2015 Annual Report

Transcription

2015 Annual Report

BUILDING
THE BEST
INNVEST REAL ESTATE INVESTMENT TRUST
ANNUAL REPORT 2015
BUILDING THE BEST 2015 was a very active and positive year for InnVest REIT
as we successfully delivered on our strategic plan to expand and enhance our
hotel portfolio, leverage our newly internalized asset management team to accelerate
growth, and strengthen our balance sheet and financial position. We look for
continued growth and strong operating performance in the years ahead.
2015 HIGHLIGHTS
117.4M
8.8%
12.8%
10.9%
81.2%
$
CONTENTS
ABOUT INNVEST
2Message to Unitholders
10Message from the CFO
11Financial Operating
Performance Highlights
12InnVest Portfolio
14Our Blueprint for
Building the Best InnVest
16Board of Directors
16Unit Price Information
IBC Corporate Information
InnVest Real Estate Investment Trust
is an unincorporated open-ended
real estate investment trust which owns
interests in a portfolio of 110 hotels across
Canada representing over 14,500 guest
rooms operated under internationally
recognized brands.
$
Acquired interests in three high quality,
full-service, city-centre hotels, further
strengthening our asset base.
Accretive growth in AFFO per Unit.
Refer to InnVest’s 2015 Management’s
Discussion and Analysis and Consolidated
Financial Statements for detailed financial
information and explanation of non-IFRS
measures and definitions.
RevPAR growth with increases in average
daily room rates and occupancy gains.
Solid and conservative AFFO payout ratio,
strengthened from 88.4% in 2014.
Increase in GOP with revenue growth,
property renovations and contributions
from acquisitions.
41.9M
Investment in hotel improvements to
enhance portfolio quality.
COVER AND OPPOSITE:
FAIRMONT ROYAL YORK, TORONTO
BUILDING THE BEST
INNVEST
MESSAGE
TO UNITHOLDERS
DREW COLES
President and Chief Executive Officer
Dear Unitholders:
I am very pleased to report on our 2015 results for my first full year as President
and Chief Executive Officer of InnVest. 2015 was an active and successful year for
the REIT as we made significant progress in three key areas of our strategic plan:
We enhanced the quality and scale of our hotel portfolio through acquisitions
and reinvestment;
➤
We internalized our asset management team to drive income growth; and
➤
We strengthened our balance sheet and financial position.
➤
Looking ahead, we remain focused on building
on this progress with continued growth and strong
operating performance in the years ahead.
ENHANCING THE INNVEST PORTFOLIO
2015 was a year in which we significantly expanded
and diversified our hotel portfolio with the acquisition
of interests in three full-service city-centre hotels.
During the year we purchased a 20% interest in the
iconic Fairmont Royal York in the centre of Toronto,
a 33% interest in the Courtyard by Marriott in
downtown Toronto, and a 100% interest in The
Hotel Saskatchewan, Autograph Collection, Regina.
Adding to this momentum, in February 2016 we
acquired a 100% interest in the Ottawa Marriott Hotel,
well-located in central downtown Ottawa.
The aggregate net purchase price for our interests
in these properties was approximately $117 million,
adding 2,651 rooms to the portfolio. All are high
quality, full-service hotels well-located in strong
downtown markets. We believe these additions to our
hotel portfolio will make accretive and increasing
contributions to our operating results and provide a
higher quality of income over the long term.
A perfect example of this income quality is the
strong performance at our Hyatt Regency hotel in
downtown Vancouver, acquired in December 2014.
In 2015, the property continued to exceed our
expectations, contributing $16.4 million in Gross
Operating Profit to our consolidated results for
the year.
HYATT REGENCY, VANCOUVER
2
BUILDING
ORGANIC
GROWTH
By leveraging our highly experienced
and recently internalized asset
management team and investing
in our core hotel portfolio to ensure
each property is the most modern
and attractive in its market, we
significantly accelerated the operating
performance of our hotel portfolio
in 2015. We expect to see further
growth going forward.
HYATT REGENCY,
VANCOUVER
Built: 1973
Renovated: 2012
Rooms: 644
Function space: 40,000 sq. ft.
16.4M
$
2015 Gross Operating Profit
ANNUAL REPORT 2015
3
BUILDING A
QUALITY
PORTFOLIO
We continue to strengthen and
diversify our hotel portfolio
through the acquisition of high
quality assets located in deep
markets that can deliver income
growth with low volatility,
the disposition of low-yield
non-core properties, and
investments in repositioning
core hotels to ensure they are
the best in their markets.
THE HOTEL SASKATCHEWAN,
AUTOGRAPH COLLECTION,
REGINA
Built: 1927
Renovation: 2015
Rooms: 224
Function Space: 14,000 sq. ft.
$
45M
Purchase Price including
Capital Improvements
DELTA WINNIPEG
4
MESSAGE TO UNITHOLDERS
REINVESTING IN OUR PORTFOLIO
Over the last three years InnVest has directed more
than $179 million in capital improvements across
our hotel portfolio to ensure we have the most
competitive, modern and attractive properties in our
markets. During 2015, approximately $41.9 million
was invested in a number of projects including the
completion of room renovations at Calgary’s Fairmont
Palliser and the Sheraton Suites Eau Claire, the
first phase of room renovations at the Delta London
Armouries, and lobby renovations at Moncton’s
Delta Beausejour.
Reinvesting in our hotels works. For example, in
2013 and 2014 we renovated 58 Comfort Inns and
as a result, in 2015 saw an 8.6% increase in room
revenues at these renovated properties and a solid
19.8% increase in gross operating profit compared to
the prior year. We will continue to reinvest in our
properties where we believe we can generate strong
incremental returns.
Our focus on revenue management
resulted in solid increases in all our
key performance benchmarks in 2015,
including a much improved GOP
margin of 26.3%.
Our efforts to strengthen our hotel portfolio have also
resulted in the sale of a number of non-core properties
which were not performing to our expectations. Since
the beginning of 2013, 31 non-core properties have
been sold generating proceeds, after the repayment
of associated debt, of approximately $147 million.
The cap rate generated by our property sales, and
the reinvestment of the net proceeds, have generated
significant accretive value for our Unitholders. We
have identified additional properties that we have
slated for sale which we believe will generate
additional net proceeds to help fuel InnVest’s growth.
ENHANCING OUR FINANCIAL POSITION
Another key focus has been to strengthen our
financial position, and we made considerable progress
with this objective in 2015. Our debt to gross book
value ratio improved significantly to 58.2% at year
end compared to 62.0% at December 31, 2014.
Pro forma the Ottawa Marriott acquisition, our debt
leverage is 60.5%. We are targeting an annual debt
leverage ratio below 55% over the near-term and
50% over the longer term. We remain committed to
maintaining a lower debt leverage ratio although the
ratio may vary through the year based on seasonality
and optimal permanent financing.
HOTEL GOP MARGIN (%)
26%
25%
24%
23%
22%
21%
20%
AUTOGRAPH COLLECTION,
REGINA
STAYBRIDGE SUITES, OAKVILLE
2011
2012
2013
2014
2015
HOLIDAY INN GUELPH HOTEL & CONFERENCE CENTRE
ANNUAL REPORT 2015
5
We also made significant progress in improving our
debt profile in 2015. The weighted average mortgage
rate declined to 5.0% from 5.5% at December 31, 2014
while the weighted average term to maturity was
extended to 4.7 years from 2.8 years at the end of
2014. Looking ahead, with only $47 million in
mortgages maturing near the end of 2016 with a
weighted average interest rate of 5.8%, we expect
to renew these mortgages at prevailing lower rates.
We will seek further interest rate cost and maturity
advantages by capitalizing on the current low
interest rate environment
We were also pleased to complete a successful
bought-deal equity offering in July 2015, raising net
proceeds of approximately $46.4 million, including an
over-allotment option, to fund our recent acquisitions
and reduce debt. As at December 31, 2015 we had a
liquidity position of approximately $92.3 million,
providing us with the financial resources and flexibility
to act on future growth opportunities as they arise.
Our focus on revenue management
resulted in increased average daily room
rates and occupancies in 2015, combining
to drive strong increases in all our key
performance benchmarks and a solid and
accretive 10.9% increase in AFFO per Unit.
STRONG RESULTS
The progress demonstrated in meeting our strategic
priorities generated much improved operating and
financial performance in 2015. Our focus on revenue
management increased average daily room rates and
occupancies through the year, combining to drive
strong increases in our key performance benchmarks.
Overall revenues grew 3.3% for the year, while same
property revenue per available room (RevPAR) rose
2.1% compared to 2014. Overall Gross Operating
Profit was up 12.8% on a much improved 26.3% GOP
margin compared to 24.1% last year.
As a result of this strong operating performance,
our Adjusted Funds from Operations (AFFO) rose
41.0% in 2015 to $62.5 million or $0.489 per diluted
unit. Additionally, these improved operating results
contributed to a solid improvement in our payout
ratio to 81.2% at December 31, 2015 compared to
88.4% at the prior year end. The strong and accretive
10.9% increase in our AFFO per Unit was generated
despite the 24.2% increase in the weighted average
number of Units outstanding in 2015 resulting from
our successful equity financings.
AFFO PAYOUT RATIO (%)
■ Total Distributions
■ Cash Distributions (1)
100%
90%
80%
70%
60%
2011
2012
2013
2014
2015
OTTAWA
MARRIOTT
(1) Excluding distribution reinvestment plan
COMFORT INN, WATERLOO
6
DELTA WINNIPEG
BUILDING
FINANCIAL
STRENGTH
A key goal is to maintain a
strong and flexible financial
position to ensure we have the
capacity and resources to invest
effectively in growth opportu
nities. We have made significant
progress in reducing our leverage,
lowering our interest costs and
strengthening our balance sheet,
and expect further progress
going forward.
OTTAWA MARRIOTT
Built: 1972
Rooms: 489
115M
$
Purchase Price
($235,000 per room)
FAIRMONT ROYAL YORK, TORONTO
ANNUAL REPORT 2015
7
BUILDING
TALENT
We believe our recently internalized
asset management team is among the
best in the business with deep expertise
gained from years of experience in
all aspects of the hotel industry. Our
people bring an average 20 years of
industry experience to InnVest, talents
that will generate solid and stable
growth in the years ahead.
COURTYARD BY MARRIOTT,
TORONTO
Built: 1957
Renovation: 2016
Rooms: 575
$
34.6M
For a 33.3% interest
ANDREW C. COLES
President and
Chief Executive
Officer
8
GEORGE M. KOSZIWKA
Chief Financial
Officer
LISA CONWAY
Executive Vice President,
General Counsel and
Corporate Secretary
It is a brand new InnVest REIT, with
the people, the assets and the proven
strategies to deliver stable, sustainable
and growing returns to our Unitholders
over the long term.
Canadian national RevPAR is forecasted to grow
2.0% in 2016 after a 3.5% increase in 2015. The hotel
industry should also benefit from today’s cheaper cost
of fuel to drive increased travel, the low relative value
of the Canadian dollar attracting larger numbers of
US and overseas visitors to Canada, and continuing
non-energy sector economic growth.
CLOSING THOUGHTS
2015 was a year of significant transition for InnVest.
We successfully delivered on our key value-enhancing
objectives while at the same time internalizing our
asset management function, enhancing the depth
of our senior management team, and building a
stand-alone operating platform on which we can
continue to grow.
Among all classes of real estate, hotels provide a
competitive advantage as we can reprice our inventory
every day. This is unique for a real estate class, and
provides a distinct opportunity to accelerate our
growth and operating results. Today, InnVest is the
largest owner of hotel assets in Canada with a
property portfolio that is transitioning into ’best in
class’ in terms of quality, scale, diversification and
performance. Combining these solid fundamentals
with what I am confident is the industry’s most
experienced management team, and I believe
InnVest’s future looks bright.
Looking ahead, we will continue to focus on our key
strategic imperatives:
Accelerating organic growth by optimizing the
operational performance of all our properties;
➤
Investing in our assets to enhance performance;
➤
Growing our portfolio through disciplined and
accretive acquisitions of quality properties in deep
markets; and
➤
Strengthening our financial position through
reduced leverage, lower interest costs and
extending our average term to maturity.
➤
In closing, we believe, a high quality hotel property
will generate high quality results, and we look
forward to keeping you apprised of our progress
in the years ahead.
Sincerely,
In short, it is a brand new InnVest REIT, with the
people, the assets and the proven strategies to
deliver stable, sustainable and growing returns to
our Unitholders over the long term.
Our confidence in the future is based on strong
fundamentals in the Canadian hotel business.
According to HVS Global Hospitality Services, the
Drew Coles
President and Chief Executive Officer
COURTYARD BY MARRIOTT,
TORONTO
SARA GLENN
Senior Vice President
Asset Management
BRAD POLLOCK
Vice President
Taxation and
Treasury
DENISE ACHONU
Vice President
Finance
CHANTAL NAPPERT
Vice President
Finance and
Investor Relations
LEO FLEMING
Vice President Asset
Management and
Capital Projects
MATT CORNELL
Vice President
Investments
NICHOLAS LAKAS
Vice President
Asset Management,
Luxury – Full Service
ANNUAL REPORT 2015
9
MESSAGE FROM THE CFO
2015 was a very positive year for InnVest as we successfully delivered on our objectives to
expand and enhance our hotel portfolio, leverage our newly internalized asset management
team to accelerate growth, and strengthen our balance sheet and financial position. We made
significant progress in all areas of our plan, and look for continued growth and strong operating
performance in the years ahead.
A key element of our strategic plan is to strengthen
our financial position. As at December 31, 2015 we
significantly reduced our leverage ratio to 58.2%,
down from 62.0% at the end of 2014, while at the
same time lowering our weighted average interest
rate by 0.5% to 5.0% and extending the term to
maturity from 2.8 years to 4.7 years.
Total investments of approximately $117 million were
made in the acquisition of three high quality city-centre
hotels during the year, while another $41.9 million
in renovations and hotel improvements served to
enhance the overall quality of our hotel portfolio.
We continue to recycle proceeds from the sale of
non-core assets to re-invest in our growth plans and
to generate higher quality earnings going forward.
Together, our portfolio and financing achievements
have enabled us to improve our payout ratio to
81.2% as compared to 88.4% in the prior year and
HIGHLIGHTS
58.2%
Significant reduction in our
leverage ratio from 62.0% at
December 31, 2014
AUTOGRAPH COLLECTION, REGINA
10 INNVEST REAL ESTATE INVESTMENT TRUST
will contribute to the stability and sustainability of
our cash flows and unitholder distributions going
forward. Looking ahead, we will continue to focus
on growing our business while maintaining a strong
financial position. Our near-term target is to further
reduce our leverage ratio to under 55%, and 50%
over the longer term. We also intend to continue
capitalizing on the current low interest rate environment
to further reduce debt costs while extending our
term to maturity.
George Kosziwka
Chief Financial Officer
5.0%
Reduced weighted average
interest rate from 5.5% at
December 31, 2014
HILTON QUEBEC
4.7YEARS
Extended weighted average
term to maturity from 2.8 years
at December 31, 2014
Financial Operating Performance Highlights
Year Ended December 31,
2015
2014
CONSOLIDATED PERFORMANCE
Number of hotel properties – December 31
107 110
Number of rooms – December 31
13,730 14,164
Occupancy (%)
65.0% 63.5%
ADR
$132.06 $124.14
RevPAR
$85.80 $ 78.86
Revenues
$553,388 $535,535
Gross Operating Profit (GOP) (1)
145,346 128,821
Gross operating margin
26.3% 24.1%
Net loss and comprehensive loss
(13,541) (14,727)
Funds from operations (FFO) (1)
76,345 58,451
Adjusted funds from operations (AFFO) (1)
62,525 44,351
Distributions declared
50,751 39,222
Capital expenditures
$41,895 $76,932
SAME HOTEL PERFORMANCE
Number of hotel properties
105 105
Occupancy (%)
64.6% 64.1%
ADR
$127.71 $126.11
RevPAR
$82.48 $ 80.77
Room Revenues
$379,459 $371,691
GOP
$127,706 $122,325
GOP margin
26.7% 25.7%
PER DILUTED UNIT
$(0.107)$(0.152)
FFO
$0.598 $ 0.574
AFFO $0.489 $ 0.441
Distributions per unit
$0.3996 $0.3996
FFO and AFFO – Weighted average units outstanding – basic
126,370,77496,598,100
FFO and AFFO – Weighted average units outstanding – diluted
148,729,970119,734,543
December 31, December 31,
As at: 2015 2014
Total assets
1,314,0521,329,285
Gross mortgages and other debt
804,626801,363
Convertible debentures
211,220247,608
Weighted average term to maturity (2)
4.7 years2.8 years
Weighted average interest rate (2)
5.0% 5.5%
Total debt to gross asset value (leverage ratio) (3)(4)
58.2% 62.0%
Total debt to total capitalization (3)(4)
59.7% 60.1%
Debt service coverage ratio (times) (3)(4)
1.9 x 1.6 x
Interest coverage ratio (times) (3)
2.6 x 2.0 x
Floating rate debt as % of total debt
12.5% 21.2%
Total potential liquidity (5)
92,308121,292
Twelve–month trailing AFFO payout ratio
81.2% 88.4%
Twelve–month trailing AFFO payout ratio (including DRIP)
68.8% 81.2%
(1)Refer to Non–IFRS Financial Measures and Additional IFRS Financial Measures.
(2)Mortgages & other debt.
(3)Calculated on a trailing 12 month basis.
(4)Total debt consists of mortgage and other debt and convertible debentures.
(5)Total potential liquidity is defined as cash on hand, the availability under credit facilities and restricted cash.
ANNUAL REPORT 2015 11
InnVest Portfolio
DISTRIBUTION BY REGION
Hotel
City
Prov. Asset Class
Number of
Guest Rooms
Hotel
City
Prov. Asset Class
Number of
Guest Rooms
WESTERN
3,538
ONTARIO
8,047
Hyatt Regency Vancouver
Travelodge Hotel Calgary Airport
The Fairmont Palliser
Sheraton Suites Calgary Eau Claire
Holiday Inn Calgary
Macleod Trail South
Fairmont Hotel Macdonald
Comfort Inn Edmonton
Travelodge Edmonton South
Comfort Inn Prince Albert
Quality Hotel Regina
Comfort Inn Regina
Hotel Saskatchewan
Comfort Inn Saskatoon
Comfort Inn Swift Current
Comfort Inn Brandon
Delta Winnipeg
Comfort Inn Winnipeg Airport
Comfort Inn Winnipeg South
Holiday Inn Barrie
Barrie
ON Midscale
161
Homewood Suites by Hilton
Burlington
ON Midscale
83
Hilton Garden Inn Toronto
/ Burlington
Burlington
ON Midscale
120
Holiday Inn Burlington Hotel &
Conference Centre
Burlington
ON Midscale
237
Comfort Inn Cambridge
Cambridge ONLimited
81
Comfort Inn Cobourg
Cobourg
ONLimited
60
Comfort Inn Dryden
Dryden
ONLimited
61
Holiday Inn Guelph
Guelph
ON Midscale
136
Staybridge Guelph
Guelph
ON Midscale
120
Comfort Inn Hamilton
Hamilton
ONLimited
59
Holiday Inn Ottawa Kanata
Kanata
ON Midscale
152
Comfort Inn Kanata
Kanata
ONLimited
146
Comfort Inn Kapuskasing
Kapuskasing ONLimited
65
Comfort Inn Kenora
Kenora
ONLimited
75
Comfort Inn Kingston – 401
Kingston
ONLimited
50
Holiday Inn Kingston-Waterfront Kingston
ON Midscale
197
Comfort Inn Kirkland Lake
Kirkland Lake ONLimited
64
Radisson Hotel Kitchener
Kitchener
ON Midscale
172
Staybridge Suites London
London
ON Midscale
117
Holiday Inn Hotel & Suites London London
ON Midscale
143
Delta London Armouries
London
ONFull-Service/Upscale 220
Comfort Inn Newmarket
Newmarket ONLimited
100
Travelodge Airport North Bay
North Bay
ONLimited
100
Holiday Inn Express Hotel & Suites
North Bay
North Bay
ON Midscale
116
Best Western North Bay
North Bay
ON Midscale
130
Holiday Inn & Suites Oakville @BronteOakville
ON Midscale
144
Staybridge Oakville
Oakville
ON Midscale
105
Comfort Inn Orillia
Orillia
ONLimited
78
Les Suites Hotel Ottawa
Ottawa
ONFull-Service/Upscale
83
Ottawa Marriott Hotel
Ottawa
Travelodge Ottawa East
Ottawa East ONLimited
128
Comfort Inn Ottawa East
Ottawa East ONLimited
68
Comfort Inn Parry Sound
Parry Sound ONLimited
60
Comfort Inn Pembroke
Pembroke
ONLimited
60
Comfort Inn Pickering
Pickering
ONLimited
146
Comfort Inn Sault Ste. Marie
Sault Ste. MarieON Limited
79
Comfort Inn Simcoe
Simcoe
ONLimited
61
Travelodge Sudbury
Sudbury
ONLimited
140
Comfort Inn Sudbury East
Sudbury
ONLimited
79
Comfort Inn Sudbury
Sudbury
ONLimited
78
Comfort Inn Thunder Bay
Thunder Bay ONLimited
78
Comfort Inn Timmins
Timmins
ONLimited
89
Quality Suites Toronto Airport
Toronto
ON Midscale
254
Holiday Inn Toronto Midtown
Toronto
ON Midscale
209
Holiday Inn Express Toronto East Toronto
ON Midscale
140
Holiday Inn Express Toronto
Downtown
Toronto
ON Midscale
196
Holiday Inn Toronto Airport East
Toronto
ON Midscale
191
Fairmont Royal York (1)
Toronto
ONFull-Service/Upscale 1,363
Courtyard by Marriott (2)
Toronto
Comfort Inn Waterloo
Waterloo
ONLimited
85
Quality Suites Whitby
Whitby
ON Midscale
104
Vancouver
Calgary
Calgary
Calgary
BCFull-Service/Upscale
ABLimited
ABFull-Service/Upscale
ABFull-Service/Upscale
644
203
405
323
Calgary
AB Midscale
Edmonton ABFull-Service/Upscale
Edmonton ABLimited
Edmonton ABLimited
Prince Albert SKLimited
Regina
SK Midscale
Regina
SKLimited
Regina
SKFull-Service/Upscale
Saskatoon SKLimited
Swift Current SKLimited
Brandon
MBLimited
Winnipeg
MBFull-Service/Upscale
Winnipeg
MBLimited
Winnipeg
MBLimited
151
199
100
219
61
126
98
224
78
73
79
393
79
83
DIVERSIFIED OPERATIONS
HOTEL
MANAGEMENT
DIVERSIFICATION
HOTEL
ASSET CLASS
DIVERSIFICATION
OUTER CIRCLE
Hotel Revenue
Westmont
Fairmont
Marriott (1)
Hyatt
Hilton
OUTER CIRCLE
2015
2014
54%
17%
11%
10%
8%
59%
20%
11%
1%
9%
2015
2014
60%
15%
8%
11%
6%
63%
22%
8%
0%
7%
INNER CIRCLE
Hotel GOP
Westmont
Fairmont
Marriott (1)
Hyatt
Hilton
HOTEL
GEOGRAPHIC
DIVERSIFICATION
Hotel Revenue
Full-Service/
Upscale
Midscale
Limited
OUTER CIRCLE
2015
2014
48%
28%
24%
44%
31%
25%
2015
2014
INNER CIRCLE
Hotel GOP
Full-Service/
Upscale
Midscale
Limited
Hotel Revenue
Western
Ontario
Quebec
Atlantic
2015
2014
37%
34%
17%
12%
32%
37%
18%
13%
2015
2014
38%
35%
14%
13%
35%
36%
15%
14%
INNER CIRCLE
42%
25%
33%
39%
28%
33%
Hotel GOP
Western
Ontario
Quebec
Atlantic
(1)Held through a 20% partnership interest
(2)Held through a 33.3% joint venture partnership interest
(1) Including Delta
AS AT MARCH 24, 2016
Hotel
City
Prov. Asset Class
Number of
Guest Rooms
QUEBEC
2,666
Comfort Inn Alma
Alma
QCLimited
Comfort Inn Ancienne-LoretteAncienne
Lorette
QC Limited
Quality Hotel Montreal – Anjou
Anjou
QC Midscale
Comfort Inn Baie-Comeau
Baie-Comeau QCLimited
Comfort Inn Boucherville
Boucherville QCLimited
Comfort Inn Brossard
Brossard
QCLimited
Comfort Inn Chicoutimi
Chicoutimi QCLimited
Comfort Inn Drummondvillle
DrummondvillleQC Limited
Comfort Inn Gatineau
Gatineau
QCLimited
Holiday Inn Laval
Laval
QC Midscale
Quality Suites Laval
Laval
QC Midscale
Comfort Inn Laval
Laval
QCLimited
Quality Suites Montreal Aeroport Pointe Claire QC Midscale
Hilton Quebec City
Quebec City QCFull-Service/Upscale
Quality Suites Quebec City
Quebec City QC Midscale
Comfort Inn Rimouski
Rimouski
QCLimited
Comfort Inn Rivière-du-Loup
Rivière-du-LoupQC Limited
Comfort Inn Rouyn-Noranda
Rouyn-NorandaQC Limited
Comfort Inn Sept-Iles
Sept-Iles
QCLimited
Delta Sherbrooke Hotel
and Conference Centre
Sherbrooke
QC Full-Service/Upscale
Comfort Inn Sherbrooke
Sherbrooke QCLimited
Comfort Inn Thetford Mines
Thetford MinesQC Limited
Comfort Inn Val D’Or
Val D’Or
QCLimited
59
58
157
60
98
98
78
59
78
176
114
120
161
571
119
79
67
77
60
Hotel
City
Prov. Asset Class
ATLANTIC
Number of
Guest Rooms
1,906
Comfort Inn Campbellton
Campbellton NBLimited
Comfort Inn Edmundston
Edmundston NBLimited
Comfort Inn Fredericton
Fredericton NBLimited
Delta Beausejour
Moncton
NBFull-Service/Upscale
Comfort Inn Moncton Magnetic Hill Moncton
NBLimited
Comfort Inn Moncton East
Moncton
NBLimited
Hilton Saint John
Saint John NBFull-Service/Upscale
Comfort Inn Saint John
Saint John NBLimited
Delta Prince Edward
CharlottetownPEI Full-Service/Upscale
Comfort Inn Charlottetown
CharlottetownPEI Limited
Comfort Inn Amherst
Amherst
NSLimited
Comfort Inn Bridgewater
Bridgewater NSLimited
Comfort Inn New Glasgow
New GlasgowNSLimited
Comfort Inn Sydney
Sydney
NSLimited
Comfort Inn Truro
Truro
NSLimited
Comfort Inn Yarmouth
Yarmouth
NSLimited
Comfort Inn Corner Brook
Corner Brook NLLimited
Quality Hotel Harbourview
St. John’s
NL Midscale
59
120
99
310
58
78
197
59
211
78
60
61
61
60
80
78
78
159
178
58
63
78
DISTRIBUTION BY BRAND
Western
Ontario
Quebec
Atlantic
Total
No. ofNo. ofNo. ofNo. of
No. of GuestNo. of GuestNo. of GuestNo. of Guest
HotelsRooms HotelsRooms HotelsRooms HotelsRooms
No. of% of Total
No. ofGuestGuest
HotelsRoomsRooms
Comfort Inn
8 651 22 1,722 16 1,190 14 1,029 60 4,592 28.4%
Fairmont Hotels & Resorts
2 604 1 1,363(1)
––––
3 1,967 12.2%
Holiday Inn 1 151 9 1,570 1 176 – –
11 1,897 11.7%
Delta Hotels 1 393 1 220 1 178 2 521 5 1,312 8.1%
Quality Hotels/Suites 1 126 2 358 4 551 1 159 8 1,194 7.4%
Travelodge2 422 3 368 ––––
5 790 4.9%
Hilton Hotel––––1 571 1 197 2 768 4.8%
Hyatt1 644 ––––––
1 644 4.0%
Courtyard––1 575(2)
––––
1 575 3.6%
Marriott––1 489 ––––
1 489 3.0%
Holiday Express––3 452 ––––
3 452 2.8%
Staybridge Suites ––3 342 ––––
3 342 2.1%
Sheraton Suites1 323 ––––––
1 323 2.0%
Autograph Collection1 224 ––––––
1 224 1.4%
Radisson Suites––1 172 ––––
1 172 1.1%
Best Western––1 130 ––––
1 130 0.8%
Hilton Garden Inn––1 120 ––––
1 120 0.7%
Hilton Homewood Suites––1 83 ––––
1 83 0.5%
Independent––1 83 ––––
1 83 0.5%
Total
18 3,538 51 8,047 23 2,666 18 1,906 110 16,157 100.0%
(1)Held through a 20% partnership interest
(2)Held through a 33.3% joint venture partnership interest
Full-Service/Upscale 6
2,1885
2,7302
7493
718
Midscale 2 277 21 3,227 5 727 1 159 Limited
10 1,073 25 2,090 16 1,190 14 1,029 18 3,538 51 8,047 23 2,666 18 1,906 166,38539.5%
29 4,390 27.2%
65 5,382 33.3%
110 16,157 100.0%
OUR BLUEPRINT FOR
BUILDING THE BEST INNVEST
At InnVest, our ultimate goal is to build unitholder value by owning a highquality and diversified hotel portfolio that generates strong, sustainable and
growing returns to our investors with a low risk profile.
Our objective is to own interests in a portfolio of
high quality, city-centre hotels diversified by
geography, asset class and brand, assets that will
outperform in periods of economic growth and be
insulated from declines during economic downturns.
Our focus going forward is to increase our ownership
of full-service, upscale hotels in high barrier to
entry downtown locations in stable markets with
long-term growth potential.
renovations to guest rooms, lobbies, restaurants and
function rooms will serve to grow occupancies and
average daily rates and provide a solid return for
our Unitholders.
Our goal is also to maintain a strong financial position
by further reducing our leverage and interest costs
while extending the maturity of our debt portfolio to
minimize our cost of capital and ensure we have the
resources and flexibility to capitalize on growth
opportunities as they occur.
We will continue to invest in our core properties to
ensure they are competitive in their markets.
Investments in hotel and brand repositioning and
In summary, we believe a high quality hotel portfolio
will deliver high quality growth for our Unitholders.
POSITIVE SUPPLY AND DEMAND DYNAMICS
■ Supply
■ Demand
■ Occupancy (%)
6%
68%
4%
64%
2%
0
60%
–2%
56%
–4%
–6%
Source: STR Inc. / HVS
OCCUPANCY
PERCENTAGE CHANGE
Fundamentals in the
Canadian hotel business
continue to strengthen
with demand outpacing
new supply.
52%
01
02
HOLIDAY INN, LONDON
03
04
05
06
07
08
09
10
11
12
13
14
15
16F
DELTA WINNIPEG
FAIRMONT ROYAL YORK,
TORONTO
BUILDING ON
OUR
VISION
At InnVest, our vision is to
become one of the top-five
performing REITs in Canada by
capitalizing on the talents of our
people, our low cost of capital,
and our proven active property
management to deliver superior
returns from our portfolio of
quality hospitality assets across
the country.
TORONTO
Built: 1929
Rooms: 1,363
37.9M
$
For a 20% interest
FAIRMONT PALLISER, CALGARY
Board of Directors
1Independent Trustee
2Audit and Risk Committee
3Investment Committee
4Compensation and Corporate Governance Committee
*Chair of Committee
EDWARD W. BOOMER 1,2,4
Corporate Director
Previous President and Chief Investment Officer of
Partners Real Estate Investment Trust. Mr. Boomer
has over 20 years of experience in commercial real
estate including as the Founder and President of
Reference Realty Inc. Mr. Boomer holds an LLB from
Queen’s University, a Bachelor of Arts (Economics)
from Glendon College and is a Member of the Law
Society of Upper Canada.
DREW COLES
President and Chief Executive Officer,
InnVest REIT
Drew Coles was appointed InnVest REIT’s President
and CEO in January 2015. He previously served as
Vice President, Hotels at Oxford Properties Group,
responsible for its luxury hotel portfolio, and in senior
management positions with Delta Hotels, bcIMC,
Fairmont Raffles Hotels International, General Electric
Capital and Choice Hotels International. He holds
an Honors MBA from Webster University (St. Louis,
Missouri), a BA Economics from Acadia University,
and serves as a Board Member of the Tourism
Industry Association of Canada.
HEATHER-ANNE IRWIN 1,4*
Adjunct Professor of Finance, Rotman School
of Management, University of Toronto
Extensive capital markets experience following roles
with TD Securities (Equity Capital Markets), Nesbitt
Burns (Investment Banking) and Citibank Canada
(Fixed Income). Ms. Irwin has an MBA from the
Schulich School of Business and an Honours Bachelor
of Science in Engineering from Queen’s University.
DANIEL LEWIS 1,3
Co-founder and Managing Partner
Orange Capital, LLC
Nearly 20 years of investment experience in shareholder
activist campaigns, event-driven equities, and
distressed debt investments worldwide. Mr. Lewis
is a former Director of Citigroup Global Special
Situations Group. Mr. Lewis holds a Bachelor of
Science from Cornell University.
JON E. LOVE 1,3
Founder and Managing Partner
KingSett Capital
Founded KingSett Capital, Canada’s leading private
equity real estate investment business co-investing
with institutional and high net worth clients. Former
President and Chief Executive Officer of Oxford
Properties Group. Mr. Love graduated with an
Honours Business Administration from the Ivey
School of Business.
ROBERT McFARLANE 1,2*
Corporate Director
Previously served as EVP and CFO of TELUS
Corporation and was named Canada’s Top CFO in
2007. He led a national team of over 800 professionals
with responsibility for conventional finance functions,
corporate strategy, M&A, ventures investment, risk
management and regulatory and governmental
affairs. Prior to Telus Corporation, Mr. McFarlane was
CFO of startup national wireless carrier Clearnet.
EDWARD PITONIAK 3
Corporate Director
Served as Managing Director of the REIT from
April 2014 to March 2015. Previously served as
President, CEO, and Board Trustee of CHIP REIT, a
leading hotel owner listed on the Toronto Stock
Exchange. In 2007 Mr. Pitoniak led CHIP REIT through
a sale to the British Columbia Investment Management
Corporation (“bcIMC”) in a going-private transaction
worth $1.2 billion.
ROBERT WOLF 1,2,3*,4
Corporate Director
Previously served as CFO of RioCan Real Estate
Investment Trust, Canada’s largest public REIT.
Mr. Wolf provides financial advisory services to
small and medium sized businesses. Mr. Wolf has a
Chartered Accountancy designation, an MBA from
the Schulich School of Business at York University
and a Bachelor of Commerce from McGill University.
Unit Price Information
TOTAL 2015 RETURN
$120
Distributions
Year ended
Declared
December 31, 2015Unit PricePer Unit
$110
High Low
1st Quarter
$6.56 $5.41 $
0.0999
2nd Quarter $
5.93 $
5.12 $
0.0999
3rd Quarter
$5.40 $4.49 $
0.0999
4th Quarter $
5.72 $
4.84 $
0.0999
$100
$90
$0.3996
$80
JAN
FEB
MAR
APR
MAY
JUN
JUL
AUG
SEP
OCT
NOV
DEC
CAUTIONARY AND FORWARD-LOOKING STATEMENTS
Certain financial measures discussed in this report, including GOP, FFO and AFFO, as well as the REIT’s Key Performance Indicators (KPIs), are additional and non-IFRS financial measures of earnings and
cash flow commonly used by industry analysts. Additional and non-IFRS financial measures do not have a standardized meaning and are unlikely to be comparable to similar financial measures used by other
organizations. Definitions and calculations for these measures can be found in the REIT’s Management’s Discussion and Analysis.
Statements contained in this report that are not historical facts are forward-looking statements. These forward-looking statements include statements with respect to assumptions and forecasts of future
results for InnVest. These forward-looking statements are based on current expectations of management and involve risks and uncertainties which could cause actual results to differ materially from those
expressed in the forward-looking statements. These factors are discussed in InnVest’s annual information form, which is available at www.sedar.com. Although management of InnVest believes that the
expectations with respect to such forward-looking statements are reasonable, such forward-looking statements are subject to known and unknown risks and uncertainties and, accordingly, there can be no
assurance that such expectations will prove to be correct. The forward-looking statements included in this report are made as of the date hereof and 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.
DESIGN: CRAIB DESIGN & COMMUNICATIONS WWW.CRAIB.COM PRINTED IN CANADA
■ InnVest REIT
■ S&P/TSX REIT Index
■ S&P/TSX Composite Index
CORPORATE
INFORMATION
TORONTO
CORPORATE
OFFICE
STOCK
EXCHANGE LISTING
REGISTRAR AND
TRANSFER AGENT
Royal Bank Plaza
200 Bay Street, Suite 2200
South Tower
Toronto, Ontario M5J 2J2
Toll-free: 1-877-209-3429
Email: [email protected]
Website: www.innvestreit.com
The Toronto Stock Exchange
Trading Symbol: INN.UN
Convertible Debentures:
INN.DB.E, INN.DB.F, INN.DB.G
Inquiries regarding change of
address, registered holdings,
transfers and duplicate
mailings should be directed
to the following:
Computershare Trust
Company of Canada
100 University Avenue, 8th Floor
Toronto, Ontario M5J 2Y1
Phone: 1-800-564-6253
Fax: 1-866-249-7775
AUDITORS
Deloitte LLP
Toronto, Ontario
DISTRIBUTION
REINVESTMENT PLAN
Unitholders may acquire units by
reinvesting cash distributions without
paying brokerage commissions or
administrative charges. For general
information concerning the Distribution
Reinvestment Plan or for a change
of address, please contact the transfer
agent and registrar.
InnVest REIT holds one of Canada’s largest hotel portfolios together with an
interest in Choice Hotels Canada Inc., one of the largest franchisors of hotels
in Canada. InnVest’s portfolio comprises 110 hotels across Canada representing
over 14,500 guest rooms operating under 18 internationally recognized brands.
RESERVATIONS
AUTOGRAPH COLLECTION HOTELS
1-844-324-1672
www.autographhotels.com
HILTON GARDEN INN
1-877-782-9444
www.hgi.com
MARRIOTT
1-888-236-2427
www.marriott.com
BEST WESTERN
1-800-780-7234
www.bestwestern.com
HILTON HOTELS
1-800-445-8667
www.hilton.com
QUALITY HOTEL, QUALITY SUITES
1-800-424-6423
www.choicehotels.ca
COMFORT INN
1-800-424-6423
www.choicehotels.com/comfort-inn
HOLIDAY INN
1-888-465-4329
www.holidayinn.com
RADISSON
1-888-201-1718
www.radisson.com
COURTYARD BY MARRIOTT
1-800-321-2211
www.courtyard.marriott.com
HOLIDAY INN EXPRESS
1-888-465-4329
www.hiexpress.com
SHERATON HOTELS & RESORTS
1-800-325-3535
www.starwoodhotels.com/sheraton
DELTA HOTELS
1-888-890-3222
www.deltahotels.com
HOMEWOOD SUITES HOTELS
1-800-225-5466
homewoodsuites3.hilton.com
STAYBRIDGE SUITES HOTELS
1-877-660-8550
www.staybridge.com
FAIRMONT HOTELS & RESORTS
1-800-257-7544
www.fairmont.com
HYATT REGENCY
1-888-591-1234
www.hyatt.com
TRAVELODGE
1-800-578-7878
www.travelodge.com
www.innvestreit.com
BUILDING
THE BEST
FINANCIAL REVIEW 2015
CONTENTS
01 Management’s Discussion and Analysis
➤01 Introduction
➤02 Our Business
➤03 Industry Trends
➤05 Key Performance Indicators
➤07 Our Strategy
➤11 2016 Strategic Objectives
➤11 Outlook
➤12 2015 Highlights
➤24 Changes in Financial Condition
➤25 Quarterly Results
➤26 Asset Profile
➤26 Liquidity and Capital Resources
➤30 Distributions to Unitholders
➤31 Unit Information
➤33 Related Party Transactions
➤34Non-IFRS Financial Measures and
Additional IFRS Financial Measures
➤37 Risks Factors
➤45 Critical Accounting Policies and Estimates
➤46 Future Accounting Changes
➤47 Controls and Procedures
➤48 Forward-Looking Statements
50 Management’s Responsibility for Financial Reporting
51 Independent Auditor’s Report
52 Consolidated Financial Statements
➤52 Consolidated Balance Sheets
➤ 53Consolidated Statements of Net Loss and
Comprehensive Loss
➤ 54Consolidated Statements of Changes in
Unitholders’ Equity (Deficit)
➤55 Consolidated Statements of Cash Flows
56 Notes to Consolidated Financial Statements
Management’s Discussion and Analysis
INTRODUCTION
InnVest Real Estate Investment Trust (“InnVest” or the “REIT”) is an unincorporated open-ended real estate investment trust
owning interests in a portfolio of hotels across Canada. The consolidated financial statements (“Financial Statements”) and
financial data included in this management’s discussion and analysis (“MD&A”) reflect the consolidated financial results of
InnVest. This MD&A is dated March 29, 2016.
