final transcript

Transcription

final transcript

FINAL TRANSCRIPT
InnVest Real Estate Investment Trust
Third Quarter Results Conference Call
Event Date/Time: November 13, 2015 — 11:30 a.m. E.T.
Length: 31 minutes
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InnVest Real Estate Investment Trust Third Quarter Results
Conference Call
CORPORATE PARTICIPANTS
Drew Coles
InnVest Real Estate Investment Trust — President and Chief Executive Officer
George Kosziwka
InnVest Real Estate Investment Trust — Chief Financial Officer
CONFERENCE CALL PARTICIPANTS
Jenny Ma
Canaccord Genuity — Analyst
Troy MacLean
BMO — Analyst
Brad Sturges
Industrial Alliance Securities — Analyst
Trevor Thompson-Harry
Scotiabank — Analyst
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PRESENTATION
Operator
Good afternoon and good morning, ladies and gentlemen. Welcome to the InnVest Real
Estate Investment Trust Third Quarter Results Conference Call.
At this time, all lines are in the listen-only mode, but following the presentation we will
conduct a question-and-answer session.
If at any time during this call you require Operator assistance, please press *, 0.
Note that this call is being recorded on Friday, November 13, 2015.
I now would like to turn the conference over to your host, Mr. Drew Coles, President and
CEO. Please go ahead, sir.
Drew Coles — President and Chief Executive Officer, InnVest Real Estate Investment Trust
Thank you, Sylvie. (phon) Good morning, and thank you for joining us today. With me is
George Kosziwka, our Financial Officer.
Before we begin, let me remind everyone that during this conference call we may make
statements containing forward-looking information. This forward-looking information is based on a
number of assumptions and is subject to a number of known and unknown risks and uncertainties
that could cause actual results to differ materially from those disclosed or implied. I direct you to our
earnings release, MD&A, and other securities filings for additional information about these
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assumptions, risks, and uncertainties, which can be found on our website at innvestreit.com or at
sedar.com.
Our results in the third quarter and year to date clearly demonstrate our plan is working.
Our focus points have been growing our business organically and reinvesting in winners; growing our
business through pertinent acquisitions; and enhancing our balance sheet and financial position.
These focus points are working, and we believe progress has been made in our overall goal to build
unitholder value over the long term.
George will shortly provide more detail on our results in the quarter and the first nine
months of 2015, but first let me touch on a few highlights. From an operational perspective, the
drivers have shown solid increase in our average daily rates and occupancies compared to last year,
resulting in strong increases in our third quarter and year-to-date RevPAR operating profit and
margins.
Our western region hotels, which include our hotels in Calgary and Edmonton, have
performed remarkably well, given the sluggish energy environment. For the first nine months of the
year, RevPAR’s down a modest 1.6 percent from prior year, and strong cost controls in the middle,
the GOP is down less than 0.6 percent year over year.
The Hyatt Regency continues to exceed our expectations posting another solid quarter,
contributing over $6.5 million in GOP in Q3 and over $13.5 million in GOP for the first nine months of
the year.
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As a result of this strong operating performance, our total AFFO rose 30.8 percent in the
third quarter and a very strong 53.4 percent through the first nine months of the year. Our trailing
12-month payout ratio also improved significantly, which is a focus for us, to 75.9 percent as of
September 30, 2015 from 85 percent the same time last year.
We’ve also significantly expanded and diversified our hotel portfolio this year with the
acquisition of a 100 percent interest in Regina’s Hotel Saskatchewan in early September and a 33
percent interest in Toronto’s Courtyard by Marriott in late August. The aggregate net purchase price
for the two properties was approximately $70 million and included another $7 million in renovations
at the Hotel Saskatchewan.
The acquisitions add 799 rooms to the portfolio, and both are high quality assets, well
located and well positioned in respect of their markets. We expect these two properties will make a
growing contribution to our results through the balance of this year and going forward.
We’re very pleased to have completed a successful bought deal equity offering in July,
raising gross proceeds of $48.3 million, including an over-allotment option to fund our growth
activities.
