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8/6/2019 InnVest 2010 Annual FINAL
1/76
the
premier
canadian hotelinvestment
Focused
strategydistinguishing
strengths
a portFolio
diversified
by brand, geography andcustomer base
investingin our properties to
drive results
INNvestinnvest real estate investment trust | www.innvestreit.com annual report 20
8/6/2019 InnVest 2010 Annual FINAL
2/76
strategicachievements
Improved occupancy
across the portfolIoEarly signs of the hospitalitymarket recovery begantaking shape in 2010, led by
occupancy gains across ourportfolio. We expect pricingimprovement to follow asdemand and confidence inthe sustainability of the
recovery improves.
strengthened
balance sheetCapital managementefforts, including early debtrefinancing and raising new
capital have contributed toreducing our leverage andstrengthening our balancesheet. These initiativesdemonstrate our ability
to access attractivecapital to support ourbusiness strategy.
Invested capItal
to drIve returnsWith an improving outlook,we are strategically investingin our portfolio to take
advantage of marketopportunities and positionour hotels to benefit from anupswing. Internal investmentopportunities are expected
to enhance our hotelscompetitive positions andmaximize bottom line returns.
maIntaIned QualIfyIng
reIt statusWe completed an internalreorganization onDecember 31, 2010 in order
to become a Qualifying REITunder Canadian income taxrules applicable to specifiedinvestment flow-through(SIFT) entities. The
reorganization enablesus to continue to benefitfrom the tax advantagesoffered to REITs.
We are long-term investors in quality hotelreal estate. As patient investors, we look
beyond near-term cyclical fluctuations andfocus on the exciting opportunities ahead.Positive industry fundamentals such asan improving economic outlook, limitednew hotel supply, and an aging population
eager to travel, give us confidence in theprospects for the industry and our portfoliospecifically. As Canadas largest hotel realestate owner, InnVest is ideally positionedto benefit from these promising trends.
8/6/2019 InnVest 2010 Annual FINAL
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02 competitiveadvantagesGain an understanding of what makes InnVest a
unique investment opportunity.
05 lettertounitholdersA personal look at InnVests business through theeyes of the CEO.
1 1 letterfromthecfoAn introduction to key finance initiatives undertakenduring the year.
12 managementsdiscussion&analysisLearn about the industry and the company including
a comprehensive look at the years results.
43 managementsresponsibilityforconsolidatedfinancialstatements
44 independentauditorsreport
45 consolidatedfinancialstatements
49 notestoconsolidated
financialstatements70 innvestportfolio
72 seniormanagementandboardoftrustees
73 corporateandunitholderinformation
Contents
15
On the cOver:
Th Fmt Pcally load i dowow
calgay, t Faio Palli
i a ladak buildig i i
ioy ad aiu.
04
17 annual report 2010
8/6/2019 InnVest 2010 Annual FINAL
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Efforts to improve theTrusts balance sheet andfinancial position have beena priority over the past two
years. Early debt refinancingactivities, raising new capitaland adjusting distributionshave enabled InnVest toemerge from the challengingeconomic environment ina strengthened position.
Maximizing financial flexibility through a bolstered
balance sheet and improved access to capital
affords us the ability to seize opportunities to
grow our earnings.
For our existing assets, we are focusedon enhancing our competitive position in
strategic assets and markets through
targeted capital investments in product andbrand upgrades. Additional resources have
also been deployed to intensify our focus
on revenue-generation opportunities.
We expect to see increasing acquisitionopportunities as operating trends in the
industry continue to improve. Our access
to low-cost capital will enable InnVest to
compete for attractive opportunities that
may arise.
strategy strengths
1 diversification
Our portfolio of urban and suburban
hotels is diversified across most major
business markets and is further diversified
by market position, brand and customer base.
We have limited exposure to any one market,
mitigating our risks and stabilizing our
long-term income.