The following MD&A is intended to assist readers in understanding InnVest, its history, business environment, strategies,
performance, outlook and risk factors and includes a discussion of the results of operations and financial condition of InnVest
for the year ended December 31, 2015, with a comparison to the results of operations and financial condition for the year
ended December 31, 2014. The MD&A should be read in conjunction with the Financial Statements of InnVest and the notes
thereto as at December 31, 2015 and 2014 and for the years ended December 31, 2015 and 2014.
Monetary data in tabular form and in the text, unless otherwise indicated, are in thousands of Canadian dollars, except for per
unit, average daily rate (“ADR”), and revenue per available room (“RevPAR”) amounts.
Certain measures in this MD&A do not have any standardized meaning as prescribed by International Financial Reporting
Standards (“IFRS”) and therefore are considered non-IFRS measures. Refer to Non-IFRS Financial Measures and Additional IFRS
Financial Measures for a discussion of those measures used by InnVest, including a reconciliation to IFRS financial measures.
Additional information relating to InnVest, including its Annual Information Form, can be accessed on the Canadian Securities
Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”) located at www.sedar.com and on its
website at www.innvestreit.com.
BUILDING THE BEST
INNVEST
1
MANAGEMENT’S DISCUSSION AND ANALYSIS
OUR BUSINESS
InnVest holds one of Canada’s largest hotel portfolios. InnVest’s portfolio
is well diversified across hotel accommodation categories, brands,
geography and customers.
HOTEL REAL ESTATE OWNER
At December 31, 2015, InnVest’s portfolio comprised 107 hotel
properties (13,730 rooms) as well as partial interests in two additional
hotels. The partial interests include a 20% interest in the Fairmont Royal
York Toronto (1,363 rooms), which InnVest acquired in February 2015
and a 33.3% interest in the Courtyard Marriott in Toronto (575 rooms)
acquired on August 26, 2015. InnVest accounts for its partial interests
in these two hotels using the equity method. On September 1, 2015,
InnVest acquired a 100% interest in the Hotel Saskatchewan, Regina
(“Hotel Saskatchewan”) and, since the beginning of 2015 the REIT has
sold four hotels. InnVest’s “same-hotel” metrics for the year ended
December 31, 2015 are based on the portfolio of 105 hotels owned over
the entire periods presented, excluding acquisitions and divestitures
completed during the periods presented.
InnVest’s hotel portfolio consists of hotels in two main service level
categories, Full-service and Limited service. Full-service hotels are
generally mid-scale, upscale or luxury hotels with a restaurant, lounge
facilities and meeting space and offer additional services, often
including bell service and room service. These hotels typically generate
significant food and beverage revenue in addition to room revenue.
At December 31, 2015, full-service hotels represent 46% of InnVest’s
total rooms and generate higher revenues per room, given higher
average daily rates charged and greater ancillary services sold. As a
result, full-service hotels in the portfolio accounted for approximately
65% of same-hotel revenues generated during the year ended
December 31, 2015 (2014 – 61%).
Limited-service hotels typically have rooms-only operations, (i.e. with
limited or no food and beverage service) with few additional services
and amenities. These hotels are often in the budget or economy
group and do not typically generate food and beverage revenue.
Limited-service hotels tend to have higher operating margins due
to the greater proportion of room revenue.
Revenues earned at our hotels consist of three broad categories, rooms,
food and beverage and other revenues. Approximately 77% of samehotel revenues (2014 – 78%) were generated from room revenues in
2015, with the remainder being generated from food and beverage
sales and other services including meeting space rental, parking, retail
operations and internet and telephone use.
The hotels’ primary operating costs include wages, food and
beverage costs, room supplies, utilities, repairs and maintenance,
management fees, brand related fees and sales and marketing
expenses. Other property level expenses include property taxes,
ground rent for leasehold interests and property insurance which are
relatively fixed and do not change in accordance with revenue levels.
2
InnVest’s hotels are operated by hotel management companies which
earn base and incentive fees related to the revenues and profitability
of each hotel. As at December 31, 2015, Westmont Hospitality Canada
Limited (“Westmont”), a division of one of the largest privately held
managers of hotels in the world, managed the majority of InnVest’s
hotels (96 hotels). InnVest also partners with other brand managers
including Marriott International Inc. (including Delta Hotels) (6 hotels),
Fairmont Hotels Inc. (4 hotels), Hilton Canada Co. (2 hotels) and Hyatt
Hotels of Canada Inc. (1 hotel), each an experienced hotel manager.
On February 1, 2016, InnVest acquired the Ottawa Marriott hotel,
which as part of the transaction, will continue to be managed by Larco
Hospitality. All but one hotel (Les Suites, Ottawa) are operated under
widely-recognized international brands. While independent hotels may
do well in certain strong market locations, we believe most travellers
prefer the consistent service, loyalty programs and quality associated
with recognized brands. InnVest’s asset managers work with the hotel
management companies to maximize hotel gross operating profit and
long-term hotel value by utilizing revenue maximization, cost control
and other strategies.
InnVest’s hotels are located across Canada and are typically near
major thoroughfares in urban and suburban areas, business centres,
government and manufacturing facilities, universities, airports and
tourist attractions. The hotels have a diverse customer base, including
business, leisure, domestic and foreign travellers, tours, associations
and corporate groups.
RETAIL AND RETIREMENT HOME PROPERTY
On December 1, 2015, as part of a hotel sale, InnVest divested all
assets within this line of business which included a retail complex
and a retirement home adjacent to the hotel. InnVest did not
consider these assets to be core to its business. For the year ended
December 31, 2015, this line of business contributed $0.8 million in
revenues (2014 – $0.7 million).
FRANCHISE BUSINESS
InnVest owns 50% of Choice Hotels Canada Inc. (“Choice Canada”),
which has franchise agreements with over 300 locations in Canada.
The remaining 50% interest is owned by Choice Hotels International Inc.
(“Choice International”), one of the largest hotel franchise companies
in the world. In 1993, Choice Canada was granted a 99-year license
to franchise all Choice hotel brands in Canada, including Comfort Inn,
Quality Suites and Quality Hotels. Choice Canada earns franchise
revenue by charging hotel owners a monthly royalty fee based on a
percentage of the revenue generated by the licensed properties and
by selling franchises. InnVest accounts for its interest in Choice Canada
under the equity method.
OUR BUSINESS (cont’d)
OUTER CIRCLE
Hotel Revenue
Westmont
Fairmont
Marriott (3)
Hyatt
Hilton
OUTER CIRCLE
INNER CIRCLE
2015
2014
54%
17%
11%
10%
8%
59%
20%
11%
1%
9%
HOTEL
GEOGRAPHIC
DIVERSIFICATION (1)(5)
HOTEL
SERVICE CATEGORY
HOTEL
MANAGEMENT
Hotel GOP
Westmont
Fairmont
Marriott (3)
Hyatt
Hilton
2015
2014
60%
15%
8%
11%
6%
63%
22%
8%
0%
7%
Hotel Revenue
Full Service
Limited
Service
OUTER CIRCLE
INNER CIRCLE
2015
2014
64%
61%
36%
39%
Hotel GOP
Full Service
Limited
Service
2015
2014
55%
53%
45%
47%
Hotel Revenue
Western
Ontario
Quebec
Atlantic
INNER CIRCLE
2015
2014
37%
34%
17%
12%
32%
37%
18%
13%
Hotel GOP
Western
Ontario
Quebec
Atlantic
2015
2014
38%
35%
14%
13%
35%
36%
15%
14%
(1) Based on portfolio as at December 31, 2015
(2) Included in the Western region are hotels in the province of Alberta, which are limited to the cities of Calgary and Edmonton. Primarily, as a result of the acquisition of
the Hyatt Regency Vancouver, the divestiture of non-strategic hotels since early 2014 and softening demand related to lower oil prices, the contribution from Alberta
hotels to room revenues
for the year ended December 31, 2015, has been reduced to 15.8% from 19.7% in 2014 and Hotel GOP has been reduced to 18.5% for year ended
INDUSTRY
TRENDS
December 31, 2015 from 26.7% in 2014. Additional information on the Western region has been provided under the “Room revenues” and “Hotel GOP” tables.
(3) Including Delta
The lodging industry’s performance is largely influenced by the
balance between supply and demand, which itself is impacted by the
performance of the economy given the largely discretionary nature
of travel spending. A net increase in demand (where new demand
outpaces new supply added to the market) should result in higher
occupancies. Given, normal supply and demand economics, higher
occupancies create demand compression, providing properties with
the opportunity to increase their ADR. Conversely, lower demand can
force hotels to aggressively pursue guests, which can lead to ADR
declines as hotels compete to attract customers. Current lodging
industry fundamentals in Canada remain favourable, driven by increased
demand as a result of the lower Canadian dollar and limited new supply.
DEMAND TRENDS The Canadian economy’s macroeconomic variables,
including employment, gross domestic product and corporate profits,
influence lodging demand. When an economy is strong, this leads to
increasing corporate profits and wages and encourages increased
spending on business (added sales initiatives to drive new business,
investments in corporate training and research and development)
and leisure travel (more likely to take vacations). During a period of
economic decline, discretionary leisure spending, such as travel, tends
to be reduced. Similarly, business travel volumes tend to be reduced
along with dampened corporate profits. Demand within the lodging
industry will typically lag an economic recovery until businesses and
consumers gain confidence in the sustainability of the recovery. We
believe one of the keys to success in the lodging industry is to own
a well-diversified portfolio made up of the best assets in each of
the markets where we are represented – assets that will outperform
in periods of growth and that are insulated from declines during
downturns. In addition, geographical diversification across all regions
of Canada provides diversification from regional economic variation.
(1)Based on portfolio as at December 31, 2015. Excludes the 20% interest in the Fairmont Royal York and 33.3% interest in the Courtyard Marriott, Toronto.
(2)The acquisition of the Hyatt Regency, Vancouver hotel in December 2014, the only InnVest hotel managed by Hyatt, resulted in the proportionate decrease in revenue and hotel
GOP contribution by other hotel managers. Additionally, two of the Fairmont hotels are based in Calgary and both are being impacted by the weakness in the energy sector.
(3)Including Delta branded hotels.
(4)The acquisition of the Hyatt Regency, Vancouver and Hotel Saskatchewan and the sale of 23 primarily limited service hotels since the beginning of 2014, has resulted in an
increase in the proportion of full-service hotels in InnVest’s portfolio.
(5)Included in the Western region are hotels in the province of Alberta, which are limited to the cities of Calgary and Edmonton. The contribution from Alberta hotels to room
revenues for the year ended December 31, 2015, has been reduced to 15.8% from 19.7% in 2014 and Hotel GOP has been reduced to 18.5% for year ended December 31, 2015
from 26.7% in 2014. This decrease is primarily, as a result of the acquisition of the Hyatt Regency Vancouver, the divestiture of non-strategic hotels since early 2014 and softening
demand related to lower oil prices. Additional information on the Western region has been provided under the “Room revenues” and “Hotel GOP” tables.
3
INDUSTRY TRENDS (cont’d)
Up until 2015, travel to Canada from the U.S. had been in decline since
the peak in 2002 owing, in part, to the Canadian currency’s considerable
growth relative to U.S. dollar over this period and increased border
security including passport requirements. We anticipate a lower relative
Canadian dollar (to the U.S. dollar) to positively impact our business.
A lower relative Canadian dollar encourages Canadians to travel within
the country while also making Canada a more economically desirable
alternative for foreigners, particularly U.S. citizens. Destination Canada
reported overnight U.S. travel to Canada grew 0.9% in 2014 and 8.0%
for the first eleven months of 2015. Overall overnight trips to Canada
from all countries were up 7.4%, also for the first eleven months of the
year. The Conference Board of Canada forecasts overnight U.S. travel
to Canada to have grown 7.0% in 2015, the strongest growth since
1998 and U.S. travel to Canada is projected to increase 3.3% in 2016.
Furthermore, the lower relative Canadian dollar is expected to positively
impact the manufacturing industry in Canada. Our broad, diversified
portfolio means that we can capture improving demand trends across
the country.
Demand for a specific hotel can be influenced by the physical quality
of the hotel, its location in relation to market specific drivers, its brand
affiliation as well as sales efforts at the local, regional and national levels.
InnVest’s hotels are typically located in convenient locations, are
well-maintained and affiliated with recognized brands, enabling them
to attract their relative share of demand to the market. While varying
by property, InnVest’s portfolio achieves an overall RevPAR index
penetration exceeding 100% (refer to Key Performance Indicators)
highlighting that its locations are attracting more than their relative
share of business. Capital expenditures undertaken over the past several
years, including the revitalization of the entire Comfort Inn portfolio,
are expected to increase our hotels’ competitive positions within their
respective markets. Different regions and types of demand vary in the
speed of their change. Given their longer booking lead-time, group
business booking trends tend to change at a much slower rate than
transient business travel, which can adapt to changing trends in a
timely manner. Similarly, regions can be influenced by different demand
generators. For example, demand in Alberta is highly dependent on
resource- and service-based industries which can see trends changing
relatively quickly, unlike manufacturing-based regions such as southern
Ontario which have a longer economic cycle.
4
While cautious on near-term trends in oil-based Alberta, we own
some of the best assets in the Calgary and Edmonton markets totalling
1,600 guest rooms (and no hotels outside these two cities) and believe
their competitive positioning will have a partially mitigating effect on
this market risk. In fact, we expect the decline in oil prices and the
resulting decrease in retail gasoline prices could be beneficial to
the balance of the portfolio as it reduces operating costs and could
encourage Canadians to travel more domestically, which may
mitigate the decline in performance from oil-dependent markets.
According to CBRE Hotels, the Canadian lodging industry saw a
0.7 point decline in overall occupancies in 2015 to 63.6%, against
ADR improvement of 4.5%, resulting in RevPAR growth of 3.5%.
RevPAR for InnVest’s hotel portfolio increased 8.8% over the prior year,
with a 1.5 point improvement in occupancy and ADR growth of 6.4%
over 2014. InnVest’s same-hotel RevPAR improved to 2.1%, with the
weak performance at the Alberta and St. John’s hotels muting the
overall performance of portfolio.
In light of current economic shifts, most notably the implications of global
oil prices, and notwithstanding the expected growth of U.S. travellers
to Canada in 2016, according to CBRE Hotels, the national hospitality
industry’s most recent forecasts have been revised downward, with
occupancy in 2016 expected to contract by approximately one percentage
point to 63%, a decrease from original forecasts of one percentage point
improvement. There is significant operating leverage within the industry,
as relatively small changes in occupancy can have a considerable impact
on the profitability of the industry. Furthermore, higher availability
compression (when more nights are full) provides properties with the
opportunity to increase their ADR.
SUPPLY TRENDS New supply is a significant risk for the lodging industry
given its immediate and direct impact on occupancies within an affected
market(s). One of the main drivers of hotel supply is rising demand and,
more importantly, rising ADR. Increasing ADR signals higher profits
thereby stimulating potential new construction. Mitigating this trend,
supply growth is also affected by higher development and construction
costs as well as the availability and cost of development financing.
Annual supply in the Canadian hotel industry has grown at historically
low levels over the last several years primarily due to limited financing
availability and the modest increases in demand. According to CBRE
Hotels, supply growth of 1.4% in 2015, is projected to be followed by
supply growth of approximately 1.2% in 2016. Supply growth in Western
Canada, primarily Alberta is expected to continue to outpace the rest of
Canada at 1.8%. Meanwhile Central and Atlantic Canada are projected to
see supply growth of 0.7% and 0.6%, respectively.
KEY PERFORMANCE INDICATORS
Key performance indicators play an important role in evaluating the
performance of the portfolio and achievement of InnVest’s objectives.
These key performance indicators are also used by management to
measure the REIT’s relative performance against its peers in the
lodging industry.
Funds from operations (FFO) and adjusted funds from operations
(AFFO): These indicators measure profitability and cash flow after
interest costs. AFFO also considers provision for normalized outlays
for the annual furniture, fixtures and equipment reserve (“FF&E
Reserve”). FFO and AFFO for the year ended December 31, 2015
improved over the prior year by $17.9 million and $18.2 million, to
$76.3 million and $62.5 million, respectively, primarily as a result of
higher GOP. FFO and AFFO are non-IFRS financial measures which do
not have a standardized meaning and are unlikely to be comparable
to similar financial measures used by other organizations. Refer to
Non-IFRS Financial Measures and Additional IFRS Financial Measures.
➤
Revenue per available room (RevPAR): RevPAR is defined as the
product of the average daily rate (ADR) achieved and the average
daily occupancy. RevPAR measures room revenues and is a commonly
used measure within the hotel industry to evaluate hotel operations.
➤
RevPAR changes driven by occupancy have different implications on
gross operating profit than changes driven by ADR. Higher occupancy
will generate incremental revenues such as food and beverage but will
also result in higher costs relating to providing such services. ADR
increases will not generate incremental revenue for ancillary services;
however, they also will not result in meaningful additional costs and,
therefore, ADR increases tend to have a greater positive impact
on profitability.
RevPAR for InnVest’s hotel portfolio increased 8.8% over the prior
year, driven by a 1.5 point improvement in occupancy and ADR
growth of 6.4% over 2014. For the year ended December 31, 2015,
InnVest’s same-hotel RevPAR improved 2.1% driven by growth in both
ADR and occupancies. This compared to the 3.3% growth realized by
the Canadian lodging industry over the same period according to
CBRE Hotels. InnVest’s portfolio same-hotel RevPAR growth was
constrained by the performance of the Alberta hotels which were
impacted in 2015 by the weakness in the energy section.
Hotel gross operating profit (Hotel GOP): Hotel operations
contribute all of InnVest’s overall gross operating profit. Defined
as hotel revenues less expenses related to hotel operations, Hotel
GOP measures property level results before debt service and
facilitates comparisons between InnVest and its hotel competitors.
➤
For the year ended December 31, 2015, Hotel GOP increased
12.6%, to $145.5 million primarily reflecting the contribution from
the recent acquisitions of the Hyatt Regency Vancouver and Hotel
Saskatchewan. Operating results from the partnership interests in
the Fairmont Royal York Hotel Toronto and the Courtyard Marriott
Toronto are included in Loss from Investment in Associate and
Joint Venture income, respectively.
Hotel GOP margin: Defined as Hotel GOP as a percentage of hotel
revenues, this key performance indicator measures an individual
hotel’s profitability efficiency in relation to top-line revenue. For
the year ended December 31, 2015, Hotel GOP margins improved
210 basis points to 26.3%, primarily highlighting the benefits of the
improved performance as a result of recent hotel renovations as
well as the reflecting the impact of the hotels acquired in the year.
➤
Liquidity: Management constantly monitors its cash flow, cash
balances and availability under credit facilities to ensure sufficient
liquidity to fund the operating and capital needs of the business
and pay its monthly cash distributions to Unitholders. Liquidity is
calculated as the sum of cash balances and availability under the
revolving credit facility and capital expenditure loan facility. At
December 31, 2015, InnVest had total liquidity of $92.3 million
(including cash, restricted cash and availability under its operating
line of credit, bridge loan and capital expenditure loan facility).
Pro forma the Ottawa Marriott acquisition in February, liquidity was
$35.8 million. Management believes that liquidity on hand, ongoing
operating cash flows, divestiture of non-core hotels and its ability to
access additional capital in the future will allow InnVest to meet all
known financial commitments.
➤
RevPAR Index or Penetration: RevPAR Index measures an individual
hotel’s performance compared to its local or regional competitive
set, as applicable. RevPAR Index accounts for market volatility by
measuring a hotel’s relative performance against its direct competitive
set. RevPAR Index is calculated by dividing an individual hotel’s
RevPAR by its market RevPAR. The RevPAR Index of a hotel reflects
a measurement of the property’s ability to obtain its relative share of
RevPAR for its specific market. An index above 100% indicates a hotel
is achieving more than its relative share of the market RevPAR, while
an index below 100% represents a property that is not attaining its
relative share of the market RevPAR. Where available (some markets
are too small to have a direct competitive set), InnVest’s average
portfolio RevPAR Index for 2015 was approximately 107.7%,
exceeding its relative share of the market. Notably, the limited
service hotels which were renovated in 2013 and 2014 saw their
RevPAR Index improve over seven percentage points to 103% in 2015.
➤
5
KEY PERFORMANCE INDICATORS (cont’d)
FINANCIAL AND OPERATING PERFORMANCE
Year Ended
20152014
Consolidated Performance:
Number of hotel properties – December 31
107 110
Number of rooms – December 3113,730 14,164
Occupancy (%) 65.0% 63.5%
ADR
$132.06 $124.14
RevPAR
$85.80 $78.86
Revenues
$553,388 $535,535
Gross operating profit (GOP)(1)
145,346 128,821
Gross operating margin
26.3% 24.1%
Net loss and comprehensive loss(13,541) (14,727)
Funds from operations (FFO)(1)
76,345 58,451
Adjusted funds from operations (AFFO)(1)62,525 44,351
50,751 39,222
Capital Expenditures
$
41,895 $76,932
Same Hotel Performance:
Number of hotel properties
105 105
Occupancy (%) 64.6% 64.1%
ADR
$127.71 $126.11
RevPAR
$82.48 $80.77
Room Revenues
$379,459 $371,691
GOP
$127,706 $122,325
GOP margin
26.7% 25.7%
Per diluted unit:
Net loss and comprehensive loss($0.107)($0.152)
FFO
$0.598 $0.574
AFFO $0.489 $0.441
Distributions per unit
$0.3996 $0.3996
FFO and AFFO – Weighted average units outstanding – basic126,370,774
96,598,100
FFO and AFFO – Weighted average units outstanding – diluted148,729,970
119,734,543
As at:
December 31, 2015December 31, 2014
Total assets
1,314,052
1,329,285
Gross mortgages and other debt
804,626
801,363
211,220
247,608
Weighted average term to maturity(2)
4.7 years
2.8 years
Weighted average interest rate(2) 5.0% 5.5%
Total debt to gross asset value (leverage ratio)(3)(4) 58.2% 62.0%
Total debt to total capitalization(3)(4)
59.7% 60.1%
Debt service coverage ratio (times)(3)(4) 1.9 x 1.6 x
Interest coverage ratio (times)(3) 2.6 x 2.0 x
Floating rate debt as % of total debt
12.5% 21.2%
Total potential liquidity(5)
92,308
121,292
Twelve-month trailing AFFO payout ratio
81.2% 88.4%
Twelve-month trailing AFFO payout ratio (including DRIP)68.8% 81.2%
(1)Refer to Non-IFRS Financial Measures and Additional IFRS Financial Measures.
(2)Mortgages & other debt.
(3)Calculated on a trailing 12 month basis.
(4)Total debt consists of mortgage and other debt and convertible debentures.
(5)Total potential liquidity is defined as cash on hand, the availability under credit facilities and restricted cash.
6
OUR STRATEGY
In 2015, we made significant progress on all three of our previously
outlined key strategic plan objectives: repositioning our property
portfolio, growing with key acquisitions and strengthening InnVest’s
financial position. These three objectives continue to remain a primary
focus for InnVest and the foundation of our value enhancing strategies.
Also, in 2015, we hired a new CEO and other key leadership roles and
completed the internalization of the asset management platform. Building
on this foundation, we continue to focus on growth with an objective of
developing the premier lodging portfolio in the Canadian industry.
With these in mind, the strategic initiatives for the company fall into
three primary areas:
1.Portfolio composition – invest and divest as appropriate to drive
superior returns on investment
2.Growth – leverage our internalized expertise to grow our business
3.Financial – continue to strengthen InnVest’s balance sheet and
financial position
INITIATIVE
2015 OBJECTIVES
1. Portfolio Composition:
One of the keys to success in the lodging
industry is to own a well-diversified
portfolio made up of high quality
competitive assets in each of the markets
where we are represented – hotels that will
outperform in periods of growth and that
are better insulated from declines during
economic downturns. Optimal property
attributes include high barrier to entry
city-centre markets as well as highly
competitive assets in secondary and tertiary
markets. We are focused on being
diversified in three primary categories:
Invest in high quality assets and
divest as appropriate to drive
superior return on investment.
ACCOMPLISHMENTS
1.Geography
2.Hotel Asset Class
3.Brand/Manager
Acquired a 100% interest in the Ottawa Marriott
Hotel located in downtown Ottawa, on February 1,
2016, which increased the REIT’s geographical
exposure to the Ottawa market. The acquisition was
financed with available cash on hand, capacity under
the existing operating line facility and a new
temporary loan facility to partially bridge long-term
mortgage financing.
➤Acquired a 100% interest in the Hotel Saskatchewan,
Regina, on September 1, 2015. This hotel was
rebranded to an Autograph Hotel by Marriott in
December 2015.
➤Acquired a 33.3% interest, with a strategic partner in
the Courtyard Marriott, Toronto on August 26, 2015.
The hotel is strategically located in central Toronto
and enhanced InnVest’s relationship with Marriott,
a well-known international brand and hotel manager.
➤Acquired a 20% interest in the Fairmont Royal York
Hotel (“Royal York Hotel”), which is unique, located
across from Union Station in downtown Toronto.
This acquisition was finalized in the first quarter of
2015, expanding our presence in this high barrier to
entry market.
➤The Hyatt Regency Vancouver was acquired in
December 2014 with 2015 being InnVest’s first full
year of ownership of this hotel. This hotel provided
InnVest with its first presence in the growing
downtown Vancouver market. This addition also
expanded InnVest’s brand and management
relationships and enhanced its geographical
diversification.
➤All acquisitions since 2014 are full-service hotels
located in high quality, highly visible and high barrier
to entry markets in central downtown locations.
➤
7
OUR STRATEGY (cont’d)
INITIATIVE
2015 OBJECTIVES
Part of optimizing our portfolio involves
investing in our assets to ensure they
are competitive within their markets. We
have made significant investments in our
properties in the past two years including
the renovation of InnVest’s 58 core Comfort
Inn hotels and continue to see meaningful
opportunities to improve the competitive
positioning of other hotels within the core
portfolio. Core hotels are characterized as
hotels with investment metrics that are
accretive to InnVest’s cost of capital, located
in stable or growing long-term markets,
achieve their fair market share or above and
show favourable potential growth prospects
through capital investment or repositioning.
ACCOMPLISHMENTS
Enhanced asset management drove 8.6% growth in
room revenues and 19.8% improvement in Hotel GOP
as compared to the prior year, for the core Comfort
Inn portfolio which was renovated in 2013 and 2014.
For 2015, management expected to
invest approximately $60 million in capital
improvements including the two recent
acquisitions finalized in the third quarter,
with the potential for some planned projects
to extend into the first quarter of 2016. The
following capital improvements were planned
for the fourth quarter of 2015 including:
➤
In 2015, invested $41.9 million in capital
improvements to hotels, including an additional
$5.9 million related to the REIT’s portion of the
capital expenditures at the Fairmont Royal York
and Courtyard Marriott Toronto. While some capital
projects were deferred, the balance of the further
planned work is scheduled to be completed in early
2016. The following major capital improvements
occurred in 2015:
The final phase of room renovations at the
Delta London Armouries.
➤
Commence guest room renovations at the
Delta Beausejour in Moncton following the
licence renewal for this hotel.
➤Completing the lobby and restaurant
renovations at the Hotel Saskatchewan.
➤Commencing the addition of a Fairmont
Gold room product and lounge at the
Fairmont Hotel Macdonald.
➤
Capital improvements are expected to be
funded by net proceeds from the remaining
hotel sales as well as available liquidity.
➤
➤
The extent and timing of InnVest’s future
capital investments depend on the
assessment of return expectations,
market considerations (timed to minimize
displacement where possible) and alternative
uses for our capital. The majority of capital
improvements take place in the first and
fourth quarters in order to minimize the
impact on business operations during the
popular summer months.
8
•Completed the final phase of room renovations
at the Fairmont Palliser and the Sheraton Suites
Eau Claire in Calgary;
•Completed the first phase of guestroom
renovations at the Delta London Armouries;
•Completed the lobby and meeting level
renovations at Moncton’s Delta Beausejour;
•900 of the 1,363 rooms at the Fairmont Royal
York were fully renovated;
•Half of the Hotel Saskatchewan, Regina’s guest
rooms, lobby and lounge were completely
renovated, with the hotel rebranded as part of the
Marriott’s Autograph collection in December 2015;
•Commenced renovations of the 575 guestrooms
and public spaces at the Courtyard Marriot
Toronto with completion expected in the first
half of 2016
INITIATIVE
2015 OBJECTIVES
ACCOMPLISHMENTS
We will also recycle capital from the
planned sale of non-core assets to improve
the overall quality and diversification of
the portfolio.
In 2015, a total of four hotels were sold, for
aggregate gross proceeds of $30.8 million (net
proceeds of $19.1 million). Since the beginning of
2014, InnVest has divested of 23 non-core assets
(the “hotel sales”), for gross proceeds
of $157.2 million (net aggregate proceeds
of $119.2 million).
➤
stet?
2. Growth:
Growing our business to
enchance cash flows
Capitalize on InnVest’s recently internalized
asset management platform.
Pursue acquisitions to grow and diversify the
portfolio and through acquisitions enhance
the balance sheet by reducing leverage.
Build on operating progress achieved by
leveraging our renovated properties and
experienced internalized asset management
platform to drive internal growth and
revenue by shifting business to highermargin segments and capturing greater
market share.
3. Financial:
Further strengthening the balance
sheet and financial position
Maintain a strong balance sheet with lower
leverage and staggered debt maturities in
order to minimize InnVest’s cost of capital
and provide adequate financial flexibility to
withstand market cycles.
Hired new a full-time CEO who commenced in
January 2015.
➤InnVest internalized its asset management function
late in 2014 enabling it to have direct and focused
oversight of the portfolio in 2015.
➤Hired key resources in 2015, including an EVP and
General Counsel and SVP Asset Management, to
enhance our internal team and capabilities.
➤
As highlighted in Portfolio Composition, the REIT has
achieved significant growth by acquiring interests in
four full-service hotels in the past fourteen months.
➤
Aided by InnVest’s active asset management
oversight, the Hyatt Regency Vancouver grew
its RevPAR Index by 1.3 points and ADR Index
7.5 points during 2015.
➤
Maintained liquidity of $89.4 million at December 31,
2015 as compared to $119.1 million at December 31,
2014. Pro forma the Ottawa Marriott acquisition in
February, liquidity was $35.8 million.
➤In July 2015, InnVest completed a successful
bought-deal equity offering, raising gross proceeds
of $48.3 million, including an over-allotment option,
to fund a portion of the acquisition of the Hotel
Saskatchewan, Regina and Courtyard Marriott
in Toronto.
➤Finalized a $23.3 million mortgage at 3.98% interest
for a 5-year term on the Hotel Saskatchewan.
➤Participated in the purchase of the Courtyard
Marriott in Toronto, funded 70% with equity and
the balance of approximately $10 million from its
operating line of credit, representing 30% of the
purchase price of its 33.3% interest in the hotel.
➤
9
INITIATIVE
2015 OBJECTIVES
Target leverage reduction below 60%
(debt to gross asset value).
➤
Reduce reliance on convertible debentures.
➤
Capitalize on the availability of debt at
current low interest rates to refinance
debt, lowering the weighted average
interest rate and extending our average
term to maturities.
➤
Lower distribution payout ratio to
improve financial flexibility by
increasing profitability.
➤
ACCOMPLISHMENTS
Improved debt to gross asset value leverage to
58.2% at December 31, 2015 from 62.0% at
December 31, 2014. Pro forma the Ottawa Marriott
acquisition in February, debt to gross asset value
leverage is 60.5%.
➤
Early redemption of our $36.4 million Series D
convertible debentures (“Series D Debentures”)
in March 2015, which resulted in approximately 90%
of the Series D debentures converting to equity.
➤
During 2015, mortgage loans on 23 hotel properties
totalling $216 million bearing a weighted average
interest rate of 5.2% were refinanced with new
mortgage loans totalling $195.1 million with a
weighted average interest rate of 3.7%. The new
mortgage loans were secured by nine hotel
properties. In addition, 12 hotels and $36 million of
capacity were added to the operating, acquisition
and capital expenditure credit line, bringing the total
availability to $100 million. The remaining two hotels
remain unencumbered pending disposition.
➤Placed a $80 million, 10-year mortgage on the Hyatt
Regency Vancouver at a fixed interest rate of 3.75%.
➤The weighted average interest rate has improved
to 5.0% at December 31, 2015 from 5.5% at
December 31, 2014.
➤The weighted average term to maturity has been
extended to 4.7 years at December 31, 2015 from
2.8 years in the prior year.
➤
Improved trailing payout ratio at December 31, 2015
to 81.2% compared to 88.4% at December 31, 2014,
reflecting the year over year improvement in
operating performance.
➤
2016 STRATEGIC OBJECTIVES
InnVest is committed to owning quality, accretive assets that deliver
income growth with lower volatility risk. Our objective is to build a
long-term diversified portfolio that can weather all market cycles.
We believe one of the keys to success in the lodging industry is to
own a well-diversified portfolio made up of the highly competitive
assets, in each of the markets where we are represented – assets that
will outperform in periods of growth and that are better insulated
from declines during inevitable economic downturns.
assets to acquire new assets or invest in capital improvements at
existing hotels. InnVest would also opportunistically consider investing
in joint ventures as this strategy was successfully implemented in 2015
with the acquisition of a 33.3% interest in the Courtyard Marriott in
Toronto and 20% of the Fairmont Royal York. The REIT would consider
similar opportunities in the future.
InnVest’s Trustees and management have developed the 2016 strategic
objectives for InnVest. The strategy is to create unitholder value through
the delivery of high quality income growth. This will be achieved
through a combination of factors.
Management is focused on growth including additional investments
in existing properties to ensure they are competitive within their
markets and optimize performance of the existing portfolio. For 2016,
management expects to invest $65 to $75 million in its existing portfolio.
Return on investment projects include the repositioning of certain
hotels located in key city centres and the addition of a Gold floor at
the Fairmont Macdonald, Edmonton. These investment are expected
to be funded by asset sales as well as available liquidity. The ultimate
extent and timing will depend on management’s assessment of return
expectations, market considerations and alternative uses for our capital.
From time to time, certain additional investments that meet internal
return on investment expectations may be considered. InnVest has
identified ten non-core hotels for sale and plans to divest of these hotels
which would generate aggregate net proceeds, after the repayment of
associated debt, of approximately $69 million. The net proceeds will be
used to reduce debt, including debt incurred to complete the Ottawa
Marriott acquisition, and for investment in our core portfolio.
HIGH-QUALITY PORTFOLIO OF HOTEL ASSETS
For 2016, management continues to focus on improving the overall
quality and diversification of the portfolio by geography, asset class
and brand. A high-quality hotel portfolio is a collection of assets that
are primarily located in high-barrier to entry city-centre markets, have
diversified sources of income and are located across Canada. These
types of assets are able to produce income that is relatively stable,
largely protected from supply growth and located in key markets which
are economically diversified, while having multiple demand drivers for
both business and leisure travelers. Assets which fit this profile tend
mainly to be hotels that are considered full-service/upscale assets
similar to the Ottawa Marriott hotel, Hotel Saskatchewan in Regina or
Toronto’s Fairmont Royal York. InnVest is focused on accumulating a
portfolio of high-quality hotel real estate which generates stable income
growth thereby improving the reliability of our monthly distributions and
prospects for continued growth and are better insulated from declines
during economic downturns. To achieve this objective, in the near-term,
we aim to increase the proportion of income earned by hotels in the
full-service/upscale segment of our portfolio and reduce the income
contribution from limited service hotels through selective disposition
of non-core hotels, As part of actively managing and improving its
portfolio mix, InnVest will continue to selectively grow the portfolio
through acquisitions in deep and stable markets with long-term
growth potential and at the same time identify non-core properties
for disposition. We plan to recycle capital from the sale of non-core
CAPITAL INVESTMENT IN EXISTING ASSETS
FINANCIAL STRENGTH
Management continues to target leverage reduction as a key priority
in order to minimize InnVest’s cost of capital and provide adequate
financial flexibility to withstand market cycles. As part of this effort,
management is targeting an annual leverage level below 55% over the
near-term and 50% over the longer term. InnVest remains committed
to maintaining this debt reduction level although debt leverage may
vary through the year based on seasonality and optimal permanent
financing. Additional objectives for 2016 include pursuing opportunities
to take advantage of the low interest rate environment, extend
debt maturities and will progress towards reduce reliance on
convertible debentures.
OUTLOOK
The Canadian economy is fragmented with current weakness in the oil
impacted markets (Alberta and Saskatchewan) being more than offset
by the improvement in manufacturing and service dominated markets of
central Canada and strength in British Columbia. The Conference Board
of Canada reported that the Canadian economy grew by 1.2% in 2015,
compared to an original forecast of 1.9% at the beginning of 2015. The
Canadian economy was affected by the weakness in the energy sector
as Alberta’s economy was and continues to be negatively impacted by
the decline in crude oil prices. Based on the Conference Board of
Canada outlook issued in February 2016, economic growth for Canada
is forecast to be 1.7% in 2016 and 2.3% in 2017. British Columbia,
Manitoba and Ontario are expected to exceed the national average
growth rate which would benefit our recent acquisitions in Vancouver,
Toronto and Ottawa and our newly renovated full-service hotel in
Winnipeg. Alberta and Newfoundland are expected to experience
negative growth in 2016 due to their exposure to the energy sector.
FINANCIAL REVIEW 2015 11
OUTLOOK (cont’d)
As previously forecasted by InnVest, operating results for our portfolio
are expected to be positively impacted from our high-quality newly
renovated hotels within the portfolio, lower gasoline prices and relatively
lower Canadian dollar and internalization of the asset management
function. The reduction in retail gasoline prices, and the related decline
in the Canadian dollar compared to the U.S. dollar, are expected to
help mitigate the negative impact of low crude oil prices on the overall
Canadian economy as more Canadians choose to travel domestically
and overnight visits from the U.S. to Canada increase.
Our broad, diversified portfolio of quality assets provides us with
appropriate risk mitigation in the face of regional disparities. Industry
fundamentals in the Canadian hotel business are expected to decline in
2016, with demand increases expected to be below supply. Based on
reports from CBRE Hotels, Canadian national RevPAR is forecasted to
grow 2.0% in 2016 compared to the 4.7% originally projected. The 2016
RevPAR forecasted growth is being driven by projected ADR growth of
2.7% offset by expected occupancy contraction of one percentage point.
The revised projection is largely influenced by the expected 2016
negative growth in Alberta, offsetting the strong growth anticipated
in British Columbia, Ontario and Quebec.