As George will outline, per unit amounts in the third quarter were impacted by the 21
percent increase in the weighted number of units outstanding due to the two equity offerings over
the last 12 months. And the proceeds from our July offering were not fully invested in the new
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properties until the last month of the quarter. However, our growth through the first nine months of
the year was still accretive as AFFO per diluted unit rose 20 percent.
Great progress continues in our other key focus area, which is to strengthen our balance
sheet and financial position. Our aggregated debt-to-gross book value ratio at September 30th
continued to strengthen, improving to 58.1 percent, which is down from 65.8 percent a year ago and
62 percent as of December 31, 2014. We continue to reduce our long-term interest costs and extend
our average term to maturity through our refinancing activities and other initiatives aimed at
capitalizing on today’s low interest rate environment.
Renovations at the Fairmont Royal York are progressing as planned, and we now have a total
of 910 guest rooms completed. This improved competitive position, as the hotel should benefit in
Toronto’s robust market heading into 2016 and beyond.
So in summary, it was another strong quarter for InnVest REIT. A higher quality, welldiversified portfolio is working. Renovation activity and a day-to-day focus on driving results is
working. We’re owners on site. Thoughtful, prudent acquisition activity is working. And the
internalization of our asset management team is working.
I’ll now turn things over to George to provide more colour on our performance in the third
quarter and the first nine months of 2015. Go ahead, George.
George Kosziwka — Chief Financial Officer, InnVest Real Estate Investment Trust
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Thanks, Drew. As Drew outlined, our progress in strengthening and repositioning our
property portfolio and the steps taken to enhance our financial position resulted in another strong
quarter. Overall revenues rose 12.2 percent and 4.1 percent for the three and nine months ended
September 30th, driven by increased occupancies and daily room rates, solid performance increases
in our recently renovated hotels, and contributions from the Hyatt Regency Vancouver.
The Hotel Saskatchewan acquisition was completed late in the third quarter, and we expect
an increasing and accretive contribution from the hotel through the balance of 2015 and going
forward.
Same hotel revenues continue to benefit from our renovation and repositioning initiatives
rising 4.1 percent and 3.6 percent in the third quarter and the first nine months of 2015. Higher
average daily room rates and occupancies contributed to the 4 percent increase in same hotel RevPAR
in the quarter and 3.6 percent increase through the first nine months of the year.
Overall RevPAR was up 12 percent and 10.8 percent in the third quarter and the first nine
months when taking into account acquisitions and dispositions.
Overall gross operating profit rose 16.8 percent in the third quarter with the GOP margin
rising 130 basis points to 34 percent. For the nine months ended September 30th, GOP rose 16.7
percent with a GOP margin improving to 27.8 percent, up 300 basis points. Same hotel GOP rose 6.5
percent and 9.3 percent in the third quarter and the first nine months respectively compared to the
prior year.
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You will note that the percentage GOP increases achieved for the third quarter and year-todate periods are higher than the percentage revenue increases. As a result, we saw an expansion in
our GOP margin. This increase highlights the positive offering leverage inherent in the hotel business
when revenue increases outpace inflationary increases and cost and where we benefit from a
relatively low-level variable cost associated with increased business volumes, particularly when
higher room rates are achieved as we saw again in Q3.
Turning to the expense side. Corporate admin costs have increased this year on a relative
basis due to the addition of a full-time executive function and costs associated with the internalization
of our asset management team in January.
Interest costs on mortgages and other debt have risen marginally in 2015 due to the new
mortgage debt on the Hyatt Regency. These increases were partially offset by the net repayment of
mortgage debt from asset sales and overall lower interest rates.
Convertible debenture interest savings reflect the redemption and repurchase of $135
million of debentures in 2014 and 2015. Adjusted funds from operation in the third quarter rose to
35.7 million from 27.3 million last year.
For the first nine months, AFFO increased to 55.5 million, up from 36.1 million in 2014. The
increases reflect the contribution from hotel acquisitions, improved operating performance, and the
reduction in overall interest expense this year.