2 scale
InnVest is one of Canadas largest hotel
real estate owners, with 144 hotels located
in every province of Canada. Our size and market
knowledge allow us to maximize operating
efficiencies and benefit from economies of scale
to reduce costs.
Focusedstrategydistinguishing
strengths
Competitive advantages
02 Innvest real estate Investment trust
8/6/2019 InnVest 2010 Annual FINAL
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ivcww144c.
Regional diversitylimits risk
37% Ontario26%Western22% Quebec15%Atlantic
HOTEL REVENUES BY GEOGRAPHY
Customerdiversity optimizes
occupancy
35% Corporate &Government
32% Transient17% Other16% Group
HOTEL ROOM REVENUES BY CUSTOMER
3 branding
We partner with recognized international
brands which provide name recognition,
central reservation systems, quality standards,
and marketing and customer loyalty programs.
Their services complement our hotels and help
attract demand to our hotels.
4 strategicinvestment
We hold a 50% strategic investment
in Choice Hotels Canada, one of the largest
franchisors of hotels in the country. This strategic
relationship contributes positive net cash flow
to InnVest, enables us to benefit from favourable
franchise terms, and provides us with the
advantages of being a franchisor, including control
over brand standards and future development.
5 experiencedmanagement
The Trust benefits from professional hotel
management with extensive Canadian
and international industry experience. Their
experience and expertise enable us to effectively
manage through market cycles to help maximize
the value of each of our assets.
6 accesstocapital
Given our size, diversification and quality
of assets, we have consistently been
able to access capital to grow our business and
address our capital needs. We have raised
capital and refinanced significant mortgages
in a challenging environment, highlighting the
perceived value of our business and continued
confidence of our partners.
our diversityadvantage
Segment diversificationbroadens
market reach
67% Full service33% Limited service
HOTEL REVENUES BY SERVICE CATEGORY
onTario
, roo hol
quebec
, roo hol
aTlanTic
, roo hol
WesTern
, roo hol
annual report 2010
8/6/2019 InnVest 2010 Annual FINAL
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Dt bj, Mt
04 Innvest real estate Investment trust
8/6/2019 InnVest 2010 Annual FINAL
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letterto unitholders
revenues. These investments in our businesswill allow us to capture greater profits as dema
and top-line revenue continue to recover.
improvingtrendsAfter almost two years of declining revenue
per available room (RevPAR), we saw the firs
positive year-over-year RevPAR trends in early
2010. Unlike the precipitous downturn in 2009
which saw this measure decline by 10.7%, the
recovery to date has been slow, with our annua
RevPAR growing a modest 1.2% in 2010. This i
not unexpected given the significant consume
shock in 2009. As Ive seen many times before
the early lodging recovery in 2010 was led by
occupancy gains as people get back on the roaThis will be followed by average daily rate (AD
growth as hoteliers gain confidence to push
prices higher.
Occupancies improved in 2010 but remain
3 points below levels achieved in 2008. Whats
more, ADRs for the Canadian industry remain
below 2008 levels. Each 1% RevPAR improvem
in our portfolio will generate almost $5 million
of revenue. With limited incremental costs
associated with these gains, the operating
leverage for our business is significant.
Ive worked in the lodging industry formore than 30 years and have witnessed
many ups and downs. If theres one thing
Ive learned through my many years
in this business, its to expect change.
These changes can stem from evolving
customer preferences, the economy or the
lending market or regulations, to name a few.
As with any dynamic business, we need to be
flexible, responsive, and prepared for whatever
may come our way.
InnVest was formed less than eight years
ago, but already we have lived through
unprecedented events, including the SARS
pandemic in 2003 and the economic and
credit meltdown of 2008/2009. Each time,our business has been affected, and each
time a recovery has followed.