We continue to expect our renovated hotels to benefit from completed
capital investments, our newly acquired hotels to contribute to our
operating results, and our core portfolio to capitalize on positive
industry fundamentals. However, the continuing impact of lower crude
oil prices on the overall Canadian economy could constrain our growth
over the near term. We do expect the lower Canadian dollar to continue
to have a positive impact on our business by creating an incentive
for Canadians to travel domestically and attracting more U.S. visitors.
Prudent financial management and an improved balance sheet have
helped lower our cost of capital and have better positioned InnVest to
take advantage of potential further growth opportunities. We continue
to see significant redevelopment and return-on-investment projects
within our existing portfolio. We are also evaluating opportunities to
further expand, diversify and upgrade our portfolio through select
acquisitions and disposition of non-core hotels.
2015 HIGHLIGHTS
STRATEGIC HIGHLIGHTS
Announced the acquisition of the Marriott Ottawa hotel, which was
finalized in February 2016;
➤Acquired the Hotel Saskatchewan, Regina, and rebranded to the
Marriott Autograph collection;
➤Purchased a 33.3% interest in the Courtyard Marriott, Toronto;
➤Purchased a 20% interest in the Fairmont Royal York, Toronto;
➤Bought-deal equity offering under a base shelf prospectus of
approximately 9.7 million units, including an over-allotment option,
raising aggregate gross proceeds of $48.3 million;
➤Finalized a $23.3 million mortgage at 3.98% interest for a 5-year term
on the Hotel Saskatchewan;
➤Financed an $82.5 million 10-year mortgage on the Fairmont Palliser
Calgary at a fixed interest rate of 4.0%;
➤Finalized a $40 million 5-year mortgage on the Fairmont Macdonald
Edmonton at a fixed interest rate of 3.5%;
➤Secured a $36 million 7-year mortgage on four hotels at a fixed
interest rate of 3.95%;
➤Finalized a $35.4 million 5-year mortgage on the Delta Beausejour
Moncton and Delta Prince Edward Island Charlottetown at a fixed
interest rate of 3.65%;
➤Reduced leverage to 58.2% at December 31, 2015 from 62.0% at the
end of 2014; and
➤Extended the weighted average term to maturity on mortgage debt
to 4.7 years at December 31, 2015 from 2.8 years at December 31,
2014 and reduced the weighted average interest rate of mortgage
debt to 5.0% at December 31, 2015 from 5.5% at December 31, 2014.
➤
OPERATING HIGHLIGHTS
Hotel performance for the year ended December 31, 2015, was up
strongly driven by new hotel acquisitions, renovated properties,
and the sale of non-core properties, all resulting in a higher quality
portfolio of assets;
➤RevPAR growth of 8.8% for the year ended December 31, 2015.
Same-hotel RevPAR grew 2.1% over the prior year for the year ended
December 31, 2015 through a combination of both room rate and
occupancy gains;
➤GOP for the year increased $16.5 million or 12.8% and GOP margins
improved 220 basis points primarily due the strong performance of
the renovated Comfort Inn portfolio and the Hyatt Regency
Vancouver acquisition;
➤Same-hotel GOP increased 4.4% over the prior year. Same-hotel GOP
margin up 100 basis points to 26.7% for the year;
➤The portfolio of 58 Comfort Inns renovated in 2013 and 2014 grew
room revenue by 8.6% and Hotel GOP by 19.8% for the year;
➤FFO and AFFO up 30.6% and 41.0% respectively, compared to the
prior year due to contributions from recent acquisitions and improved
same-hotel performance;
➤FFO per unit of $0.598 up 4.2% over the prior year, and AFFO per unit
of $0.489 up 10.9% compared to the prior year. Per unit amounts in
2015 were impacted by the timing of the July 2015 equity offering,
as proceeds were not fully invested in acquisitions until the end of
August and beginning of September along with the 24.2% increase
in the weighted average number of units outstanding resulting from
the July 2015 and November 2014 equity offerings.
➤
2015 HIGHLIGHTS (cont’d)
The following discussion summarizes InnVest’s performance for the year ended December 31, 2015 as compared to 2014.
REVENUES
2015
Hotel
$552,588 Other real estate properties
800 2014Variance %
$534,811 3.3%
724 10.5%
Revenues
$553,388 $535,535 InnVest’s principal business is the ownership of hotel real estate (see
detailed discussion below). The revenue improvement for the year
ended December 31, 2015, compared to 2014 is primarily due to the
addition of the Hyatt Regency Vancouver which was acquired at the
end of 2014, strong performance of the renovated Comfort Inn
3.3%
portfolio and offset by revenue related to the hotels sold in 2014 and
2015. Revenues from other real estate properties relate to a retail
complex and retirement home adjacent to an existing hotel, which sold
in the fourth quarter of 2015.
Hotel Revenues
2015
2014Variance %
Room
$428,162 $417,475 Non-room
124,426 117,337 2.6%
6.0%
Hotel Revenues
$552,588 3.3%
$534,811 Hotel revenues consist primarily of revenue generated from room
occupancy. Non-room revenues include food and beverage services and
other miscellaneous revenue streams associated with hotel operations
such as meeting space rentals, parking, retail operations and telephone
use. The increase in hotel revenues for the year ended December 31,
2015, was primarily due the addition of the Hyatt Regency Vancouver in
December 2014 and strong performance of the renovated Comfort Inn
portfolio offset by revenue related to the hotels sold. Since the beginning
of 2014, 23 non-core hotels (3,034 rooms) have been sold (four in 2015
and 19 in 2014). Same-hotel revenue growth was 1.0% for the year
ended December 31, 2015.
Same-hotel room revenues for the year ended December 31, 2015
improved $7.8 million or 2.1%. Notably, room revenue growth achieved
from the Comfort Inn assets which were renovated in 2013 and 2014
grew 8.6% as compared to the prior year period. The hotels divested
since the beginning of 2014 contributed to overall room revenue
declines of $35.2 million compared to the prior year while the
acquisition of the Hyatt Regency Vancouver and Hotel Saskatchewan
contributed $38.1 million in incremental room revenues for the year.
ROOM REVENUES
RevPAR for the year ended December 31, 2015 improved 8.8%.
RevPAR growth in 2015 includes the impact of the acquisition of the
Hyatt Regency Vancouver and Hotel Saskatchewan Regina in the past
12 months and revenue displacement caused by renovations across
the portfolio in 2014. This was somewhat mitigated by ongoing
disruption caused by renovations at select hotels in 2015 or hotels still
recovering from renovations undertaken in 2014. Same-hotel RevPAR
for the year improved 2.1% with growth in occupancy and average daily
rates as highlighted in the table below.
Total room revenues for the year ended December 31, 2015 increased
$10.7 million or 2.6%, owing largely to the contribution of room revenues
from the Hyatt Regency Vancouver acquired in December 2014 and
improved operating results from the renovated Comfort Inn portfolio.
Room revenues for the year ended December 31, 2015 are net of
$8.7 million (2014 – $8.7 million) of costs associated with third-party
loyalty programs.
2015Variance to
2015Variance to
2015Variance to
Same-Hotel Portfolio
Occupancy2014 ADR2014
RevPAR2014
Ontario 66.6%
Quebec 66.2%
Atlantic
58.5%
Western 63.2%
1.1 pts$116.23 2.6 pts$122.61 (1.4 pts)$ 124.45 (1.3 pts)$160.67 3.4% $77.35 2.1% $81.18 4.8%$ 72.78 (3.3%)$101.48 5.1%
6.3%
2.4%
(5.3%)
Total
64.6% 0.5 pts$127.71 1.3% $82.48 2.1%
Note: Gross hotel revenues on a same-hotel basis (105 hotels), excluding hotels which were sold or acquired during the periods presented.
Room Revenue
Year Ended December 31, 2015
Variance to Prior Year Variance to Prior Year
Room Revenue by Region
Number of HotelsNumber of Rooms Room Revenue $
$
%
Core Portfolio(1):
Ontario
42 4,611 $
129,942 $ 5,761 4.6%
Quebec
21 2,327 68,829 4,495 7.0%
Atlantic
16 1,786 47,783 1,150 2.5%
Western
16 2,670 96,539 (5,227) (5.1%)
Total Core Portfolio
95 11,394 $
343,093 $ 6,179 Non-Core Portfolio
10 1,468 36,366 1,589 1.8%
4.6%
Same-Hotel Portfolio 105 12,862 $
379,459 $ 7,768 Acquisitions
2 868 39,283 38,117 2.1%
nm
Total Current Portfolio
107 13,730 $
418,742 $45,885 12.3%
2015 dispositions
4 651 9,420 (5,605)
nm
2014 dispositions
19 2,383 – (29,593)
nm
Total Portfolio
16,764 $
428,162 $10,687 2.6%
“nm” – not meaningful
(1)Core Portfolio hotels are defined as hotels with investment metrics that are accretive to InnVest’s cost of capital, located in stable or growing long-term markets, achieve their fair
market share or above and show favourable potential growth prospects through capital investment or repositioning.
Total same-hotel portfolio analysis for the year ended December 31, 2015:
Experienced growth across all regions of Ontario driven by the
renovations to the Comfort Inn portfolio completed in prior years.
The metropolitan markets of Toronto and Ottawa performed
exceptionally well.
➤Quebec region saw significant year-over-year improvements primarily
due to renovations across the Comfort Inn portfolio and increased
demand particularly in Greater Montreal.
➤
Performance across the Atlantic region was impacted by the declining
oil market in St. John’s, Newfoundland, which offset growth following
completed renovations at the Delta Prince Edward Island and the
Comfort Inn Portfolio. Additionally, displacement from renovations
at the Delta Beausejour throughout the year hampered annual
performance in the region.
➤The Western region same hotel portfolio revenue decreased
compared to prior year as strong performance at the Delta Winnipeg
was offset by softening demand in Alberta and Saskatchewan due
to the declining oil market. The following table provides additional
information regarding the performance of the Western region
by province.
➤Growth in room revenue for the non-core portfolio, includes the
results of the Holiday Inn London under renovation in 2014. As a
result, 2014 room revenue was impacted by revenue displacement.
➤
Room Revenue
Western region by province
Number of HotelsNumber of Rooms Room Revenue $
Variance to
Prior Year $
Variance to
Prior Year %
Alberta
7 1,600 67,666 (7,327) (9.8%)
Manitoba
4 634 18,615 2,450 15.2%
British Columbia
–
–
–
–
nm
Saskatchewan
5 436 10,258 (350) (3.3%)
West same-hotel basis
16 2,670 96,539 (5,227) (5.1%)
Acquisitions:
British Columbia
1 644 37,124 35,958 nm
Saskatchewan
1 224 2,159 2,159 nm
Total Acquisitions
Western Hotels and Acquisitions
2 nm
18 3,538 135,822 32,890 32.0%
The growth in room revenue for the non-core portfolio includes
the results of a hotel aided by revenue displacement caused by
renovations in 2014.
➤
Following the extensive renovation and repositioning of our 58 Comfort
Inns in 2013 and 2014, these hotels delivered growth rates which exceed
results achieved at hotels which have not been renovated. Based on our
experience, the typical period for these hotels to fully ramp up from the
renovation can be a year or more, depending on the market. In 2015,
the renovated hotels continued to shift their business mix to higher
rated segments and achieved higher revenue growth rates.
In addition, a number of large projects at our full-service hotels were
completed in 2014 and 2015, with others underway at year end that
will be completed in the first of half of 2016 including the following:
Half of the Hotel Saskatchewan, Regina’s guest rooms, lobby and
lounge were renovated, with the hotel rebranded as part of Marriott’s
Autograph collection in December 2015.
➤Commenced renovations of the 575 guestrooms and public spaces
at the Courtyard Marriott Toronto with completion expected in the
first half of 2016.
➤Completed the meeting room level renovations at Moncton’s
Delta Beausejour in the third quarter of 2015.
➤Room renovations were completed at the Toronto Fairmont
Royal York with over 900 of the 1,363 rooms renovated.
➤Completed 206 guest rooms renovations at the Delta London
Armouries in the first quarter of 2015, with the remaining rooms and
public areas to be completed in the first half of 2016.
➤Phased renovations were underway through 2014 and 2015 at two
hotels in Calgary (the Fairmont Palliser and the Sheraton Calgary
Eau Claire) and were completed in the second quarter of 2015.
➤
868 39,283 38,117 The following table summarizes room revenue across our Portfolio
and serves to highlight the displacement experienced while renovation
work is underway, as well as the growth achieved-to-date following
the completion of renovations. Moreover, the table highlights that
revenues from renovated Comfort Inn hotels generally take a few
quarters to ramp-up. Notably, the 27 Comfort Inn hotels which
completed renovations in 2014 increased revenue by 14.0% for the
year ended December 31, 2015. We continued to see meaningful
growth from hotels renovated for more than one year as highlighted
by the annual room revenue growth of 4.8% from the Comfort Inn
hotels renovated in 2013. These growth rates exceed results achieved
from hotels which have not been renovated, highlighting the return
opportunities provided by internal investments within the existing
portfolio. When compared to 2012, the year prior to the initiation of
the renovations, RevPAR and room revenue for the 58 renovated hotels
have improved by 9.5% and 7.9%, respectively.
The Full-service Core hotels under renovation in 2014 and 2015, are
the REIT’s two full-service hotels in Calgary, The Fairmont Palliser and
Sheraton Eau Claire. Both hotels are being negatively impacted by the
weakness in Alberta as a result of the energy sector. The Full-service
Core hotel under renovation in 2015, relates to a hotel that experienced
revenue displacement caused by renovations in 2015.
Room revenue for Other Core hotels was reflective of oil-related
declines, offset by improved performance in Quebec City owing to
higher group demand as compared to the prior year.
Room Revenues
Number of Hotels
Number of Rooms
Room Revenue $
Variance to
Prior Year $
Variance to
Prior Year %
Core Comfort Inn Portfolio(1)
Renovated in 2013
31 2,503 $59,467 $ 2,698 4.8%
Q1 2014 renovations
4 295 8,351 658 8.6%
Q2 2014 renovations
11 68616,979 2,164 14.6%
Q3 2014 renovations
1 146 2,324 436 23.1%
Q4 2014 renovations
11 84218,562 2,430 15.1%
Renovated in 2014
27 1,96946,216 5,688 14.0%
Renovated Core Comfort Portfolio
58 4,472
105,683 8,386 8.6%
Full service Core hotels under renovations:
2014 renovations(1)
2 60420,231 2,433 13.7%
2014 & 2015 renovations(1)(3)
2 72841,363 (5,518) (11.8%)
2015 renovations(1)(4)
1 220 5,365 (975) (15.4%)
Other Core hotels(5)
32 5,370
170,451 1,853 1.1%
Total Core Portfolio(2)
95 11,394 $
343,093 $ 6,179 Non-Core Portfolio 10 1,468 36,366 1,589
1.8%
4.6%
Same-Hotel Portfolio
105 12,862 $
379,459 $ 7,768 Acquisitions 2 868 39,283 38,117
2.1%
nm
107 13,730 $
418,742 $45,885 12.3%
2015 dispositions
4 651 9,420 (5,605)
nm
2014 dispositions
19 2,383 – (29,593)
nm
Total Portfolio 130 16,764 $
428,162 $10,687 2.6%
(1)
Based on the period in which substantial completion of renovations were completed.
(2)Excludes one hotel acquired during 2014, one hotel acquired in 2015 and four sold hotels in 2015 and ten non-core hotels which have been identified for divestiture.
(3)The full-service Core hotels under renovation in 2014 and 2015, are the REIT’s two full-service hotels in Calgary, The Fairmont Palliser and Sheraton Eau Claire. Both hotels are
being negatively impacted by the weakness in Alberta as a result of the energy sector.
(4)The full-service Core hotel under renovation in 2015, relates to the Delta London Armouries that was impacted by revenue displacement caused by renovations in 2015.
(5)Room revenue for Other Core hotels was reflective of oil price-sensitive markets related declines, offset by improved performance in Quebec City owing to higher group demand
as compared to the prior year.
NON-ROOM REVENUES
The sale of food and beverage represented over 80% of the non-room
revenue earned in 2015 and 2014. Non-room revenues for the year
ended December 31, 2015 increased $7.1 million or 6.0% over the same
period in the prior year. The acquisition of the Hyatt Regency Vancouver
in December 2014 and Hotel Saskatchewan in 2015, contributed to
improved non-room revenues of $19.5 million. The hotels divested since
2014 partially offset this contribution. Same-hotel non-room revenues
for the year ended December 31, 2015 decreased $4.8 million or 4.6%
largely due to decline in demand at the Fairmont Palliser and Sheraton
Eau Claire, as both hotels located in Calgary are being impacted by the
weakness in the energy sector.
HOTEL AND OTHER REAL ESTATE PROPERTIES EXPENSE
2015
2014Variance %
Hotel
$407,063 $405,604 0.4%
Other real estate properties
979 1,110 (11.8%)
Hotel and other real estate properties
$408,042 16 INNVEST REAL ESTATE INVESTMENT TRUST
$406,714 0.3%
InnVest, through its asset management function, continually works
with its hotel operations managers to focus on managing all costs to
maximize overall profitability while achieving desired service levels
offered to guests. Management’s focus is on limiting incremental costs
associated with improved occupancy and/or adjusting costs in periods
of declining occupancy in order to enable margin expansion. Many
property level expenses, including property taxes, rent and insurance
are relatively fixed and do not change in accordance with overall
demand levels.
Hotel expenses increased $1.5 million or 0.4% for the year which
compares favourably to the 3.3% growth in revenue. For the year ended
December 31, 2015, higher hotel expenses were related to the recent
hotel acquisitions offset by the elimination of costs associated with
assets sold. Same-hotel expenses for the year decreased by $2.4 million
or 0.7% compared to the prior year.
GROSS OPERATING PROFIT (“GOP”)
2015
2014Variance %
Hotel
$145,525 $129,207 12.6%
(179) (386) 53.6%
$145,346 Overall GOP improved $16.5 million or 12.8% compared to the prior year,
primarily as a result of the addition of the Hyatt Regency Vancouver
hotel, and the relatively lower yielding nature of assets sold as compared
to the existing portfolio as well as the operating leverage derived from
the year-over-year improvement in occupancy and room rates achieved.
Hotel GOP
The hotel industry has a high level of fixed costs with incremental
revenue gains requiring marginal increases in costs. As a result,
revenue growth achieved beyond inflation can contribute to substantial
operating leverage for the portfolio. Notably, while occupancy growth
contributes to improved profitability, higher margins are achieved
through increases in ADR. Conversely, in periods of marginal (below
inflation) or declining revenues, decreases to expenses are limited,
resulting in reduced profitability. This highlights the positive operating
leverage inherent in the hotel business when revenue increases outpace
inflationary increases in costs and there is a relatively low level of
variable costs associated with increased business volumes and higher
room rates achieved.
For the year ended December 31, 2015, Hotel GOP improved
$16.3 million, or 12.6%, as compared to revenue increases of 3.3% for
the same period. Same-hotel GOP growth for the year was $5.4 million
or 4.4%. While the addition of the Hyatt Regency Vancouver and Hotel
Saskatchewan acquired since December 2014 contributed $16.6 million
to GOP for the year, it was partially offset by reduced contribution to
Hotel GOP of $5.6 million from the hotels sold.
$128,821 12.8%
HOTEL GOP MARGINS
26%
25%
24%
23%
22%
21%
20%
2011
2012
2013
2014
2015
Hotel GOP margins improved 210 basis points to 26.3% compared to
the prior year, largely benefitting from the addition of the Hyatt Regency
Vancouver and higher overall portfolio quality as a result of recent
capital improvements. Same-hotel GOP margin of 2015, improved
100 basis points to 26.7% compared to the prior year. The Ontario hotels
contributed same-hotel GOP growth benefitting from renovations
completed at a number of hotels, particularly the Comfort Inns.
The growth in GOP of 12.7% for the non-core portfolio below is primarily
driven by the results of the Holiday Inn London which experienced
revenue displacement in 2014 as a result of room renovations.
Hotel GOP
Number of Hotels
Number of Rooms
Hotel GOP
Variance to
Prior Year $
Variance to
Prior Year %
Core Portfolio:
Ontario
42 4,611 $45,666 $ 4,874 Quebec
21 2,327 20,070 2,708 Atlantic
16 1,786 18,118 1,731 Western
16 2,670 38,017 (4,590)
11.9%
15.6%
10.6%
(10.8%)
Total Core Portfolio
95 11,394 $
121,871 $ 4,723 4.0%
Non-Core Portfolio
10 1,468 5,835 658 12.7%
Same-Hotel Portfolio 105 12,862 $
127,706 $ 5,381 Acquisitions
2 868 16,648 16,585 4.4%
nm
107 13,730 $
144,354 $21,966 17.9%
2015 dispositions
4 651 1,175 (368)
nm
2014 dispositions 19 2,383 (4) (5,280)
nm
$
145,525 $16,318 12.6%
The following table provides additional information regarding the performance of the Western region by province. The 2015 performance of the
hotels in Alberta and Saskatchewan was impacted by weakness in the energy markets.
Hotel GOP
Western Region by Province Number of HotelsNumber of Rooms
2015
Variance to
Prior Year $
Variance to
Prior Year %
Alberta
7 1,600 $26,925 $(5,545) (17.1%)
Manitoba
4 634 6,927 1,511 27.9%
British Columbia
– – – – nm
Saskatchewan
5 436 4,165 (556) (11.8%)
West same-hotel basis
16 2,670 $38,017 $(4,590) (10.8%)
Acquisitions:
British Columbia
1 644 16,412 16,349 nm
Saskatchewan
1 224 236 236 nm
Total Acquisitions
2 868 $16,648 $16,585 nm
Western Hotels and Acquisitions
18 3,538 $54,665 $11,995 28.1%
The following table summarizes hotel gross operating profits across
our Core Portfolio and serves to highlight the profitability impact
of renovations sometimes take up to a year to stabilize after renovations.
58 Comfort Inn hotels have been renovated since 2013 (31 in 2013;
27 in 2014). In aggregate, the renovated Comfort Inn portfolio
experienced Hotel GOP growth of 19.8% in 2015 reflecting the significant
operating leverage of strong revenue growth. This growth rate exceeds
results achieved in our remaining portfolio, highlighting the return
opportunities provided by internal investments within the existing
portfolio. When compared to 2012, the year prior to the initiation of
the renovations, Hotel GOP for the 58 renovated hotels has improved
by $4.1 million or 10.6%.
Hotel GOP
Number of Hotels
Number of Rooms
Hotel GOP
Variance to
Prior Year $
Variance to
Prior Year %
Core Comfort Inn Portfolio:(1)
Renovated in 2013
31 2,503 $24,907 $ 2,329 Q1 2014 renovations
4 295 3,696 598
Q2 2014 renovations
11 686 6,570 1,815
Q3 2014 renovations
1 146 768 327
Q4 2014 renovations
11 842 6,218 1,892
10.3%
19.3%
38.2%
74.1%
43.7%
Renovated in 2014
27 1,96917,252 4,632 36.7%
Renovated Core Comfort Portfolio
58 4,47242,159 6,961 19.8%
Full service Core hotels under renovations:
2014 renovations(1)
2 604 7,179 1,840 34.5%
2014 and 2015 renovations(1)(3)
2 72816,472 (4,413) (21.1%)
2015 renovations(1)(4)
1 220 700 (562) (44.5%)
Other Core hotels(5)
32 5,37055,361 897 1.6%
Total Core Portfolio(2)
95 11,394 $
121,871 $ 4,723 4.0%
(1)Based on the period in which substantial completion of renovations were completed.
(2)Excludes one hotel acquired during 2014, one hotel acquired in 2015 and four sold hotels in 2015 and ten non-core hotels which have been identified for divestiture.
(3)The full-service Core hotels under renovation in 2014 and 2015, are the REIT’s two full-service hotels in Calgary, The Fairmont Palliser and Sheraton Eau Claire. Both hotels are
being negatively impacted by the weakness in Alberta as a result of the energy sector.
(4)The full-service Core hotel under renovation in 2015, relates to the Delta London Armouries that was impacted by revenue displacement caused by renovations in 2015.
(5)Room revenue for Other Core hotels was reflective of oil price-sensitive markets related declines, offset by improved performance in Quebec City owing to higher group demand
as compared to the prior year.
OTHER EXPENSES AND (INCOME), NET
2015
Year Ended Decemebr 31,
2014Variance %
Corporate and administrative(1)
$11,927 $12,033 (0.9%)
Interest expense
Mortgages and other debt
49,229 47,605 3.4%
Convertible debentures16,188 21,441 (24.5%)
Joint venture income(2)
(5,124) (4,998) 2.5%
Loss from investment in associate(3) 1,076 –
nm
Other expense and (income), net 172 (26,938)
nm
Writedown (reversal of writedown) of hotel and other real estate properties, net 2,843 3,754 nm
Depreciation and amortization87,994 81,149 8.4%
Unrealized (gain) loss on liabilities presented at fair value (5,418) 9,502 nm
Other expenses
$158,887 $
143,548 10.7%
(1)Prior year included $3.6 million in non-recurring costs relating to a settlement.
(2) Joint venture income includes income from the REIT’s 50% interest in Choice Hotels Canada Inc. and 33.3% interest in the Courtyard Marriott in Toronto.
(3)Loss from investment in associate relates to the REIT’s 20% interest in the Fairmont Royal York.
CORPORATE AND ADMINISTRATIVE
LOSS FROM INVESTMENT IN ASSOCIATE
Corporate and administrative costs reflect the addition of the full time
executive function at the REIT, as well as a non-cash charge relating
to the unit based inducement compensation awarded to the newly
appointed Chief Executive Officer (refer to Unit Information). Corporate
and administrative expenses also reflect incremental costs associated
with the internalization of InnVest’s asset management platform in late
2014 and other corporate functions in 2015. Effective December 1, 2014,
external asset management fees, previously included in ‘Hotel Operating
expenses’, were eliminated and resources are now allocated to corporate
and administrative expenses. Hotel operating expenses in 2014 include
$1.4 million in external asset management fees. The expenses in 2014
also include $3.6 million in non-recurring settlement costs.
In 2015, InnVest recognized a non-cash loss of $1.1 million from its
20% proportionate share of net earnings (after interest and depreciation)
from its recently acquired ownership interest in the Royal York Hotel.
InnVest exercises significant influence over its investment and accounts
for its investment using the equity method. Operating performance of
this hotel was negatively affected from the significant renovation activity
underway for much of the year.
INTEREST EXPENSE
InnVest has benefitted from a reduction in its weighted average
cost of debt since the beginning of 2014 which was partially offset
by debt extinguishment costs of $1.8 million incurred in 2015 related
to mortgage debt repayment. Interest expenses in 2015 include new
mortgages associated with the Hyatt Regency Vancouver acquisition
in December 2014, the Hotel Saskatchewan acquisition in September
2015 and the funding of the KingSett loan in April 2014 (refer to
Related Party Transactions). Convertible debenture interest savings
reflect the redemption of InnVest’s $70 million Series C debentures in
early June 2014, the purchase for cancellation of $28.8 million of its
Series G debentures on July 31, 2014, and the early redemption of
the Series D Debentures on March 3, 2015 (refer to Unit Information).
JOINT VENTURE INCOME
Joint venture income reflects InnVest’s 50% interest in the net earnings
of Choice Canada and the acquisition of 33.3% of the Courtyard Marriott
in Toronto. InnVest’s joint venture income generated $5.1 million in 2015
(2014 – $5.0).
OTHER EXPENSES AND (INCOME), NET
Other expenses and (income), net of $0.2 million for 2015, includes
other income related to a non-recurring termination receipt of
$1.1 million, from the sale of hotels jointly licensed between InnVest
and Choice Canada, refunds of $0.8 million received from the Quebec
Occupational Health and Safety Commission relating to sold hotels and
a net gain of $0.6 million relating to four hotels sold in 2015. Other
income is offset by a contingency provision and $1.7 million in
acquisition costs for the Hotel Saskatchewan. Other expenses and
(income) in the prior year, comprise primarily of gains on sale of assets
and non-cash gains on the early settlement and amendments to the
Series D and G debentures and acquisition costs related to the Hyatt
Regency Vancouver.
WRITEDOWN (REVERSAL OF WRITEDOWN) OF HOTEL
AND OTHER REAL ESTATE PROPERTIES, NET
In 2015, results include a $2.8 million non-cash impairment charge
relating to three hotels (2014 – net impairment of $3.8 million related
to five properties).
UNREALIZED (GAIN) LOSS ON LIABILITIES PRESENTED
AT FAIR VALUE
InnVest accounts for various unit-based instruments as financial
liabilities. These instruments are re-measured at their fair value at
each reporting period resulting in non-cash gains or losses based
on the change in InnVest’s unit price over the periods presented and
their impact on convertible debenture holders’ conversion option
feature. In 2015, InnVest recognized a fair value gain of $5.4 million
(2014 – loss of $9.5 million).
INCOME TAXES
InnVest did not incur income taxes during the years ended December 31,
2015 and 2014. For distributions paid in 2015, 67% will not be taxable
to Canadian resident unitholders through a return on capital (2014 – 8%).
The increase in the non-taxable portion can be attributed to a decrease
in the number of properties sold (four hotels in 2015) compared to the
prior year (19 hotels in 2014).
NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)
For the year ended December 31, 2015, InnVest incurred a net loss
of $13.5 million ($0.107 per unit diluted) compared to a net loss of
$14.7 million in the prior year ($0.152 per unit diluted). While hotel
GOP for 2015 improved $16.3 million or 12.6%, prior year net income
included $11.6 million in gains on the redemption and amendment of
convertible debentures. Refer to FFO for a comparison of profitability
excluding non-recurring costs and non-cash items. Per unit amounts
in 2015 were impacted by the 24.2% increase in the weighted average
number of units outstanding related to the November 2014 and
July 2015 equity offerings.
FUNDS FROM OPERATIONS (FFO)
For the year ended December 31, 2015, InnVest generated FFO of
$76.3 million ($0.598 per unit diluted) compared to FFO of $58.5 million
($0.574 per unit diluted) for the same period in 2014. The $17.9 million
improvement primarily reflects higher Hotel GOP which was partially
offset by $11.6 million of debt extinguishment costs in 2015. Per unit
amounts in 2015 were impacted by the 24.2% increase in the weighted
average number of units outstanding related to the November 2014
and July 2015 equity offerings and the fact that the proceeds from the
July 2015 equity offering were not fully invested during the year. Refer
to Non-IFRS Financial Measures and Additional IFRS Financial Measures
for a reconciliation of net loss and comprehensive loss to FFO.
ADJUSTED FUNDS FROM OPERATIONS (AFFO)
For the year ended December 31, 2015, InnVest generated AFFO
of $62.5 million ($0.489 per unit fully diluted) compared to AFFO of
$44.4 million for the same period in 2014 ($0.441 per unit fully diluted).
The $18.2 million improvement reflects the higher FFO generated.
Per unit amounts in 2015 were impacted by the 24.2% increase in the
weighted average number of units outstanding related to the November
2014 and July 2015 equity offering, and the fact that the proceeds from
the July 2015 equity offering were not fully invested during the year.
Refer to Non-IFRS Financial Measures and Additional IFRS Financial
Measures for a reconciliation of FFO to AFFO. For the year ended
December 31, 2015 AFFO per unit fully diluted improved by $0.048 or
10.9%, whereas FFO per unit fully diluted improved by $0.024 or 4.2%.
Distributions declared in 2015 totalled $50.8 million, or $0.3996 per
unit (2014 – $39.2 million or $0.3996 per unit). The increase in total
distributions paid over the prior year reflects the incremental increase
in the number of units outstanding following the issuance of units in
November 2014 and July 2015 to partially fund the acquisition of two
hotels, investment in a joint venture and investment in associate, the
DRIP as well as the conversion of Series D Debentures in the first quarter
of 2015. Refer to Unit Information.
PROPORTIONATE SHARE OF INVESTMENT IN JOINT VENTURES AND ASSOCIATE
As at December 31, 2015, the REIT has a 20% ownership interest in The Fairmont Royal York, a 33.3% interest in the Courtyard Marriott, Toronto and a
50% interest in Choice Hotels Canada, Inc. (“CHC”). InnVest accounts for its partial interests in these two hotels and CHC, using the equity method.
The following is a reconciliation of the REIT’s consolidated balance sheet as presented on a proportionate share basis as at December 31, 2015:
Proportionate Share Amounts Per
of Investment in Consolidated
Joint Ventures
Financial Statements
and Associate
Total
Current assets
Cash$9,269$4,793$
14,062
Accounts receivable25,268 3,75029,018
Prepaid expenses and other assets11,363
7511,438
Finance lease receivable
–
–
–
Assets held for sale15,984
–15,984
61,884 8,63870,502
Non-current assets
Restricted cash 2,881 2,046 4,927
Investment in joint ventures36,453(36,453)
–
Investment in associate19,983(19,983)
–
Hotel properties
1,181,42278,572
1,259,994
–
–
–
Intangible and other assets11,429 13511,564
Total assets$
1,314,052$
32,935$
1,346,987
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities$
61,277$6,672$
67,949
Distributions payable 4,455
– 4,455
Long-term debt62,963
–62,963
Other long-term obligations 203
– 203
Liabilities related to assets held for sale11,220
–11,220
140,118 6,672
146,790
Non-current liabilities
Long-term debt
720,41623,295
743,711
202,648
–
202,648
Provisions11,936
–11,936
Other long-term obligations 4,024 2,968 6,992
Other liabilities 5,607
– 5,607
1,084,74932,935
1,117,684
UNITHOLDERS’ EQUITY
229,303
–
229,303
$1,314,052$
32,935$
1,346,987
The following is a reconciliation of the REIT’s consolidated income statement as presented on a proportionate share basis as at December 31, 2015:
Proportionate Share
Amounts Per
of Investment in
Consolidated
Joint Ventures
and Associate
Total
Hotel and other real estate revenues$
553,388$
23,748$
577,136
Franchise revenues
–15,23115,231
Total revenues$
553,388$
38,979$
592,367
Operating expenses
354,35121,229
375,580
Property taxes, rent and insurance35,903
–35,903
Management fees17,788
–17,788
Franchise expenses
– 9,862 9,862
408,04231,090
439,133
Gross operating profit
145,346 7,889
153,235
Other expenses
Corporate and administrative11,927
–11,927
Interest expense
49,229 85950,088
16,188
–16,188
Joint venture income (5,124) 5,124
–
Loss from investment in associate 1,076 (1,076)
–
Other expense and (income), net 172 419 591
Writedown of hotel and other real estate properties, net 2,843
– 2,843
Depreciation and amortization87,994 2,56390,557
Unrealized gain on liabilities presented at fair value (5,418)
– (5,418)
Net loss and total comprehensive loss$
(13,541) $
– $(13,541)
The following is selected Operating statistics presented on a proportionate share basis at December 31, 2015.
Proportionate Share
Amounts Per
of Investment in
Consolidated
Joint Ventures
and Associate
Total
Occupancy (%) 65.0% 62.4% 64.9%
ADR$
132.06$
205.91$
133.61
RevPAR$85.80$
128.39$86.73
CHANGES IN FINANCIAL CONDITION
OPERATING ACTIVITIES
INVESTING ACTIVITIES
For the year ended December 31, 2015, cash generated by operating
activities was $66.3 million, a $6.1 million increase as compared to
the same period in 2014, largely reflecting the period over period
improvement in operating results and contributions from the
performance of the asset acquisitions.
Investing activities include $44.9 million related to the acquisition of the
Hotel Saskatchewan, $35.3 million for a 33.3% interest in the Courtyard
Marriot in Toronto, and $21.6 million for the acquisition of a 20% interest
in the Fairmont Royal York Hotel.
FINANCING ACTIVITIES
Financing activities in 2015, included cash proceeds related to operating
line draws and incremental proceeds from various refinancing’s. Proceeds
were used to primarily fund acquisitions during the year. Financing
activities for the prior year, included a public offering and concurrent
private placement of equity, the receipt of cash proceeds related to the
refinancing of the Sheraton Eau Claire, Calgary, a bridge loan and a new
subordinate term loan, some of which were used to fund the early
redemption of convertible debentures and repay certain mortgages.
Cash distributions to unitholders in 2015 totalled $42.5 million as
compared to $35.3 million for the same period in 2014. The increase
reflects the higher number of outstanding units compared to the
same period in the prior year.
To drive continuing strong operating performance and maintain the
competitiveness of our hotels, InnVest allocates 4% to 5% of hotel
revenues to a furniture, fixture and equipment reserve (“FF&E Reserve”).
This FF&E reserve is a source of funding to maintain the physical quality
and competitiveness of the portfolio. Capital expenditures for 2015
totalled $41.9 million (2014 – $76.9 million) compared to the FF&E
Reserve of $23.6 million (2014 – $22.6 million). Incremental capital
above the FF&E Reserve was funded through cash generated from asset
sales, cash on hand and operating line availability.
Capital investments completed in 2015 include the final phase of room
renovations at Calgary’s Fairmont Palliser and the Sheraton Suites Eau
Claire. In addition, the first phase of the room renovations at the Delta
London Armouries were completed in August, the lobby renovations at
Moncton’s Delta Beausejour were completed in the second quarter and
the meeting level renovations finished in September. In addition,
subsequent to the acquisition of the Hotel Saskatchewan, half of the
guestrooms, lobby and lounge renovations at this hotel were completed.
Investing activities reflect distributions of $5.8 million received from
InnVest’s investment in Choice Canada (2014 – $5.0 million).
Investing activities also include net proceeds of $21.0 million from the
sale of four properties in 2015 (19 properties were sold in 2014 for
gross proceeds of $124.3 million).
QUARTERLY RESULTS
SEASONALITY
InnVest’s operations are seasonal and as such its results are not
consistent throughout the year. Revenue earned from hotel operations
fluctuates throughout the year, with the third quarter being the highest
due to the increased level of leisure travel in the summer months and
the first quarter being the lowest because leisure travel tends to be
lower due to weather related issues. The results from operations vary
materially from quarter to quarter given the seasonal nature of the
revenue stream and the fact that certain costs such as property taxes,
insurance, interest, and depreciation and amortization are virtually fixed.
InnVest’s objective is to complete as much of renovation activity as
reasonably possible in the first and fourth quarter when business
displacement is minimized.
Q4
2015
Quarter Ended (Unaudited) (Restated) Q3
2015
Q2
2015
Q1
2015
Q4
2014
Q3
2014
Quarter Ended (Unaudited)
Q2
2014
Q1
2014
Revenues
$130,177 $165,565 $147,580 $110,066 $126,439 $148,434 $146,231 $114,431
27,200 56,654 46,146 15,346 27,766 48,398 39,004 13,653
Net (loss) income
(14,293) 14,301 9,684 (23,233) (1,182) 16,508 4,818 (34,871)
FFO
10,938 39,378 29,433 (3,404) 10,359 31,720 20,765 (4,575)
AFFO
7,069 35,746 24,910 (5,200) 8,205 27,319 16,450 (7,623)
13,339 13,261 12,219 11,932 10,910 9,481 9,453 9,378
Per unit – diluted:
Net (loss) income
$ (0.107) $ 0.109 $ 0.079 $ (0.196)$ (0.011)$ 0.161 $ 0.051 $ (0.372)
FFO
0.082 0.275 0.224 (0.029)
0.100 0.278 0.190 (0.049)
AFFO
0.053 0.247 0.189 (0.044)
0.079 0.239 0.151 (0.081)
Trust units outstanding
133,768,240 133,049,525 122,466,130122,203,362116,280,294 94,992,322 94,713,251 93,909,613
Weighted average trust
units outstanding
133,403,868 130,954,208 122,265,716 118,646,773 103,154,099 94,863,069 94,433,893 93,858,254
Total assets
Total long-term debt
$1,314,052 $1,333,835 $1,287,657 $1,284,327 $
1,329,285 $
1,186,098 $
1,227,354 $
1,271,608
783,379 794,177 793,260 790,446 782,951 709,493 714,154 688,038
The fourth quarter of 2015 generated AFFO of $7.1 million (2014 –
$8.2 million) and FFO of $10.9 million (2014 – $10.4 million). Net loss
of $14.3 million in 2015 compares to a net loss of $1.2 million in the
prior year as the fourth quarter of 2014, included higher gains realized
on asset sales.
