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Press release from Marketwire

InnVest REIT Reports Third Quarter Results and Adjusted Monthly Distribution and Implements Normal Course Issuer Bids

Friday, November 11, 2011

InnVest REIT Reports Third Quarter Results and Adjusted Monthly Distribution and Implements Normal Course Issuer Bids08:00 EST Friday, November 11, 2011TORONTO, ONTARIO--(Marketwire - Nov. 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 nine months ended September 30, 2011. All dollars are in thousands unless otherwise specified."Strength through the early part of the quarter was somewhat offset by growing concerns relating to the global economic environment. These factors are affecting consumer confidence and contributing to a slower recovery for our industry. Notwithstanding, we were able to realize modest rate and RevPAR growth during the quarter," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "The current environment faced by InnVest and our desire to conserve liquidity to fund profit-improving capital investments contributed to our decision to reduce distributions. We are committed to enhancing unitholder value and believe that today's distribution announcement represents a prudent capital management decision."Third Quarter HighlightsRevenue per available room ("RevPAR") on a same hotel basis increased 1.2% benefitting from a 0.9% improvement in average daily rate ("ADR") and a 0.2 point growth in occupancy; Hotel revenues improved 1.0% to $174.8 million; Hotel operating income ("HOI") was relatively unchanged at $50.8 million; InnVest realized net income of $66.9 million compared to a net loss of $4.4 million in 2010. Excluding non-cash charges relating to the IFRS implementation, deferred income taxes and a non-cash impairment charge during the quarter, InnVest's net income improved to $10.7 million compared to $7.7 million in the prior period; and Funds from operations and distributable income each improved reflecting the benefit of lower interest charges. InnVest's Consolidated Financial Statements and Management's Discussion and Analysis for the three and nine months ended September 30, 2011 and 2010 are available on InnVest's website at www.innvestreit.com.SELECTED FINANCIAL INFORMATION(unaudited)($000s except per unit amounts)Three Months Ended September 30, 2011Three Months Ended September 30, 2010Nine Months Ended September 30, 2011Nine Months Ended September 30, 2010Hotel revenues$174,832$173,022$465,703$461,727Hotel operating income (1)$50,774$50,823$109,470$110,023Net income (loss) and comprehensive income (loss)$66,929($4,432)$48,859($144,458)Reconciliation to funds from operations (FFO)Add / (deduct)Depreciation and amortization22,66824,12571,13470,719Deferred income tax expense (recovery)7,186(5,443)(1,815)(8,475)Unrealized (gain) loss on liabilities presented at fair value(71,434)17,486(73,677)115,898Finance costs - distributions46452,39218,383Gain on sale of asset held for sale-(327)-(327)SIFT transition expenses589510589510Writedown of hotel properties7,711-7,711-Funds from operations (1)$33,695$31,964$55,193$52,250Reconciliation to distributable incomeAdd / (deduct)Non-cash portion of mortgage interest expense6676402,0091,534Non-cash portion of convertible debentures interest and accretion9521,1042,8282,815Reserve for replacement of furniture, fixtures and equipment and capital improvements(7,186)(7,101)(19,138)(18,965)Distributable income (1)$28,128$26,607$40,892$37,634Per unit dataFFO - diluted$0.314$0.324$0.565$0.572Distributable income - diluted$0.262$0.270$0.425$0.414Distributions per unit (2)$0.1251$0.1251$0.3753$0.3753(1)Hotel operating income, funds from operations and distributable income are non-IFRS measures of earnings and cash flow commonly used by industry analysts. Non-IFRS financial measures do not have a standardized meaning and are unlikely to be comparable to similar measures used by other organizations.