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As Drew stated, our per-unit amounts were impacted in the third quarter by the 21 percent
increase in the weighted average number of units outstanding due to the two equity raises over the
last 12 months. In addition, we did not have all the proceeds from the July 2015 equity offering fully
invested in income producing properties until near the end of the third quarter.
FFO per diluted unit was also negatively impacted by approximately $0.012 from $1.8
million of costs associated with the early refinancing of mortgage debt in the third quarter and
approximately $0.01 from the timing of the equity issue proceeds and the deployment of those funds.
Having said that, AFFO per unit for the nine months ended September 30, 2015, increased 20 percent
despite the increase in the weighted average number of units outstanding compared to last year.
Importantly, our AFFO payout ratio for the trailing 12 months ended September 30th
strengthened to 75.9 percent, compared to 85.0 percent for the trailing 12-month period last year.
Turning to our balance sheet. Leverage continued to strengthen with our debt-to-grossbook value ratio improving to 58.1 percent at September 30, 2015, down from 62 percent at the end
of the year and 65.8 percent at the same time last year.
Our total potential liquidity position stood at 72.7 million at quarter-end. To further enhance
our liquidity, we have five noncore hotels currently slated for disposition, which we expect will
generate approximately $20 million after related mortgages are repaid.
During the third quarter, all remaining 2015 mortgage maturities were refinanced, with
mortgage loans on 23 hotel properties totalling $216 million with a weighted average interest rate of
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5.2 percent, were refinanced with new mortgage loans totalling $195.1 million, with a weighted
average interest rate of 3.7 percent.
The new mortgage loans were secured by nine hotel properties. In addition, 12 hotels and
$36 million of capacity were added to our $100 million operating acquisition and capital expenditure
credit facility, making it now fully available.
The remaining two hotels are unencumbered pending disposition. There are no further debt
maturities until December 2016, when approximately 47 million or 5.8 percent of the total
outstanding mortgages mature. This debt bears interest at 5.9 percent.
In 2015, we have extended our average term to maturity of our mortgage debt from 2.8
years to 5 years, while lowering the weighted average interest rate from 5.5 percent to 5.0 percent
compared to December 31, 2014.
We continue to invest in our hotel portfolio to optimize performance and ensure our
properties are well positioned and competitive in their respective markets. 28.6 million has been
invested through the first nine months of this year, including the completion of room renovations at
Calgary’s Fairmont Palliser, the Sheraton Suites Eau Claire, first phase of room renovations at the
Delta London Armouries, and lobby renovations at Moncton’s Delta Beausejour.
We expect to invest a total of approximately $60 million in our core portfolio this year,
including capital improvements in the two hotels acquired in the third quarter. However, there is a
potential for some planned projects to extend into the first quarter of 2016. Details on the positive
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impact that these investments are having on our results are outlined in our Q3 press release and
MD&A.
Thanks for your time today, and I will turn things back to Drew.
Drew Coles
Thanks, George. Looking ahead, we remain confident that our focus on improving
performance is generating real benefit for our unitholders. As George detailed, we saw solid growth
in all our key performance benchmarks in the third quarter. We expanded and diversified our hotel
portfolio with two important acquisitions. Our balance sheet and financial position continue to
strengthen. And thus, we are well positioned to capitalize on future growth opportunities.
Our confidence is also based on strengthening and strong fundamentals in the Canadian
hotel business, with demand continuing to outpace new supply in the sector. Independent expert
forecasts show the industry should grow at about an expected 3.5 percent increase in overall RevPAR
in Canada in 2015 and maybe north of 4 percent through 2016. That’s from the industry experts.
The reduction in retail gasoline prices and the low relative Canadian dollar are also drivers
that are expected to benefit the industry. Anecdotally, more Canadians appear to be choosing
domestic travel rather than travelling into the US or overseas. Travel to Canada from the United States
was predicted to climb to 3.5 percent this year in 2015, which would be the highest growth rate in
the past five years. However, in the first eight months of 2015, overnight trips to Canada from the US
are up 7 percent compared to the same time last year, according to Destinations Canada.