Operating highlights for the fourth quarter include:
RevPAR increased 2.7% for the quarter due to acquisitions and
gains in rate.
➤Same-hotel RevPAR decreased 2.4% compared to the prior year,
primarily as a result of reduced occupancy in Alberta.
➤Same-hotel revenues decreased 4.7% as weak performance in the
Western region offset the strength experienced in Ontario and
Atlantic Canada. Highlights include:
•Experienced growth across all regions of Ontario driven by the
renovations to the Comfort Inn portfolio completed in prior years.
Southern and Eastern Ontario performed particularly well with the
REIT seeing strong lift from its investments at the Delta and Holiday
Inn hotels in London;
•Quebec region saw improvements primarily due to renovations
across the Comfort Inn portfolio and strong market growth in the
Montreal Metropolitan Area;
➤
•A strong summer across the Atlantic stretched into the fourth
quarter with InnVest’s portfolio continuing to see growth from
its Comfort Inn in the Region while also benefitting from market
growth at its full service asset in Saint John, New Brunswick;
•The Western region decreased significantly from prior year due to
the downturn in markets as a result of low oil prices which had a
significant effect on reducing the number of holiday parties and
guest room bookings during the November and December months.
Additionally, in November InnVest commenced a guest room
renovation at the Fairmont Hotel Macdonald in Edmonton which
caused revenue displacement in the quarter.
➤Overall revenues increased $3.7 million or 3.0%, with recent
acquisitions contributing $13.4 million of increased revenues, offset
by revenue reduction from hotels sold of $4.1 million.
➤GOP declined $0.6 million during the quarter or approximately 1.1%;
➤Corporate and administrative expenses for the quarter increased
$0.3 million year-over-year and are reflective of incremental expenses
relating to InnVest’s business transition which included costs related
to the internalization of asset management. Two hotels were sold in
the fourth quarter of 2015. InnVest recognized a net gain on sales of
$0.7 million related to these sales.
ASSET PROFILE
InnVest’s total asset carrying value was $1,314.1 million at December 31, 2015 compared to $1,329.3 million at December 31, 2014. The following
table summarizes some of the key balance sheet movements against 2014 year end results.
December 31,December 31,
2015 2014
Current assets
Utilized cash to fund the recent hotel acquisitions, capital expenditures
Cash
$9,269
$56,404
and unit distributions.
Reflects increased business activity from acquisitions.
Accounts receivable
25,26822,175
Higher balance reflects deposits for acquisition of the Ottawa Marriott.
Prepaid expenses and other assets 11,363 7,734
Lease receivable fully collected in the third quarter.
– 2,078
Assets held for sale
$15,984
$14,924 Two hotels classified as held for sale at the end of December 31, 2015.
Two hotels classified as held for sale at December 31, 2014 were sold
$61,884
$103,315
in the first quarter of 2015.
Non-current assets
Restricted cash
2,881 2,236
Reflects the acquisition of the 33% interest in the Courtyard Marriott
Investment in joint venture 36,453 1,179
in Toronto in the third quarter.
Represents 20% interest in the Royal York Hotel.
Investment in associate 19,983
–
See description below.
Hotel properties1,181,422
1,210,143
Disposed of these assets in the fourth quarter.
– 1,918
Intangible assets 11,42910,494
Total assets
$1,314,052
$1,329,285
Hotel properties comprise over 90% of InnVest’s total assets. Activity during 2015 included the acquisition of the Hotel Saskatchewan and related
renovations totalling $44.9 million and capital additions of $41.9 million. These additions were offset by depreciation of $88.0 million as well as the
disposition of four hotels in 2015.
LIQUIDITY AND CAPITAL RESOURCES
InnVest has several sources of liquidity including the following:
Cash generated from hotel operations: InnVest’s operations are seasonal
with the third quarter being the highest earnings period and the first
quarter typically being the weakest earnings period given the different
levels of business and leisure travel during these quarters. Over the
annual period, InnVest anticipates generating GOP sufficient to fund
distributions to unitholders, capital expenditures, corporate and
administrative expenses and debt service requirements.
Credit Facilities: InnVest has various credit facilities including a new
revolving operating line of up to $100.0 million secured by 24 hotels. The
operating line can be used to finance temporary deficits in cash resulting
from business seasonality and working capital fluctuations, to issue letters
of credit, to provide short-term financing in the event of the acquisition
of a new hotel, to provide additional short-term liquidity pending the sale
of assets and/or permanent financing, and to fund a portion of capital
expenditures in accordance with mortgage terms. At December 31, 2015
the cash amount advanced was $15.0 million, with a further amount
allocated for outstanding letters of credit of $8.6 million leaving net
availability of $76.4 million. Subsequent to year end $56.5 million was
utilized for the Ottawa Marriott acquisition.
As part of certain mortgage agreements, InnVest had access to a capital
expenditure loan facility for up to $30.0 million to fund 65% of capital
expenditures incurred at certain of its hotels. Following the repayment of
a portion of these mortgages during the third quarter the loan facility was
reduced to $20 million. At December 31, 2015, InnVest had remaining
capacity on this facility of $3.7 million (December 31, 2014 – $8.4 million).
LIQUIDITY AND CAPITAL RESOURCES (cont’d)
Issuing Additional Debt: InnVest has the ability to raise funds by
mortgaging its properties or by issuing either unsecured debt or
unsecured convertible debt securities. InnVest typically uses long-term
debt financing to refinance existing debt or to finance an acquisition.
The ability to obtain debt financing on reasonable terms is ultimately
dependent on market conditions and the lender’s determination of
InnVest’s creditworthiness and property specific cash flow and collateral.
At December 31, 2015, substantially all of InnVest’s hotel assets have
been pledged as security under debt agreements, however financing
capacity is available on certain hotel assets or pools of hotel assets,
encumbered under these debt agreements.
Issuing Additional Equity Securities: InnVest’s listing on the Toronto
Stock Exchange gives it the ability to access, subject to market
conditions, additional equity through the issuance of units or equitylinked instruments. On July 2, 2015, InnVest filed a base shelf
prospectus, which is valid for a 25-month period, during which time
InnVest may offer trust units, debt securities, warrants and subscription
receipts, or any combination thereof, having an aggregate offering
price of up to $500 million. On July 15, 2015, InnVest issued by way
of a successful bought-deal equity offering, 9,660,000 units under the
base shelf prospectus (including 1,260,000 units issued on July 22,
2015, pursuant to the full exercise of the underwriters’ over-allotment
option), at a price of $5.00 per unit for aggregate gross proceeds of
$48.3 million. The use of proceeds from the equity issue was primarily
for the participation in the acquisition of the Courtyard Marriott Toronto
and the Hotel Saskatchewan which is consistent with the disclosure
included in the July 15, 2015 prospectus supplement.
At December 31, 2015, InnVest had total current liquidity of
$89.4 million (total potential liquidity of $92.3 million). Pro forma the
Ottawa Marriott acquisition, total potential liquidity is $35.9 million.
December 31,
2015
Cash
$9,269
Revolving credit facility availability
76,436
Capital expenditure loan facility availability 3,722
Total current liquidity
$89,427
Additional liquidity contingent on capital
expenditures incurred:
Restricted cash 2,881
Total potential liquidity $92,308
InnVest’s credit and liquidity facilities, cash on hand and expected cash
flow from operations, and the potential to sell assets or access debt and
equity markets are expected to allow InnVest to meet all of its financial
commitments. There can be no assurance that capital market conditions
will enable possible debt or equity issuance, if or when desirable, or on
terms and at costs advantageous to InnVest. If necessary, near-term
disruptions to operating earnings and cash flow could be addressed
through reductions in discretionary capital allocation decisions such
as capital investments above the FF&E Reserve and/or distributions.
CASH ON HAND
At December 31, 2015, InnVest had cash totalling $12.2 million, of
which $2.9 million is restricted to undertake capital refurbishments in
accordance with certain mortgage and franchise agreements.
Capital expenditures during the year ended December 31, 2015 totalled
$41.9 million (2014 – $76.9 million) compared to the allocated FF&E
Reserve of $23.6 million (2014 – $22.6 million). Incremental capital
expenditures above the allocated FF&E Reserve were funded through
cash generated from asset sales and cash on hand. The following chart
shows the funding of capital expenditures and changes in the FF&E
Reserve restricted cash balance since January 1, 2014.
2015
Opening balance, January 1
$2,236 FF&E Reserve additions
23,573 Cash used for FF&E capital additions
in excess of the reserve
16,775 Funded through capital loan facility
(added to mortgage debt)
2,192 Capital expenditures
(41,895)
Closing balance, December 31
2014
$6,760
22,568
31,540
18,300
(76,932)
$2,881 $2,236
DEBT STRATEGY
InnVest’s debt strategy involves the use of various forms of debt
including conventional property-specific secured mortgages, unsecured
convertible debentures, secured floating interest rate bank financing
and subordinated term loans. Management intends to continue to
reduce its reliance on dilutive unsecured convertible debentures.
Management’s objectives are to maximize its liquidity sources and
flexibility while maintaining access to low cost debt and a staggered
debt maturity schedule to manage interest rate and refinancing risk.
Operating Line
InnVest’s operations are seasonal (refer to Quarterly Results). InnVest’s
credit facility is used to fund seasonal fluctuations in cash flows,
acquisitions and for general corporate purposes.
In the second quarter of 2015, InnVest successfully refinanced its two
revolving credit facilities into one revolving credit facility with two major
Canadian financial institutions, which as of December 31, 2015 had a
borrowing capacity of $100.0 million ($76.4 million, net of amount
drawn of $15.0 million and letters of credit outstanding) and is secured
by 24 properties. Interest rates are based on either (i) the Canadian
prime rate plus 1.75%, or (ii) the Canadian Bankers’ Acceptance rate plus
2.75%. The new two-year facility extends the term to June 2017. Refer
to Risks and Uncertainties.
Letters of credit totalling $8.6 million were issued and are outstanding
pursuant to the operating line (December 31, 2014 – $8.2 million).
Mortgages, Subordinated Term Loans, Operating Line and
Convertible Debentures
InnVest attempts to stagger the maturity of fixed-term debt to minimize
interest and financing risks.
2015 2014
Mortgages and subordinated
term loans
Mortgages and subordinated term
loans payable
$804,626 $801,361
Weighted average term to maturity
4.7 years
2.8 years
Weighted average interest rate
5.0% 5.5%
Percentage of mortgages and
subordinated term loan at
floating interest rate debt
12.5%
21.2%
Convertible debentures outstanding
$211,220 $247,608
Weighted average term to maturity
2.5 years
3.2 years
Weighted average interest rate
6.0% 6.1%
In early 2015, the REIT elected not to exercise a one year option to
extend mortgage debt of approximately $153.9 million. As a result,
InnVest had approximately $216 million of mortgages (excluding
$8.3 million offset by a lease receivable) with a weighted average
interest rate of 5.2% maturing in 2015. Approximately $153.9 million
of this current debt was with one lender, of which $80 million was
successfully refinanced in July 2015. Another approximately $15 million
of mortgages on three hotels maturing in the third quarter of 2015
were repaid with the hotels added as additional security to the REIT’s
operating line facility increasing its availability by a similar amount.
A further nine hotels with existing mortgage debt of $21 million
were added to this line in August 2015 increasing the availability under
this facility to $100 million. Remaining 2015 maturities of approximately
$96 million on seven hotels were refinanced in the third quarter under
three mortgage agreements with three different lenders. In December
2016, approximately $47 million of debt, that bears interest at 5.8% and
which represents 5.8% of the total outstanding mortgage and other
debt, matures on two hotel properties. Based on recent negotiations
with lenders, and InnVest’s knowledge and experience refinancing
mortgages and accessing the public markets, management expects to
address its 2016 debt maturities in the normal course of business. More
specific details regarding the financings are provided below:
In November 2015, InnVest completed new financing of The Hotel
Saskatchewan, Autograph Collection for $23.3 million at a fixed interest
rate of 3.98% for a 5-year term with a Canadian financial institution.
➤In September 2015, InnVest refinanced maturing mortgages of
$29.4 million secured by the Delta Beausejour Moncton and the
Delta Prince Edward Island Charlottetown bearing interest rate of
5.3% with a new 5-year $35.4 million mortgage at a fixed interest
rate of 3.65% with a Canadian financial institution.
➤
In September 2015, InnVest refinanced maturing mortgages of
$35 million secured by the Fairmont Macdonald Edmonton, Alberta at
a fixed interest rate of 5.3% with a new 5-year $40 million mortgage at
a fixed interest rate of 3.5% with a Canadian financial institution.
➤In August 2015, maturing mortgages of $26 million secured by four
hotels bearing interest rate of 5.2% with a new 7-year $36 million
mortgage at a fixed interest rate of 3.95% were refinanced with a
Canadian financial institution.
➤In July 2015, InnVest completed the refinancing of the Fairmont
Palliser for $82.5 million at a fixed interest rate of 4.0% for a 10-year
term. In connection with this mortgage, the REIT entered into a
forward interest rate agreement to fix the interest rate.
➤In April 2015, the REIT completed the refinancing of the Hyatt
Regency Vancouver for $80 million at a fixed interest rate of 3.75%
for a 10-year term. This refinancing replaced a $70 million three year
floating rate mortgage completed as part of the hotel’s acquisition.
Incremental proceeds from the refinancing were used to fund capital
investments, to repay debt and for general corporate purposes.
➤
In January 2015, InnVest called its $36.4 million Series D Debentures
for early redemption on March 3, 2015 (Refer to Unit Information).
At December 31, 2015, InnVest has three series of fixed-rate
convertible debentures totalling $211.2 million (December 31, 2014 –
$247.6 million). InnVest has made significant progress in reducing
its convertible debt including reducing approximately $135 million
of convertible debentures since the beginning of 2014.
The following chart highlights InnVest’s mortgage, subordinated
term loans and convertible debentures maturity schedule at
December 31, 2015.
$300
$200
$100
0%
2016
Convertible Debenture
2017
2018
2019
Subordinated Term Loan
2020
2021+
Mortgage
LEVERAGE
InnVest is not permitted to exceed certain financial leverage amounts
under the terms of its Declaration of Trust. InnVest is permitted to incur
indebtedness up to 60% of gross asset value (75% including convertible
debentures). The financial ratio is computed as of the last day of each
financial year excluding any indebtedness under any operating line,
non-interest bearing indebtedness, and trade accounts payable and for
greater certainty, deferred income tax liability. Management’s policy is
not to exceed this leverage limit at any time during the year. Separately,
InnVest is further limited by its operating line covenant, which limits
aggregate indebtedness (including convertible debentures) to a level
up to 65% of gross asset value at the end of every quarter.
Consistent with its strategic objective to decrease its debt leverage,
during the year ended December 31, 2015, InnVest reduced its leverage
ratio 380 basis points to 58.2% (December 31, 2014 – 62.0%). InnVest’s
leverage excluding convertible debentures was 46.1% (December 31,
2014 – 47.4%). Pro forma the Ottawa Marriott acquisition, InnVest’s
leverage is 60.5%.
Total assets per Consolidated
Balance Sheet
$1,314,052
Accumulated depreciation
and amortization 430,502
Gross Asset Value
$1,744,554
Book value of mortgages and
other indebtedness(1)
Convertible debentures(2)
$804,626 211,220 46.1%
12.1%
Total debt
$1,015,846
58.2%
InnVest’s financial strategy includes maintaining a strong balance
sheet with appropriate leverage and staggered debt maturities in
order to minimize InnVest’s cost of capital and provide adequate
financial flexibility to withstand market cycles. As part of its 2016
strategic objectives, InnVest has a target to reduce its debt leverage
(total debt to gross asset value) below 55% and to further reduce
reliance on dilutive convertible debt. Significant progress has been
made with respect to these objectives. Notwithstanding, there is no
assurance that InnVest will achieve and maintain its targeted leverage
reduction in a set timeframe.
CONTRACTUAL OBLIGATIONS REPAYMENT SUMMARY
Given available liquidity, access to capital and expectations of improving
economic and operating trends, management expects to be able to fund
all commitments in the normal course of business.
The following table summarizes InnVest’s contractual obligations as at
December 31, 2015. In addition to amounts shown in the table below,
InnVest, through its partial ownership of the Royal York Partnership and
the Courtyard Marriott Toronto, has minimum capital commitments to
fund capital expenditures and working capital needs of the hotels over
an unspecified period of time.
(1)Gross of financing issuance costs.
(2)Adjusted to face value.
2021 andContractual
2016
2017
2018
2019
2020 ThereafterCash Flows(1)
Accounts payable and accrued liabilities $ 61,277 $
– $
– $
– $
– $
– $ 61,277
Mortgage and subordinated
term loan payable
– –
– – – – –
– principal(2) 62,964 178,206 67,766 148,644 93,387 229,215 780,182
– interest(3)
38,976 29,735 22,180 15,597 12,082 34,256 152,826
Credit facility – principal
– 15,000 –
– – – 15,000
– interest
668 334 –
– – – 1,002
– principal
– 74,995 49,975 86,250 – – 211,220
– interest 12,764 12,764 6,827 2,695 – – 35,050
Long-term leases 2,003 2,057 2,061 2,047 1,973 71,597 81,738
Capital commitments 9,093 –
–
–
–
– 9,093
Total $187,745 $313,091 $148,809 $255,233 $107,442 $335,068 $
1,347,388
(1)Contractual cash flows include principal and interest payments.
(2)Mortgage principal includes regular amortization and repayments at maturity.
(3)Interest for floating rate debt is based on interest rates prevailing at December 31, 2015.
As at December 31, 2015, InnVest has leasehold interests in seven of its
hotels. The leasehold interests require minimum annual average lease
payments and expire between 2018 and 2088. At December 31, 2015,
the average term of InnVest’s leaseholds exceeded 35 years.
CONTINGENT OBLIGATIONS
InnVest and its operating subsidiaries are contingently liable with
respect to litigation and claims that arise from time to time in the normal
course of business. In the normal course of business, InnVest receives
default notices relating to the maintenance of brand standards at
certain hotels. InnVest typically disputes such notices and negotiates
a resolution with its franchisors or management companies.
Most contingencies and liabilities are resolved over long periods of time,
liabilities may change in the future due to new developments (including
litigation developments, the discovery of new facts, changes in
legislation and outcomes of similar cases), changes in assumptions or
changes in the REIT’s litigation strategy.
DISTRIBUTIONS TO UNITHOLDERS
For the year ended December 31, 2015, distributions totalling
$50.8 million were declared ($0.40 per unit), consisting of cash
distributions paid of $43.1 million and reinvested distributions
of $7.7 million provided under the distribution reinvestment plan
(“DRIP”). While the per unit level of distribution was unchanged,
total distributions paid increased by $11.5 million ($7.0 million in
cash distributions and $4.5 under the DRIP) compared to the same
period in the prior year reflecting the issuance of additional units over
the year from the DRIP as well as the equity and private placement
offerings in November 2014 and July 2015 (refer to Unit Information).
The non-cash distributions have the effect of increasing the number
of units outstanding, which will cause cash distributions to increase
over time assuming stable per unit distribution levels.
Liquidity to fund distributions is generated from cash flow from
operations, cash on hand, capacity under available credit facilities and
by the ability to finance certain under-leveraged assets. First and fourth
quarter distributions are typically partially funded through cash on hand
and/or the temporary use of InnVest’s revolving operating line given the
seasonality of revenues in contrast to costs which are fixed throughout
the year. For the year ended December 31, 2015, InnVest’s cash from
operations exceeded distributions paid by $23.8 million for the year.
Distributions in excess of cash flow from operations represent a return
of capital, rather than a return on capital, since they represent cash
payments in excess of cash generated by InnVest’s continuing operations
during the period. In the first and fourth quarters primarily, InnVest has
elected to provide distributions partly representing a return of capital in
order to maintain the stability of current distribution levels. Management
believes that the current per unit level of distributions is sustainable, given
that the trailing twelve month cash flow from operations is sufficient to
cover distributions. Distributions are set based on annual results and not
quarterly results which are subject to seasonal fluctuations.
For the twelve months ended December 31, 2015, InnVest’s distribution payout ratio improved to 81.2% of AFFO, as compared to 88.4% at
December 31, 2014. Excluding the DRIP, the payout ratio was 68.8%, an improvement over the 2014 ratio of 81.2%.
AFFO
Distributions
Years Ended December 31,
20152014201320122011
$62,525 $44,351 $46,185 $44,619 $46,440
50,751 39,222 37,465 37,383 44,896
AFFO in excess of (less than) distributions
11,774 5,129 8,720 7,236 1,544
Non-cash distributions made through the DRIP 7,711 3,224 500 143 309
AFFO in excess of (less than) cash distributions
$19,485 $ 8,353 $ 9,220 $ 7,379 $ 1,853
AFFO Payout ratios:
Total distributions 81.2% 88.4% 81.1% 83.8% 96.7%
Cash distributions (excluding DRIP)
68.8% 81.2% 80.0% 83.5% 96.0%
DISTRIBUTIONS TO UNITHOLDERS (cont’d)
Distributions to unitholders are approved by InnVest’s Board. Each
month, InnVest may distribute such percentage of its estimated
AFFO as the Trustees determine in their discretion. In exercising their
discretion to approve the level of distributions, the Trustees rely on
annual forecasts prepared by management and other financial
information to determine if sufficient cash flow will be available to fund
distributions. Such financial information is subject to change due to the
nature of the Canadian hotel industry, which can be difficult to predict,
even in the short run. Refer to Risks and Uncertainties.
To provide a notional allocation for annual capital expenditures, InnVest
deducts a reserve for capital expenditures based on 4% to 5% of hotel
revenues (the “FF&E Reserve”). Whether funds are specifically set aside
or not, the FF&E Reserve is used in determining the level of distributions
paid to unitholders and, as such, is considered a source of funding to
maintain the quality of the portfolio. Actual capital spent in any given year
may be in excess of this FF&E Reserve, for that year as demonstrated for
the past three years as InnVest completed its strategic plan and invested
over $179.0 million in the portfolio, such that, if actual spending was
deducted, distributions would have exceeded annual cash flow. Capital
invested in excess of the FF&E Reserve over the past three years was
funded through the sale of assets and cash available from the issuance
of additional debt. Annual capital expenditures are expected to
exceed the FF&E Reserve for the full year 2016 based on the extensive
renovation program anticipated during the year. Refer to Our Strategy.
When assessing future distribution levels, management and the Board
believe in maintaining a stable and conservative distribution level to
minimize risk. Assuming improving cash flow from operations, this
would result in a declining payout ratio over time.
UNIT INFORMATION
Since January 1, 2015, InnVest issued units as follows:
Units outstanding, January 1, 2015
116,280,294
Distribution reinvestment plan
1,532,674
Conversion of Convertible Debentures
5,742,735
Executive compensation plan
189,668
Equity issue
9,660,000
Conversion of Exchangeable Units
362,869
Units outstanding, December 31, 2015
133,768,240
Issued subsquent to the quarter
Distribution reinvestment plan
411,873
Executive compensation plan
42,790
Units outstanding, March 29, 2016 134,222,903
The following table summarizes the number of units issuable based on the convertible debentures outstanding at December 31, 2015.
Convertible Debentures
Maturity DateConversion Strike Price Balance Outstanding Units to Be Issued
Upon Conversion
Series ESeptember 30, 2017$ 8.00 $74,995 9,374,375
Series F
March 30, 2018 $ 9.45 $49,975 5,288,359
Series GMarch 31, 2019 $ 7.50 $86,250 11,500,000
For each series of debentures, InnVest may elect, from time to time, to
satisfy its obligation to pay interest by delivering units. Also, for each
of its debentures, InnVest may, at its option, on not more than 60 days’
and not less than 30 days’ prior notice and subject to applicable
regulatory approval, elect to satisfy its obligation to repay all or any
portion of the principal amount of the debentures that are to be
redeemed or that are to mature by issuing units. The number of units to
be issued in respect of each debenture will be determined by dividing
the principal amount by 95% of the volume-weighted average trading
price of the units on the Toronto Stock Exchange for the 20 consecutive
trading days ending on the fifth trading day preceding the date fixed
for redemption or maturity, as the case may be. Series E Debentures
are currently redeemable at face value and that on March 30, 2016 the
Series F will be redeemable at face value.
UNIT INFORMATION (cont’d)
UNITS ISSUED
On July 15, 2015, InnVest issued 9,660,000 units (including 1,260,000
units issued on July 22, 2015, pursuant to the full exercise of the
underwriters’ over-allotment option), at a price of $5.00 per unit or
$48.3 million (the “Public Offering”). The net proceeds from the equity
issue was primarily used for the acquisition of the Courtyard Marriott
Toronto and Hotel Saskatchewan, which is consistent with the disclosure
included in the July 15, 2015 prospectus supplement.
EXCHANGEABLE UNITS
As part of an acquisition made in 2005, InnVest granted 362,869
exchangeable units (“Exchangeable units”) to an entity in which a
former trustee has a partial ownership interest. The Exchangeable
units received a monthly cash payment equal to the value of the cash
distributions that would have been paid on the InnVest units if they
had been issued on the date of grant. The Exchangeable units were
exchangeable into InnVest units with three business days of prior written
notice to InnVest or on August 2, 2015. In the third quarter of 2015,
these Exchangeable units were converted into InnVest units.
REDEMPTIONS
On March 3, 2015, InnVest completed the early redemption of its
Series D Debentures (due March 31, 2016). Series D Debentures
totalling $32.7 million were converted into 5,739,465 units. Also, related
to the early redemption of Series D debentures, InnVest redeemed and
cancelled $3.6 million of remaining Series D Debentures. During 2015,
Series F 5.75% Debentures totalling $25 were converted into 2,645 units
and Series E 6.00% Debentures totalling $5 were converted into 625 units.
DISTRIBUTION REINVESTMENT PLAN (“DRIP”)
InnVest has a DRIP whereby eligible Canadian unitholders may elect to
have their distributions of income from InnVest automatically reinvested
in additional units of InnVest. Effective September 2014, InnVest amended
its DRIP to provide it discretion to purchase units on the open market or
to be issued from treasury. If InnVest elects to issue units from treasury,
unitholders who have elected to participate in the DRIP will receive
3% bonus units in addition to any units issued to them under the DRIP.
EXECUTIVE COMPENSATION PROGRAM
InnVest’s executive compensation program provides for the grant of
restricted units to certain senior employees. Units granted vest not
more than four years from the effective date of grant. Upon vesting, the
payment will be satisfied through the issuance of units. Unvested units
are presented in liabilities at their fair value. Upon issuance of units
(following the satisfaction of all vesting conditions), the liability is
reclassified to Unitholders’ equity’ at the then-current fair value based
on the market price of the REIT’s units. Units granted to executives
entitle the holder to also accumulate units equal to the monthly cash
distributions, assuming the reinvestment of the distribution into units.
At December 31, 2015, there were 101,927 unvested executive units
granted under the plan (December 31, 2014 – 58,794). Pursuant to his
short-term compensation agreement, units issued to InnVest’s former
President and CEO vested immediately upon grant, rather than vesting
over the three- and four-year periods. In January 2015, 44,000 units
were granted to the former President and CEO (2014 – 40,000).
On December 17, 2014, InnVest announced the appointment of Andrew
Coles, the new President and CEO, effective January 26, 2015. Mr. Coles
was awarded an equity grant effective on his start date, January 26,
2015, of 400,000 units vesting at a rate of 80,000 units (“tranche”) over
a four-year period with the first tranche vesting upon his start date and
each subsequent tranche vesting on each subsequent anniversary
thereafter. In 2015, 80,000 units relating to the first tranche of the
400,000 units were awarded to Mr. Coles. Under the terms of the 2015
equity grant, the second tranche of 80,000 units are to be awarded
in 2016. In January 2016, 30,000 units of the second tranche were
awarded with the remaining 50,000 units expected to be awarded or
settled in deferred units following the annual general meeting in 2016.
TRUSTEE COMPENSATION PROGRAM
In September 2014, InnVest’s Board approved an increase of the
number of units in reserve for Board compensation, to 1% of InnVest’s
outstanding units from time to time, in connection with changes to the
Trustee compensation structure. The listing of additional units relating
to this change was approved by the Toronto Stock Exchange (“TSX”)
in October 2014, and by unitholders at the annual general meeting on
June 16, 2015. As at December 31, 2015, 265,179 units were granted
to Trustees under the new compensation structure.
In 2014, the Board of Trustees approved the adoption of a Deferred Unit
(DU) plan for non-employee Trustees of the REIT to further align the
interests of the Trustees and the Unitholders. InnVest’s compensation
structure enhances unit-compensation, which further aligns our Trustee’s
interest with those of our unitholders. InnVest’s trustees participate in a
compensation plan involving the grant of deferred units. The plan entitles
trustees, at their option, to receive up to 100% of their annual retainer in
the form of deferred units. InnVest matches, on a one-for-one basis, the
number of deferred units elected to be received by the Trustee. Therefore
the value of deferred units granted is equal to the trustee’s election
multiplied by two. The number of deferred units granted result in the
award of units on a one-for-one basis upon the trustee’s departure from
the Board or, at the Board’s discretion, may be settled in cash.
The number of deferred units granted is based on the five-day weighted
average price of units on the day preceding the award date. Deferred
units granted entitle the holder to also accumulate deferred units equal
to the monthly cash distributions, assuming the reinvestment of the
distribution into units.
RELATED PARTY TRANSACTIONS
In accordance with InnVest’s corporate governance practices, all related
party agreements are approved by a majority of the independent trustees.
WESTMONT HOSPITALITY CANADA LIMITED
InnVest has a Management Agreement for hotel management
and accounting services and an Administrative Services Agreement
(the “Agreements”) with Westmont Hospitality Canada Limited
(“Westmont”). A unitholder and former trustee of InnVest, who resigned
from the InnVest Board of Trustees in January 2016, has a controlling
interest in Westmont and as such has a material interest in the
Agreements and Westmont is considered a related party. Westmont is
currently entitled to appoint two members to the Board, however as at
March 24, 2016, Westmont has not exercised that right. At December 31,
2015, Westmont managed 96 of InnVest’s hotels. The Agreements are
on terms consistent with those that prevail in arm’s length transactions.
For hotels that it manages, Westmont provides customary hotel
management services, including preparation of annual operating and
capital budgets and marketing plans, accounting and financial reporting,
supervision of sales and marketing, human resource management,
purchasing, management and supervision of construction and technical
services, information technology, supervision of property repairs and
maintenance, supervision of compliance with material contracts relating
to the hotel properties, leasing, yield management and quality control.
Westmont’s management fees are 2.95% of hotel revenues with an
incentive fee structure that allows Westmont to earn up to 3.80%
of gross hotel revenue each year. The hotel management agreement
expires in April 2024. The amended and restated management
agreement allows InnVest to request Westmont’s services in connection
with construction work to be performed at hotels that it does not
manage and for accounting services in respect of InnVest’s business on
a case-by-case basis, as may be agreed to by both parties. Westmont
is also entitled to be reimbursed for certain reasonable out-of-pocket
costs and expenses incurred in the performance of its duties under
the management agreement, provided that such costs have been
identified in an approved budget or are otherwise approved in writing
For assets sold which are managed by Westmont, InnVest pays a
termination fee equal to the management fees paid based on the
trailing 12 months revenues.
In accordance with the hotel management agreement, in addition to the
base management fee and incentive fee, Westmont is entitled to the
following fees in respect of hotels that it manages: (i) purchasing fees
based on 5% of the cost of certain goods and supplies; (ii) construction
fees based on 5% of the cost of construction and capital expenditures;
and (iii) per guest room fees for accounting services in respect of the
hotel businesses. The amended and restated management agreement
did not result in any changes to the basis for such additional fees.
In accordance with the administrative services agreement, Westmont
also provides certain administrative and support services, including the
provision of: (i) office space and office equipment; (ii) communications
and computer systems; and (iii) such administrative and secretarial
support services as reasonably required from time to time to support
InnVest’s ongoing administration and operation. Such services are
provided on a cost recovery basis pursuant to a budget. Majority
of the administrative and support services ended in 2015, with
the remaining support to end in 2016 as the REIT finalizes the
internalization of these services.
Total management and other fees paid to Westmont during the year
ended December 31, 2015 were $15.1 million (2014 – $19.3 million).
Total fees paid in 2015 reflect the elimination of the asset management
fee and reduced project management fees based on lower capital
expenditures incurred on capital projects managed by Westmont.
These fees represent approximately 67% (2014 – 65%) of total hotel
management and other fees paid by InnVest to the five hotel
management companies with which it partners.
KINGSETT CAPITAL
An InnVest Trustee who is also a unitholder is the Managing partner
of KingSett. On April 24, 2014, InnVest completed a credit agreement
with KingSett Real Estate Growth LP No. 5 (“KingSett LP No. 5) (a fund
managed by KingSett) (the “Credit Agreement”) for a $50.0 million
subordinated term loan facility (the “Term Loan”). The Term Loan is
outstanding for a four-year term, bears regular interest payments of
8.75% per annum (the “Term Interest Payments”) and is supported by
a general security agreement. A trustee of the REIT has an indirect
controlling interest in KingSett.
In the first year that the Term Loan was outstanding, a portion of the
Term Interest Payments due in that year, equal to 3% per annum, was
payable in units at the option of KingSett. During the three subsequent
years, the same portion of the Term Interest Payments will be payable
in units if mutually agreed by KingSett and InnVest. Any units will be
issued at a price equal to the five-day volume-weighted average price
of the units on the TSX prior to the date of each issuance. Since its
inception, InnVest issued 146,950 units in satisfaction of the Term
Interest Payments. No units were issued during the year ended
December 31, 2015.
On February 2, 2015, InnVest acquired a 20% interest in the Royal York
Hotel through an arrangement with KingSett LP No. 5, and Ivanhoé
Cambridge (collectively, the “Partnership”). KingSett LP No. 5, with its
60% interest, is the managing partner of the Partnership. InnVest is the
hotel asset manager and oversees the property’s hospitality operations.
Ivanhoé Cambridge retained a 20% interest in the property. Under the
terms of the Partnership, no fees will be paid between InnVest and
KingSett LP No. 5 for the services provided by each.
In August 2015, InnVest acquired a 33.3% interest in the Courtyard
Marriott in Toronto for a net purchase price of $33 million, while
KingSett LP No. 5 acquired the remaining 66.7% interest. InnVest is
also the hotel asset manager for the property and earns a nominal
management fee for this service, which is recorded in “Other
Expenses and (Income)”.
NON-IFRS FINANCIAL MEASURES AND ADDITIONAL IFRS FINANCIAL MEASURES
InnVest’s consolidated financial statements are prepared in accordance
with IFRS. Included in this MD&A are certain additional IFRS measures
and non-IFRS measures, which are measures of InnVest’s historical or
future financial performance that are not calculated and presented in
accordance with IFRS. These measures are unlikely to be comparable
to similar measures presented by other reporting issuers. InnVest
uses these measures to better assess its underlying performance and
provides these additional measures so that investors may do the same.
The following discussion defines the measures used by InnVest and
presents why management believes they are useful supplemental
measures of InnVest’s performance.
ADDITIONAL IFRS FINANCIAL MEASURES
Gross Operating Profit
GOP is defined as revenues less hotel and other real estate properties
expenses. GOP reflects results of operations from InnVest’s two lines
of business: hotel ownership and other real estate assets. For the year,
ended December 31, 2015 and 2014, InnVest’s hotel ownership
operations accounted for all of its GOP.
Measures which reflect the cash flow generating ability of real estate
assets are commonly used by real estate owners which, when
considered with IFRS measures, give management a more complete
understanding of property level results before debt service. It also
facilitates comparisons between InnVest and its competitors.
Management believes that GOP, specifically Hotel GOP, is one of
InnVest’s key performance indicators since it helps management,
lenders and investors evaluate its core business’ ongoing profitability.
GOP is an additional IFRS financial measure derived from the
consolidated financial statements but does not have a standardized
meaning prescribed by IFRS. Therefore it is unlikely to be comparable
to similar measures presented by other issuers.
GOP has been calculated as follows:
2015
2014
Revenues
$553,388 $535,535
Operating expenses
354,351 346,566
Property taxes, rent and insurance 35,903 38,798
Management fees
17,788 21,350
408,042 406,714
145,346 128,821
Gross operating profit margin
26.3% 24.1%
NON-IFRS FINANCIAL MEASURES
Funds from Operations (“FFO”)
FFO is a common measure of performance in the real estate investment
trust industry. FFO is one measure used by industry analysts and
investors in the determination of InnVest’s valuation, its ability to fund
distributions and investors’ investment return requirements. As a result,
InnVest believes that FFO is a useful supplemental measure of its
operating performance for investors. FFO assumes that the value of real
estate investments does not necessarily decrease on a systematic basis
over time, an assumption inherent in our application of IFRS (given
the depreciation charge), and it adjusts for items included in net
income that do not necessarily provide the best indicator of operating
performance, such as gains or losses on the sale of assets, provisions
for impairment (and impairment reversals) of assets as well as changes
in the fair value of certain equity-based financial instruments classified
as financial liabilities.
FFO should not be considered a substitute for net income or cash flow
from operating activities determined in accordance with IFRS.
InnVest presents FFO in accordance with Real Property Association of
Canada’s (“REALpac”) White Paper on Funds From Operations revised
in April 2014 except that InnVest excludes unusual items which are
not in the normal course of business and are not expected to reoccur.
InnVest’s method of calculating FFO may be different from that of
other organizations.
InnVest calculates FFO by using net income or loss and adjusting for:
i)Depreciation, amortization and accretion, excluding amortization of
deferred financing costs (including related costs included in equity
accounted entities);
ii)Deferred income tax expense or recovery;
iii)Any gains or losses on the disposition of assets or the settlement
of liabilities;
iv)Non-cash writedown of assets held for sale as well as the impairment
provision (and impairment reversals) on assets;
v)Non-cash effect of certain equity-based financial instruments
classified as financial liabilities under IFRS (includes distributions
included in corporate and administrative expense and changes to
fair value each reporting period);
vi)Transaction costs expensed as a result of the purchase of a property
being accounted for as a business combination; and
vii)Non-recurring costs that may impact cash flow. Items are considered
non-recurring when a similar loss or gain is not reasonably likely to
occur within the next two years and has not occurred during the
prior two years.
NON-IFRS FINANCIAL MEASURES AND ADDITIONAL IFRS FINANCIAL MEASURES (cont’d)
A reconciliation of IFRS net loss and comprehensive loss to FFO is as follows:
Year Ended December 31
20152014
$(13,541)$(14,727)
Add (deduct)
Non-cash items:
Depreciation and amortization(1)
90,449 81,149
Unrealized changes in the fair value of financial liabilities
(including fair value changes in unit-based compensation) (5,806) 9,700
Writedown (reversal of writedown) of hotel and other real estate properties, net
2,843 3,754
Distributions included in expenses
84 145
(Gain) Loss on sale on assets, net
(631) (18,774)
Gain on early redemption of convertible debentures, net (196) (11,628)
Other items:
Acquisition cost(2) 2,051 4,324
Non-recurring items:
Proxy defense and settlement costs
– 3,594
Actuarial loss on pension settlement
– 1,414
Litigation settlement and provision
1,092 (500)
Funds from operations (FFO)
$76,345 $58,451
FFO per unit
Basic
$0.604 $0.605
Diluted
$0.598 $0.574
Weighted average units outstanding
Basic
126,370,774 96,598,100
Adjustments to basic average units outstanding
Assuming converts of Convertible Debentures
21,867,032 22,715,440
Assuming converts of Exchangeable and Executive
492,164 421,002
Diluted weighted average units outstanding
148,729,970 119,734,543
(1)Includes depreciation and amortizaton included in ‘Loss from investment in associate’ and ‘Joint venture income’.
