8,3457,962Asset held for sale-3346,097131,640Restricted cash3,8313,815Hotel properties1,694,2101,740,642Other real estate properties16,95515,770Licence contracts15,22116,537Intangible and other assets18,11636,120Future income tax asset5,603-Asset held for sale-5,685$1,800,033$1,950,209LIABILITIESCurrent LiabilitiesAccounts payable and accrued liabilities$78,236$67,710Distributions payable3,7313,649Current portion of long-term debt82,80821,326Liabilities related to asset held for sale-54164,77592,739Long-term debt758,122931,685Other long-term obligations6,9216,448Convertible debentures241,472225,918Future income tax liability2,537186,4301,173,8271,443,220Non-controlling interest (Note 1)52,832-Commitments and contingenciesUNITHOLDERS' EQUITY573,374506,989$1,800,033$1,950,209InnVest Real Estate Investment TrustCONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)(unaudited)(in thousands of dollars, except per unit amounts)Three Months Ended December 31, 2010Three Months Ended December 31, 2009Year Ended December 31, 2010Year Ended December 31, 2009(Restated)(Restated)Total revenues$151,963$147,786$622,847$619,115Hotel revenues$148,429$144,625$609,566$607,139Hotel expensesOperating expenses102,41997,881395,585389,870Property taxes, rent and insurance13,34113,28954,28252,728Management fees5,4505,67622,54923,030121,210116,846472,416465,628Hotel operating income27,21927,779137,150141,511Other (income) and expensesInterest on mortgages and other debt14,30614,25957,58755,955Convertible debentures interest and accretion4,9532,76719,18913,598Corporate and administrative3,6251,2648,0055,574Capital tax184574193Other business income, net(1,492)(1,354)(5,231)(5,184)Other income(237)(598)(558)(944)Depreciation and amortization23,63522,96694,67891,165Writedown of hotel properties and intangible assets5,90729,7515,90736,48950,71569,100179,651196,846Loss 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 operations164,084(25,159)146,996(30,788)Net income (loss) from discontinued operations-357461(135)Net income (loss) and comprehensive income (loss)$164,084$(24,802)$147,457$(30,923)Income (loss) from continuing operations, per unitBasic$1.832$(0.294)$1.658$(0.398)Diluted$1.459$(0.294)$1.487$(0.398)Net income (loss) per unitBasic$1.832$(0.290)$1.663$(0.400)Diluted$1.459$(0.290)$1.492$(0.400)Income (loss) from discontinued operations, per unitBasic and diluted$-$0.004$0.005$(0.002)InnVest Real Estate Investment TrustCONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(in thousands of dollars) (unaudited)Three Months Ended December 31, 2010Three Months Ended December 31, 2009Year Ended December 31, 2010Year Ended December 31, 2009(Restated)(Restated)OPERATING ACTIVITIESIncome (loss) from continuing operations$164,084$(25,159)$146,996$(30,788)Add (deduct) items not affecting operationsDepreciation and amortization23,63522,96694,67891,165Writedown of hotel properties and intangible assets5,90729,7515,90736,489Non-cash portion of mortgage interest expense6754582,2091,680Non-cash portion of convertible debentures interest and accretion976(121)3,7912,142Future income tax recovery(187,580)(16,162)(189,497)(24,547)Non-cash executive and trustee compensation6548212268Changes in non-cash working capital12,7977,3966,581401Discontinued operations-(1,867)440(2,089)20,55917,31071,31774,721FINANCING ACTIVITIESRepayment of long-term debt(5,762)(2,737)(123,710)(11,217)Proceeds from long-term debt-(554)3,1005,979Issue of new units, net-47,601-47,601Issue of convertible debentures-47,82571,68847,825Redemption 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 loan7,200-7,200-Repayment of bridge loan--(1,000)(2,000)Discontinued operations repayment of debt---(4,576)(9,640)82,387(131,014)32,903INVESTING ACTIVITIESCapital 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)6,0313,164Increase 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)82,911Cash, beginning of year13,7678,888101,05418,143Cash, end of year$9,001$101,054$9,001$101,054Supplemental disclosure of cash flow information:Cash paid for interest$15,885$16,232$69,323$65,365Cash paid for income taxes (including capital tax)$-$107$76$230Note 1. Non-controlling InterestNon-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.FOR FURTHER INFORMATION PLEASE CONTACT: Kenneth D. GibsonInnVest Real Estate Investment TrustPresident and Chief Executive Officer(905) 206-7100(905) 206-7114 (FAX)ORTamara L. LawsonInnVest Real Estate Investment TrustChief Financial Officer and Corporate Secretary(905) 206-7100(905) 206-7114 (FAX)