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Looking ahead, we’ll continue to focus on our key strategic imperatives: first, growing our
organic cash flow by further optimizing the operational performance of our properties and utilizing
our asset management strength; second, continuing to invest in our assets to accelerate performance;
third, growing the portfolio through disciplined acquisitions and prudent; and fourth, focusing on
strengthening our balance sheet through reduced leverage, lower interest costs and smoothing out
our average term to maturity.
In summary, we feel a high quality hotel portfolio will generate high quality results, and we
will maintain this focus going forward.
Thank you for your time today, and we’d now be pleased to take any questions.
Q&A
Operator
Thank you, sir. Ladies and gentlemen, if you do have a question, please press *, followed by
1 on your touch-tone phone. You will hear a three-tone prompt acknowledging your request.
Questions will be taken in the order received, and if you wish to withdraw your request, please press
*, followed by 2. And note that if you’re using a speakerphone, you will need to lift the handset before
pressing any keys. One moment while we wait for your first question.
And your first question will be from Jenny Ma at Canaccord Genuity. Please go ahead.
Jenny Ma — Canaccord Genuity
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Conference Call
Hi. Good morning, everyone.
Drew Coles
Hi, Jenny.
George Kosziwka
Hi, Jenny.
Jenny Ma
I had some questions on your debt; in particular, the mortgage that you’re planning to place
on Hotel Saskatchewan. Can you give us a little bit more colour as far as timing and because the hotel
is undergoing some renovation conversion activity, what kind of term you’re looking for, for that
mortgage?
George Kosziwka
Sure. We are going to put a five-year mortgage on that property. It’s going to be
approximately $23.5 million, and the interest rate should be right around 4 percent. And it hopefully
will be in place by the end of November.
Jenny Ma
So has there been a little bit of an increase in the spread on the five year? Compared to what
you were able to do in Q3?
George Kosziwka
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A little bit on this one because of the nature in the investment and the substantial amount
of capital going into it. And it’s a little bit less certain with the trailing 12 cash flow because it’s been
under so much renovation.
Jenny Ma
So it’s really asset specific, as opposed to indicative of what’s going on generally for hotel
financing.
George Kosziwka
Yes, that’s true. We would say spreads still remain in the 2.50 to 3 range.
Jenny Ma
Okay.
George Kosziwka
And depending on sort of 5-, 7-, or 10-year term.
Jenny Ma
Okay. And I’m looking at your convertible debentures schedule, and it looks like there are a
couple of series that are either redeemable or up for maturity in the next couple of years. I’m
wondering if you could provide some insight into what you’re thinking on a longer term, and how
much you have, after all the finance activity you did, as far as unencumbered hotels that you might
be able to take out secured financing on, or take these out, or how it’s looking.
George Kosziwka
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We’re currently working on our financing plan for 2016. Safe to say that we’re looking at our
mortgage properties where we have financing capacity, even though they may be encumbered. We’re
also looking at the possibility of increasing some financing there to help pay down convertible
debentures. We’re looking at other financing opportunities that wouldn’t attract a convertible
feature, but we remain committed to reducing our reliance on dilutive securities.
Jenny Ma
Okay. And this question’s probably for Drew. Can you give some insight into what the
acquisition outlook is shaping up to be for 2016? It looks like—well, you guys had a pretty active year.
What’s the activity like out there in the Canadian hotel space? And what kind of cap rates are you
seeing?
Drew Coles
Yeah. You know, it’s looking to be a pretty robust year this year again. And, I think, in
speaking with the brokerage community they all seem to expect that overall transaction activity
should tip over $2 billion. What’s interesting this year is that other than the Fortis deal these are all
individual trades. So the activity seems to be pretty strong. The availability of capital and debt seems
to be fairly robust. And we’re okay with that; we think we can compete if something fits our strike
zone.
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Cap rates; I think we’re—in the full-service, big-box area, we’re seeing really low 7s, high 6s,
to mid 7s. And then in the limited service stuff we’re seeing in select service, we’re seeing anywhere
from 8 to 10 in the spread.