(2)Includes acquisition cost included in ‘Joint venture income’.
NON-IFRS FINANCIAL MEASURES AND ADDITIONAL IFRS FINANCIAL MEASURES (cont’d)
Adjusted Funds from Operations (“AFFO”)
InnVest uses AFFO as its measure of normalized cash flow in order to assess its ability to fund distributions for current or potential investors.
AFFO is defined as FFO adjusted for:
i)Non-cash deferred financing charges (including related costs included in equity accounted entities);
ii)The FF&E Reserve; and
iii)Any other adjustment determined by the Board in their discretion.
A reconciliation of FFO to AFFO is as follows:
Year Ended December 31
20152014
FFO
$76,345 $58,451
Add (deduct)
Non-cash portion of mortgage interest expense(1) 3,483 4,604
Amortization and other costs associated with the early re-financing of mortgage debt
3,156 –
Non-cash portion of convertible debentures interest and accretion 3,114 3,864
FF&E Reserve(2)
(23,573) (22,568)
AFFO
$62,525 $44,351
AFFO per unit
Basic
$0.495 $0.459
Diluted
$0.489 $ 0.441
Weighted average unit outstanding
Basic
126,370,774 96,598,100
Adjustments to basic average unit outstanding
Assuming converts of Convertible Debentures
21,867,032 22,715,440
Assuming converts of Exchangeable, Trustees and Executive
492,164 421,002
Diluted
148,729,970 119,734,542
(1)Includes deferred financing amortization included in ‘Loss from investment in associate’ and ‘Joint venture income’.
(2)Includes proportion of FF&E reserve related to Investment in associate and joint ventures.
AFFO is also used by management and the Board to determine the level
of distributions to unitholders and also serves as an important measure
for investors in their evaluation of the performance of management.
The reconciliation of cash from operating activities to AFFO is as follows:
In addition, when evaluating acquisition opportunities, the AFFO to
be generated by the asset is reviewed by management to determine
whether a proposed acquisition is expected to generate an increase
in AFFO per unit. Therefore, AFFO is an important measure for
management as a guideline through which operating and financial
decisions are made and is an integral part of the investment decision
for investors and potential investors. There is no standard industrydefined measure of AFFO. InnVest’s method of calculating AFFO
may be different from that of other organizations.
2015
2014
Cash flow utilized in operating activities $66,294 $60,191
Changes in non-cash working capital 9,251 (8,271)
Joint venture income 5,792 4,998
Loss from associate (1,076)
–
Proxy defense and settlement costs
– 3,594
Acquisition costs
2,051 4,324
Change in accrued interest accounts 952 1,119
Others, net 2,834 964
FF&E Reserve (23,573) (22,568)
AFFO
Years Ended
December 31
$62,525 $44,351
RISK FACTORS
In addition to the other information contained in this Management’s
Discussion and Analysis, you should carefully consider the following risk
factors. The occurrence of any of the following risks could materially
and adversely affect InnVest’s investments, prospects, cash flows,
results of operations or financial condition and InnVest’s ability to make
cash distributions to Unitholders. Although InnVest believes that the risk
factors described below are the most material risks that InnVest faces,
they are not the only ones. Additional risk factors not presently known
to InnVest or that InnVest currently believes are immaterial could also
materially and adversely affect InnVest’s investments, prospects, cash
flows, results of operations or financial condition and InnVest’s ability to
make cash distributions to Unitholders and negatively affect the value
of the REIT Units.
REAL ESTATE RISKS
Real Estate Investment Risks
As InnVest owns hotel properties (or interests in hotel properties),
its investments are subject to risks generally incident to the ownership
of real property. One of the factors contributing to the underlying
value of InnVest’s real estate investments and its income and ability
to make distributions to its Unitholders is the ability of the Operator
and its subsidiary partnerships under the supervision of the Manager,
to operate the hotels in the Portfolio and any subsequently acquired
hotels in a manner sufficient to maintain or increase revenues and to
generate sufficient income in excess of operating expenses. Income
from the hotels may be adversely affected by changes in national
economic conditions, changes in local market conditions due to changes
in general or local economic conditions (including dependence on
manufacturing, oil or other resource markets) and neighbourhood
characteristics, changes in interest rates and in the availability, cost and
terms of mortgage funds, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need
for capital improvements, particularly in older structures, changes in
real estate assessed values and taxes payable on such values and
other operating expenses, changes in governmental laws, regulations,
rules and fiscal policies, changes in zoning laws, civil unrest, disease
outbreaks, acts of God, including earthquakes and other natural
disasters and acts of terrorism or war (which may result in uninsured
losses). When interest rates increase, the cost of acquiring, developing,
expanding or renovating real property increases and real property values
may decrease as the number of potential buyers decreases. Similarly,
as financing becomes less available, it becomes more difficult to both
acquire and to sell real property, and also impacts InnVest’s ability to
refinance properties on reasonable terms. Finally, governments can,
under eminent domain laws, expropriate or take real property for less
compensation than an owner believes the property is worth. Almost
all of these factors are beyond the control of InnVest and the Manager.
Real estate investments are relatively illiquid. There can be no
assurance that InnVest will be able to dispose of an investment when it
finds disposition advantageous or necessary or that the sale price of any
disposition will recoup or exceed the amount of InnVest’s investment.
The ability of InnVest to vary its real estate portfolio in response to
changes in economic and other conditions will be limited. If InnVest
were required to liquidate its real property investments, the proceeds
to it might be significantly less than the aggregate carrying value of
its properties.
In January 2013, InnVest announced an intention, as part of its 2013
Strategic Plan, to divest its low-yielding non-core hotels and selectively
invest in stable markets with long-term growth potential. Under the
direction of the Board of Trustees of the REIT, a review of the entire
Portfolio was completed to help determine the optimal future strategy
for InnVest. Additional hotels were identified as sale candidates.
Although InnVest has exceeded its original divestiture objectives,
there can be no assurance that InnVest will be able to dispose of
remaining identified properties for the aggregate proceeds or within
the timeframes contemplated, or that InnVest will generate an adequate
return on investment in respect of its capital expenditures.
In addition, increases in the cost to InnVest of acquiring hotel properties
may materially adversely affect the ability of InnVest to acquire such
properties on favourable terms, and may otherwise have a material
adverse effect on InnVest’s business, cash flows, financial condition and
results of operations and ability to make distributions to Unitholders.
Fixed Costs and Increased Expenses
The failure to maintain stable or increasing average room rates
combined with acceptable occupancy levels would likely have a material
adverse effect on InnVest’s business, cash flows, financial condition and
results of operations and ability to make distributions to Unitholders.
Certain significant expenditures, including property taxes, maintenance
costs, mortgage payments, insurance costs and related charges, must
be made throughout the period of ownership of real property regardless
of whether a property is producing any income. If InnVest is unable
to meet mortgage payments on any property, losses could be sustained
as a result of the mortgagee’s exercise of its rights of foreclosure or
sale. InnVest is also subject to utility and property tax risk relating
to increased costs that InnVest may experience as a result of higher
resource prices as well as its exposure to significant increases in
property taxes. There is a risk that property taxes may be raised as a
result of re-valuations of properties and their adherent tax rates. In some
instances, enhancements to properties may result in significant increases
in property assessments following a re-valuation. Additionally, utility
expenses, mainly consisting of natural gas and electricity service
charges, have been subject to considerable price fluctuations over the
past several years. Any significant increase in these resource costs that
InnVest cannot charge back to the guest may have a material adverse
effect on InnVest’s business, cash flows, financial condition and results
of operations and ability to make distributions to Unitholders. The timing
and amount of capital expenditures by InnVest will affect the amount of
cash available for distributions to Unitholders. Distributions may be
reduced, or even eliminated, at times when InnVest deems it necessary
to make significant capital or other expenditures.
RISK FACTORS (cont’d)
Borrowing Risks
InnVest is subject to the risks associated with debt financing, including
the risks that cash flow from operations will be insufficient to meet
required payments of principal and interest, the risk that existing debt
will not be able to be refinanced or that the terms of such refinancings
will not be as favourable to InnVest. In such circumstances, if InnVest
was in need of capital to repay indebtedness in accordance with its
terms or otherwise, it could be required to liquidate one or more
investments in hotel properties at times which may not permit
realization of the maximum return on such investments or could be
required to agree to additional financing on unfavourable terms.
In addition, InnVest is subject to the risk that its interest expense may
increase on the refinancing of existing indebtedness or on any portion
of its indebtedness that bears interest at floating interest rates if interest
rates increase, which could have a material adverse effect on the results
of operations of InnVest and its ability to make distributions. As at
December 31, 2015, 12.5% of InnVest’s mortgage and subordinated
term debt is at floating interest rates.
InnVest’s financing arrangements contain certain covenants, including
a covenant that the lender under an existing credit facility shall have
the right to approve any change of the hotel manager for the relevant
Hotel Properties, covenants restricting transfers of the relevant Hotel
Properties, including transfers among InnVest and its affiliates, covenants
restricting InnVest’s ability to sell the Operator and covenants to provide
cash reserves for major capital expenditures from time to time. Future
financing agreements may contain similar, or more restrictive, provisions
and covenants. If InnVest fails to comply with the restrictions in current
or future financing arrangements, its lenders may be able to accelerate
related debt as well as any other debt to which a cross default or cross
acceleration provision applies. A default could also allow creditors to
foreclose, sell or realize on the property securing such debt or exercise
other remedies against InnVest. Credit facilities typically require
repayment of funds or cash flow sweeps when certain coverage
ratios are not met.
InnVest and the Operator have granted security interests over
substantially all of their assets to secure indebtedness owing under
mortgages and credit facilities. If InnVest is not able to meet its debt
service obligations, it risks the loss of some or all of its assets to
foreclosure or sale.
While management expects to address maturities in the normal
course of business, there can be no assurance that InnVest will be able
to complete additional mortgage financings or borrow additional funds
on terms acceptable to it, or at all. If InnVest were unable to refinance
maturing mortgage debt, it would be required to curtail its capital
investment activities, which could have a material adverse effect on
its results of operations and financial condition. Were this to occur,
the amount of monthly cash distributions could be negatively affected.
InnVest may not be able to achieve its lower debt leverage target.
The following table summarizes InnVest’s indebtedness at
December 31, 2015:
As at
December 31,Financial
2015Leverage Ratio
Indebtedness excluding the Debentures $804.6 46.1%
Indebtedness including the Debentures $1,015.8 58.2%
Availability of Additional Capital
InnVest utilizes cash flow from operations and credit facilities to
support operating requirements, to fund capital expenditures, to make
acquisitions and to pay distributions to Unitholders. There can be no
assurance that InnVest will have access to sufficient capital or access to
capital on terms favourable to InnVest for future property acquisitions,
financing or refinancing of properties, funding operating expenses or
other purposes. In addition, InnVest may be unable to access capital
or refinance existing obligations, given interest rate volatility, to satisfy
cash flow obligations in a timely and cost-effective manner.
In assessing the operating performance of its hotels, InnVest deducts a
4% to 5% FF&E reserve. Whether funds are specifically set aside or not,
this FF&E reserve is a source of funding to maintain the quality of the
Portfolio. For the year ended December 31, 2015, InnVest invested
$41.9 million in capital expenditures within the Portfolio. This compares
to InnVest’s FF&E reserve of $23.6 million for the year. Capital
investments undertaken in 2014 reflect the completion of InnVest’s
Comfort Inn revitalization program, which included the substantial
renovation of 58 Comfort Inn hotels over the last two years. Other
significant projects underway in 2015 included guest room upgrades
at the Delta Prince Edward, the Delta Winnipeg, the Fairmont Palliser
in Calgary, and the Sheraton Suites Calgary Eau Claire. Investments
also included the repositioning of one previously unbranded hotel to
a Holiday Inn.
Where the cost of capital improvements exceeds the FF&E reserve,
or the cost of certain capital improvements reduces the reserve to
significantly lower levels, InnVest will be required to fund these
activities principally by issuing additional equity or incurring additional
indebtedness. Access to capital markets for additional equity financings
and the availability of additional borrowing will depend on prevailing
market conditions and the acceptability of the terms offered. The
Declaration of Trust prohibits the REIT from incurring or assuming
any indebtedness if it would result in the Financial Leverage Ratio
exceeding 60% (75% including convertible debentures).
In 2015, InnVest raised over $48 million of equity in the public market,
finalized new financings of $398.4 million and completed the sale of
4 hotel properties for aggregate gross proceeds of $30.8 million.
There can be no assurance that InnVest will be able to complete
additional equity financings or borrow additional funds on terms
acceptable to it, or at all. If InnVest were unable to secure additional
funding for acquisitions or capital improvements, it would be required
to curtail these activities, which could have a material adverse effect
on its results of operations and financial condition. Were this to occur,
the amount of monthly cash distributions could be negatively affected.
Joint Ventures and Other Arrangements
InnVest participates in two partnership interests in respect of its
20% ownership interest in the Royal York Hotel and 33.3% interest
in the Courtyard Marriott Toronto. InnVest also participates in a joint
venture in respect of its 50% ownership interest in Choice Canada.
Such investments involve risks not present were third parties not
involved, including the possibility that the REIT’s partners might fail
to fund their share of required capital contributions.
Additionally, the REIT’s partners might at any time have economic or
other business interests or goals which are inconsistent with the REIT’s
business interests or goals. The REIT does not have sole control of
certain major decisions relating to the Royal York Hotel and Choice
Canada, including decisions relating to: annual budgets; the sale of
the property/business; refinancings; and capital improvements.
In some instances, the joint venture or partnership retains joint
approval rights over various material matters such as the budget for
the property/business. In addition, the sale or transfer of interests
in the joint venture or partnership may be subject to rights of first
refusal or first offer or provide for buy-sell or similar arrangements.
Such rights may be triggered at a time when InnVest may not want to
sell but may be forced to do so because it may not have the financial
resources at that time to purchase the other party’s interest. Such rights
may also inhibit the REIT’s ability to sell the REIT’s interest in the joint
venture or partnership within the REIT’s desired time frame or on any
other desired basis.
Acquisition Risks
InnVest’s business plan includes growth through acquisition of
additional hotel properties. There can be no assurance that additional
hotel properties will be available to InnVest at prices that will be
accretive to InnVest. In addition, competition for assets may result in
higher costs to InnVest for such acquisitions. If InnVest is unable to
manage its growth effectively, its business, financial condition, operating
results and cash available for AFFO could be adversely affected.
In addition to making investments in existing properties and seeking
operational efficiencies in the operation of the Portfolio, InnVest may
seek to increase cash flow and enhance REIT Unit value by acquiring
additional hotel properties that meet its investment criteria and by
applying its operating strategy to improve the financial performance
of the subsequently acquired hotels. Acquisitions entail risks that
investments will fail to perform in accordance with expectations and
that judgments with respect to the costs of improvements to bring an
acquired property up to appropriate standards will prove inaccurate,
as well as general investment risks associated with any new real estate
investment. In addition, deposits to vendors related to contemplated
acquisitions by InnVest may not be refunded should InnVest fail to
complete such purchases. Representations and warranties given by
the vendors of hotel properties to the REIT may not adequately inform
or protect the REIT against these risks, and any recourse against third
parties may be limited. There can be no assurance as to the pace of
growth through property acquisitions or that InnVest will be able to
acquire assets on an accretive basis.
Integration of Additional Hotel Properties
InnVest intends to acquire additional hotel properties in the future.
InnVest cannot assure Unitholders that it will be able to successfully
integrate these additional properties into its existing Portfolio
without operating disruptions or unanticipated costs. As InnVest
acquires additional properties, InnVest will be subject to risks
associated with managing new properties, including potential
mortgage default. In addition, acquisitions may cause disruptions in
InnVest’s operations and divert management’s attention away from
day-to-day operations. Furthermore, InnVest’s profitability may suffer
because of acquisition related costs or amortization and depreciation
costs for acquired assets. InnVest’s failure to successfully integrate any
future properties into its Portfolio could have an adverse effect on
InnVest’s operating costs and its ability to generate stable positive
cash flow from its operations.
Internalization of Asset Management Functions
In connection with the Settlement, the asset supervisory agreement was
terminated effective November 30, 2014, and the asset management
function performed by the Manager on behalf of InnVest was internalized
as of and from December 1, 2014. While InnVest expects that the
internalization of the asset management function previously performed
by the Manager will benefit the REIT through enhanced business
oversight and alignment of interests, this cannot be assured.
Capital Expenditures
The timing and amount of capital expenditures by InnVest directly
affect the amount of cash available for AFFO. Furthermore, failure to
invest in the Hotel Properties, or possible variances in planned amount
and timing on capital expenditures may result in temporary and/or
permanent loss or shift in business and earnings at the Hotel Properties.
The REIT’s distributions may be dependent upon the ability of the REIT
to fund a portion of its capital expenditures and working capital with
cash generated from operations. There can be no assurance that
sufficient capital will be available on acceptable terms to the REIT for
necessary or desirable capital expenditures or that the amount required
will be the same as currently estimated. The REIT may be required to
reduce, or even eliminate, distributions or sell additional REIT Units in
order to accommodate capital investments. While InnVest expects to
develop and execute the appropriate capital expenditure plans that
balance the needs of the Hotel Properties, guests and Unitholders,
this cannot be assured.
LODGING INDUSTRY RISKS
Hotel Industry Risks
The REIT directly or indirectly owns and (through the Operator)
operates hotels. As a result, InnVest is subject to the operating risks
inherent in the Canadian hotel industry. These risks include:
cyclical downturns arising from changes in general and regional
economic conditions (including dependence on manufacturing, oil
or other resource markets);
➤changes in the level of business and commercial travel and tourism;
➤increases in the supply of accommodations in local markets which
may adversely affect the results of operations;
➤competition from other hotels and its potential impact on
pricing pressure;
➤the recurring need for renovation, refurbishment and improvement
of hotel properties;
➤changes in wages, prices, energy costs and construction and
maintenance costs that may result from inflation, government
regulations, changes in interest rates or currency fluctuations;
➤seasonal fluctuations in hotel operating income produced throughout
the year;
➤availability of financing for operating or capital requirements;
➤increases in operating costs due to inflation which may not necessarily
be offset by increased room rates;
➤increases in expenses of travel, particularly automotive travel (which
results in reduced overall travel and hotel stays); and
➤other factors, including changes in cross-border movement of
Americans to Canada, medical concerns related to travelling to
Canada, acts of terrorism, natural disasters, extreme weather
conditions and labour shortages, work stoppages or disputes.
➤
In addition to the foregoing, there are economic trends and factors
that may be beyond InnVest’s control which affect its operations and
business. Such trends and factors include adverse changes in the
conditions in the hotel industry, including those described above, and
the conditions in the domestic or global economy generally. Such trends
and factors could result in geographical disparities among regions.
Although InnVest’s performance is affected by the general condition
of the economy, not all of its service areas are affected equally. It is not
possible for management to accurately predict economic fluctuations
and the impact of such fluctuations on InnVest’s performance.
Competition
The Canadian hotel industry is highly competitive. Each of the hotels in
the Portfolio is located in an area that includes other hotels owned or
operated by third parties. InnVest competes locally and regionally with
existing hotels and will compete with hotels that may be developed in
the future. In addition, new types of entrants in the hospitality market,
such as Airbnb, may provide alternative accommodation sources to
current customers. Some of the competitors of hotels in the Portfolio
may have substantially greater marketing and financial resources than
InnVest and, amongst other things, may be better able to improve
service and product quality. The number of competitive hotel properties
in a particular area could have a material adverse effect on the
occupancy rates and ADR of the hotels in the Portfolio.
The Westmont Group continues to own hotels and may, in certain
circumstances, acquire additional hotels, including hotels that compete
with InnVest properties.
Guest Demands and Satisfaction
The performance of the REIT is partly dependent on the Hotel Business’
respective ability to attract guests and ability to understand and respond
to changing guest demands and needs. InnVest works closely with the
brands associated with the Portfolio to support aggressive sales and
marketing initiatives. The association of InnVest’s Portfolio with negative
publicity could damage InnVest’s reputation, adversely affect InnVest’s
ability to attract guests, and divert management’s attention from
day-to-day operations. Significant harm to the REIT’s reputation can
also arise from other sources, including online hotel reviews and social
media sources, employee misconduct, unethical behaviour, environmental
matters, litigation or regulatory outcomes, failing to deliver minimum
or required standards of service and quality, compliance failures,
unintended disclosure of confidential information and the activities
of InnVest’s guests and counterparties, including the Operator and
Manager. While InnVest expects that it will be able to effectively
understand and respond to changing guest demands and needs,
this cannot be assured.
Franchised Hotel
With the exception of one independent hotel, each of the hotels in
the Portfolio (including the hotels branded under Choice Canada flags)
is subject to a franchise agreement, and any hotels InnVest invests in
after the date of this Management’s Discussion and Analysis may also
be operated under franchise agreements. The continuation of the
franchises is subject to specified operating standards and other terms
and conditions. Such standards are often subject to change over time,
in some cases at the discretion of the franchisor, and may restrict a
franchisee’s ability to make improvements or modifications to a hotel
property without the consent of the franchisor. Franchisors typically
periodically inspect licensed properties to confirm adherence to
operating standards. The failure of a hotel in the Portfolio to conform
to such standards or the failure of InnVest or the Operator to maintain
such standards or adhere to such other terms and conditions could
result in the loss or cancellation of the franchise agreement and
potential liquidated damages. In a large portfolio, it is typical that,
each year, several hotels will fail to pass such inspections. From time
to time, hotels in the Portfolio have not passed an inspection but have
subsequently passed inspections upon correction of noted deficiencies.
It is possible that a franchisor could condition the continuation of a
franchise agreement on the completion of capital improvements which
the Trustees determine are too expensive or otherwise unwarranted
in light of general economic conditions or the operating results or
prospects of the affected hotel. In that event, the Trustees may elect to
allow the franchise agreement to lapse. If a franchise were terminated,
InnVest would generally seek to obtain a suitable replacement franchise.
However, there can be no assurance that InnVest would be able to
obtain a suitable replacement franchise on acceptable terms, or at all.
The loss of a franchise agreement could have a material adverse effect
upon the operations or the underlying value of the hotel covered by the
franchise because of the loss of associated name recognition, marketing
support and centralized reservation systems provided by the franchisor.
Sixty-eight of the hotels in the Portfolio (representing approximately
36% of total rooms) are operated under Choice Canada franchises.
Despite the Operator’s 50% indirect ownership of Choice Canada, under
Choice Canada’s master franchise agreement with Choice International,
the Choice branded hotels in the Portfolio are required to operate to
standards determined by Choice Canada, and representatives of Choice
Canada must approve any hotel to be re-flagged under a Choice flag.
InnVest is subject to risks related to the concentration in the Portfolio of
hotels operating under the Choice flags, including the risk of a reduction
in hotel revenue following any adverse publicity related to the Choice
flags, which could have a material adverse effect on InnVest’s results
of operations and financial condition.
Reliance on Franchisees by Choice Canada
The growth of Choice Canada’s business is, in part, dependent on
its ability to attract and retain qualified franchisees in Canada and
on the ability of Choice Canada’s franchisees to maximize penetration
of their designated markets and operate their hotels successfully.
Although Choice Canada has established criteria to evaluate prospective
franchisees, there can be no assurance that its existing or future
franchisees will have the business abilities or access to financial
resources necessary to open the required number of hotels or that
they will successfully develop or operate these hotels in their franchise
areas in a manner consistent with Choice Canada’s standards. There
can be no assurance that Choice Canada will be able to attract
qualified franchisees.
Dependence on and Relationship with the Manager
InnVest amended and restated the Master Hotel Management Agreement
with the Manager on April 21, 2014. The Manager provides hotel
management services to the Operator and its subsidiary partnerships.
InnVest is dependent on the Manager with respect to the management
and the operation of most of the hotels in the Portfolio. Any failure to
effectively manage InnVest’s operations or to implement InnVest’s
strategy could have a material adverse effect on the REIT’s operating
results. Under the Master Hotel Management Agreement, the
Westmont Group may sell the Manager or sell or assign the Master
Hotel Management Agreement subject, in each case, to the approval
of not less than 66 2/3% of the Independent Trustees, which shall not be
unreasonably withheld if the person acquiring the agreement or control
of the Manager is a hotel management company having comparable
experience and operating and service standards equal to or better than
those of the Manager and if all necessary third party consents and other
approvals have been obtained without adverse consequence to InnVest.
There is no assurance that the strategic relationships between InnVest
and the Manager will be maintained in the future. There can be no
assurance that if the Manager were to terminate the Master Hotel
Management Agreement a suitable replacement would be found.
Dependence on and Relationship with Hotel Managers Generally
The financial performance of InnVest will also depend in part on the
performance of Fairmont, Hilton, Delta, Westmont and Hyatt, as hotel
managers, with whom InnVest has hotel management agreements
with respect to the management of certain Hotel Properties of InnVest.
InnVest depends on the hotel managers for all aspects of the day-to-day
management of certain Hotel Properties. There is no assurance that the
relationships between InnVest and Fairmont, Hilton, Delta, Westmont
and Hyatt, as hotel managers, will be maintained in the future. There
can be no assurance that a suitable replacement would be found in a
timely manner, or at all, if any of the hotel managers ceased providing
its services to InnVest.
Potential Labour Disruptions
A significant number of the employees employed at the hotels in the
Portfolio are unionized and governed by collective agreements. The
bargaining rights of the unions at these hotels are site specific to the
employees at each particular hotel. Individual hotels have experienced,
and may in the future experience, labour disruptions or difficulties which
could affect the short term operating performance of particular hotels.
Relations with employees could deteriorate due to disputes related to,
among other things, wage or benefit levels or InnVest’s response to
changes in government regulation of workers in the workplace. Hotel
operations rely heavily on employees. Any labour shortage or stoppage
caused by disagreements with employees, including unionized employees,
could adversely affect the ability of InnVest’s hotels to operate, its
occupancy, room revenue and cash flows, and/or damage InnVest’s
reputation. Any such labour difficulties could have a material adverse
effect on InnVest’s results of operations, business, prospects and
financial condition.
Technological Innovation
The ability to leverage technological innovation allows the REIT to
improve operating efficiencies to maximize earnings. The business
depends on information technology systems for day-to-day operations,
including for each hotels’ reservation systems. An inability to operate
the REIT’s systems or make enhancements to accommodate customer
expectations, or a failure to leverage technological innovation to achieve
or sustain financial and operational efficiency, competitive advantage,
and deliver better quality services to guests could have the potential
to have a material adverse effect on the REIT’s business, financial
condition, results of operations and cash flow.
TAX RELATED RISKS
Potentially Ceasing to be a Qualifying REIT
The REIT would be subject to Canadian income tax on a similar basis
to a Canadian public corporation on its income for a year unless it
qualified in that year as a Qualifying REIT for purposes of the Tax Act.
The conditions for qualifying as a Qualifying REIT are onerous, and
include various numerical tests (including tests entailing valuations or
measurement of various asset and revenue streams), which must be
satisfied throughout, or for the whole of, the year in question. Therefore,
financial results for a year, or developments occurring during the year,
that were not anticipated earlier in the year, or challenges by the CRA to
valuations made by or on behalf of management of InnVest, or to other
calculations, that are relevant to being a Qualifying REIT, could result in
the REIT not so qualifying for the year. The CRA also could seek to treat
rents received by the REIT, or subsidiary limited partnerships of the
REIT, from the Operator or subsidiary limited partnerships of the
Operator, as payments for the occupation or use of hotel rooms rather
than accepting that they qualify as “rent from real or immovable
properties”. If its asset values and revenues were similar in 2015 (and
subsequent years) to what they were in 2014, InnVest anticipates after
consultation with legal counsel that it would be a Qualifying REIT for
2015 (and subsequent years).
Furthermore, qualifying as a Qualifying REIT also depends on there
being no adverse amendments to the Tax Act. Accordingly, there is a
risk that the REIT will not qualify as a Qualifying REIT for one or more
of its 2015 or subsequent taxation years (and qualification for 2013
and 2014 also could be challenged). Were this to occur, the amount
of monthly cash distributions on the REIT Units (and therefore the
aggregate distributions on the REIT Units) would be negatively affected.
Mutual Fund Trust Status of the REIT
Management of InnVest believes that the REIT qualifies as a “mutual
fund trust” for purposes of the Tax Act. However, if it was determined
that the REIT did not qualify as a mutual fund trust for purposes of the
Tax Act, there likely would be material adverse consequences to the
REIT and the Unitholders, including the REIT becoming subject to a
36% tax under Part XII.2 of the Tax Act on all or substantially all of its
income in any taxation year in which it was determined not to have
qualified as a mutual fund trust. As the REIT does not intend to file its
trust returns on the basis that it is subject to Part XII.2 tax, there may
be no ability of any Unitholders to receive a refund of all or any portion
of their pro rata share of any subsequent assessment by the CRA of
the REIT for Part XII.2 tax for such taxation year.
GENERAL RISK FACTORS
Potential Conflicts of Interest
The REIT was established to purchase, directly and indirectly, the
original portfolio of 114 hotel properties, 75 of which are still owned
at December 31, 2015. The Independent Trustees did not receive
independent advice pertaining to the agreements that were entered
into by the REIT, the Manager and the REIT’s promoters in connection
with the purchase of the original portfolio and the REIT’s initial
public offering.
In addition, InnVest may be subject to various conflicts of interest
because of the fact that the Manager and its respective directors,
officers and associates, as well as the Trustees, are engaged in a wide
range of business activities, including hotel management, acquisition
and ownership. Additionally, certain Trustees and officers of the REIT
are officers and directors of entities that manage and can provide capital
to the REIT, which could give rise to conflicts of interest. InnVest may
become involved in transactions which conflict with the interests of the
foregoing. The Trustees and officers of the REIT and associates or
affiliates of the Manager may from time to time deal with persons, firms,
institutions or corporations with which InnVest may be dealing, or which
may be seeking investments similar to those desired by it. The interests
of these persons could conflict with those of InnVest. In addition, from
time to time, these persons may be competing with InnVest for available
investment opportunities. The Declaration of Trust contains provisions to
address these potential conflicts of interest. See “Management Structure
– Conflict of Interest Restrictions and Provisions” and “Management
Structure – Independent Trustee Matters”.
Lender Concentration
At December 31, 2015, InnVest has outstanding indebtedness with a
variety of lenders including Canadian banks, institutional lenders, life
insurance companies, credit unions and commercial mortgage backed
securities lenders. At December 31, 2015, almost 43% of InnVest’s
outstanding indebtedness (excluding convertible debentures) is with
one lender. There is a limited pool of lenders able to finance debt of
significant size in the Canadian market, particularly for borrowers in
the hospitality industry. InnVest is subject to the risk that its lenders,
particularly its largest lender, may tighten borrowing conditions and be
unable to renew financing on terms acceptable to InnVest, or at all. If
InnVest’s currently outstanding debt is refinanced on less favourable
terms or cannot be refinanced on terms acceptable to InnVest this
may negatively impact its AFFO.
Litigation Risks
In the normal course of InnVest’s operations, whether directly or
indirectly, it may become involved in, named as a party to or the subject
of, various legal proceedings, including regulatory proceedings, tax
proceedings and legal actions relating to personal injuries, property
damage, property taxes, land rights, the environment and contract
disputes. The outcome with respect to outstanding, pending or future
proceedings cannot be predicted with certainty and may be determined
in a manner adverse to InnVest and as a result, could have a material
adverse effect on InnVest’s assets, liabilities, business, financial condition
and results of operations. Even if InnVest prevails in any such legal
proceeding, the proceedings could be costly and time-consuming and
may divert the attention of management and key personnel from
InnVest’s business operations, which could have a material adverse
effect on InnVest’s business, cash flows, financial condition and results
of operations and ability to make distributions to Unitholders.
Legislative and Regulatory Compliance
There are many laws and governmental rules and regulations that apply
to InnVest, including, among others, financial reporting requirements,
securities, ethics and privacy laws and regulations. Changes in these
laws, rules and regulations, or their interpretation by agencies or the
courts, could occur. Non-compliance with applicable laws or rules or
regulations, or InnVest’s inability to keep up with, or adapt to, an ever
changing, complex regulatory environment, could result in civil liability,
criminal liability and/or sanctions against the REIT, including fines,
injunctive relief, suspension or expulsion from a particular jurisdiction
or market or the revocation of licenses, any of which could adversely
affect InnVest’s financial condition and results of operations.
Environmental Risks
Under various environmental laws and regulations, a current or previous
owner or operator of real property may be liable for the costs of
remediation of contamination or hazardous or toxic substances on,
under or in a property. Environmental laws and regulations often impose
liability whether or not the owner or operator knew of, or was
responsible for, the presence of such contamination or hazardous or
toxic substances. In addition, the presence of contamination or
hazardous or toxic substances, or the failure to remediate contamination
properly, may adversely affect the owner’s ability to borrow using a
property as collateral. In connection with the ownership of the Portfolio,
InnVest may be potentially liable for any such remediation costs.
Phase I environmental site assessments and, where appropriate, Phase II
environmental site assessments were typically completed in respect of
each of the Hotel Properties, and may also be completed in connection
with financing opportunities. Based on the results of these assessments,
InnVest believes that the Hotel Properties are operated in substantial
compliance with all material environmental laws and regulations and
that the current estimated cost of remediation or capital expenditures
with respect to actual or potential environmental conditions will not
have a material adverse effect on InnVest’s results of operations,
business, prospects and financial condition. There can be no assurance
that such assessments have identified all material environmental
contamination or hazardous or toxic substances or violations of
environmental laws or regulations. Further, the costs involved for
remediation of the contaminated property can be difficult to estimate
and could exceed current estimated amounts.
The Operator, directly or through its subsidiary partnerships, intends
to make the necessary capital and operating expenditures to comply
with environmental laws and regulations. Although there can be no
assurances, InnVest does not believe that costs relating to environmental
matters will have a material adverse effect on its results of operations,
business, prospects and financial condition. However, environmental
laws and regulations may change and InnVest or its subsidiaries may
become subject to more stringent environmental laws and regulations
in the future. Compliance with more stringent environmental laws and
regulations may have a material adverse effect on InnVest’s results of
operations, business, prospects and financial condition. Environmental
laws and regulations may also limit future development or expansion
of the Hotel Properties.
Uninsured and Underinsured Losses
The Declaration of Trust requires that the REIT obtains and maintains at
all times insurance coverage in respect of its potential liabilities and the
accidental loss of value of its assets from risks, in amounts, with such
insurers, and on such terms as the Trustees consider appropriate, taking
into account all relevant factors including the practices of owners of
comparable properties. InnVest believes that the insurance coverage
to be maintained is of the type and amount customarily obtained for
or by an owner of real property assets. However, there are certain
types of losses, generally resulting from catastrophic events, such as
earthquakes and floods or acts of terrorism that may be uninsurable
or not economically insurable. The Trustees will use their discretion in
determining amounts, coverage limits and deductibility provisions of
insurance, with a view to maintaining appropriate insurance coverage
on InnVest’s investments at a reasonable cost and on suitable terms.
This may result in insurance coverage that, in the event of a substantial
loss, would not be sufficient to pay the full current market value or
current replacement cost of InnVest’s lost investment. Certain factors,
including inflation, changes in building codes and ordinances and
environmental considerations, also might make it unattractive to use
insurance proceeds to replace the property after such property has
been damaged or destroyed. Under such circumstances, the insurance
proceeds received by InnVest might not be adequate to restore its
economic position with respect to such property.
Fraud, Illegal Acts, or Inadequate or Failed Internal
Processes or Systems
The REIT may suffer a significant loss resulting from fraud, other illegal
acts or inadequate or failed internal processes or systems. InnVest
operates in different markets and relies on its employees to follow
its policies and processes as well as applicable laws in their activities.
Risk of illegal acts or failed systems is managed through InnVest’s
infrastructure, controls (including internal audits), systems, policies
and people. Failure to manage these risks can result in direct or indirect
financial loss, reputational impact, regulatory censure or failure in the
management of other risks such as credit or market risk.
Reliance on Management Personnel
InnVest’s management team has a significant role in its success. A lack
of human capital strategy to address retention, development of talent
and training may impede the REIT’s ability to retain personnel or to
attract suitable replacements should any members of the management
group leave. The loss of services from members of the management
group or a limitation in their availability could adversely affect InnVest’s
operations, reputation, and its financial condition. The departure of a
significant number of InnVest’s professionals for any reason, or the
failure to appoint qualified or effective successors in the event of such
departures, could have a material adverse effect on InnVest’s ability to
achieve its objectives.
Disclosure Controls and Procedures or Internal Control Over
Financial Reporting
InnVest’s business could be adversely impacted if there are deficiencies
in its disclosure controls and procedures or internal control over
financial reporting. The design and effectiveness of InnVest’s disclosure
controls and procedures and internal control over financial reporting
may not prevent all errors, misstatements or misrepresentations.
While management continues to review the effectiveness of InnVest’s
disclosure controls and procedures and internal control over financial
reporting, InnVest cannot assure investors that its disclosure controls
and procedures and internal control over financial reporting will
be effective in accomplishing all control objectives all of the time.
Deficiencies, particularly material weaknesses, in internal control
over financial reporting which may occur in the future could result
in misstatements of InnVest’s results of operations, restatements
of InnVest’s financial statements, a decline in InnVest’s Unit price
or otherwise materially adversely affect the business of InnVest, its
reputation, its results of operations or its financial condition or liquidity.
Consumer Privacy and Data Use and Security
InnVest and its customers are subject to regulations related to privacy
and data use and security. Failure to adequately restrict logical or
physical access to information (data or programs) could result in the
unauthorized knowledge and use of confidential information by others.
Information security is essential to maintaining efficient, reliable business
processes and to enabling sustained business growth. Technology
advancements and the people using these technologies introduce new
information security risks. Cyber threats are maturing with time and
their sophistication and effectiveness are increasing. Such threats can
result from deliberate attacks or unintentional events. These threats
can include, but are not limited to, gaining unauthorized access to
digital systems for purposes of misappropriating assets or sensitive
information, corrupting data or causing operational disruption. The
effect of a data breach or cyber attacks could result in significant
disruption to hotel information technology networks.
InnVest uses standard industry practices for network and information
technology security, survivability and disaster recovery. InnVest’s
ongoing success partly depends on protecting the REIT’s corporate
business-sensitive data, including personal information about the REIT’s
customers and employees. InnVest treats this information as intellectual
property and protects it from unauthorized access and compromise.
InnVest relies on its policies and procedures and information technology
systems to protect this information.
The result of cyber threats could include, but are not limited to,
disrupted operations, misstated financial data, liability for stolen
assets or information, increased cyber-security protection costs, and
litigation and reputational damage adversely affecting the business
and results of operations. InnVest also relies on annual investments
in new capabilities, education, continuous improvement and policies
established by the REIT’s managers and franchise brands to maintain
and improve InnVest’s security posture. If InnVest fails to secure its data
and the privacy of its customer information, the REIT may not be in
compliance with regulatory standards and it could result in negative
publicity, litigation and damage to the REIT’s reputation. Any of these
outcomes can cause InnVest to lose customers or public confidence,
or experience financial losses.
In mid-2010, new standards relating to credit card payment security
were implemented. The Payment Card Industry Data Security
Standard (“PCI DSS”) is a multifaceted security standard that includes
requirements for security management, policies, procedures, network
architecture, software design and other critical protective measures.
This comprehensive standard is intended to help organizations
proactively protect customer payment card account data. All
entities that transmit, process or store payment card data must
be compliant with PCI DSS.