Difficult times can create opportunities for
those who can recognize and seize them. Indeed,
we have taken this opportunity to re-evaluate our
hotel operations and we have made adjustments
to be more efficient and competitive. In our
portfolio, for example, we have streamlined
processes to reduce headcounts, invested
in technology to improve efficiencies and, most
recently, undertaken extensive sales training
for all hotel executive staff to help maximize
stayingpowerWearecommittedtooWningquality,Well-locatedhotelrealestate
thatWilldrivelong-termreturnstoinvestors.
by Kenneth gibson
President and Chief Executive Officer
o.W4,.
annual report 2010
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If you didnt have to sell during the downturn, why
would you? With cash flows improving, additional
hotel opportunities should start coming to the
market as short-term hotel investors look to
re-allocate their capital. We will continue to look
at quality hotel assets to add to our portfolio.
Well-located assets acquired at attractive entry
prices and which can be aggressively managed
could provide compelling yields.
financialflexibilityAs the past two years have taught us all, we must
maintain a strong balance sheet. This is relevant
in bad times, to provide insurance to weather the
storms. But it is equally relevant in good times,
when having access to capital to take advantage
of new opportunities can provide us with a strong
competitive edge. Our finance team has been
active, raising $250 million of convertible debt
and equity over the past two years, as well as
refinancing more than $340 million in mortgages.
This was no small achievement considering the
challenging credit markets during this period.
New capital proceeds were used to repay and
extend maturities and contributed to a reduction
in our overall leverage in 2010.
REITs, by their nature, require capital to
sustain and grow. We have always been proactive
in our capital management efforts, consistently
addressing our refinancing needs in advance of
maturities. With a staggered maturity schedule
and access to reasonably-priced capital, we
expect to address all debt maturities in the
normal course of business.
Overall, our reported funds from operations
(FFO), the most common measure of a REITs
financial performance, fell to $0.67 per unit in
2010 from $0.94 per unit in 2009. The majority
of this decline reflects the recapitalization of
our balance sheet, with new equity raised this
year and last. Despite the earnings reductions,
we are reassured by the fact that our core
business is improving and our balance sheet
has been strengthened.
strategyoncourseOur strategy has been influenced, in the near
term at least, by the recent economic challenges.
We set aside our pursuit of growth while we
focused on cash flows from our existing asset
base. We spent a great deal of time looking at
our portfolio and seeing how its performance
could be enhanced. We have begun several
exciting profit-improving projects to help our
hotels capture greater market share from their
competitors. By the end of 2011, for example, we
will have invested over $8 million at The Fairmont
Palliser in Calgary to renovate our guest room
product. We are also participating in Holiday Inns
global brand re-launch. Holiday Inn is one of our
best performing brands and we expect positive
returns from a re-energized product.
Somewhat surprisingly, the much-anticipated
fire sale of distressed hotel assets did not
materialize in Canada. This was a sign of the
conservative lending practices and the general
understanding that the market would return.
>>
re-brandingof16holidayinnhotelsiV pp h i
- vv f . t p , f h i . gv xv v ,h i f pf .
Hdy i b
We spent a great deal of time looking at ourportfolio and seeing how its performancecould be enhanced. We have begun severalexciting profit-improving projects to helpour hotels capture greater market sharefrom their competitors.
06 Innvest real estate Investment trust
letter to unItholders
8/6/2019 InnVest 2010 Annual FINAL
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Hdy i Kgt
2010highlights
$118.0
06
$140.2
07
$181.9
08
$141.7
09
$137.3
10
$200
$150
$100
$50
$0
HOTEL OPERATING INCOME(1)
($ millions)
(1) Includes continuing and discontinued
operations.
Hdy i bgtHt & cf ct
Hdy i cgy Md T sth
$74.9
06
$88.0
07
$108.2
08
$72.7
09
$61.2
10
$125
$100
$75
$50
$25
$0
FUNDS FROM OPERATIONS
($ millions)
$27.3
06
$29.0
07
$42.9
08
$25.2
09
$39.4
10
$50
$40
$30
$20
$1 0
$0
CAPITAL INVESTED (1)
($ millions)
(1) Includes continuing and discontinued
operations.
annual report 2010
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>>
recentrenovationscontinueatthefairmontpalliserincalgarya xv vp t F P f f . b -,f f v f v xp f p F g
p. t f p pv v p k.