Jenny Ma
Okay. Great. That’s helpful. Thanks, guys.
Drew Coles
Thanks, Jenny.
Operator
Thank you. And your next question will be from Troy MacLean at BMO. Please go ahead.
Troy MacLean — BMO
Good morning.
Drew Coles
Hey, Troy.
Troy MacLean
Just with the ADR decline in Western Canada, it seemed a little higher than in the past couple
quarters. Is that a sign it’s becoming a more—Alberta in particular is becoming a more rate
competitive market?
George Kosziwka
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Well, in a general sense, Troy, I would say it really depends on the pocket in Alberta. We
don’t have anything up north in Grande Prairie or Fort McMurray or anything like that. So when we
look at the city centre dynamics, we only have Edmonton and Calgary. And in that sense, I think—and
even if you look at the Calgary airport has a different dynamic than say downtown.
I would say where there’s supply increases in markets like the Calgary airport, yeah, I would
say that has more price sensitivity and more price competition. When you get downtown, yes, I would
say it’s more price competitive than it has been over the past couple of years, but it’s more just, I
would say, a shift in the type of customer that is going to the downtown market.
So we’re still seeing some occupancy activity, and the rate differential’s really just driven by
the type of customer or some of the higher end business transient that is now getting replaced by
group business, which you need to go out and buy a little bit.
Troy MacLean
Would you say in Calgary and Edmonton that you’re gaining market share versus your
competitors?
Drew Coles
I would say yes, we are.
Troy MacLean
And then just on capital investment; do you have kind of a forecast for what you expect to
invest in 2016 in your portfolio?
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Drew Coles
We’re not quite there yet, but I would say this year we’re coming in right around 60 million,
and I would expect that we’d be coming in around that range for next year. But early days right now
still.
Troy MacLean
And then given the forecast for RevPAR growth industry wide in 2016, given the mix of hotels
and where you’re located, do you think you’ll meet or exceed the industry’s growth outlook for 2016?
Drew Coles
Our objective as a company and as a platform is to always try to outperform that number.
Troy MacLean
Thank you. I’ll turn it back.
Drew Coles
Thanks, Troy.
Operator
Thank you. Your next question will be coming from Brad Sturges at Industrial Alliance
Securities.
Brad Sturges — Industrial Alliance Securities
Hi. Good morning.
Drew Coles
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Hi. Good morning, Brad.
Brad Sturges
Just to follow up on the Calgary discussion there. It sounds like it’s more just a shift of
customer base. And would you say your strategy has shifted there? Or is it just more a function of the
market?
Drew Coles
No. I mean I think the strategy is to—I would say that the team on the ground at the hotels
understand the landscape, and I think the strategy is to compete still for what makes sense and still
being mindful of rate. And I think if we’re mindful of rate, somewhere down the road Calgary will
come out of this, and we’ll be better positioned.
So the real strategy is just understanding what customer is still coming to town, and I think
one of the GMs at the hotel put it best, that we’re in the hotel business, not in the energy business.
And I’d probably rather own a hotel in some of those markets right now than other kinds of real
estate.
Brad Sturges
Okay. And in terms of planned dispositions, I think there’s still five assets you’re looking to
sell. What’s the timing we should be looking at for those sales?
Drew Coles
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Yeah. We’ll certainly see two of them close by the end of this year, and the other three may
drift into the early part of next year.
Brad Sturges
And beyond those five, there’s nothing else you’re really thinking or contemplating at this
point?
Drew Coles
I think we are constantly now looking at what’s really performing in our metrics and what
isn’t. So I think it will always be an evaluation that is continuous now, and those assets we see that
we don’t see performing down the road we’ll continue a disposition cycle.
Brad Sturges
Okay. Great. I’ll turn it back. Thanks.
Drew Coles
Thanks, Brad.
Operator
Thank you. Your next question will be from Trevor Thompson-Harry at Scotiabank. Please
go ahead.
Trevor Thompson-Harry — Scotiabank
Hi. Good morning.