Regulation of privacy, data use and security may materially increase
InnVest’s and its customers’ costs. Failure to comply with the privacy
and data use and security laws, regulations and/or standards,
specifically PCI DSS, could result in financial penalties to InnVest
as well as the risk of losing its ability to process credit card payments
at hotels.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of InnVest’s financial position and results
of operations are based upon its consolidated financial statements,
which have been prepared in accordance with IFRS. The preparation
of financial statements requires management to make judgments,
estimates and assumptions concerning the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at
the balance sheet date and the reported amounts of revenue and
expenses during the reporting period. Management uses its judgment
and knowledge from past experience as a basis for estimates and other
assumptions required in the preparation of the financial statements.
Management’s estimates and assumptions are evaluated and updated
on a regular basis taking into account current market conditions. The
actual results may materially differ, if management were to use different
estimates and assumptions.
InnVest believes that the following significant accounting policies are
most affected by judgments, estimates and assumptions used in the
preparation of its consolidated financial statements. For a detailed
description of these and other accounting policies, refer to Note 2
to the accompanying consolidated financial statements.
FAIR VALUE
Fair value is the amount at which an item could be bought or sold in
a current transaction between independent, knowledgeable willing
parties, as opposed to a forced or liquidation sale, in an arm’s-length
transaction under no compulsion to act. Quoted market prices in active
markets are the best evidence of fair value and are used as the basis for
fair value measurement, when available. When quoted market prices are
not available, estimates of fair value are based on the best information
available including prices for similar items and the results of other
valuation techniques. Valuation techniques used would be consistent
with the objective of measuring fair value.
The techniques used to estimate future cash flows will vary from one
situation to another depending on the circumstances surrounding the
asset or liability in question.
InnVest’s financial statements are affected by the fair value based
method of accounting, the most significant areas of which are as follows:
Management is required to make a number of assumptions and
estimates in calculating the fair value less costs to sell assets
presented as held for sale. In assessing these values, management’s
valuation methodology include the use of discounted cash flow models,
the direct capitalization approach and a per room valuation approach.
➤The fair value of exchangeable units, unvested executive incentive
plan units and Trustees’ deferred units use quoted market prices
based on the price of InnVest units at each reporting date.
➤The fair value of InnVest’s convertible debentures use quoted market
prices based on the price of each series of debentures. The fair value
of the convertible debenture conversion feature is estimated using
the Black Scholes valuation model and uses various methods to
➤
determine its underlying assumptions including the volatility of
InnVest units’ quoted market price, market interest rates as well
as management’s judgment relating to interest rate spreads for
instruments of similar terms and risks.
➤The fair value of the identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination
are measured initially at fair value at the acquisition date.
IMPAIRMENT
Impairment testing of hotel properties requires management to assess
each respective property’s ability to recover its book value through the
normal course of operations and evaluate the property’s recoverable
amount which is equal to the greater of (i) fair value less costs to sell,
and (ii) value-in-use of the property.
Significant assumptions are used in the assessment of the recoverable
amount and impairment including estimates of future operating cash
flows, the time period over which they will occur (including management’s
intention not to hold the assets through their useful life), an appropriate
discount rate, appropriate growth rates (revenues and costs) and
changes in market valuation parameters. Management considers various
factors in its assessment including the historical performance of hotel
properties, expected trends in each specific market including new or
expected new hotel supply as well as local and macroeconomic conditions.
Impairment is measured as the excess of the carrying value over the
recoverable amount of the hotel, with the recoverable amount value
determined based on the greater of (i) the estimated future discounted
cash flows of the hotel and (ii) the estimated sales value of the hotel,
net of selling costs.
As part of its impairment review as at and throughout the year ended
December 31, 2015, InnVest completes internal valuations for each of
its properties. During the year, an external third party valuation firm
completed a limited scope appraisal review on an individual hotel basis
to support management’s internal valuations. Such internal valuations
are determined based upon, among other things, cash flows generated
by the properties and growth assumptions reflecting known local market
conditions, less future capital outflows with respect to such properties
as well as comparable sale transactions in each market. Minimum price
per room metrics are also considered where current cash flows are not
reflective of stabilized operating results. Based on its reviews, InnVest
estimates that its aggregate hotel property values exceed InnVest’s
net book value. InnVest’s accounting policy requires management to
recognize impairment charges on individual assets based on their
estimated recoverable amount, unlike gains, which can only be
recognized upon sales.
During the year ended December 31, 2015, InnVest recognized net gains
on asset sales of $0.6 million, and recognized non-cash impairment charges
of $2.8 million triggered by updated sales expectations for three non-core
assets and changes in local market conditions including comparable sales
CRITICAL ACCOUNTING POLICIES AND ESTIMATES (cont’d)
activity in the market and/or reduced cash flow projections for two assets.
In 2014, the REIT recorded a $7.3 million non-cash impairment charge
relating to five properties, the reversal of $3.5 million of prior impairments
and $18.8 million of net gains on asset sales.
HOTEL PROPERTY COMPONENTS AND USEFUL LIVES
Hotel properties consisting of land, buildings, finishes, electrical and
mechanical components and furniture, fixtures and equipment represent the
vast majority of InnVest’s assets. Depreciable assets within hotel properties
represent the vast majority of the assets and the depreciation method and
estimates of useful life selected could have a material impact on InnVest’s
operating results. Upon conversion to IFRS, management undertook a
process to (i) identify hotel property components, (ii) allocate the deemed
cost of the hotel property to each component and (iii) determine the
appropriate depreciation period for each component. A similar process is
undertaken for acquisitions to the portfolio. The identification, allocation
and depreciation period chosen for each component of hotel properties
affects the depreciation expense in each accounting period.
InnVest depreciates these assets using the straight-line method over
their estimated economic or useful lives, which vary from seven years
to 40 years. The selected depreciation method and estimates of useful
life impacts the level of depreciation expense recognized in InnVest’s
operating results. In establishing useful lives, management considered
its capital maintenance plans and consulted with third party and internal
construction experts.
The estimate of the economic or useful lives of hotel properties would
not affect key financial metrics reported including GOP, FFO and
AFFO since these measures exclude non-cash depreciation charges.
BUSINESS COMBINATION
At the time of acquisition of a property, InnVest considers whether the
acquisition represents the acquisition of a business or of assets and
liabilities. InnVest accounts for an acquisition as a business combination
where an integrated set of activities is acquired in addition to the
property. The cost of a business combination is measured as the
aggregate fair value of the consideration transferred at the acquisition
date. Identifiable assets acquired and liabilities and contingent liabilities
assumed in a business combination are measured initially at fair value
at the acquisition date. InnVest recognizes any contingent consideration
to be transferred by the REIT at its acquisition date fair value. Goodwill,
if applicable, is initially measured at cost, being the excess of the
purchase price over the fair value of the net identifiable assets
acquired and liabilities and contingent liabilities assumed. A bargain
purchase gain, if applicable, is recognized immediately in net income.
Acquisition-related costs are expensed in the period incurred.
When the acquisition of a property does not represent a business, it is
accounted for as an acquisition of a group of assets and liabilities. The
cost of the acquisition is allocated to the assets and liabilities acquired
based upon their relative fair values, and no goodwill is recognized.
InnVest has determined that all acquisitions made during the periods
presented were acquisitions of a business. If the initial accounting for a
business combination is incomplete by the end of the reporting period in
which the combination occurs, InnVest reports provisional amounts for the
items for which the accounting is incomplete. Such provisional amounts
may be adjusted during the ‘measurement period’ (which cannot exceed
one year from the acquisition date) based on additional information about
facts and circumstances that existed at the acquisition date that, if known,
would have affected the amounts recognized at that date.
JOINT ARRANGEMENTS
The REIT has one joint operation and two joint ventures. The joint
ventures include the REIT’s interest in CHC and 33.3% ownership of
one hotel, both of which are accounted for using the equity method.
In assessing whether the joint arrangements are joint operations or
joint ventures, management applies judgment to determine the REIT’s
rights and obligations in the arrangement based on factors such as the
structure, legal form and contractual terms of the arrangement.
FUTURE ACCOUNTING CHANGES
InnVest has reviewed new and revised accounting pronouncements
that have been issued but are not yet effective and determined that,
except as noted below in respect of amendments to IAS 1 and the
updated effective implementation period for IRFS 15, there have not
been any changes to expected future accounting changes than those
described in Note 2 to the audited consolidated financial statements
at December 31, 2015.
AMENDMENTS TO IAS 1, DISCLOSURE INITIATIVE
The amendments to IAS 1 relate to (i) materiality; (ii) order of notes;
(iii) subtotals; (iv) accounting policies; and (v) disaggregation, and are
designed to improve presentation and disclosure in financial reports by
encouraging companies to apply professional judgment in determining
what information to disclose in financial statements. Amendments to
IAS 1 are effective for annual periods beginning on or after January 1,
2016, with early application permitted. InnVest adopted this standard
on January 1, 2016.
FUTURE ACCOUNTING CHANGES (cont’d)
IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS
IFRS 15 specifies how and when revenue should be recognized as
well as requiring more informative and relevant disclosures. IFRS 15
supersedes IAS 18, Revenue Recognition, IAS 11, Construction Contracts
and a number of revenue-related interpretations. Application of the
standard is mandatory and it applies to nearly all contracts with
customers: the main exceptions are leases, financial instruments and
insurance contracts. IFRS 15 is effective for annual periods on or after
January 1, 2018. InnVest is currently evaluating the impact to the
consolidated financial statements and plans to adopt this standard
on the required effective date.
IFRS 16 – LEASES
In January 2016, the IASB issued IFRS 16 which replaces IAS 17,
“Leases” and its associated interpretative guidance. IFRS 16 applies
a control model to the identification of leases, distinguishing between
a lease and a service contract on the basis of whether the customer
controls the asset being leased. For those assets determined to meet
the definition of a lease, IFRS 16 introduces significant changes to the
accounting by lessees, introducing a single, on-balance sheet accounting
model that is similar to current finance lease accounting, with limited
exceptions for short-term leases or leases of low value assets. Lessor
accounting remains similar to current accounting practice. The standard
is effective for annual periods beginning on or after January 1, 2019,
with early application permitted for entities that apply IFRS 15. InnVest
is currently assessing the impact of IFRS 16 on its consolidated
financial statements.
AMENDMENTS TO IFRS 9 – FINANCIAL INSTRUMENTS
On July 24, 2014, the IASB issued the final version of IFRS 9,
“Financial Instruments” (“IFRS 9”), which replaces IAS 39, “Financial
Instruments: Recognition and Measurement”. This final version of IFRS 9
includes requirements for recognition and measurement, impairment,
de-recognition and general hedge accounting. The standard introduces a
single, principles-based approach that amends both the categories and
associated criteria for the classification and measurement of financial
assets, which is driven by the entity’s business model for the portfolio in
which the assets are held and the contractual cash flows of these financial
assets. This new standard supersedes all prior versions of IFRS 9.
Amendments to IFRS 9 are effective for annual periods beginning on
or after January 1, 2018, with early application permitted. InnVest is
currently evaluating the impact to the consolidated financial statements
and plans to adopt this standard on the required effective date.
CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate
internal controls over disclosure controls and procedures, as defined
in National Instrument 52-109, Certification of Disclosure in Issuers’
Annual and Interim Filings (“52-109”), of the Canadian Securities
Administrators. The Chief Executive Officer and the Chief Financial
Officer have assessed, or caused an assessment to be made under
their direct supervision, of the design and operating effectiveness of
InnVest’s internal controls over financial reporting as at December 31,
2015, based on the criterial set forth in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In 2015, InnVest updated its internal controls over financial reporting
to the criteria set forth in Internal Control – Integrated Framework
(2013) from the 1992 Framework. This update has not resulted in any
significant changes in internal controls over financial reporting during
the year ended December 31, 2015. In order to effect an efficient and
effective transition, InnVest established an implementation team and
program including the engagement of external resources to assist with
the update and testing process.
It should be noted that a control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. The inherent limitations in
all controls systems ensure that no evaluation of controls can provide
absolute assurance that all control issues, including instances of fraud,
if any, have been detected. These inherent limitations include, amongst
other items: (i) that management’s assumptions and judgment could
ultimately prove to be incorrect under varying conditions and
circumstances; and/or (ii) the impact of material errors.
Additionally, controls may be circumvented by the unauthorized acts
of individuals, by collusion of two or more people, or by management
override. The design of any system of controls is also based, in part,
upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving
its stated goals under all potential (future) conditions.
As part of our annual internal control certification process to satisfy the
requirements of 52-109, Management identified a material weaknesses
in the internal control processes in connection with the tendering,
awarding and monitoring of capital projects.
CONTROLS AND PROCEDURES (cont’d)
Management has hired an external advisor to assist in the remediation
of the internal control material weaknesses identified, including
designing and implementing enhanced controls as well as providing
training to both internal staff and those at certain third party suppliers
to ensure the enhanced internal controls, are appropriately designed
and implemented. Until the remediation process is complete, there is a
possibility that the internal controls over financial reporting relating to
the tendering, awarding and monitoring of capital projects will fail to
detect a material misstatement in the consolidated financial statements
on a timely basis.
Management does not believe that these internal control weaknesses
contributed to a material misstatement of the REIT’s consolidated financial
statements, or notes thereto, for the year-ended December 31, 2015.
FORWARD-LOOKING STATEMENTS
In the interest of providing InnVest unitholders and potential investors
with information regarding InnVest, certain statements contained in
this Annual Information Form constitute forward-looking statements
within the meaning of applicable securities laws. These statements
include, but are not limited to, statements made concerning InnVest’s
investment approach, objectives, its strategies to achieve those
objectives, assumptions and forecasts of future results from acquisitions
and divestitures as well as other statements with respect to
management’s beliefs, plans, estimates and intentions, and similar
statements concerning anticipated future events, results, circumstances
and performance or expectations that are not historical facts. Forwardlooking information typically contains statements with words such as
“outlook”, “objective”, “may”, “could”, “continue”, “anticipate”, “believe”,
“expect”, “estimate”, “plan”, “intend”, “forecast”, “project” or similar
expressions suggesting future outcomes or events. Such forward-looking
statements reflect management’s current beliefs and are based on
certain factors, assumptions and analyses made by InnVest in light
of information currently available to management, management’s
experience and perception of historical trends, current conditions and
expected future developments, as well as other factors management
believes are appropriate in the circumstances, including those factors
set out below.
These forward-looking statements are not guarantees of future events
or performance and, by their nature, are based on InnVest’s estimates
and assumptions, which are subject to risks and uncertainties, including
those described under “Risk Factors” in this Annual Information
Form and those detailed in InnVest’s filings with applicable securities
regulators, including InnVest’s annual and interim financial statements
and the notes thereto. Readers are cautioned not to place undue
reliance on forward-looking statements, as there can be no assurance
that the plans, intentions or expectations upon which they are based
will occur. By its nature, InnVest’s forward-looking information involves
numerous assumptions, inherent risks and uncertainties, which may
cause InnVest’s actual performance and financial results in future
periods to differ materially from any estimates or projections of future
performance or results expressed or implied by such forward-looking
statements. Factors that could cause actual results, performance, or
achievements to differ materially from those expressed or implied by
forward-looking statements include, but are not limited to, the status
of InnVest as a real estate investment trust for Canadian federal income
tax purposes in any year; achievement of plans to develop an optimal
asset portfolio through completion of acquisitions, divestitures, and
reinvestments within the timeframes necessary to generate the desired
return on investment; maintain adequate liquidity; extent of realized
benefits from the internalization of asset management functions; ability
to refinance debt maturities as planned; ability to achieve and maintain
a lower debt leverage target; ability to reduce payout ratio; ability to
sustain the current level of unit distributions; ability to fund acquisitions
at a capital cost and equity/debt mix as desired; lender concentration;
general global credit market conditions including currency and interest
rate fluctuations; general global economic and business conditions;
variable regional economic conditions including dependence on
manufacturing, oil or other resource markets; failure to effectively
understand and respond to changing guest demands and/or failure to
meet guest needs; failure to effectively manage relationships with hotel
brands including failure to comply with the appropriate standards and
contractual requirements; failure to effectively manage relationships
with operators including operator managed employee satisfaction,
morale, and effectiveness; medical or terrorist concerns relating to
travel and/or specific destinations; reliance on entities that provide
management services to InnVest, including pursuant to the Master
Hotel Management Agreement; the impact of lower oil prices and the
decline in the Canadian dollar compared to the U.S. dollar on travel;
the effects of competition and pricing pressures from multiple bidders
for acquisitions; development and opening of new hotel properties;
aggressive marketing, and service or product quality improvements by
competitors; extent of industry overcapacity; changes in the level of
cross-border travel by Americans to Canada and other possible shifts
in market demands; adverse changes in laws and regulations, including
environmental and taxation; failure to leverage technological innovation
to achieve or sustain financial and operational efficiency, competitive
advantage, and deliver better quality services to guests; potential
increases in maintenance and operating costs; possible variances in the
FORWARD-LOOKING STATEMENTS (cont’d)
amount and timing of completion for planned capital or maintenance
projects; failure of planned capital projects to result in desired shift in
business mix; uncertainties of litigation; labour disputes; various events
which could disrupt operations; reliance on information systems and
associated security risks; the effect of a data breach or significant
disruption of hotel information technology networks as a result of cyber
attacks and technological changes including impact of direct internet
reservation systems and potential impact of new disruptive hospitality
offerings in the market.
Although InnVest believes that the expectations represented by such
forward-looking statements are reasonable, there can be no assurance
that such expectations will be consistent with these forward-looking
statements. The forward-looking statements contained in this
Annual Information Form are made as of the date of this Annual
Information Form.
Management’s Responsibility for Financial Reporting
The management of InnVest Real Estate Investment Trust (“InnVest”) is responsible for the preparation and fair presentation of the related annual
consolidated financial statements and Management’s Discussion and Analysis (“MD&A”). The consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards (“IFRS”).
The consolidated financial statements and information in the MD&A include amounts based on best estimates and judgments by management
of the expected effects of current events and transactions with the appropriate consideration to materiality. In addition, in preparing this financial
information we must make determinations about the relevancy of information to be included, and estimates and assumptions that affect the reported
information. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources,
operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because
future events and circumstances may not occur as expected.
In meeting our responsibility for the integrity and fairness of the annual consolidated financial statements and MD&A and for the accounting systems
from which they are derived, management has established the necessary internal controls designed to ensure that our financial records are reliable
for preparing financial statements and other financial information, transactions are properly authorized and recorded, and assets are safeguarded
against unauthorized use or disposition.
As at December 31, 2015, our Chief Executive Officer and Chief Financial Officer evaluated, or caused an evaluation under their direct supervision
of the design and operation of our internal controls over financial reporting (as defined in National Instrument 52-109, Certification of Disclosure
in Issuers’ Annual and Interim Filings). A material weaknesses in the internal control processes in connection with the tendering, awarding and
monitoring of capital projects was identified. An external advisor has been engaged to assist in the remediation of the internal control material
weaknesses identified, including designing and implementing enhanced controls as well as providing training to both internal staff and those at
certain third party suppliers to ensure the enhanced internal controls, are appropriately designed and implemented. Until the remediation process
is complete, there is a possibility that the internal controls over financial reporting relating to the tendering, awarding and monitoring of capital
projects will fail to detect a material misstatement in the consolidated financial statements on a timely basis. Management does not believe that
these internal control weaknesses contributed to a material misstatement of the REIT’s consolidated financial statements, or notes thereto, for the
year-ended December 31, 2015.
The Board of Trustees oversees management’s responsibility for financial reporting through an Audit and Risk Committee, which is composed entirely
of independent trustees. This committee reviews InnVest’s annual consolidated financial statements and MD&A with both management and the
independent auditors before such statements are approved by the Board of Trustees. Other key responsibilities of the Audit and Risk Committee
include recommending InnVest’s auditors, approving our interim unaudited condensed consolidated financial statements and MD&A, and monitoring
InnVest’s existing systems of internal controls and enterprise risk assessment and mitigation processes.
Deloitte LLP, the independent auditors appointed by the unitholders of InnVest upon the recommendation of the Board of Trustees, has audited the
consolidated financial statements in accordance with Canadian generally accepted auditing standards. Their report is set out on the following page.
The auditors have full and free access to, and meet at least quarterly with, the Audit and Risk Committee to discuss their audit and related matters.
Andrew ColesGeorge Kosziwka
President andChief Financial Officer
Chief Executive Officer
Toronto, Ontario
March 29, 2016
Independent Auditor’s Report
TO THE UNITHOLDERS OF INNVEST REAL ESTATE INVESTMENT TRUST
We have audited the accompanying consolidated financial statements of InnVest Real Estate Investment Trust, which comprise the consolidated
balance sheets as at December 31, 2015 and December 31, 2014, and the consolidated statements of net loss and comprehensive loss, consolidated
statements of changes in unitholders’ equity (deficit) and consolidated statements of cash flows for the years ended December 31, 2015 and 2014
and a summary of significant accounting policies and other explanatory information.
MANAGEMENT’S RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International
Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.
AUDITOR’S RESPONSIBILITY
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance
with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.
The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated
financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated
financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
OPINION
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of InnVest Real Estate Investment
Trust as at December 31, 2015 and December 31, 2014, and its financial performance and its cash flows for the years then ended in accordance with
International Financial Reporting Standards.
Chartered Professional Accountants
Licensed Public Accountants
Toronto, Ontario
March 29, 2016
Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
(in thousands of Canadian dollars)
December 31, 2015 December 31, 2014
ASSETS
Current assets
Cash
$9,269 $56,404
Accounts receivable
25,268 22,175
Prepaid expenses and other assets
11,363 7,734
Finance lease receivable – 2,078
Assets held for sale (NOTE 3)15,984 14,924
61,884 103,315
Non-current assets
Restricted cash (NOTE 4)
2,881 2,236
Investment in joint ventures (NOTE 5)
36,453 1,179
Investment in associate (NOTE 6)
19,983 –
Hotel properties (NOTE 8)
1,181,422 1,210,143
Other real estate properties (NOTE 9)
– 1,918
Intangible and other assets (NOTE 10)
11,429 10,494
Total assets
$1,314,052 $1,329,285
LIABILITIES
Current liabilities
Accounts payable and accrued liabilities $61,277 $67,570
Distributions payable 4,455 3,872
Long-term debt (NOTE 11)
62,963 231,731
Other long-term obligations (NOTE 14)
203 190
Liabilities related to assets held for sale (NOTE 3)
11,220 9,144
140,118 312,507
720,416 552,520
Convertible debentures (NOTE 12)
202,648 234,981
Provisions (NOTE 13)
11,936 9,359
Other long-term obligations (NOTE 14) 4,024 4,841
Other liabilities (NOTE 16)
5,607 13,086
1,084,749 1,127,294
UNITHOLDERS’ EQUITY 229,303 201,991
$1,314,052 $1,329,285
The accompanying notes are an integral part of these consolidated financial statements.
On behalf of the Board of Trustees:
Edward Pitoniak Robert McFarlane
Chairman of the Board of Trustees Chairman of the Audit and Risk Committee
CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS
Year EndedYear Ended
(in thousands of Canadian dollars, except per unit amounts)December 31, 2015December 31, 2014
Revenues (NOTE 30)
$553,388 $535,535
Operating expenses (NOTE 24)
354,351 346,566
Property taxes, rent and insurance
35,903 38,798
Management fees (NOTE 24)
17,788 21,350
408,042 406,714
145,346 128,821
Other expenses
Corporate and administrative (NOTE 24)
11,927 12,033
Interest expense
49,229 47,605
16,188 21,441
Joint venture income (NOTE 5) (5,124) (4,998)
Loss from investment in associate (NOTE 6) 1,076 –
Other expense and (income), net (NOTE 25)
172 (26,938)
Writedown (reversal of writedown) of hotel and other real estate properties, net (NOTE 26) 2,843 3,754
Depreciation and amortization
87,994 81,149
Unrealized (gain) loss on liabilities presented at fair value (NOTE 27) (5,418) 9,502
Net loss and total comprehensive loss
$(13,541)$(14,727)
Net loss per unit (NOTE 22)
Basic and diluted
$(0.107)$(0.152)
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN UNITHOLDERS’ EQUITY (DEFICIT)
(in thousands of Canadian dollars) DeficitUnits in $
Total
Balance December 31, 2013
$(502,923) $ 644,380 $ 141,457
CHANGES DURING THE YEAR
Net loss and total comprehensive loss(14,727)
– (14,727)
Distributions to unitholders
(39,222) – (39,222)
Distribution reinvestment plan units issued (NOTE 21) – 3,224 3,224
Vested executive compensation (NOTE 21)
– 210 210
Trustee compensation (NOTE 21)
– 83 83
Issue of new units, net
– 110,966 110,966
$(556,872)
$ 758,863 $ 201,991
$(556,872) $ 758,863 $ 201,991
CHANGES DURING THE YEAR
Net loss and total comprehensive loss(13,541)
– (13,541)
Distributions to unitholders(50,751)
– (50,751)
Distribution reinvestment plan units issued (NOTE 21)
– 7,711 7,711
Vested executive compensation (NOTE 21)
– 1,188 1,188
Issue of new units, net (NOTE 21)
– 82,705 82,705
$(621,164)
$ 850,467 $ 229,303
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of Canadian dollars) December 31, 2015December 31, 2014
OPERATING ACTIVITIES
Net loss and total comprehensive loss
$(13,541)$(14,727)
Add (deduct) items not affecting cash
Depreciation and amortization
87,994 81,149
Gain on sale of assets, net (NOTE 25)
(631)
(18,774)
Gain on redemption and amendment of convertible debentures (NOTE 25) (196) (11,628)
Writedown (reversal of writedown) of hotel and other real estate properties, net (NOTE 26)
2,843 3,754
Unrealized (gain) loss on liabilities presented at fair value (NOTE 27) (5,418) 9,502
Interest on mortgages and other debt
49,229 47,605
Convertible debentures interest and accretion16,188 21,441
Interest expense paid(58,445) (61,697)
Non-cash executive and trustee compensation
1,188 293
Share of net loss from associate (NOTE 6)
1,076 –
Share of net earnings from joint ventures (NOTE 5) (5,792) (4,998)
Contingency provision (NOTE 13) 1,050 –
Changes in non-cash working capital (NOTE 23) (9,251)
8,271
Cash generated from operating activities
66,294 60,191
FINANCING ACTIVITIES
Repayment of long-term debt
(333,265)
(113,437)
Proceeds from long-term debt, net of issuance costs
328,311 134,546
Redemption and cancellation of convertible debentures (3,643)
(102,547)
Distributions to unitholders
(42,457) (35,251)
Issue of new units, net of issuance costs (NOTE 21)
46,385 107,182
Cash utilized in financing activities (4,669) (9,507)
INVESTING ACTIVITIES
Capital expenditures (NOTE 30)
(41,895) (76,932)
Acquisition (NOTE 7)(44,862) (65,364)
Finance receivable
10,419 –
Investment in associate (NOTE 6)(21,559)
–
Distribution from associates (NOTE 6)
500 –
Additions to intangible and other assets (NOTE 10)
(320)
(129)
Investment in joint ventures (NOTE 5)(35,293)
–
Distributions received from investment in joint venture (NOTE 5) 5,811 5,021
Proceeds from sale of assets (NOTE 3)
20,959 124,325
Payment of costs associated with sale of assets (1,875) (5,986)
(Increase) decrease in restricted cash
(645) 4,524
Cash utilized in investing activities
(108,760)
(14,541)
(Decrease) increase in cash during the year
(47,135)
Cash, beginning of the year
56,404 36,143
20,261
Cash, end of the year
$9,269 $56,404
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 — BASIS OF PRESENTATION
InnVest Real Estate Investment Trust (“InnVest” or the “REIT”) is an
unincorporated open-ended real estate investment trust governed by
the laws of Ontario. The REIT began operations on July 26, 2002. As at
December 31, 2015, the REIT owned 107 Canadian hotels and interest
in two partnerships which hold interest in two hotels, each operated
under international brands.
The REIT leases its hotels to InnVest Hotels Trust (“IHT”), an indirectlyowned unit trust. IHT indirectly holds all of the hotel operating assets,
earns revenues from hotel customers and pays rent to the REIT. IHT
also indirectly holds a 50% interest in Choice Hotels Canada Inc. (“CHC”).
At December 31, 2015, InnVest wholly-owns an indirect interest in
the entities that carry on the business of operating hotels.
Revenues earned from hotel operations fluctuate throughout the year,
with the third quarter being the highest due to the increased level
of leisure travel in the summer months and the first quarter being the
lowest as leisure travel tends to be lower at that time of year.
Units of InnVest trade on the Toronto Stock Exchange (the “TSX”)
under the symbol INN.UN.
InnVest’s registered office is at 200 Bay Street, Royal Bank Plaza,
South Tower, Suite 2200, Toronto, M5J 2J1.
2 — SIGNIFICANT ACCOUNTING POLICIES
(a) STATEMENT OF COMPLIANCE
These consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of the REIT as well as the entities that are controlled by the REIT
(subsidiaries). The consolidated financial statements include the
accounts of the REIT, IHT and their subsidiaries and interests in joint
arrangements described in Note 2 (d). Control is achieved when InnVest
is exposed, or has rights, to variable returns from its involvement with
the investee and has the ability to affect those returns through its power
over the investee. Subsidiaries are fully consolidated from the date on
which control is transferred to the REIT. They are deconsolidated from
the date that control ceases. Inter-company transactions, balances
and other transactions between consolidated entities are eliminated.
(c) BUSINESS COMBINATION
At the time of acquisition of a property, InnVest considers whether the
acquisition represents the acquisition of a business. InnVest accounts
for an acquisition as a business combination where an integrated set
of activities is acquired in addition to the property. The cost of a
business combination is measured as the aggregate fair value of the
consideration transferred at the acquisition date. Identifiable assets
acquired and liabilities and contingent liabilities assumed in a business
combination are measured initially at fair value at the acquisition date.
InnVest recognizes any contingent consideration to be transferred by
the REIT at its acquisition date fair value. Goodwill, if applicable, is
initially measured at cost, being the excess of the purchase price over
the fair value of the net identifiable assets acquired and liabilities and
contingent liabilities assumed. A bargain purchase gain, if applicable,
is recognized immediately in net income. Acquisition-related costs are
expensed in the period incurred.
When the acquisition of a property does not represent a business, it is
accounted for as an acquisition of a group of assets and liabilities. The
cost of the acquisition is allocated to the assets and liabilities acquired
based upon their relative fair values, and no goodwill is recognized.
InnVest has determined that all acquisitions made during the periods
presented were acquisitions of a business.
If the initial accounting for a business combination is incomplete by the
end of the reporting period in which the combination occurs, InnVest
reports provisional amounts for the items for which the accounting is
incomplete. Such provisional amounts may be adjusted during the
‘measurement period’ (which cannot exceed one year from the
acquisition date) based on additional information about facts and
circumstances that existed at the acquisition date that, if known,
would have affected the amounts recognized at that date.
(d) JOINT ARRANGEMENTS
InnVest accounts for its investment in joint ventures using the equity
method and accounts for investments in joint operations by recognizing
InnVest’s direct rights to assets, obligations for liabilities, revenues and
expenses. The REIT has one joint operation and two joint ventures. The
joint ventures are IHT’s 50% interest in CHC and 33.3% ownership of one
hotel, both of which are accounted for using the equity method. Under
the equity method, the investment in the joint venture is carried in the
balance sheet at cost plus post-acquisition changes in InnVest’s share
of the net assets of the joint venture, less distributions received and less
any impairment in the value of the investment.
The joint operation is a co-tenancy that owns one of the REIT’s hotels.
InnVest accounts for the joint operation by recognizing its proportionate
share of jointly controlled assets, liabilities, revenues and expenses. The
REIT’s income statement reflects the share of the results of operations
of the joint arrangement after tax.
2 — SIGNIFICANT ACCOUNTING POLICIES (cont’d)
(e) INVESTMENT IN ASSOCIATE
(j) DEPRECIATION
InnVest exercises significant influence in a partnership and accounts for
its investment using the equity method. Under the equity method, its
investment in the partnership is carried on the balance sheet at cost
plus post acquisition changes in InnVest’s share of the net assets of the
partnership, less distributions received. The REIT’s income statement
reflects the share of the results of the operations of its investment
in associate.
Depreciation for Hotel properties and Other real estate properties is
provided on a straight-line basis over their estimated useful life:
(f) COMPREHENSIVE INCOME
InnVest recognizes comprehensive income which represents changes
in the unitholders’ equity during a period arising from transactions
and other events with non-owner sources.
(g) ASSETS HELD FOR SALE
Assets held for sale are presented in current assets at the lower of their
carrying amount and fair value less the costs to sell. Assets are not
depreciated from the time when they are classified as “held for sale”.
The liabilities related to these assets are reclassified to current liabilities
once the assets are classified as held for sale. A held-for-sale asset is a
non-current asset that is available for immediate sale in its present
condition subject only to terms that are usual and customary for sales
of such assets and its sale must be highly probable. For the sale to be
highly probable management must be committed to a plan to sell the
asset and an active effort to locate a buyer and complete the plan must
have been initiated. Further, the asset must be actively marketed for
sale at a price that is reasonable in relation to its current fair value. In
addition, the sale should be expected to be consummated within one
year from the date of classification as held-for-sale. A disposal group of
the REIT will generally represent a group of properties of a certain type
and/or geographical area of operations.
(h) HOTEL PROPERTIES
Hotel properties, consisting of land, buildings, building finishes,
electrical and mechanical and furniture, fixtures and equipment, are
stated at cost less accumulated depreciation. Hotel properties are
reviewed periodically for impairment as described in Note 2 (k).
(i) OTHER REAL ESTATE PROPERTIES
Other real estate properties include a retail property as well as a retirement
residence which were sold during the year ended December 31, 2015. The
other real estate properties include land, buildings and furniture, fixtures
and equipment. The buildings and furniture, fixtures and equipment are
stated at cost less accumulated depreciation and are reviewed periodically
for impairment as described in Note 2 (k).
Buildings40 years
Leaseholdslesser of the lease term and 40 years
Furniture, fixtures and equipment7 years
Building finishes10-15 years
Electrical and mechanical30 years
(k) IMPAIRMENT OF LONG-LIVED ASSETS
Management reviews long-lived assets on a quarterly basis for impairment
triggers to determine if any events or changes in circumstances exist
that would indicate that the carrying amount of an asset may not be
recoverable over time. Impairment assessments are conducted at the
level of cash generating units (“CGUs”), with each hotel or other real
estate property representing a separate CGU. If the carrying value
exceeds the estimated recoverable amount, the asset is written down
to its recoverable amount. Recoverable amount is the greater of (i) fair
value less costs to sell and (ii) value in use. Value in use is assessed
based on estimated future cash flows discounted to their present value
using a pre-tax discount rate that reflects current market assessments of
the time value of money and the risks specific to the asset. Impairments
are reversed if there has been a change in the estimates used to
determine the recoverable amount. An impairment loss is reversed only
to the extent that the asset’s carrying amount does not exceed the
carrying amount that would have been determined, net of depreciation,
if no impairment had been recognized.
(l) INTANGIBLE ASSETS
Intangible assets include licence contracts, franchise rights, customer
relationships and a mortgage receivable.
Licence contracts are related to the joint venture interest in CHC, and
are recorded at the value attributed to the discounted cash flow of the
expected earnings stream under the contract terms at the time of
acquisition of CHC. This amount is amortized on a straight-line basis
over the average life or expected renewal life of the contracts, which
is estimated to be twenty years. Costs associated with franchise rights
with various brands are amortized on a straight-line basis over the
term of the agreement. Customer relationships represent the amount
allocated to the value of long-term customers when a hotel is acquired
and are amortized on a straight-line basis over five years.
(m) PROVISIONS
Provisions are recognized on the balance sheet when InnVest (i) has a
present obligation (legal or constructive) as a result of a past event,
(ii) it is probable that an outflow of economic benefits will be required
and (iii) a reliable estimate of the amount payable can be made. If
the effect is material, provisions are determined by discounting the
expected future cash flows at a pre-tax rate that reflects current market
assessments of the time value of money and, when appropriate, the
risks specific to the liability. InnVest recognizes decommissioning and
restoration provisions related to various environmental obligations
for certain properties where the quantum of such costs and the timing
for settlement are reasonably determinable. The obligations relate to
the eventual removal of asbestos, underground storage tanks and
polychlorinated biphenyls (“PCBs”) and eventual remediation of land
contamination. InnVest has recorded a provision and corresponding
asset (capitalized in buildings) for the estimated future decommissioning
and restoration costs, discounted to present value. Such estimates
are subject to revisions based on changes in laws and regulations or
changes in inputs to the decommissioning model.
(n) FINANCIAL INSTRUMENTS
Financial assets and financial liabilities are initially recognized at fair
value. Measurement in subsequent periods depends on whether the
financial instrument has been classified as fair value through profit
or loss (“FVTPL”), available-for-sale, held-to-maturity, loans and
receivables, or other liabilities. Subsequent measurement for financial
assets and liabilities is based on either fair value or amortized cost
using the effective interest method (“EIM”), depending upon their
classification. Any financial asset or financial liability can be classified
at FVTPL as long as the fair value is reliably determinable.
The following summarizes the classification and measurement InnVest has elected to apply to each of its significant categories of financial instruments:
Financial assets
Cash and restricted cash
Accounts receivable
Financial liabilities
Bank indebtedness
Accounts payable and accrued liabilities
Operating line Bridge loan
Mortgages payable
Subordinated term loan
Convertible debentures – host instrument
Exchangeable units
Convertible debentures-holders’ conversion option
Unvested executive compensation liability
Deferred units
Transaction costs, other than those related to financial instruments
measured at fair value (expensed as incurred), are added to the fair
value of the financial asset or financial liability on initial recognition
and amortized using the EIM.
Other liabilities consist of the fair value of InnVest’s exchangeable
units, the fair value of the conversion feature associated with InnVest’s
convertible debentures, the fair value of the unvested executive
compensation, and the fair value of deferred units awarded to trustees
which are further defined below and in Note 2 (r) and (s).
Derivatives embedded in other financial instruments or contracts are
separated from their host contracts and are measured at fair value, with
changes therein recognized in the consolidated statement of net loss
Classification
Measurement
Loans and receivables
Amortized cost
Amortized cost
Amortized cost
Other liabilities
Amortized cost
Other liabilities
Amortized cost
Other liabilities
Amortized cost
Other liabilities
Amortized cost
Other liabilities
Amortized cost
Other liabilities
Amortized cost
Other liabilities
Amortized cost
FVTPL
Fair value
FVTPL
Fair value
FVTPL
Fair value
FVTPLFair value
and comprehensive loss. InnVest has concluded that its convertible
debentures include embedded derivatives under IFRS. InnVest has
separated the conversion option component for each of its series of
convertible debentures and measures such component at fair value
at each reporting date.
The fair value of a financial instrument is the price that would be
received to sell an asset, or paid to transfer a liability, in an orderly
transaction between market participants at the measurement date.
In certain circumstances, however, the initial fair value may be based
on other observable current market transactions in the same instrument,
without modification, or on a valuation technique using market based
inputs. Except as noted below, the carrying value of InnVest’s financial
assets and financial liabilities approximate their fair values because of
the short period until receipt or payment of cash. The fair values of longterm debt are based on the current market conditions for mortgages
with similar terms and conditions. The fair value of the convertible
debentures is based on the market prices for the convertible debentures
at each reporting date.
In accordance with IAS 17, “Leases”, Leases are classified as finance
leases whenever the terms of the lease transfer substantially all the risks
and rewards of ownership to the lessee. All other leases are classified as
operating leases.