Th Fmt P, cgy
Th Fmt P, cgy
08 Innvest real estate Investment trust
letter to unItholders
8/6/2019 InnVest 2010 Annual FINAL
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Reduce leverage over time to improveour ability to support cyclical variability in
cash flows and keep our debt coverage
ratios strong.
InnVest continues to be the premier
hospitality real estate investment opportunity
in Canada. We should all be proud of the qualit
portfolio we own. Our management teams
experience and expertise is unsurpassed in thi
specialized industry. With the wind at our back
our entire organization is focused on making
prudent capital allocation decisions to increaslong-term value and grow cash flows to suppor
distributions to our unitholders. In closing,
I would like to thank all our partners for your
patience and support.
Kenneth Gibson
President and
Chief Executive Officer
lookingaheadWe have faced many obstacles during the past
two years which have affected our bottom line
results. This has been disappointing to us all.
Unlike other real estate companies, we rent our
assets by the day. This can have negative
implications on the downside, but provides equal,
if not greater, opportunity as demand improves
and we re-price our product every day.
As I look forward, I see many reasons to
be optimistic about the future; favourable
demographics as the population ages and travels;new demand from the important Chinese
market following Canadas gaining of approved
destination status; the low supply outlook
following constrained development lending in
recent years; and improving economic indicators
including growing consumer confidence.
Notwithstanding, dealing with risks and
uncertainties, including the health of our domestic
and global economies, is a part of any business.
As always, we will keep a close eye on micro and
macro environment developments and be ready
to react proactively to what may lay ahead.
With these factors in mind, our priorities
looking forward are quite simple, but if executed
properly, should drive meaningful value. We will: Focus our energies on driving top-line
performance to generate operating leverage.
With occupancies firming in 2010, pricing
power should return to the hotels.
Invest in our assets to enhance theircompetitive position and market share.
Remain poised to take advantage ofopportunities to acquire quality hotel real
estate in stable markets and to recycle
capital from our existing assets.
Th Fmt P, cgy
With the wind at our back, our entireorganization is focused on makingprudent capital allocation decisions toincrease long-term value and growcash flows to support distributions toour unitholders.
annual report 2010
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1 1 letterfromthecfo
12 managementsdiscussion&analysis12 Ioduio
13 Fowad-lookig a
14 Ou bui
16 td i lodgig iduy
18 Ou agy
20 Ou abiliy o dli ul
22 Oulook
22 Opaig uay23 opaig ul iw
26 cag i fiaial odiio
27 Qualy ul ad iw of
fou qua pfoa
28 Liquidiy ad apial ou
31 Diibuio o uiold
32 Ui ifoaio
33 no-GAAP fiaial au
35 rlad pay aaio
35 rik ad uaii
37 ciial aouig ia
39 Fuu aouig ag
42 cool ad podu
43 managementsresponsibilityfor consolidatedfinancialstatements
44 independentauditorsreport
45 consolidatedfinancialstatements45 coolidad bala
46 coolidad a of io (lo)
ad opi io (lo)
47 coolidad a of
uiold quiy
48 coolidad a of a flow
49 notestoconsolidated
financialstatements
FinancialrevIew
10 Innvest real estate Investment trust
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throughout 2011 as new standards and amendments to
existing standards are issued. InnVest will report its first
IFRS financial statements for the first quarter of 2011.
Separately, unlike certain other real estate income tru
(REITs), REITs with hotel operations were not exempted
from the changes to the tax legislation taking effect in 201
As a result, InnVest completed an internal reorganizationon December 31, 2010 in order to become a Qualifying RE
The purpose of the reorganization was to increase unitho
value by adopting a structure that allows InnVest to contin
to flow through the majority of its income to unitholders
without being subject to entity-level taxation.