George Kosziwka
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Hi, Trevor.
You touched on this a bit in the opening remarks, but was wondering maybe you could walk
us through how lower gas prices, the Canadian dollar, and maybe the weaker domestic economy due
to lower commodity prices might be impacting your portfolio in isolation.
And then maybe given there are a couple offsetting macro conditions emerging at the
moment. Just wondering if maybe we could get a sense as to which ones you believe are most
important to your portfolio and your business, and which ones might be sort of nice to have but not
necessarily critical.
Drew Coles
Sure. With the first one, I say it anecdotally, but and we hear it from the industry, that we
feel, first and foremost, that lower gas prices keep people travelling, stimulated travel through the
summer, and as we believe—and again anecdotally; it’s pretty tough to quantify this stuff—but having
an overall positive impact on travel across the country. And given our dispersion and our locations
seems to affect it.
The low dollar one is always an interesting question. And I’ve asked other peers and other
operators, are they able to really pinpoint the increase in the US travel into Canada? Are people really
coming because of the low dollar? And the answer we seem to get across the industry is it’s not just
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the low dollar, but US travel activity is up, both in their own domestic backyard, and that causes
spillover into Canada.
And then additionally to that, Destinations Canada, TIAC, and the federal government have
done a really nice job of remarketing Canada back in the US, where they were absent for a number of
years. So there’s been a pretty good marketing spend going on, and I think the industry is taking their
hat off to those groups to be able to just market Canada, despite where the dollar, that it’s producing
those kinds of results. Seven percent year over year is a good number for US travellers coming back
into Canada.
And then on the macro areas. To Brad’s question, we look to outperform the industry in
terms of RevPAR growth, and we are focused on a day-to-day level on our revenue management
practices and outperforming in that regard. And then, of course, we want to make sure that translates
down to the bottom line and increasing our hotel operating profit. And when we focus on average
rate growth, we are focused on driving our margins, which helps our margins, which then flows right
into our AFFO.
From an overall macroeconomic perspective, it’s an interesting time for the hotel industry.
We’re seeing very restricted growth in the overall GDP of the economy, and yet we see really strong
activity in BC. We see strong economic activity in Manitoba, Ontario, Quebec.
So across the country, it’s a fragmented economy, but the way we look at what’s driving our
business is, is still activity seems to be robust right across the country, and we really like the activity
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in Vancouver right now. We like the activity in Toronto. We like the activity in Winnipeg. And so when
we look at those fragments that are producing, we’re happy to have our assets performing well.
George Kosziwka
And maybe just touching on the interest rate environment from a macro level, we’re all
aware that the US Fed is expected to increase the overnight rate in December. Doesn’t look like that
Canada will follow suit until late 2016.
But for us, even in a modestly rising interest rate environment, which could happen to the
between the five- and the ten-year bonds, we still have refinancing upside in our numbers going
forward to 2016 and into ’17 where our weighted average interest rate is in the 6 percent range.
And we would expect, even if bond rates increased modestly, there are a bunch of new
adept players in the market, and there seems to be increased competition and fingers crossed that
spreads will partially or completely offset any increase in bond rates. And we expect to be able to
refinance at very favourable rates going forward, even in a rising interest rate environment.
Okay. Great. That was very helpful. Thank you very much. I’ll turn it back.
Drew Coles
Thanks, Trevor.
Operator
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Thank you. Ladies and gentlemen, as a reminder, if you do have any questions, please press
*, followed by 1.
And currently, Mr. Coles, we have no other questions registered. Back to you, sir.
Drew Coles
Thank you very much. So that completes our call for this morning. We appreciate
everybody’s time.
In summary, going forward, we are going to remain focused on achieving optimum
performance, outperforming the market, and we look forward to updating you on our progress in the
quarters ahead. Thanks for your support, and if you have any further questions, don’t hesitate to call
George or myself at any time. Thank you, and good bye.
Operator
Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today.
Once again, we thank you for participating, and at this time we ask that you please disconnect your
lines. Have yourselves a great weekend.
*****
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