Amounts due from lessees under finance leases are recognized as
receivables at the amount of the net investment in the leases. Finance
lease income is allocated to accounting periods so as to reflect a
constant periodic rate of return on the net investment outstanding
in respect of the leases. Assets held under finance leases are initially
recognized as assets at their fair value at the inception of the lease or,
if lower, at the present value of the minimum lease payments.
Fair value measurements recognized in the balance sheet are
categorized using a fair value hierarchy that reflects the significance
of inputs used in determining the fair values:
(i)Level 1 – quoted prices (unadjusted) in active markets for identical
financial assets or liabilities that InnVest has the ability to access at
the measurement date;
(ii)Level 2 – inputs other than quoted prices included within Level 1
that are observable for the financial asset or liability, either directly
(i.e.: as prices) or indirectly (i.e.: derived from prices); and
(iii)Level 3 – inputs for the financial asset or liability that are not based
on observable market data (unobservable inputs).
Each type of fair value is categorized based on the lowest level input
that is significant to the fair value measurement in its entirety.
(o) DEFINED BENEFIT PENSION PLANS AND OTHER
EMPLOYMENT BENEFITS
InnVest maintains defined benefit pension plans for the benefit of
management employees of certain hotels acquired in 2006 and 2007.
The benefit obligation for retired members, beneficiaries and terminated
vested members is calculated as the actuarial present value of their
respective benefits. With respect to active members, the benefit
obligation and the service cost are calculated using the projected unit
credit method (prorated on service) using actuarial assumptions, which
include management’s best estimate of salary escalation and retirement
ages of employees.
InnVest is also responsible to provide retirement allowances to certain
unionized employees at a limited number of its hotels. Liabilities are
recorded for employee retirement allowance benefits using actuarial
valuations based on actuarial assumptions which include management’s
best estimate of future salary levels, employee eligibility, retirement
ages of employees, and length of service.
(p) REVENUE RECOGNITION
Hotel revenue
Revenues from hotel operations are recognized when services are
provided and ultimate collection is reasonably assured.
Loyalty programs
Hotel loyalty programs administered by various third party brands
enable customers to earn points to be redeemed for free
accommodation or other benefits. InnVest acts as an agent for
these third party programs. In accordance with IFRIC 13 – Customer
Loyalty Programmes, the cost of loyalty program points are recorded
as a reduction in revenues at the time of sale to the customer.
For hotel loyalty programs awarded by CHC, a portion of the revenue
received relating to the issuance of loyalty points is deferred until
the awards are ultimately redeemed. The allocation of the consideration
to the award is based on an evaluation of the award’s estimated fair
value at the date of the transaction using the residual fair value method.
Retail and retirement residence revenue
InnVest retains all the risks and benefits of ownership of its other real
estate properties and therefore accounts for leases with its tenants as
operating leases. Rental revenue from retail and retirement residence
leases includes all amounts earned from tenants related to lease
agreements and revenue is recognized on a straight-line basis.
(q) DEFERRED INCOME TAXES
For InnVest’s taxable subsidiary entities, income taxes are accounted for
using the liability method, whereby deferred income tax assets and
liabilities are determined based on differences between the carrying
amount of the balance sheet items and their corresponding tax values
as well as unused tax losses and tax credits. Deferred income taxes are
computed using enacted or substantively enacted income tax rates for
the years in which deferred tax balances are expected to reverse.
A deferred tax asset is recognized only to the extent that it is probable
that future taxable profits will be available against which the asset can
be utilized. Deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realized.
Deferred tax assets and liabilities are offset when there is a legally
enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same
taxation authority and InnVest intends to settle its current assets and
liabilities on a net basis.
(r) DEFERRED UNIT PLAN
InnVest’s trustees participate in a compensation plan involving the grant
of deferred units (“Deferred Units”). Deferred Units result in the award
of units on a one-for-one basis upon the trustee’s departure from the
Board. Deferred Units granted entitle the holder to also accumulate
Deferred Units equal to the cash distributions, assuming the
reinvestment of the distribution into units.
The benefit resulting from the grant of Deferred Units under this plan is
recorded under ‘Corporate and administrative’ expense when awarded.
Deferred Units granted are initially presented in ‘Other liabilities’ based
on the fair value of the units on the date of grant and are subsequently
remeasured at each reporting date at their fair value with changes in the
carrying amount recognized as ‘Corporate and administrative’ expense
in the period.
Upon issuance of units (following a trustee’s departure from the Board),
the liability is reclassified to ‘Unitholders’ equity’ at the then current
fair value.
(s) EXECUTIVE COMPENSATION PLAN
The senior executives participate in an incentive plan that involves the
grant of units which vest over time. A unit granted entitles the holder to
receive, on the vesting date, the then current fair market value of the
unit plus the value of the cash distributions that would have been paid
on the unit if it had been issued on the date of grant, assuming the
reinvestment of the distribution into units. The payment will be satisfied
through the issuance of units.
The benefit resulting from the issuance of units under this plan is
recorded as compensation expense, on a straight-line basis over the
vesting period. Units granted (based on vesting schedule accrual) are
initially presented in ‘Other liabilities’ based on the fair value of the
units on the date of grant and are subsequently measured at each
reporting date at their fair value with changes in the carrying amount
recognized as ‘Corporate and administrative’ expense in the period.
Upon issuance of units (following the satisfaction of all vesting
conditions), the liability is reclassified to ‘Unitholders equity’ at the
then-current fair value.
(t) EXCHANGEABLE UNITS
Exchangeable units are exchangeable into InnVest units on a one-for-one
basis. The Exchangeable units largely have the same features as InnVest’s
units but their features are not identical. The Exchangeable units are
classified as ‘Other liabilities’. Distributions on the Exchangeable units are
recognized in the consolidated statements of net loss and comprehensive
loss as ‘Interest expense’. The Exchangeable units are measured at each
reporting date at their fair value, based on the market price of InnVest
units, with changes in the carrying amount recognized in net loss for
the period. All Exchangeable units were converted to units of the REIT
during the year ended December 31, 2015.
(u) SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES
AND ASSUMPTIONS
The preparation of InnVest’s financial statements requires management
to make judgments, estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the balance sheet date and the reported amounts of
revenues and expenses during the year. Actual results could differ from
those estimates.
Significant accounting judgments:
IDENTIFICATION OF IMPAIRMENT INDICATORS
Management is required to test for impairment when there is an
indicator of impairment whereby the carrying value of a property may
not be recoverable. Management has established a methodology for
identifying indicators of impairment which includes looking at changes
in net operating performance, revenue levels and other factors on a
property-by-property basis. The identification of impairment indicators
will affect whether management will test for the impairment of
a property at each reporting date.
DEGREE OF COMPONENTIZATION OF HOTEL PROPERTY
Each component of a hotel property with a cost that is significant in
relation to the total cost of the hotel property must be depreciated
separately. Upon conversion to IFRS, management undertook a process
to (i) identify hotel property components, (ii) allocate the deemed
cost of the hotel property to each component and (iii) determine the
appropriate depreciation period for each component. A similar process
is undertaken for acquisitions to the portfolio. The identification,
allocation and depreciation period chosen for each component of hotel
properties affects the depreciation expense in each accounting period.
Significant accounting estimates and assumptions:
IMPAIRMENT
Impairment testing of hotel properties requires management to assess
the property’s ability to recover its book value through the normal
course of operations and evaluate the value-in-use of the property.
Significant assumptions are used in the assessment of fair value and
impairment including estimates of future operating cash flows, the
time period over which they will occur, an appropriate discount rate,
appropriate growth rates (revenues and costs) and changes in market
valuation parameters. Management considers various factors in its
assessment including the historical performance of hotel properties,
expected trends in each specific market including new or expected
new hotel supply as well as local and macroeconomic conditions.
DETERMINATION OF USEFUL LIVES OF HOTEL
PROPERTY COMPONENTS
(v) FUTURE ACCOUNTING CHANGES
Management determines the estimated useful lives and related
depreciation charge for each hotel property component. InnVest
depreciates these assets using the straight-line method over their
estimated economic or useful lives. The selected depreciation method
and estimates of useful life impact the level of depreciation expense
recognized in InnVest’s operating results. In establishing useful lives,
management considers its capital maintenance plans and consults with
third party and internal construction experts.
IFRS 11 – Joint Arrangements: Accounting for Acquisitions of
Interests in Joint Operations
VALUATION OF FINANCIAL INSTRUMENTS AND LIABILITIES
Management makes estimates and assumptions relating to the fair value
measurement of its Exchangeable units, unit executive incentive plans,
Deferred Units, the convertible debenture conversion feature and the
fair value of mortgages payable. The critical assumptions and estimates
underlying the fair value measurements and disclosures include current
market interest rates and credit spreads reflected in comparable
financial instruments and InnVest’s own credit risk.
In determining the fair value of mortgages, management uses
internally developed models to discount future payments based upon
a current market rate for debt instruments with similar terms and risks.
The selection of the applicable market rate is based on management
experience in obtaining similar financing as well as current credit market
conditions. Changing credit market conditions, including movements
in interest rates and credit spreads, may impact underlying estimates
and, in turn, the fair value of debt instruments.
The fair value of Exchangeable units, unit executive incentive plans and
Deferred Units use quoted market prices based on the price of InnVest’s
units. The fair value of InnVest’s convertible debentures use quoted
market prices based on the price of each series of debentures. The fair
value of the convertible debenture conversion feature is derived based
on the volatility of InnVest units’ quoted market price, market interest
rates as well as management’s judgment relating to interest rate spreads
for instruments of similar terms and risks.
DEFINED BENEFIT PENSION PLANS AND OTHER
EMPLOYMENT BENEFITS
In May 2014, the IASB issued amendments to IFRS 11, the objective
of which was to add new guidance to IFRS 11 on accounting for the
acquisition of an interest in a joint operation in which the activity of the
joint operation constitutes a business, as defined in IFRS 3. Acquirers
of such interests are to apply the relevant principles on business
combination accounting in IFRS 3 and other standards, as well as
disclosing the relevant information specified in these standards for
business combinations. This amendment to IFRS 11 is effective for
annual periods beginning on or after January 1, 2016, and should be
applied prospectively. This amendment to IFRS 11 has no material
impact on InnVest’s consolidated financial statements or note disclosure.
IFRS 15 – Revenue from Contracts with Customers
In May 2014, the IASB issued its new revenue standard, IFRS 15,
“Revenue from Contracts with Customers”. IFRS 15 specifies how
and when revenue should be recognized as well as requiring more
informative and relevant disclosures. IFRS 15 supersedes IAS 18,
“Revenue Recognition”, IAS 11, “Construction Contracts” and a number
of revenue-related interpretations. Application of the standard is
mandatory and it applies to nearly all contracts with customers with
the exception of leases, financial instruments and insurance contracts.
IFRS 15 is effective for annual periods on or after January 1, 2018.
InnVest is currently evaluating the impact to the consolidated
financial statements and plans to adopt this standard on the required
effective date.
Amendments to IAS 1 – Presentation of Financial Statements
The amendments to IAS 1 relate to (i) materiality; (ii) order of notes;
(iii) subtotals; (iv) accounting policies; and (v) disaggregation, and are
designed to improve presentation and disclosure in financial reports by
encouraging companies to apply professional judgment in determining
what information to disclose in financial statements. Amendments to
IAS 1 are effective for annual periods beginning on or after January 1,
2016. This amendment to IAS 1 has no material impact on InnVest’s
consolidated financial statements or note disclosure.
The cost of defined benefit pension plans and other post-employment
benefits is determined using actuarial valuations. The actuarial valuation
involves making assumptions about expected plan investment
performance, salary escalation, the retirement ages of employees,
employee eligibility, length of service and expected health care costs as
at the date of the actuarial valuation. Changes in estimates about plan
investment performance, as impacted by current market conditions,
may impact future pension costs.
Amendments to IFRS 9 – Financial Instruments
IFRS 16 – Leases
On July 24, 2014, the IASB issued the final version of IFRS 9, “Financial
Instruments” (“IFRS 9”), which replaces IAS 39, “Financial Instruments:
Recognition and Measurement”. This final version of IFRS 9 includes
requirements for recognition and measurement, impairment,
derecognition and general hedge accounting. The standard introduces a
single, principles-based approach that amends both the categories and
associated criteria for the classification and measurement of financial
assets, which is driven by the entity’s business model for the portfolio in
which the assets are held and the contractual cash flows of these financial
assets. This new standard supersedes all prior versions of IFRS 9.
Amendments to IFRS 9 are effective for annual periods beginning on
or after January 1, 2018, with early application permitted. InnVest is
currently evaluating the impact to the consolidated financial statements
and plans to adopt this standard on the required effective date.
In January 2016, the IASB issued IFRS 16 which replaces IAS 17,
“Leases” and its associated interpretative guidance. IFRS 16 applies
a control model to the identification of leases, distinguishing between
a lease and a service contract on the basis of whether the customer
controls the asset being leased. For those assets determined to meet
the definition of a lease, IFRS 16 introduces significant changes to the
accounting by lessees, introducing a single, on-balance sheet accounting
model that is similar to current finance lease accounting, with limited
exceptions for short-term leases or leases of low value assets. Lessor
accounting remains similar to current accounting practice. The standard
is effective for annual periods beginning on or after January 1, 2019,
with early application permitted for entities that apply IFRS 15. InnVest
is currently assessing the impact of IFRS 16 on its consolidated
financial statements and plans to adopt this standard on the required
effective date.
3 — ASSETS HELD FOR SALE
Assets held for sale at December 31, 2015 include two hotels
(December 31, 2014 – two hotels). All assets and liabilities relating to
these hotels have been classified to current assets and current liabilities
and are outlined in the table below:
2015 2014
Assets
Accounts receivable
$726
$355
Prepaid expenses and other assets 156 138
Hotel properties, net of accumulated
amortization (2015 – $8,291;
2014 – $4,438) (NOTE 8) 15,006 14,431
Intangible and other assets (NOTE 10) 96 –
Total assets
$15,984 $14,924
Liabilities
Accounts payable and
accrued liabilities
$1,776 $591
9,444 8,553
Total liabilities
$11,220 62 INNVEST REAL ESTATE INVESTMENT TRUST
$9,144
Assets held for sale are measured at the lower of their carrying amount
and fair value less costs to sell. Once they have been classified as held
for sale, depreciation ceases. The sale of these properties, which have
been approved by the Board of Trustees, are highly probable and are
expected to close within a year of their classification as held for sale.
SALE OF ASSETS
During the year ended December 31, 2015, InnVest sold four hotels and
its other real estate properties for (2014 – nineteen hotels) for aggregate
net proceeds after closing costs of $28,925 (2014 – $118,339). InnVest
recorded an aggregate gain on sale of $631 and has been included
in ‘Other (income) and expense, net’ (Note 25) in the consolidated
statements of net loss and comprehensive loss.
As part of a sale, InnVest issued a vendor take back mortgage of $1,500
for 4 years at 4.75% for the first three years and 6.75% in the fourth year.
This mortgage receivable is secured by a mortgage on the property and
is included in ‘Intangibles and other assets’ (Note 10). InnVest entered
into a lease and sale agreement with the purchaser of a separate hotel
which resulted in a finance lease receivable of $8,341. Overall, net cash
proceeds on the sale of assets during the year totalled $19,084. On
July 2, 2015, the finance lease receivable of $8,341 was fully collected.
4 — RESTRICTED CASH
The restricted cash of $2,881 (December 31, 2014 – $2,236) is held by InnVest to undertake capital refurbishments in accordance with certain
mortgage and franchise agreements.
5 — INVESTMENT IN JOINT VENTURES
The REIT has investments in two joint arrangements that are joint ventures as a result of shared control. One joint venture owns a hotel and the other
owns a 50% interest in CHC.
Details of the REIT’s investments in these joint ventures, which have been accounted for following the equity method, are as follows:
Proportions ofProportions of
OwnershipOwnership
Interest Interest
Name of Entity
Name of Property/Activity 2015
2014
CYM Partnership LP
Courtyard Marriott Toronto 33.3%
Choice Hotels Canada Inc
Franchise owner 50%
n/a
50%
The following table summarizes the aggregate movement of InnVest’s investment in its joint ventures:
Year Ended December 31, 2015Year Ended December 31, 2014
CYM
CYM
CHCPartnership
Total
CHCPartnership
Total
Opening balance, beginning of year $
1,179$
–$ 1,179$ 1,202 $
Acquisition
– 34,593 34,593
–
Additional investment
–
700
700
–
InnVest’s share of net income 5,262
530 5,792 4,998
Distributions received
(5,811)
– (5,811) (5,021)
–
$1,202
–
–
–
–
–
4,998
–
(5,021)
Closing balance, end of year $
–
$1,179
630$ 35,823$ 36,453$ 1,179
ACQUISITION OF INTEREST IN COURTYARD
MARRIOTT TORONTO
On August 26, 2015, InnVest acquired a 33.3% interest in the Courtyard
Marriott Toronto, a select-service hotel located in downtown Toronto,
Ontario (the “Courtyard Toronto”) in an arrangement with KingSett
Real Estate Growth LP No. 5, an affiliate of KingSett Capital (“KingSett”)
with KingSett acquiring the remaining 66.7% interest in the hotel
(collectively, the “CYM Partnership”). The CYM Partnership’s office is
located at 66 Wellington Street West, Toronto, Ontario.
The CYM Partnership acquired the Courtyard Toronto for an aggregate
price of $99,000 plus payment for capital expenditures of $912 before
closing costs and working capital adjustments. The CYM Partnership
funded the acquisition of Courtyard Toronto with capital from the
partners of $100,255 with InnVest’s share of the equity contribution
being $34,508 including transaction costs. InnVest incurred transaction
costs of $85 on the acquisition for a total net investment of $34,593.
$
The joint arrangement with KingSett was determined to be a joint
venture and as such accounted for using the equity method of
accounting for investments. The hotel is encumbered by mortgage debt
of approximately $54,100 which is the sole responsibility of KingSett.
KingSett has provided InnVest with an indemnity for any loss to InnVest
associated with this debt.
A subsidiary of the REIT entered into an asset management agreement
with the CYM Partnership for oversight of the Courtyard Toronto.
InnVest charges the Partnership an asset management fee which
is included in ‘Other income and expense, net’ in the consolidated
statements of net loss and comprehensive loss. The REIT eliminates its
33% share of management fees it charges the CYM Partnership against
‘Joint venture income’. For the year ended December 31, 2015, this
amounted to $21 (2014 – $nil).
The CYM Partnership has a commitment to complete certain capital
expenditures under the licence and royalty agreement with Marriott
Hotels Ltd.
5 — INVESTMENT IN JOINT VENTURES (cont’d)
Presented below are the amounts included in the financial statements of the CYM Partnership (adjusted where the accounting policies between the
CYM Partnership and the REIT differ):
Summarized income statement:
December 31,August 26,
2015 2015
Non-current assets
$102,849
$99,912
Current assets
1,845 1,254
Cash
4,428
40
Revenues
$12,049
Hotel property expenses(8,300)
Total assets
109,122
101,206
Current liabilities
(4,522) (297)
Net assets
$104,600 $ 100,909
InnVest 33.3% share of net assets
$34,866 $ 33,636
Acquisition costs
957 957
Investment in CYM Partnership
$ 35,823 From August 26, 2015
to December 31, 2015
Gross operating profit 3,749
General and administrative (213)
Acquisition costs (1,192)
Depreciation and amortization (751)
Net income 1,593
InnVest 33.3% share of net income
$530
$ 34,593
INVESTMENT IN CHC
InnVest holds a 50% interest in CHC, a separate legal entity. CHC’s
registered office is at 5090 Explorer Drive, Suite 500, Mississauga, Ontario
L4W 4T9. InnVest’s investment in CHC is classified as a joint venture.
InnVest accounts for its investment in CHC using the equity method.
Related party transactions occur between InnVest and CHC. These
related party transactions are in the normal course of operations and
are measured at the exchange amount, which is the amount of
consideration established and agreed to between the related parties.
As at December 31, 2015, the related party balances with CHC are
included in accounts payable, in the amount of $80 (December 31,
2014 – accounts receivable – $53).
At acquisition date
2015 2014
Non-current assets
$ 585
$309
Current assets
4,498 4,987
Cash 7,847 9,681
12,93014,977
Current liabilities
(11,671)
(12,618)
InnVest’s Choice branded hotels pay franchise fees to CHC in accordance
with a master franchise agreement. These fees are recorded by CHC as
franchise revenue. The REIT eliminates its 50% share of franchise revenue
arising from payments made by InnVest’s Choice-branded hotels to
CHC against ‘Operating expenses’. For the year ended December 31,
2015, this amounted to $647 (2014 – $318).
Summarized financial information below represents amounts presented
in CHC’s financial statements, as adjusted to comply with IFRS.
Summarized income statement:
2015 2014
Revenues
Expenses
$ 30,461 $28,446
(18,350)(16,897)
Net income before depreciation
and income tax expense 12,111 11,549
Depreciation
(214) (184)
Net income before income tax expense 11,897 11,365
Net assets
$
1,259
$2,359
Income tax expense
(1,372) (1,370)
InnVest 50% share of
net assets in CHC
$630
$1,179
Net income and total
comprehensive income $
10,525 $ 9,995
InnVest’s 50% share of net income
and total comprehensive income
$ 5,262 $ 4,998
Dividends declared and royalties paid
$ (11,622) $ (10,041)
6 — INVESTMENT IN ASSOCIATE
On February 2, 2015, InnVest and an affiliate of KingSett acquired an
aggregate of 80% interest in the Fairmont Royal York Hotel in Toronto,
Ontario (the “Royal York Hotel”) whereby Ivanhoé Cambridge retained
a 20% interest in the hotel (collectively, the “Royal York Partnership”).
InnVest owns a 20% interest in the Royal York Partnership.
The Royal York Partnership acquired the Royal York Hotel for an
aggregate price of $189,145 before closing costs and working capital
adjustments. InnVest incurred transaction costs of $1,218 on the
acquisition for a total net investment of $18,759. InnVest exercises
significant influence over its investment in the Royal York Partnership
and accounts for its investment using the equity method.
The acquisition of the Royal York Hotel was financed with equity from
the partners and a 3 year floating rate mortgage loan in the amount of
$98,600 that bears interest at the Bankers’ Acceptance rate plus 2.85%.
InnVest’s share of the equity contribution and mortgage loan was
$17,541 and $19,720, respectively. Each partner is severally liable for its
percentage share of the mortgage loan. Subsequent to the acquisition,
additional funds were borrowed by the Royal York Partnership to fund
capital expenditure projects totalling $18,700 as at December 31, 2015.
Under the Royal York Partnership, each partner has minimum
capital commitments to fund capital expenditures and working
capital needs for the Royal York Hotel over a specified period of time.
As at December 31, 2015, InnVest’s remaining proportionate capital
commitment approximated $13,700.
Opening balance at acquisition, February 2, 2015 $18,759
Add:
InnVest’s 20% share of the Royal York Partnership’s
net loss from February 2, 2015 to
December 31, 2015 (1,076)
Additional investment in associate 2,800
Distribution received (500)
Closing balance, December 31, 2015 $19,983
Presented below are the amounts included in the financial statements of
the Royal York Partnership (adjusted where the accounting policies
between the Royal York Partnership and the REIT differ):
December 31, February 2,
2015 2015
Non-current assets
$221,172 $189,145
Current assets 4,810 8,408
Cash
7,202 1,041
Total assets
233,184 198,594
123,555 97,562
Current liabilities 15,802 13,328
Total liabilities
139,357 110,890
Net assets
$93,827 $87,704
InnVest’s 20% share of net assets 18,765 17,541
Acquisition costs 1,218 1,218
Investment in Royal York Partnership
$19,983 $18,759
From February 2, 2015
to December 31, 2015
Revenues
$98,663
Hotel property expenses (88,348)
Gross operating profit 10,315
Other expenses
General and administrative
(371)
Depreciation and amortization (11,027)
Interest expense (4,295)
Net loss (5,378)
InnVest’s 20% share of net loss
$(1,076)
7 — BUSINESS COMBINATION
On September 1, 2015, InnVest acquired a 100% interest in the Hotel
Saskatchewan in Regina, Saskatchewan (“Hotel Saskatchewan”). Hotel
Saskatchewan is a full-service hotel located in downtown Regina. The
net purchase price before closing costs and working capital adjustments
was $38,000 plus payment for capital expenditures of $7,012, for total
purchase price before working capital and closing costs of $45,012.
The acquisition was funded with a combination of cash on hand and
availability under the REIT’s operating line.
The results of operations of the Hotel Saskatchewan since the date of
acquisition have been included in the consolidated statement of net loss
and comprehensive loss. Hotel Saskatchewan contributed revenue of
$4,040 and a net loss of $532 from the date of acquisition. If the Hotel
Saskatchewan had been consolidated from January 1, 2015, the
consolidated statement of net loss would have included revenue of
$11,997 (unaudited) and a net loss of $3,312 (unaudited).
InnVest incurred acquisition related costs of $909, which have been
expensed in ‘Other expense and (income), net’ in the consolidated
statements of net loss and comprehensive loss. The transaction was
accounted for as a business combination under IFRS 3 “Business
Combinations”. InnVest has a commitment to complete certain capital
expenditures under the licence and royalty agreement.
The following table summarizes the allocation of the purchase price to
the fair value of each major asset acquired and net liability assumed as
at the acquisition date.
Land and building (NOTE 8)
$32,431
Building finishes (NOTE 8) 4,383
Electrical and mechanical (NOTE 8) 3,756
Furniture, fixtures and equipment (NOTE 8)
3,628
Intangibles (NOTE 10) 814
Identifiable assets acquired45,012
Working capital, net (150)
Net assets acquired and cash consideration paid $44,862
In connection with the Hyatt Regency Vancouver hotel acquisition in late
2014, an additional $745 was incurred for acquisition costs during the
year ended December 31, 2015, which have been expensed in ‘Other
expense and (income), net’ in the consolidated statements of net loss
and comprehensive loss.
8 — HOTEL PROPERTIES
Land,
Building and
Building
Electrical
Leaseholds
Finishes
and Mechanical
Furniture, Fixtures and
Equipment
Total
Cost
Opening balance at January 1, 2015
$882,725 $348,027 $206,711 $113,159 $
1,550,622
Derecognition of assets
–
–
– (9,312) (9,312)
Acquisition (NOTE 7)
32,431 4,383 3,756 3,628 44,198
Additions
6,514 17,086 4,324 13,896 41,820
Fair value of decommissioning and
restoration provision (NOTE 13)
1,333 –
–
– 1,333
Reclass to assets held for sale (NOTE 3) (18,725)(11,067) (8,907) (3,581)(42,280)
Writedown of asset to
recoverable amount (NOTE 26) (2,177) (313)
(96)
(83) (2,669)
Balance at December 31, 2015
902,101 358,116 205,788 117,707 1,583,712
83,060 171,048 31,339 55,032 340,479
–
–
– (9,312) (9,312)
Depreciation
19,878 44,539 6,898 14,990 86,305
Reclass to assets held for sale (NOTE 3)
(3,322) (6,924) (2,115) (2,821)(15,182)
99,616 208,663 36,122 57,889 402,290
Carrying value, December 31, 2015
$802,485 $149,453
$169,666 $ 59, 818 $
1,181,422
Land,
Building and
Building
Electrical
Leaseholds
Finishes
and Mechanical
Equipment
Total
Cost
$
831,647 $
295,421 $
202,140 $99,940 $
1,429,148
–
–
– (6,840) (6,840)
Acquisition 99,654 21,758 9,860 7,728 139,000
Additions
4,408 48,298 5,497 18,695 76,898
Fair value of decommissioning
and restoration provision (NOTE 13)
2,313 –
–
– 2,313
Writedown of asset to
recoverable amount (NOTE 26)
(4,158) (1,060) (1,754) (278) (7,250)
Reclass from assets held for sale 10,491 6,697 8,880 2,180 28,248
Reclass to assets held for sale (61,630)(23,087)(17,912) (8,266)
(110,895)
882,725 348,027 206,711 113,159 1,550,622
74,256 140,824 26,863 51,702 293,645
–
–
– (6,840) (6,840)
Depreciation
17,856 40,562 6,956 13,934 79,308
Reclass from assets held for sale 1,342 3,431 1,099 1,213 7,085
Reclass to assets held for sale (10,394)(13,769) (3,579) (4,977)(32,719)
83,060 171,048 31,339 55,032 340,479
$
799,665 $
176,979 $
175,372 $58,127 $
1,210,143
8 — HOTEL PROPERTIES (cont’d)
The depreciation expense has been included in the line item
‘Depreciation and amortization’ in the consolidated statements of net
loss and comprehensive loss.
The land amount included in land, building and leaseholds is $161,282
at December 31, 2015 (December 31, 2014 – $160,902). This amount
is not depreciated. During the year ended December 31, 2015, land
totalling $4,700 was acquired. Hotel properties at December 31, 2015
include $2,889 relating to leased assets (December 31, 2014 – $3,145).
IMPAIRMENT REVIEW DURING THE PERIOD
Each reporting period, InnVest performs a review for indicators of
impairment in respect of its hotel properties. If an impairment indicator
is identified, InnVest determines the recoverable amount of the
individual hotel property as the higher of value-in-use and fair value less
costs to sell. Value-in-use is based on a discounted cash flow approach
whereas fair value less costs to sell is determined giving consideration
to comparable sales transactions and price per room metrics. During the
year ended December 31, 2015, InnVest’s review led to the recognition
of an impairment loss of $2,669 relating to three hotels (2014 – $7,250
relating to five hotels). The impairment loss has been included in
‘Writedown (reversal of writedown) of hotel and other real estate
properties, net’ (Note 26) in the consolidated statements of net loss
and comprehensive loss. The recoverable amount was based on the
fair value less costs to sell.
9 — OTHER REAL ESTATE PROPERTIES
Other real estate properties included a retail property and
a retirement residence.
As described in Note 8, a similar impairment review was performed
on ‘Other real estate properties’. During the year ended December 31,
2015, InnVest’s review led to the recognition of an impairment loss of
$174 (2014 – $nil). The impairment loss has been included in
‘Writedown (reversal of writedown) of hotel and other real estate
properties, net’ (Note 26) in the consolidated statements of net loss
and comprehensive loss. The recoverable amount was based on the
fair value less costs to sell. During the fourth quarter of 2015, all assets
included in ‘Other real estate properties’ were sold.
Land and
Building
Equipment
Total
Cost
$ 2,529 $
77 $ 2,606
Additions
63 12 75
– (5) (5)
Writedown of assets to recoverable amount (170) (4) (174)
Disposal (2,422)
(80) (2,502)
–
–
–
Opening balance at January 1, 2015 641 47 688
Depreciation
79 7 86
–(5)(5)
Disposal (720)
(49) (769)
–
–
–
–$
–$
–
$
9 — OTHER REAL ESTATE PROPERTIES (cont’d)
Land and
Building
Equipment
Total
Cost
$ 2,497 $
Additions
32 77 $ 2,574
–
32
Balance at December 31, 2014 2,529
77 2,606
Depreciation
573 68 37 10 610
78
641 47 688
$ 1,888 $
30 $ 1,918
The depreciation expense has been included in the line item ‘Depreciation and amortization’ in the consolidated statements of net loss and
comprehensive loss.
10 — INTANGIBLE AND OTHER ASSETS
LicenceFranchiseCustomer
Contracts
Rights
Relationships
Total
Cost
$26,320 $ 2,492 $
Additions
–
320 Reclass to assets held to sale
– (96)
– $28,812
814 1,134
– (96)
Balance at December 31, 2015 26,320 2,716 814 29,850
Accumulated amortization
Opening balance at January 1, 2015 16,363 1,955 Amortization 1,316 219 – 18,318
68 1,603
Balance at December 31, 2015 17,679 2,174 68 19,921
$ 8,641 $
542 $
746 $ 9,929
Mortgage receivable 1,500
Intangibles and other assets, December 31, 2015
$
11,429
10 — INTANGIBLE AND OTHER ASSETS (cont’d)
Licence Contracts
Franchise Rights
Total
Cost
$26,320 $ 2,320 $28,640
Reclass to assets held for sale – (212) (212)
Reclass from assets held for sale – 255 255
Additions
–
129 129
26,320 2,492 28,812
Accumulated amortization
15,047 1,516 16,563
Reclass to assets held for sale – (199) (199)
Reclass from assets held for sale – 191 191
Amortization 1,316 447 1,763
Balance at December 31, 201416,363 1,955 18,318
Carrying value, December 31, 2014$9,957 $
537 $10,494
The amortization expense has been included in the line item ‘Depreciation and amortization’ in the consolidated statements of net loss and
comprehensive loss.
11 — LONG-TERM DEBT
2015 2014
Mortgages payable
$739,626 $749,363
Subordinated term loan 50,000 50,000
Operating line 15,000 –
Bridge loan
– 2,000
804,626 801,363
Reclass to liabilities related to
assets held for sale (NOTE 3) (9,444) (8,553)
795,182 792,810
Less debt issuance costs (11,803) (8,559)
Total long-term debt
783,379 784,251
Less current portion (62,963) (231,731)
Net long-term debt – non-current
$720,416 $
552,520
Substantially all of InnVest’s assets have been pledged as security
under debt agreements. At December 31, 2015, long-term debt had
a weighted average interest rate of 5.0% (December 31, 2014 – 5.5%)
and a weighted average effective interest rate of 5.6% (December 31,
2014 – 5.9%). The long-term debt is repayable in average monthly
payments of principal and interest totalling $4,812 (December 31,
2014 – $5,098) and matures at various dates from December 15, 2016
to August 1, 2025.
MORTGAGES PAYABLE
InnVest has access to a loan facility to fund 65% of capital expenditures
incurred at certain of its hotels. With the refinancing of one pool of
mortgages the maximum borrowing capacity was reduced from $30,000
to $20,000 during the year. At December 31, 2015, InnVest had remaining
capacity on the facility of $3,721 (December 31, 2014 – $8,386).
On April 13, 2015, InnVest refinanced the Hyatt Regency Vancouver
hotel for a new 10-year $80,000 mortgage at a fixed interest rate of
3.75%. This financing replaced the $70,000, 3-year floating rate
mortgage incurred as part of the acquisition of the property.
On July 2, 2015, InnVest repaid maturing mortgage loans totalling
$50,740 that were secured by seven hotel properties bearing a weighted
average interest rate of 5.2%. Three of the hotel properties were added
to the pool of assets securing the operating line. One hotel property was
previously sold and its mortgage loan repaid from proceeds of a finance
lease receivable collected (refer to Note 3). Subsequently, the REIT
obtained a new mortgage loan of $36,000 secured by the remaining
three hotels plus one additional hotel bearing an interest rate of 3.95%.
On July 24, 2015, InnVest refinanced a maturing mortgage loan of $650
secured by one Comfort Inn hotel bearing an interest rate of 5.87% with
a new 10-year $1,150 mortgage at a fixed interest rate of 3.96%.
11 — LONG-TERM DEBT (cont’d)
During the third quarter, mortgage loans totalling $152,444 bearing
a weighted average interest rate of 5.2% were refinanced with new
mortgage loans totalling $157,900 bearing a weighted average interest
rate of 3.7%.The new mortgage loans were secured by four properties.
In connection with one of the loans, the REIT entered into a forward
interest rate agreement to fix the interest rate at 4% for a 10-year term.
Upon finalization of the financing agreement, the hedge was unwound
at a cost of $1,351 which will be amortized to interest expense over
the term of the loan and will be offset by the lower contracted interest
rate of 3.8%.
In addition to the above, the REIT repaid mortgage loans of $18,848
which bore an interest rate of 5.5% with cash available on hand.
In November 2015, InnVest completed new financing of Hotel
Saskatchewan, for $23,300 at a fixed interest rate of 3.98% for a
5-year term with a Canadian financial institution.
SUBORDINATED TERM LOAN
InnVest has a credit agreement with an affiliate of KingSett (the “Credit
Agreement”) for a $50,000 subordinated term loan facility (the “Term
Loan”). The Term Loan is outstanding for a four-year term ending April
2018, bears interest at 8.75% per annum and is secured by a general
security agreement.
In connection with the Term Loan, a portion of the interest payments can
be paid in units if mutually agreed upon by KingSett and InnVest. During
the year ended December 31, 2015, no units were issued in satisfaction of
the interest payments (December 31, 2014 – 146,950 units).
BRIDGE LOAN
During the year ended December 31, 2015, the bridge loan of $2,000
with an expiry date of February 29, 2016 was repaid in full and cancelled
(December 31, 2014 – $2,000).
OPERATING LINE
On June 5, 2015, the existing operating credit line of up to $40,000 with
an expiry date of August 31, 2016 was repaid in full and cancelled.
On June 5, 2015, InnVest obtained a new operating, acquisition and
capital expenditure line (“Operating Line”) of up to $100,000 with two
Canadian chartered banks which expires on June 5, 2017. The Operating
Line is secured by 24 hotel properties. The amount of the Operating
Line is subject to a mortgageability test which is based on the lesser
of 50% of the appraised value and the operating results of the secured
properties, calculated for the immediately preceding four quarters.
The Operating Line bears interest at either the Canadian bank prime rate
plus 1.75% or the Canadian Bankers’ Acceptance rate plus 2.75%.
As at December 31, 2015, the amount outstanding on the Operating
Line was $15,000 (December 31, 2014 – $nil) and had a remaining
capacity of $76,436. An amount of $8,557 was reserved for letters of
credit (refer to Note 20).
Scheduled repayments of long-term debt are as follows:
Regular Amortization
Due on Maturity
Total
2016$
17,467 $ 45,496 $ 62,963
201714,626 178,581 193,207
201812,510 55,256 67,766
201910,108 138,536 148,644
2020 7,973 85,414 93,387
2021 and thereafter23,679 205,536 229,215
The estimated fair value of InnVest’s long-term debt at December 31,
2015 was approximately $819,462 (December 31, 2014 – $817,791).
This estimate was determined by discounting expected cash flows at
interest rates that reflect current market conditions for debt with similar
terms, maturities and credit risk.
$
86,363 $ 708,819 $ 795,182
Long-term debt includes $100,808 (December 31, 2014 – $170,013)
which is subject to floating interest rates. Annual interest expense
will increase by $1,008 for every 1% increase in the base Bankers’
Acceptance rate.
Interest expense on long-term debt and convertible debentures are
considered operating items in the consolidated statements of cash flows.
12 — CONVERTIBLE DEBENTURES
The convertible debentures outstanding are as follows:
Interest Rate
OutstandingOutstanding
Coupon Including EffectiveConversion Principal Principal
Face
Maturity Interest Issuance Interest
Strike
Debenture
Amount
Date
Rate
Costs
Rate(1)
Price
2015
2014
Series D 50,000 March 31, 2016
Series E 75,000 September 30, 2017
Series F 50,000 March 30, 2018
Series G 86,250 March 31, 2019
6.75%
6.00%
5.75%
6.25%
7.64%
6.79%
6.57%
6.25%
9.41%$
7.75%$
7.40%$
8.25%$
5.70 $
– $ 36,358
8.00 74,995 75,000
9.45 49,975 50,000
7.50 86,250 86,250
Total convertible debentures$211,220 $ 247,608
(1) Includes issuance costs and conversion option allocation.
The net proceeds received from the issuance of each convertible
debenture have been split between a financial liability element and the
conversion option component, representing the value attributable to
the option to convert the financial liability into units of InnVest. InnVest
has separated the conversion option component for each of its series
of convertible debentures and measures such component at fair value at
each reporting date (see Note 16). The conversion option feature of the
convertible debentures is recorded as a liability under ‘Other liabilities’
in the consolidated balance sheets.
December 31,
December 31,
2015
2014
$211,220 $
247,608
Financing costs
3,748 2,602
Less allocation of conversion
option value (12,320) (15,229)
Convertible debentures $202,648 $
234,981
The fair value of InnVest’s convertible debentures, estimated based on
the market price for each series of convertible debentures as at
December 31, 2015, is $211,401 (December 31, 2014 – $253,667).