The reorganization resulted in InnVest transferring all
of its operating assets to a newly formed taxable trust wh
trades together with a regular InnVest unit on a stapled
basis. The reorganization was highly technical but in the
end, has had little, if any, practical effect on unitholders.
Looking forward, we will maintain our focus on making
prudent capital allocation decisions with a view to grow o
cash flows to support distributions to our unitholders.
Tamara Lawson
Chief Financial Officer and Corporate Secretary
efforts to improve the Trusts balance sheet
and financial position have been a priority
over the past two years. Over this period,
we have made significant progress in
strengthening our balance sheet through
early debt refinancing activities, raising
new capital and adjusting distributions. We have alwaysbeen proactive in our capital management efforts and
have a demonstrated ability to access attractive capital
to support our business strategy.
Early signs of the hospitality market recovery began
taking shape in 2010, led by occupancy gains across our
portfolio. To date, the industrys recovery has been slow,
with our annual RevPAR growing a modest 1. 2% in 2010.
Our reported funds from operations (FFO) declined to
$0.673 per diluted unit in 2010 from $0.939 per diluted
unit in 2009. The majority of this decline reflects the
recapitalization of our balance sheet with new equity.
Despite the reduction, we are reassured by the fact that
our core business is improving and our balance sheet
has been strengthened.
Our finance team has been hard at work addressingseveral other important developments taking hold in
2011, including the accounting standards conversion to
International Financial Reporting Standards (IFRS)
and changes to tax legislation affecting trusts.
The accounting change to IFRS will not impact cash
flows generated by our properties, but it will affect InnVests
reported financial position and results of operations.
As more fully explained in the accompanying MD&A, the
biggest change will involve the one-time re-measurement of
our hotel assets given our election to revalue our portfolio.
The IFRS implementation will be an ongoing process
letterfrom the Cfo
tamara lawson
Chief Financial Officer and Corporate Secretary
iv$250w$340
.Ww.
We have always been proactive inour capital management efforts andhave a demonstrated ability to accessattractive capital to support ourbusiness strategy.
annual report 2010
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managementsdisCussion & analysis
introduCtionInnVest Real Estate Investment Trust (the REIT) is an
unincorporated open-ended real estate investment trust
which owns a portfolio of 144 hotels across Canada
representing approximately 19,000 guest rooms operated
under internationally recognized brands. The REIT leases
its hotels to InnVest Operations Trust (IOT), an
unincorporated open-ended taxable investment trust.
IOT directly and indirectly holds all of the hotel operating
assets, earns revenues from hotel customers and pays
rent to the REIT. IOT also indirectly holds a 50% interest
in Choice Hotels Canada Inc., one of the largest franchisors
of hotels in Canada, and earns revenues from franchising
fees. The REIT and IOT are collectively referred to in
this managements discussion and analysis (MD&A)
as InnVest.
On December 31, 2010, InnVest completed an internal
reorganization pursuant to a Plan of Arrangement
as described in InnVests information circular dated
May 13, 2010. The reorganization resulted in each issued
and outstanding unit of the REIT trading together with a
non-voting unit of IOT as a Stapled Unit on the Toronto
Stock Exchange under the symbol INN.UN. InnVest
and IOT are both governed by the laws of Ontario and
a Declaration of Trust.
The following MD&A is intended to assist readers in
understanding InnVest, its history, business environment,
strategies, performance and risk factors and includes
a discussion of the results of operations and financial
condition of InnVest for the year ended December 31, 2010,
Fmt Ht Mdd, edmt
12 Innvest reAL estAte Investment trUst
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forward-lookingstatements
with a comparison to the results of operations of InnVest
for the year ended December 31, 2009. The MD&A should
be read in conjunction with the audited consolidated
financial statements of InnVest and the notes thereto as at,
and for the years ended, December 31, 2010 and 2009. The
consolidated financial statements of InnVest include the
financial statements of the REIT and IOT.