(2)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.Three months ended September 30, 2011Variance to 2010Nine months ended September 30, 2011Variance to 2010OccupancyOntario67.6%(1.0 pt)61.5%1.7 ptsQuebec73.6%2.5 pts63.8%1.2 ptsAtlantic79.4%0.6 pts63.9%0.2 ptsWestern67.9%0.1 pts62.3%(0.2 pts)Total70.7%0.2 pts62.5%1.0 ptsADROntario$106.58(0.4%)$105.67(2.1%)Quebec$118.161.7%$114.850.6%Atlantic$124.04(0.8%)$117.630.3%Western$142.173.3%$140.171.5%Total$118.600.9%$116.05(0.5%)RevPAROntario$72.10(1.7%)$65.020.6%Quebec$86.955.2%$73.312.6%Atlantic$98.44(0.1%)$75.160.7%Western$96.573.5%$87.311.2%Total$83.891.2%$72.571.2%FINANCIAL REVIEWThree months ended September 30, 2011For the three months ended September 30, 2011, hotel revenues increased 1.0%, to $174.8 million. RevPAR over this period increased 1.2%, benefitting from a 0.9% increase in ADR and a 0.2 point improvement in occupancy. Strength in the Quebec and Western regions following recent renovations offset declines in Ontario.Hotel expenses for the three months ended September 30, 2011 increased $1.9 million or 1.5% to $124.1 million. Operating expenses increased 2.1% reflecting inflationary wage increases for hotel staff and higher energy costs during the quarter.For the three months ended September 30, 2011, InnVest generated HOI of $50.8 million, unchanged from the prior year. The modest RevPAR gains achieved were not sufficient to offset inflationary cost increases, resulting in HOI margins declining 40 basis points to 29.0%.Other income and expenses for the three months ended September 30, 2011 increased $4.7 million to $47.8 million. InnVest recognized a non-cash impairment charge of $7.7 million during the quarter, triggered by InnVest's long-term holding expectation for certain assets. The impairment provision relates to four hotel properties representing 770 rooms. This charge offset a $1.9 million net reduction in interest expense due to lower debt balances and weighted average interest rates as compared to the prior period.The third quarter of 2011 generated distributable income of $28.1 million ($0.262 per unit diluted) and FFO of $33.7 million ($0.314 per unit diluted), each showing modest improvements from the prior year reflecting lower interest charges.Nine months ended September 30, 2011For the nine months ended September 30, 2011, hotel revenues increased 0.9%, to $465.7 million. Through the first nine months of the year, RevPAR increased 1.2% based on a 1.0 point improvement in occupancy which offset a 0.5% decline in ADR. Occupancy has improved consistently through the portfolio since early 2010 although pricing power has been limited in most markets driven by a competitive landscape.For the nine months ended September 30, 2011, hotel operating income margins declined 30 basis points to 23.5%. InnVest generated HOI of $109.5 million, down 0.5% or $553 as compared to the prior year. The growth in hotel revenues over this period was achieved through occupancy gains. The marginal contribution from this incremental demand was offset by higher operating costs. In addition, various rooms were taken out of the rental pool as a result of renovations which resulted in a reduction in hotel operating income of approximately $1.7 million during the first half of the year. Excluding the renovations displacement, HOI growth would have approximated 1.0%.Year-to-date InnVest generated distributable income of $40.9 million ($0.425 per unit diluted) and FFO of $55.2 million ($0.565 per unit diluted). Over this period, distributions totalling $34.8 million, or $0.3753 per unit, were declared.BALANCE SHEET REVIEWAt September 30, 2011, InnVest has cash on hand of $29.0 million and availability under its credit facility of up to $39.2 million.At September 30, 2011, InnVest has mortgages payable of $812.6 million with a weighted average term of 2.1 years (December 2010 – 2.8 years) and a weighted average interest rate of 5.6% (December 2010 – 6.0%). Approximately 10.1% of InnVest's mortgage debt is at floating rate.During the third quarter of 2011, InnVest extended the maturity of a mortgage previously scheduled to mature on September 20, 2011 until November 20, 2011. Management is finalizing a five-year renewal of this $50.7 million mortgage at comparable terms and conditions. The mortgage is secured by two full service hotels.Mortgage maturities in 2012 total $176.5 million at an average interest rate of 7.5%. This includes three separate maturities including one of approximately $164.1 million with a large Canadian institutional lender. Forty limited service hotels serve as collateral on this mortgage which matures in November 2012. InnVest also has a $146.0 million maturity with the same lender in February 2013 (following InnVest's one-year option election) secured by seven full-service hotels. Management has begun discussions for early extensions of both