REDEMPTION, CONVERSION AND AMENDMENTS
During the first quarter of 2015, Series D convertible debentures with
a face value totalling $32,715 were converted into 5,739,465 units
of the REIT. On March 3, 2015, the REIT redeemed and cancelled
all remaining Series D convertible debentures totalling $3,643. The
convertible debentures redeemed resulted in a gain of $196 included
in ‘Other (income) and expenses, net’ (Note 25).
In 2014, two series of convertible debentures were redeemed for a
net gain of $1,045. In addition, the $86,250 Series G 5.75% convertible
debentures were amended to increase the rate of coupon interest
payable per annum and the conversion price was increased. These
amendments resulted in a gain of $10,583 that has been included
in “Other income and expenses, net”.
The scheduled convertible debentures maturities are as follows:
Due on Maturity
2016$
–
201774,995
201849,975
201986,250
2020
–
$211,220
Financing costs and allocation of
conversion option value
(8,572)
$202,648
13 — PROVISIONS
December 31,
December 31,
2015
2014
Opening balance, beginning of year
$9,359 $7,073
Increase (decrease) to ‘Hotel properties’:
Other
194 (27)
Effect of changes in the
discount rate (NOTE 8)
1,333 2,313
Contingency provision
1,050 –
Ending balance, end of year
$11,936 $9,359
The total provision of $11,936 primarily relates to InnVest’s
decommissioning and restoration obligations related to the estimated
future cost of environmental obligations for certain properties. InnVest
intends to settle the obligations at the end of the expected useful
life of the hotel properties. At December 31, 2015, the liability has been
discounted at a rate of 2.15% based on the Bank of Canada long-term
bond yields (December 31, 2014 – 2.33%). Upon the initial recognition
of the liability, the decommissioning and restoration obligation was
capitalized to buildings and is being amortized over the remaining useful
life. The effects of the change to the discount rate are capitalized to
buildings and amortized over the remaining useful life.
14 — OTHER LONG-TERM OBLIGATIONS
December 31,
December 31,
2015
2014
Finance lease
$637 $ 821
Other lease obligations 242 262
Employee retiring allowance
1,132 1,271
Employee benefit plans (NOTE 15) 2,216 2,677
Total other long-term obligations
Less current portion
$4,227 $5,031
(203) (190)
Other long-term obligations –
non-current $4,024 $4,841
InnVest has a finance lease relating to one Ontario hotel with a lease
term through 2018. InnVest has the option to purchase the hotel at
a discounted amount at the conclusion of the lease. The fair value of
the lease liability is approximately equal to its carrying amount.
15 — DEFINED BENEFIT PENSION PLANS AND OTHER EMPLOYMENT BENEFITS
InnVest is responsible to provide employee retirement allowances to
certain unionized employees at a limited number of its hotels. Liabilities
are recorded for employee retirement allowance benefits using
actuarial valuations.
InnVest has defined benefit pension plans which are for specific
employees of four hotels and are closed plans. The most recent actuarial
valuation with respect to the funding of InnVest’s pension plans was
prepared on December 31, 2015.
The principal assumptions used for the purposes of the actuarial
valuations were as follows:
The actual return on plan assets for the year ended December 31, 2015
was a gain of $9 (2014 – gain of $129).
The benefit obligation for retired members, beneficiaries and terminated
vested members was calculated as the actuarial present value of their
respective benefits.
The defined benefit obligation as at December 31, 2015 is calculated on
a wind-up basis and was calculated using the present value of accrued
benefits. Under this method the obligations are calculated as the present
value of benefits based on service to the valuation date. There is no
future service cost for these plans as at December 31, 2015 and 2014.
December 31,
December 31,
2015
2014
Discount rate
3.25%
3.25%
Expected return on plan assets
n/a
n/a
Expected rate of salary increasesn/a n/a
15 — DEFINED BENEFIT PENSION PLANS AND OTHER EMPLOYMENT BENEFITS (cont’d)
The amounts recognized in the consolidated balance sheets in respect of
the employee benefit plans are as follows:
December 31,
December 31,
2015 2014
Accrued benefit obligation
Fair value of plan assets
$2,834 $3,269
925 903
Funded status – plan deficit
Liability arising from minimum
funding requirement
Asset not recognized due to
asset ceiling
$1,909 $2,366
Accrued employee future
benefit liability (NOTE 14)
65 49
242
262
$2,216 $2,677
Movements in the present value of
the defined benefit obligation
Opening defined benefit obligation
$3,269$6,899
Current service cost 17 12
Interest cost 122 284
Contributions from plan participants
–
2
Actuarial losses (gains)
(469) 1,465
Benefits paid
(105) (145)
Curtailment
–
–
Settlements
– (5,248)
Closing defined benefit obligation
Since the sum of the accounting surplus as at December 31, 2015 and
the Minimum Funding Requirement (“MFR”) for past service for the
plans are greater than the economic benefit that can be realized by
InnVest, there is an additional liability as at December 31, 2015 for these
plans. The MFR is calculated as the present value of the remaining
solvency special payments established as at December 31, 2015. The
MFR as at December 31, 2015 is $217,000. As the plan was wound up
as of December 31, 2013, the economic benefit is calculated as any
wind-up expense that can be paid from the plan plus any surplus that
can be recovered from the plan.
Past service costs are recognized immediately in defined benefit cost.
The pension expense recognized in ‘Operating expenses’, in the
consolidated statements of net loss and comprehensive loss in respect
of the employee benefit plans, are as follows:
2015 2014
Current service costs
$17 $
Interest on obligation
122
Interest income on plan assets
(35)
Interest on asset ceiling
10 Administrative costs
–
Actuarial gain (474) Net amount in operating expenses
$2,834 $3,269
Movements in the fair value
of plan asset
Opening fair value of plan assets
$903$5,943
Interest income on plan assets 35 278
Return on plan assets greater than
discount rate
(26)
(51)
Contributions from employer
105 219
Contributions from plan participants
–
2
Benefits paid
(92) (145)
Actual non-investment expenses – (206)
Settlements
– (5,248)
Other
– 111
Closing fair value of plan assets
$925 $ 903
12
284
(278)
–
206
(353)
$(360)$ (129)
16 — OTHER LONG-TERM OBLIGATIONS
December 31,
December 31,
2015 2014
Exchangeable units
$–$2,170
Convertible debenture holders’
conversion option (NOTE 20)
1,957 9,931
Deferred Units
1,597 774
Unvested executive compensation
1,070 211
Deferred hotel management incentive
983
–
Other liabilities
$5,607$
13,086
EXCHANGEABLE UNITS
As part of an acquisition made in 2005, InnVest granted 362,869
exchangeable units (“Exchangeable units”) to an entity in which a
former trustee has a partial ownership interest (Note 21). On August 4,
2015, 362,869 Exchangeable units were exchanged into InnVest units.
Prior to the exchange, the Exchangeable units were presented as
liabilities at their fair value. The fair value of the Exchangeable units was
based on market price of InnVest units. The fair value at the date of
exchange was $1,771.
CONVERTIBLE DEBENTURE HOLDERS’ CONVERSION OPTION
InnVest has separated the conversion option component for each
of its series of convertible debentures which are presented as ‘Other
liabilities’. InnVest measures the conversion option component
at fair value at each reporting date which is derived based on the
volatility of InnVest units’ market price, market interest rates as
well as management’s judgment relating to interest rate spreads
for instruments of similar terms and risks.
DEFERRED UNIT PLAN
InnVest’s trustees participate in a compensation plan involving the grant
of deferred units. The plan entitles trustees, at their option, to receive up
to 100% of their annual retainer in the form of deferred units. InnVest
matches, on a one-for-one basis, the number of deferred units elected
to be received by the Trustee. Therefore the value of deferred units
granted is equal to the trustee’s election multiplied by two.
The number of deferred units granted is based on the five-day weighted
average price of units on the day preceding the award date. Deferred
units granted entitle the holder to also accumulate deferred units equal
to the monthly cash distributions, assuming the reinvestment of the
distribution into units.
The number of deferred units granted result in the award of units on
a one-for-one basis upon the trustee’s departure from the Board or at
the Board’s discretion, may be settled in cash.
The benefit resulting from the grant of deferred units under this
plan is recorded in ‘Corporate and administrative expenses’ when
awarded. Deferred units granted are initially presented in ‘Other
liabilities’ based on the fair value of the units on the date of grant
and are subsequently remeasured at each reporting date at their fair
value with changes in the carrying amount recognized in ‘Corporate
and administrative’ expenses in the consolidated statements of
net loss and comprehensive loss.
To the extent that units are issued, (following a trustee’s departure from
the Board), the liability is reclassified to ‘Unitholders’ equity’ at the then
current fair value based on the market price of the REIT’s units, payment
is made and the liability is extinguished.
EXECUTIVE COMPENSATION PLAN
The senior executives participate in an incentive plan that involves the
grant of InnVest units which vest over time. Units granted entitle the
holder to also accumulate units equal to the monthly cash distributions,
assuming the reinvestment of the distribution into units.
Upon vesting, the payment will be satisfied through the issuance of
units. Unvested units are presented at their fair value. Upon issuance of
units (following the satisfaction of all vesting conditions), the liability is
reclassified to ‘Unitholders’ equity’ at the then-current fair value based
on the market price of the REIT’s units.
DEFERRED HOTEL MANAGEMENT INCENTIVE
Deferred hotel management incentive is recorded in conjunction with
entering into a hotel management agreement and completing specific
capital projects and is deferred and amortized over the term of the hotel
management agreement.
17 — CAPITAL MANAGEMENT
InnVest manages its capital, which is defined as the aggregate of
unitholders’ equity and debt, under the terms of the Declarations of
Trust (the “DOT”). InnVest’s capital management objectives are (i) to
ensure compliance with debt and investment restrictions outlined in
its DOT as well as external existing debt covenants, (ii) to allow for the
implementation of its acquisition and disposition strategy and hotel
property refurbishment program, and (iii) to build long-term unitholder
value. Issuances of equity and debt are approved by the Board of Trustees
through their review and approval of InnVest’s annual business plan,
along with periodic changes to the approved plans throughout each year.
At December 31, 2015, InnVest’s primary contractual obligations
consisted of long-term mortgage obligations and convertible
debentures. InnVest is not permitted to exceed certain financial leverage
amounts under the terms of the DOT. InnVest is permitted to hold
indebtedness excluding convertible debentures up to a level of 60% of
gross asset value. Further, InnVest is permitted to have indebtedness
and convertible debentures up to a level of 75% of gross asset value.
Indebtedness is computed as of the last day of each financial period
excluding any indebtedness under any operating line, non-interest
bearing indebtedness, trade accounts payable and, for greater
certainty, deferred income tax liability. InnVest is further limited by
an operating line covenant which limits total indebtedness including
convertible debentures up to 65% of gross asset value. Management’s
policy is not to exceed this leverage limit at any time during the year.
Under the terms of the DOT, individual property mortgages (or
mortgages on a pool of properties) cannot exceed 75% of the fair
value of the underlying property.
At December 31, 2015, InnVest’s leverage excluding and including convertible debentures was 46.1% and 58.2%, respectively, calculated
as follows:
Total assets per consolidated balance sheets
$1,314,052$
1,329,285
Accumulated depreciation and amortization
430,502 363,923
Gross asset value
$1,744,554$
1,693,208
Book value of mortgages and other debt (NOTES 11)(1) $804,626 46.1%$
801,363 47.4%
Convertible debentures (NOTE 12)(2)
211,220 12.1%
247,608 14.6%
Total indebtedness
$1,015,846 58.2%$
1,048,971 62.0%
(1) Adjusted to eliminate financing issuance costs.
(2) Adjusted to face value.
The DOT also includes guidelines that limit capital expended to, among
other items, the following:
(a) Direct and indirect investments in real property on which hotels are
situated and the hotel business conducted thereon, primarily in
Canada, and in entities whose activities consist primarily of
franchising hotels;
(b) Temporary investments held in cash, deposits with a Canadian
chartered bank or trust company, short-term government debt
securities or in money market instruments of, or guaranteed by, a
Schedule 1 Canadian bank, short-term commercial paper, notes,
bonds of other debt securities of a Canadian entity having a rating
of at least R-1 (Mid) by Dominion Bond Rating Service or A-1 (Mid)
by Standard & Poor’s Corporation maturing prior to one year from
the date of issue;
(c) Investments in mortgages or mortgage bonds, where the related
security is a first mortgage on income producing real property
which otherwise complies with (a) above and is subject to certain
leverage limits and debt service coverage. The aggregate value of
such investments shall not exceed 20% of unitholders’ equity; and
(d) Investments other than those summarized in (a) through
(c) are limited to 15% of InnVest’s Unitholders’ equity plus
accumulated depreciation.
InnVest is in compliance with these guidelines.
17 — CAPITAL MANAGEMENT (cont’d)
InnVest maintains an Operating Line with a syndicate of two Canadian chartered banks with the following covenants:
Threshold
2015Capacity(1)2014
(i)Total indebtedness (including convertible debentures)
as a percentage of gross assets < 65.0%
58.2%$
118,114 62.0%
(ii)Trailing 12 months consolidated earnings before interest, taxes,
depreciation and amortization (“EBITDA”) to consolidated
interest expense(2)> 1.8 x 2.6 x$
42,488 2.0 x
(iii)Trailing 12 months consolidated EBITDA to consolidated
debt service(3)> 1.5 x 1.9 x$
32,818 1.6 x
(iv)Unitholders’ equity plus accumulated depreciation
less ‘Intangible assets’> $300,000
$648,280$
348,280$
555,421
(1) Reflects additional capacity (for debt, EBITDA or unitholders’ equity, as applicable) before exceeding the covenant threshold at December 31, 2015.
(2) Consolidated interest expense excludes the non-cash portion of mortgage interest expense and the non-cash portion of convertible debenture interest and accretion.
(3) Consolidated debt service includes consolidated interest expense plus scheduled principal payments of $17,563.
18 — GUARANTEES
Significant guarantees provided by InnVest to third parties are
as follows:
a reasonable estimate of the maximum potential amount it could be
required to pay to counter parties. No amount has been recorded in the
financial statements with respect to these indemnification agreements.
TRUSTEE AND OFFICER INDEMNIFICATION AGREEMENTS
InnVest has entered into indemnification agreements with its trustees
and officers to indemnify them, to the extent permitted by law, against
any and all charges, costs, expenses, amounts paid in settlement and
damages incurred by the trustees and officers as a result of any lawsuit
or any other judicial or administrative proceeding in which the trustees
and officers are sued as a result of their service. These indemnification
claims will be subject to any statutory or other legal limitation period.
InnVest has purchased trustees’ and officers’ liability insurance. The
nature of the indemnification agreements prevents InnVest from making
INDEMNIFICATION OF UNDERWRITERS
InnVest has entered into agreements that provide for indemnification in
underwriting agreements. These indemnifications generally require
InnVest to indemnify the underwriters for costs incurred as a result of
losses from litigation that may be suffered by the underwriters arising
from transactions with InnVest. These types of indemnifications normally
extend over an unspecified period of time and do not provide for any
limit on the maximum potential amount. No amount has been recorded
in the financial statements with respect to these indemnifications.
19 — INCOME TAXES AND DEFERRED INCOME TAX
The sources of deferred income tax balances are as follows:
December 31,
December 31,
20152014
Deferred income tax liability (asset)
Hotel properties
$–$ 160
Non-capital losses
– (160)
$–$
–
The REIT has subsidiaries that are corporations for which deferred tax
liabilities have been measured using the corporate tax rates that are
expected to apply in the year the temporary differences are expected
to reverse.
tax liability or asset has been recognized due to the flow-through nature
of the entities or because it is not probable that the benefit will be
realized. Entities within the REIT have incurred non-capital losses of
$21,000 (2014 – $29,000) which expire in the years 2030 to 2033.
The REIT has approximately $257,000 (2014 – $286,000) of taxable
temporary differences and approximately $72,000 (2014 – $88,000) of
deductible temporary differences and tax losses for which no deferred
The combined tax rate is determined using the substantively enacted
tax rates by jurisdiction as at each reporting period.
A reconciliation of the income taxes computed at the Canadian statutory tax rate of 26.9% (2014 – 26.7%) to the effective tax rate is as follows:
20152014
Loss before income tax recovery
$(13,541) $(14,727)
Income tax based on a combined federal and provincial tax rate $(3,644)$(3,932)
Tax effect of loss not recognized 3,585 4,002
Other
59 (70)
Income tax recovery $–$
–
20 — FINANCIAL INSTRUMENTS
RISK MANAGEMENT
for doubtful accounts is adjusted for any balances which are determined
by management to be uncollectable. This provision adjustment is
recorded in ‘Operating expenses’ in the consolidated statements of
net loss and comprehensive loss. The following summarizes accounts
receivable related balances:
In the normal course of business, InnVest is exposed to a number of
risks that can affect its operating performance. These risks, and the
actions taken to manage them, include the following:
Interest rate risk
The average term to maturity of InnVest’s aggregate long-term debt and
convertible debentures is approximately five years. This strategy reduces
InnVest’s exposure to re-pricing risk resulting from short-term interest
rate fluctuations in any one year. Management believes that such a
strategy will provide the most effective interest rate risk management
for debt.
InnVest’s floating rate debt balance is monitored by management to
minimize InnVest’s exposure to interest rate fluctuations. As at
December 31, 2015, InnVest’s floating rate debt balance of $100,808
(December 31, 2014 – $170,013), excluding InnVest’s share of the
mortgage loan related to its investment in associate (Note 6) is
approximately 12.5% (December 31, 2014 – 21.2%) of total long-term
debt, excluding convertible debentures. Including InnVest’s share of the
mortgage loan related to its investment in associate the floating rate
debt balance is approximately 15% of total long-term debt, excluding
convertible debentures.
Credit risk
Credit risk relates to the possibility that hotel guests do not pay the
amounts owed to InnVest. InnVest mitigates this risk by limiting its
exposure to customers allowed to pay by invoice after check out (“direct
bill”). InnVest reviews accounts receivable regularly and the allowance
December 31,
December 31,
2015 2014
Accounts receivable
$25,268 $
22,175
Allowance for doubtful accounts
$364 $ 365
Accounts receivable greater than
90 days not provided
$246 $ 447
Allowance for doubtful accounts
to total receivables
1.4% 1.6%
Year Ended
Year Ended
December 31,
December 31,
2015 2014
Bad debt (recovery) expense
$(1)$
68
Liquidity risk
Liquidity risk arises from the possibility of not having sufficient cash
available to InnVest to fund its growth and capital maintenance
programs and refinance its obligations as they arise. There is a risk
that lenders will not refinance maturing debt on terms and conditions
acceptable to InnVest, or on any terms at all. There is also a risk that
bank lenders will not refinance the operating loan facility on terms and
conditions acceptable to InnVest, or on any terms at all.
The REIT’s contractual cash flows for the next five years and thereafter are as follows:
2021 andContractual
2016
2017
2018
2019
2020 ThereafterCash Flows(1)
Accounts payable and accrued liabilities $
Mortgage and subordinated term loan payable
– principal(2)
– interest(3)
Operating line – principal
Operating line – interest
– principal
– interest
Long-term leases
61,277 $
–$
–$
–$
–$
–$ 61,277
62,964 178,206 67,766 148,644 93,387 229,215 780,182
38,976 29,735 22,180 15,597 12,082 34,256 152,826
– 15,000 –
–
–
– 15,000
668 334 –
–
–
– 1,002
– 74,995 49,975 86,250 12,764 12,764 6,827 2,695 2,003 2,057 2,061 2,047 –
– 211,220
–
– 35,050
1,973 71,597 81,738
Total $178,652$313,091$148,809$255,233$107,442$335,068$
1,338,295
(1) Contractual cash flows include principal and interest payments.
(2) Mortgage principal includes regular amortization and repayments at maturity.
(3) Interest for floating rate debt is based on interest rates prevailing at December 31, 2015.
20 — FINANCIAL INSTRUMENTS (cont’d)
Contingent Obligations
InnVest and its operating subsidiaries are contingently liable with
respect to litigation and claims that arise from time to time in the normal
course of business (Note 13).
FAIR VALUES
The fair values of InnVest’s current financial assets and current financial
liabilities approximate their recorded values at December 31, 2015 and
December 31, 2014 due to their short-term nature.
The fair value of InnVest’s long-term debt is greater than the carrying
value by approximately $14,836 at December 31, 2015 (December 31,
2014 – $16,428) due to changes in interest rates since the dates on
which the individual mortgages were arranged. The fair value of
long-term debt has been estimated based on the current market rates
for mortgages with similar terms, credit risks and conditions.
The fair value of InnVest’s convertible debentures is greater than the
carrying value by approximately $6,796 at December 31, 2015
(December 31, 2014 – $8,755). The fair value of convertible debentures
is based on the market price for each series of convertible debentures
as at each reporting date.
The fair value hierarchy of financial liabilities measured at fair value on the balance sheet is as follows:
Level 1
December 31, 2015
Level 3
Total
Financial Liabilities:
Exchangeable units
–
–
–
Convertible debenture holders’ conversion option
– 1,957 1,957 Deferred Units 1,597 – 1,597 Unvested executive compensation
1,070 – 1,070 December 31, 2014
Level 1
Level 3
2,170 –
774 211 –
9,931 –
–
Total
2,170
9,931
774
211
Total financial liabilities
$2,667 $1,957 $4,624 $ 3,155 $ 9,931 $ 13,086
There were no transfers between Level 1 and Level 2 fair value
measurements during the periods presented and no transfer into and
out of Level 3. There were no financial instruments measured at Level 2
at any of the dates presented.
The fair market value of convertible debenture holders’ conversion
options is estimated using a Black-Scholes valuation model. InnVest
uses the following methods to determine its underlying assumptions:
expected volatilities are based on the historical volatilities of the
monthly losing price of InnVest’s unit prices; the expected term of
the conversion option is based on the remaining term of each series
of debentures; the risk-free interest rate is based on the Government
of Canada Bond yield with similar life terms to the expected life of
the option; and the expected dividend yield is based on the current
annual dividend amount divided by InnVest’s unit price on the issuance
date of the convertible debenture.
The following key assumptions were used in the Black-Scholes
valuation model:
2015 2014
Expected volatility
27.0% 27.0%
Expected distribution yield
8.0% 6.7%
The fair market value of convertible debenture holder’s conversion
options might result in a significantly higher or lower fair value due to
a change in the unobservable inputs used.
20 — FINANCIAL INSTRUMENTS (cont’d)
The following table reconciles movements in convertible debenture holders’ conversion option, which are financial instruments classified as Level 3
during the periods presented.
December 31,
December 31,
20152014
$9,931 $17,227
Fair value (gain) loss included in net loss (NOTE 27) (5,019) 9,027
Change in fair value of Series G conversion option resulting from redemption and amendment –(16,323)
Change in fair value of Series D conversion option resulting from redemption and conversions
(2,955)
–
Balance at end of the year
$1,957$9,931
Fair value gains and losses are included in ‘Unrealized (gain) loss on liabilities presented at fair value’ (see Note 27).
LETTERS OF CREDIT
As at December 31, 2015, InnVest has letters of credit totalling $8,557 (December 31, 2014 – $8,255 which include $6,000 relating to a deposit on
the investment in the Royal York Hotel acquisition). The letters of credit outstanding relate to security deposits for various utility companies, liquor
licences, additional security for the pension liabilities and for commitments to complete capital expenditures as required under franchise agreements.
21 — UNITS OUTSTANDING
InnVest is authorized to issue an unlimited number of units, each of which represents an equal undivided beneficial interest in any distributions
from InnVest. Per the DOT, units cannot be issued from treasury unless the Trustees consider it not to be dilutive to ensuing annual distributions
of distributable income to existing unitholders.
Units issued and outstanding:
Units$Units
$
116,280,294 758,863 93,830,897
644,380
Issuance of units pursuant to public offering
9,660,000 46,385 21,050,000
107,182
Conversion of convertible debentures
5,742,735 34,549 ––
Conversion of Exchangeable units (NOTE 16)
362,869 1,771 ––
Units issued under distribution reinvestment plan 1,532,674 7,711 617,237 3,224
Units vested under executive and trustee plans 189,668 1,188 61,849 293
Payments in kind
–
– 720,311 3,784
Balance, end of year 133,768,240 850,467 116,280,294 758,863
Issuance of units pursuant to public offering
Conversion of Exchangeable units
On July 15, 2015, InnVest issued 9,660,000 units (including 1,260,000
units issued pursuant to the full exercise of the underwriters’ overallotment option) by way of public offering, at a price of $5.00 per unit
for aggregate gross proceeds of $48,300, net of issuance costs of $1,915.
On August 4, 2015, pursuant to a purchase and sale agreement made
in 2005, InnVest converted 362,869 Exchangeable units into units of the
REIT for no additional consideration. The units were issued to an entity
in which a former trustee has a partial ownership interest.
Conversion of convertible debentures
During the year ended December 31, 2015, convertible debentures
with a face value totalling $32,745 were converted into 5,742,735 units
of the REIT.
21 — UNITS OUTSTANDING (cont’d)
Distribution reinvestment plan (“DRIP”)
InnVest has a DRIP whereby eligible Canadian unitholders may elect to
have their monthly distributions automatically reinvested in additional
InnVest units. Effective September 2014, InnVest amended its DRIP
to provide it discretion to purchase units on the open market or to
be issued from treasury. If InnVest elects to issue units from treasury,
unitholders who have elected to participate in the DRIP will receive 3%
bonus units in addition to any units issued to them under the DRIP.
Executive Compensation Plan
The senior executives participate in the executive compensation
plan under which InnVest units are granted by the Board of Trustees
from time to time. Granted units vest not more than four years from
the effective date of grant. InnVest has reserved a maximum of
1,000,000 units for issuance under the plan. The balance in this reserve
account at December 31, 2015 is 432,912 units (December 31, 2014 –
584,780 units).
A unit granted through the plan entitles the holder to receive, on the
vesting date, the then-current fair market value of the unit plus the value
of the cash distributions that would have been paid on the unit if it had
been issued on the date of grant assuming the reinvestment of the
distribution into InnVest units. The payment will be satisfied through
the issuance of units.
The benefit resulting from the issuance of unvested units under this
plan and any fair value adjustments on the liability are recorded in
‘Corporate and administrative’ expense in the consolidated statements
of net loss and comprehensive loss.
At December 31, 2015, there were 101,927 unvested executive units
granted (December 31, 2014 – 58,794) under the plan. The unvested
units are presented as ‘Other liabilities’.
Separately, as part of his inducement, the President and CEO was
awarded an equity grant effective on his start date, January 26, 2015,
of 400,000 units of which 80,000 units vested immediately and the
remaining 320,000 units vest at a rate of 80,000 units (“tranche”) per
year over a four-year period. In 2015, 80,000 units were awarded to the
President and CEO. Under the terms of the inducement, the President
and CEO is entitled to be awarded an additional 80,000 units in 2016.
Subsequent to December 31, 2015, 30,000 units were awarded to
the President and CEO with the remaining 50,000 units to be awarded,
or settled in deferred units, following InnVest’s annual general meeting
in 2016.
Total units vested and awarded under the executive unit plans for
the year ended December 31, 2015 were 189,668 units including
80,000 units awarded to the current President and CEO in January
2015 and 102,528 units awarded to previous CEOs as part of their
short-term employment agreements.
Trustee Compensation Plan
Effective October 21, 2014, the REIT amended its Board of Trustee
compensation program to grant Deferred units (Note 16). Previously,
Trustees were compensated a portion of their annual retainer through
the issuance of units of the REIT.
The following table summarizes the status of the executive compensation plan at December 31, 2015, excluding granted units which have fully
vested and/or were cancelled:
Unvested (Vested)
Executive Units, Net
Unvested
(Vested) Units
Accumulated from
Unvested (Vested)
Distributions, Net
Total Units, Net
2011 – granted 4,000 Vested in 2014 (2,000)
Vested in 2015 (2,000)
2013 – granted 13,500 2014 – granted 70,672 Vested in 2014 (40,000)
Fair Value
Per Unit
at Grant Date
1,316 5,316 $
(558) (2,558)
(758) (2,758)
2,086 9,086 $
(882) (4,382)
2,671 16,171 $
4,033 74,705 $
– (40,000)
2,552 148,875 $
– (102,528)
91,467 10,460 101,927
6.80
4.50
4.65
5.30
5.98
22 — PER UNIT INFORMATION
The net loss and weighted average number of units for the purposes of diluted earnings per unit are as follows:
Weighted Weighted
Net Loss Average Units Net Loss Average Units
Basic $(13,541) 126,370,774 $(14,727) 96,598,100
Diluted $(13,541) 126,862,939 $(14,727) 96,598,100
The following potential units are anti-dilutive and are therefore excluded from the weighted average number of units for the purposes of diluted
earnings per unit.
27,155,544 39,390,578
For the year ended December 31, 2015, InnVest declared distributions to unitholders totalling $50,751 (2014 – $39,222) at $0.40 distributions
per unit annually (2014 – $0.40 per unit annually). Declared distributions include cash distributions and distributions arising from the DRIP (Note 21).
Subsequent to the end of the year, InnVest declared $8,931 of distributions to unitholders at $0.40 per unit annually or $0.0333 per month to
March 24, 2016.
23 — CHANGES IN NON-CASH WORKING CAPITAL
Cash (Utilized in) Generated from
Accounts receivable
$(3,093)$10,376
Prepaid expenses and other assets (3,629) 7,616
Accounts payable and other liabilities (2,529) (9,721)
Changes in non-cash working capital
$(9,251)$ 8,271
24 — RELATED PARTY DISCLOSURES
WESTMONT HOSPITALITY CANADA LIMITED
InnVest has a Management Agreement for hotel management and
accounting services and an Administrative Services Agreement (the
“Agreements”) with Westmont Hospitality Canada Limited (“Westmont”).
As at December 31, 2015, one trustee of InnVest had a direct or indirect
controlling interest in Westmont and as such had a material interest in
the Agreements. Westmont is considered a related party to InnVest
as a result of its ability to exercise significant influence through the
Agreements. The Agreements are on terms consistent with those that
prevail in arm’s length transactions. At December 31, 2015, Westmont
managed 96 of InnVest’s hotels.
Westmont manages the hotel businesses and provides customary hotel
management services, including preparation of annual operating and
capital budgets and marketing plans, accounting and financial reporting,
supervision of sales and marketing, human resource management,
purchasing, management and supervision of construction and technical
services, information technology, franchise relations and evaluations,
supervision of property repairs and maintenance, supervision of
compliance with material contracts relating to the hotel properties,
leasing, yield management and quality control.
Westmont’s management fees are 2.95% with an incentive fee structure
that allows Westmont to earn up to 3.80% of gross hotel revenue each
year. The Agreements expire in April 2024.
24 — RELATED PARTY DISCLOSURES (cont’d)
In accordance with the management agreement, in addition to the
base management fee and incentive fee, Westmont is entitled to the
following fees in respect of hotels that it manages: (i) purchasing fees
based on 5% of the cost of certain goods and supplies; (ii) construction
fees based on 5% of the cost of construction and capital expenditures;
and (iii) per guest room fees for accounting services in respect of the
hotel businesses. For assets sold which are managed by Westmont,
InnVest pays a termination fee equal to the management fees paid
based on the trailing 12 months’ revenues.
Previously, for certain hotels owned by InnVest and not managed by
Westmont, Westmont was entitled to an asset management fee based
on a fixed percentage of the purchase price of the hotel or a fixed
percentage of gross operating profit, after the reserve for replacement
of furniture, fixtures and equipment and capital improvements,
subject to an annual minimum fee. This asset management agreement
terminated on November 30, 2014.
During the year ended December 31, 2015 and 2014, the fees charged
by Westmont pursuant to the Agreements were as follows:
2015 2014
Management fees
$10,611$
10,774
Asset management fees
(included in ‘Management fees’)
– 1,373
Accounting services
(included in ‘Operating expenses’)
1,876 2,142
Administrative services (included in
‘Corporate and administrative’)
309 361
Project management and general
contractor services (capitalized
to ‘Hotel properties’)
1,843 3,550
Termination fees 476 1,055
$15,115 $
19,255
In addition, InnVest reimbursed Westmont for costs of certain
employees which are paid by Westmont on account of InnVest. For the
year ended December 31, 2015 InnVest reimbursed $nil of related costs
(2014 – $817). Included in ‘Accounts payable and accrued liabilities’ are
amounts owed to Westmont at December 31, 2015 totalling $921
(December 31, 2014 – $1,071).
KINGSETT CAPITAL (“KINGSETT”)
A trustee of InnVest has a direct or indirect controlling interest in
KingSett. KingSett is considered a related party to InnVest as a result
of its ability to exercise significant influence over InnVest. In 2014, an
affiliate of KingSett provided InnVest with a $50,000 Term Loan. Refer to
Note 11 for a description of key terms of this loan. Included in ’Accounts
payable and accrued liabilities’ are amounts owed to KingSett at
December 31, 2015 totalling $372 (December 31, 2014 – $372).
An affiliate of KingSett is the land owner for one leasehold hotel owned
by InnVest. The lease expires in 2088. For the year ended December 31,
2015, InnVest paid $542 (2014 – $542) in lease payments related to this
asset. Included in ’Accounts payable and accrued liabilities’ are amounts
owed to an affiliate of KingSett at December 31, 2015 totalling $45
(December 31, 2014 – $45).
KingSett with its 60% interest in the Royal York Partnership and 66.7%
interest in the CYM Partnership, is the managing partner of both
partnerships. InnVest has an Asset Management agreement with the
partnerships for oversight of the hotel manager of the Royal York Hotel
and Courtyard Toronto. InnVest as the hotel asset manager oversees
the property’s hospitality operations. No fees will be paid between
KingSett and InnVest for services provided by each for the Royal York
Hotel. Under the Courtyard Toronto asset management agreement,
InnVest recorded $15 in asset management fees for the period ended
December 31, 2015.
25 — OTHER EXPENSE AND (INCOME), NET
Gain on sale of assets, net (NOTE 3)
$(631) $(18,774)
Contingency provision (NOTE 13) 1,050
–
Litigation settlement
42 (500)
Acquisition costs (NOTE 7) 1,654 4,324
Termination of royalty fee arrangement for joint CHC and InnVest licenced properties (1,050)
–
Gain on redemption and amendment of convertible debentures, net (NOTE 12) (196)
(11,628)
Refunds received related to sold properties (806)
–
Asset management fee (NOTE 5) (41)
–
Other 150 (360)
$172 $(26,938)
During the year ended December 31, 2015, InnVest recorded a net gain of $631 on the sale of four hotels and other real estate properties
(2014 – gain of $18,774 on the sale of 19 hotels).
26 — W
RITEDOWN (REVERSAL OF WRITEDOWN) OF HOTEL
AND OTHER REAL ESTATE PROPERTIES, NET
Reversal of previous impairment
$– $(3,496)
Writedown of hotel properties (NOTE 8) 2,669 7,250
Writedown other real estate properties (NOTE 9) 174
–
$2,843$3,754
27 — UNREALIZED (GAIN) LOSS ON LIABILITIES PRESENTED AT FAIR VALUE
Fair value (gains) losses recorded are as follows:
Exchangeable units
$(399)$ 475
Convertible debenture holders’ conversion option (5,019) 9,027
$(5,418)$ 9,502
28 — PERSONNEL EXPENSES
For the year ended December 31, 2015, total employee benefits related to hotel employees of $185,701 (2014 – $185,308) are included in
‘Operating expenses’ and total employee benefits related to corporate employees of $6,712 (2014 – $4,289) are included in ‘Corporate and
administrative’ expenses. Employee benefits include all forms of consideration provided to employees and Board of Trustees for services rendered.
29 — KEY MANAGEMENT PERSONNEL COMPENSATION
Key management personnel is comprised of the Board of Trustees and the senior executives who participate in the executive compensation plan.
Short-term employment benefits
$3,092 $ 2,551
Unit-based compensation benefits 3,029 1,198
$6,121 $ 3,749
30 — SEGMENT INFORMATION
The management of InnVest’s operations is organized within four Canadian geographical regions: Western, Ontario, Quebec and Atlantic. Unallocated
functions include the revenues and costs associated with InnVest’s other real estate properties, and costs of central corporate services provided. All
key financing, investing and capital allocation decisions are centrally managed.
REVENUES
Year Ended December 31, 2015 Western Ontario Quebec Atlantic Total
Hotel properties
$
200,034$
183,501$
97,706$
71,347$
552,588
Other real estate properties 800
Revenues
$553,388
Western Ontario Quebec Atlantic Total
Hotel properties
$ 160,201$
195,813$
98,832$
79,965$
534,811
Revenues$
535,535
30 — SEGMENT INFORMATION (cont’d)
GROSS OPERATING PROFIT
Hotel properties
$54,665 $50,259 $21,636 $18,965 $
145,525
(179)
145,346
Other expenses, net
(158,887)
Net loss
$(13,541)
Hotel properties
$ 44,698 $47,991 $19,830 $16,688 $
129,207
Other real estate properties (386)
128,821
Other expenses, net
(143,548)
Net loss$
(14,727)
Hotel Properties Western Ontario Quebec Atlantic Total
December 31, 2015
$535,318 $363,841 $154,340 $127,923 $
1,181,422
December 31, 2014$
508,446$
386,460$
178,888$
136,349$
1,210,143
CAPITAL EXPENDITURES
Western Ontario Quebec Atlantic Total
Hotel properties
$
15,956$
16,042$3,158$6,664$
41,820
$41,895
Year Ended December 31, 2014$
27,723$
21,485$
18,470$9,254$
76,932
31 — SUBSEQUENT EVENTS
On February 1, 2016, InnVest acquired the Ottawa Marriott Hotel located in downtown Ottawa, Ontario for a purchase price of $115,000. The
acquisition was funded with available cash on hand and a $35,000 bridge loan at an interest rate of the Canadian Bankers’ Acceptance rate plus 4.5%
with a Canadian financial institution.
32 — APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS
These consolidated financial statements were authorized for issue by the Board of Trustees of InnVest on March 24, 2016.
InnVest REIT holds one of Canada’s largest hotel portfolios together with an
interest in Choice Hotels Canada Inc., one of the largest franchisors of hotels
in Canada. InnVest’s portfolio comprises 110 hotels across Canada representing
over 14,500 guest rooms operating under 18 internationally recognized brands.
RESERVATIONS
AUTOGRAPH COLLECTION HOTELS
1-844-324-1672
www.autographhotels.com
HILTON GARDEN INN
1-877-782-9444
www.hgi.com
MARRIOTT
1-888-236-2427
www.marriott.com
BEST WESTERN
1-800-780-7234
www.bestwestern.com
HILTON HOTELS
1-800-445-8667
www.hilton.com
QUALITY HOTEL, QUALITY SUITES
1-800-424-6423
www.choicehotels.ca
COMFORT INN
1-800-424-6423
www.choicehotels.com/comfort-inn
HOLIDAY INN
1-888-465-4329
www.holidayinn.com
RADISSON
1-888-201-1718
www.radisson.com
COURTYARD BY MARRIOTT
1-800-321-2211
www.courtyard.marriott.com
HOLIDAY INN EXPRESS
1-888-465-4329
www.hiexpress.com
SHERATON HOTELS & RESORTS
1-800-325-3535
www.starwoodhotels.com/sheraton
DELTA HOTELS
1-888-890-3222
www.deltahotels.com
HOMEWOOD SUITES HOTELS
1-800-225-5466
homewoodsuites3.hilton.com
STAYBRIDGE SUITES HOTELS
1-877-660-8550
www.staybridge.com
FAIRMONT HOTELS & RESORTS
1-800-257-7544
www.fairmont.com
HYATT REGENCY
1-888-591-1234
www.hyatt.com
TRAVELODGE
1-800-578-7878
www.travelodge.com
www.innvestreit.com

2015 Annual Report

Transcription

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