The financial statements of InnVest are prepared in
accordance with Canadian generally accepted accounting
principles (GAAP) and are presented in Canadian dollars.
Monetary data in tabular form and in the text, unless
otherwise indicated, are in thousands of dollars, except for
per unit, average daily rate (ADR), and revenue per
available room (RevPAR) amounts. This MD&A is dated
March 16, 2011.
Certain measures in this MD&A, such as hotel operating
income (HOI), funds from operations (FFO) and
distributable income, do not have any standardized meaning
In the interest of providing InnVest unitholders and potential
investors with information regarding InnVest, certain
statements contained in this M&DA constitute forward-
looking statements within the meaning of applicable
securities laws. These statements include, but are not limited
to, statements made concerning InnVests objectives, its
strategies to achieve those objectives, as well as other
statements with respect to managements beliefs, plans,
estimates and intentions, and similar statements concerning
anticipated future events, results, circumstances and
performance or expectations that are not historical facts.
Forward-looking information typically contains statements
with words such as outlook, objective, may, continue,
anticipate, believe, expect, estimate, plan, intend,
forecast, project or similar expressions suggesting future
outcomes or events. Such forward-looking statements
reflect managements current beliefs and are based on
information currently available to management.
These forward-looking statements are not guarantees
of future events or performance and, by their nature,
are based on InnVests estimates and assumptions, which
are subject to risks and uncertainties, including thosedescribed under Risks and uncertainties in this MD&A.
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, InnVests forward-looking
information involves numerous assumptions, inherent
risks and uncertainties, which may cause InnVests 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
as prescribed by GA AP, and therefore are considered
non-GAAP measures. InnVest uses non-GAAP financial
measures to assess its operating performance. Securitie
regulators require that entities caution readers that
earnings and other measures adjusted to a basis other th
GAAP do not have standardized meanings and are unlike
to be comparable to similar measures used by other
companies. Please see Non-GAAP Financial Measures
for a discussion of certain non-GAAP financial measures
used by InnVest, including a reconciliation to GAAP
financial measures.
Additional information relating to InnVest, including its
Annual Information Form, can be accessed on the Canad
Securities Administrators System for Electronic Docume
Analysis and Retrieval (SEDAR) located at www.sedar.c
and on its website at w ww.innvestreit.com.
results, performance, or achievements to differ materiall
from those expressed or implied by forward-looking
statements include, but are not limited to, changes in
business strategies; general global economic and busines
conditions; medical concerns relating to travel and/or
specific destinations; general global credit market
conditions; the effects of competition and pricing pressu
industry overcapacity; shifts in market demands; change
in laws and regulations, including environmental and
regulatory laws; potential increases in maintenance and
operating costs; uncertainties of litigation; labour dispute
timing of completion of capital or maintenance projects;
currency and interest rate fluctuations; various events wh
could disrupt operations; and technological changes.
Although InnVest believes that the expectations represen
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 MD&A are
made as of the date of this MD&A. Except as required by
InnVest does not under take any obligation to publicly upd
or revise any forward-looking statements, whether as aresult of new information, future events or other wise.
All forward-looking statements contained in this MD&A
are expressly qualified by this cautionary statement.
AnnUAL rePOrt
8/6/2019 InnVest 2010 Annual FINAL
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hotelrealestateoWnerAs at December 31, 2010, InnVests portfolio comprised
144 hotel properties operated under internationallyrecognized franchise brands. The portfolio is evenly divided
between full-service and limited service hotels based on
number of rooms. Full-service hotels however, generate
higher revenues per room given higher ADRs charged and
greater ancillary services sold. As a result, full-service hotels
in the portfolio accounted for approximately 67% of total
hotel revenues during the year. Of total revenues earned,
approximately 78% were generated from room revenues
and 22% from food and beverage services and other
services including meeting space rental, parking, retail
operations and telephone use.