maturities.At September 30, 2011, InnVest's leverage excluding and including convertible debentures was 45.8% and 63.0%, respectively. This reflects a 70 basis point leverage reduction since the beginning of the year.Year-to-date, InnVest has invested $35.6 million in capital expenditures throughout its portfolio. These investments reflect a number of profit-improving projects designed to increase cash flow and improve profitability by capitalizing on changing market conditions and the favorable locations of InnVest's properties. Significant investments year-to-date include the completion of renovations to the executive gold floor and rooms at the Fairmont Palliser in Calgary and room renovations at the Hilton Quebec City. Other on-going projects include brand upgrades at a number of our Holiday Inn and Delta hotels. InnVest expects that its capital expenditures for 2011 will approximate $50.0 million.PROPOSED CORPORATE REORGANISATIONOn July 20, 2011, the Minister of Finance (the "Minister") announced changes in, among other things, the tax treatment of real estate investment trusts that have issued "stapled" securities. If the Minister's announcement is enacted as proposed and no changes are made to the existing structure of the REIT and IOT, then rents (and certain other amounts) paid by IOT to the REIT after the applicable transition date (expected to be July 20, 2012) (the "Transition Period") would cease to be deductible in computing the income of IOT for Canadian income tax purposes.After careful consideration of options, the Board of Trustees of InnVest recommends a merger of IOT into the REIT effective on June 30, 2012. This reorganization would result in all the former stapled unitholders and stapled debenture holders of the REIT and IOT holding only units or convertible debentures, as the case may be, of the REIT. The merged entity would be governed as a trust. The proposed merger will be subject to unitholder approval.InnVest intends to schedule a special meeting of unitholders in the first quarter of 2012 to approve the merger (the "Special Meeting"). Unitholders will be provided with a notice of the Special Meeting and management information circular in respect of the Special Meeting and will be entitled to vote at the Special Meeting.Pending completion of the proposed merger, InnVest is restricted from issuing stapled securities during the Transition Period, subject to certain exceptions. As a consequence, InnVest suspended its distribution reinvestment plan ("DRIP") beginning in August 2011 until further notice and will satisfy all Trustee compensation and the vesting of executive units in cash as opposed to the usual satisfaction in the form of units.ADJUSTED MONTHLY DISTRIBUTIONInnVest also declared a distribution of $0.0333 per stapled unit, payable on December 15, 2011 to the holders of record as at the close of business November 30, 2011. This equates to an annual distribution of $0.40 per unit. The Board of Trustees unanimously approved the reduction of distributions after careful consideration of the environment faced by InnVest and its desire to conserve liquidity to fund profit-improving capital investments throughout the portfolio.INCOME TAX DEFERRAL PERCENTAGEFor 2011, InnVest estimates that the non-taxable portion of the distributions made to unitholders during the year will approximate 60%.LITIGATION SETTLEMENTSubsequent to the end of the quarter, InnVest settled an outstanding lawsuit in which it was the plaintiff. As a result, InnVest expects to record a gain of $2.9 million less legal and associated costs, in the fourth quarter of 2011.OUTLOOKCurrent macro environment factors are impacting the global economy and reinforce the importance of strong operational expertise and regional focus for our business. InnVest's broad, diversified portfolio remains a key advantage in the current environment.Looking ahead, we remain focused on driving internal growth within our existing portfolio. In 2011, we began an important multi-year capital program to enhance our product offering at a number of our full-service and limited-service hotels. These targeted investments are expected to improve our hotels' competitive positioning and operating performance through increased occupancies and rates. An enhanced product, coupled with improving demand and constrained new supply should enable InnVest to realize cash flow growth.NORMAL