InnVests hotels are operated by four hotel management
companies which earn base and incentive fees related to
the revenues and profitability of each hotel. The hotels
primary operating costs include wages, food costs, utilities,
management fees and sales and marketing expenses. Otherproperty level expenses include property taxes, ground
rent for leasehold interests and property insurance. Many
of these property level expenses are relatively fixed and do
not necessarily change in accordance with revenue levels.
InnVests hotels are typically located 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 travellers,
leisure travellers, tours, associations and corporate groups.
innvestsfranchisebusinessGenerating $3.5 million in 2010 (2009 $3.4 million),
InnVest owns 50% of Choice Hotels Canada Inc. (CHC),which has franchise agreements with over 290 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 addition to strong international brand recognition,
Choice International has a centralized reservation system,
sales and marketing programs and proprietary property
management systems.
In 1993, CHC was granted a 99-year licence to franchise
all Choice hotel brands in Canada, including Comfort Inn,
Quality Suites and Quality Hotels. CHC earns franchise
revenue by charging hotel owners a monthly royalty fee
based on a percentage of the revenue generated by the
licenced properties and by selling franchises. InnVests
proportionate interest in operating results are includedin the consolidated statements of income in other
business income.
office,retailandretirementhomebusinessGenerating $1.8 million in 2010 (2009 $1.8 million),
InnVest owns office and retail real estate as well as a
retirement home. These real estate interests are adjacent
to owned hotels and were acquired as part of certain
hotel acquisitions. The operating results are included in
the consolidated statements of net income (loss) and
comprehensive income (loss), in other business income.
our
business
67% Full service33% Limited service
HOTEL REVENUES BY SERVICE CATEGORY HOTEL ROOM REVENUES BY CUSTOMER
35% Corporate & Government32% Transient17% Other16% Group
HOTEL REVENUES BY GEOGRAPHY
37%Ontario26%Western22% Quebec15% Atlantic
a diVersiFiedCanadianhotelinvestmentInnVest holds one of Canadas largest hotel portfoliostogether with a 50% interest in Choice Hotels Canada Inc.,one of the largest franchisors of hotels in Canada. InnVestsportfolio is well diversified across hotel accommodationcategories, brands, geography and customers.
14 Innvest reAL estAte Investment trUst
managements dIscussIon & analysIs
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The lodging industrys performance is largely influenced
by the balance between supply and demand, which itself is
impacted by the performance of the economy given thelargely discretionary nature of travel spending. A net increase
in demand (where new demand outpaces new supply
added to the market) will result in higher occupancies.
Higher occupancies create demand compression, providing
properties with the opportunity to increase their ADR.
Conversely, lower demand forces hotels to aggressively
pursue guests, which can lead to ADR declines as hotels
compete to attract customers. As demonstrated in the chart
below, RevPAR performance tends to disproportionately
follow trends in net demand as changes in occupancies are
compounded by ADR movements.
Demand growth outpaced new supply in 2010 resulting in
an improvement in overall hotel occupancies. This followed
two years of declining occupancy trends. The industryachieved modest ADR growth during 2010, led by growth
in the Vancouver area (Winter Olympics) and downtown
Toronto (G20 meetings). Expectations are that the growth
in demand will exceed supply additions again in 2011,
leading to continued improvement in RevPAR.
demandtrendsDemand within the lodging industry historically has a high
correlation with the economy and will typically lag an
economic recovery until businesses and consumers gain
confidence in the sustainability of the recovery. A strong
010099 02 03 04 05 06 07 08 09 10F 11P
Source: Pannell Kerr Forster Consulting Inc.
RevPAR GrowthNet Demand Growth (Demand less Supply)
REVPAR TRENDS FOLLOW CHANGES IN NET DEMAND
8%
6%
4%
2%
-2%
-6%
-10%
-14%
-12%
-8%
-4%
0%
REVPAR TRENDS TURNED POSITIVE IN EARLY 2010
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2008 2009 2010
10.0%
5.0%
-5.0%
-15.0%
-10.0%
0%
trends in
the lodgingindustry
increasingdemand&
limited suPPlyIncreasing demand and limited supply growth areexpected to drive positive operating dynamics for thelodging industry in2011. We are encouraged by theoccupancy recovery realized in2010 and expect roomrates to follow as demand and confidence in thesustainability of a recovery improve.