COURSE ISSUER BIDThe Toronto Stock Exchange (the "TSX") has accepted notice of the intention of the REIT and IOT to jointly make normal course issuer bids for their stapled units ("Units") and Series F 5.75% Stapled Convertible Debentures and the intention of the REIT to make normal course issuer bids for its Series B 6.00% Convertible Debentures, Series C 5.85% Convertible Debentures, Series D 6.75% Convertible Debentures and Series E 6.00% Convertible Debentures.As at November 4, 2011, there were 93,538,022 Units issued and outstanding. The REIT and IOT may purchase through the facilities of the TSX or other applicable marketplaces in Canada, up to 8,485,405 Units, representing 10% of the public float of Units as of such date. Daily purchases of Units will not exceed 49,020 Units, subject to InnVest's ability to make "block" purchases under the rules of the TSX.As at November 4, 2011, the REIT had the following principal amount of convertible debentures outstanding: $74,980,000 of Series B 6.00% Convertible Debentures; $70,000,000 of Series C 5.85% Convertible Debentures; $36,358,000 of Series D 6.75% Convertible Debentures; and $75,000,000 of Series E 6.00% Convertible Debentures. In addition, as of November 4, 2011, the REIT and IOT had outstanding $50,000,000 aggregate principal amount of Series F 5.75% Stapled Convertible Debentures.Under the normal course issuer bids, convertible debentures may be purchased through the facilities of the TSX or other applicable marketplaces in Canada up to the following limits: Limit on Purchases (Principal Amount)Total Limit1Daily Limits2Series B 6.00% Convertible Debentures$7,498,000$9,638Series C 5.85% Convertible Debentures$7,000,000$16,297Series D 6.75% Convertible Debentures$3,635,800$41,378Series E 6.00% Convertible Debentures$7,500,000$13,191Series F 5.75% Stapled Convertible Debentures$5,000,000$11,0451Represents 10% of the public float of each series of debentures as at November 4, 2011.2Subject to InnVest's ability to make "block" purchases under the rules of the TSX.InnVest believes that, from time to time, the market price of its Units and convertible debentures may not reflect their underlying value and that the purchase of Units and convertible debentures may represent an appropriate and desirable use of its funds. InnVest intends to fund any purchases out of available cash and undrawn credit facilities.Purchases under the normal course issuer bids can be made from time to time over a twelve-month period, commencing on November 15, 2011 and terminating on November 14, 2012, as appropriate opportunities arise. The price InnVest will pay for any Units or convertible debentures will be the market price at the time of acquisition. It is currently expected that Units or convertible debentures purchased under the bids will be cancelled, other than Units delivered to the trustees of the REIT in satisfaction of a portion of their annual retainer fee. The actual number of Units or principal amount of convertible debentures which may be purchased and the timing of any such purchases will be determined by InnVest, in accordance with the rules of the TSX.QUARTERLY CONFERENCE CALLManagement will host a conference call on Friday November 11, 2011 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing (416) 340-2216 or 1-866-226-1792. You will be required to identify yourself and the organization on whose behalf you are participating. A recording of this call will be made available November 11th beginning at 1:00 pm through to 11:59 p.m. on November 18th. To access the recording please call (905) 694-9451 or (800) 408-3053 and use the reservation number 7573534#.FORWARD LOOKING STATEMENTSStatements contained in this press release that are not historical facts are forward-looking statements which involve risk and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Among the key factors that could cause such differences are real estate investment risks, hotel industry risks and competition. These and other factors are discussed in InnVest's 2011 annual information form which is available at www.sedar.com or www.innvestreit.com. InnVest disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable securities law.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 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, INN.DB.E and INN.DB.F.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)www.innvestreit.com