Hdy i b
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economy leads to increasing corporate profits and wages
and encourages increased spending on business and le isure
travel. During a period of economic decline, discretionaryleisure spending, such as travel, tends to be reduced.
Similarly, business travel volumes tend to be reduced
along with dampened corporate profits.
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 and sales efforts at
the local, regional and national levels. InnVests hotels are
typically located in convenient locations, are well-maintained
and affiliated with recognized brands, enabling them to
attract their fair share of demand to the market.
Demand can also be influenced by market-specific
drivers. In 2010 for example, the Canadian industry was
disproportionately impacted by market-based events
including the Winter Olympics in Vancouver, the return ofthe Grand Prix in Montreal and the G20 meetings held in
Toronto. With limited hotels in the surrounding Vancouver
area and downtown Toronto (each up over 17% in 2010),
InnVest did not achieve the same RevPAR growth as
experienced by the industry overall. For the year, InnVests
RevPAR improved 1.2% after declining 10.7% in 2009.
This compares to the Canadian industry RevPAR growth
of 5.5% in 2010 following a 12.3% decline in 2009.
The prolonged period of demand softness over the prior
two years resulted in increasing ADR pressures as hotels
competed to attract a smaller base of customer demand.
supplytrendsNew supply is a significant risk for the lodging industry
given its immediate and direct impact on occupancies wia market. One of the main drivers of hotel supply is rising
demand and, more importantly, rising ADR. Increasing A
signals higher profits thereby stimulating potential new
construction. Mitigating this trend, supply growth is also
affected by higher development and material costs as we
as the availability and cost of development financing.
One of the positive results of the difficult credit market
environment over the past two years has been the reduct
in new hotel development given the unavailability of
financing for such activity. In addition, the challenging
economic environment has negatively impacted profits
achieved by the industry, thereby limiting the appetite for
new hotel development.
Canadian hotel supply grew 1.8% in 2009 and 1.4% 2010
largely reflecting the completion of projects which had be
underway prior to the global recession. Supply typically
takes several years to open given lengthy financing and
development processes. Industry supply growth is foreca
at approximately 1.5% for 2011 and should remain low for
the next several years given limited financing availability
over the last two years. In comparison, the industry is
projecting demand to improve 2.5% in 2011. The excess
demand growth above new supply will drive incremental
occupancy to existing hotels.
t
wadr.
hotelshavesignificantoperatingleverageinarecovery
t v f fx xp, pp x, . t v v. a , v v p vpf v v pp .
opp x v pf rvPar pv. gv p f fx , vq , pp pf.
op f pv p v v .
i , adr v. e% rvPar pv iV pf $ f v. w , p v f f.
Dt cgy apt
qty st Tt apt
AnnUAL rePOrt
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Early debt refinancing activities, raising new capital and
reducing distributions have contributed to a strengthened
balance sheet. InnVest continues to manage its portfolioaggressively with emphasis on cost efficiencies and
maximizing the performance and cash flow of each of its
hotels. Management continues to prioritize its internal
growth prospects and expects to see increasing acquisition
opportunities as operating trends in the industry continue
to improve. InnVest is focused on making prudent capital
allocation decisions to increase long-term value and grow
cash flows to support distributions to our unitholders.
operatingstrategyInnVests operating focus aims to enhance the performance
of each hotel and improve its RevPAR penetration versus its
competitive set. Internal growth is maximized through the
following operating and strategic principles:
1 Partnering with leading hotel management groupsand brands;2 Implementing yield management and marketstrategies to maximize RevPAR;3 Leveraging InnVests size and industry experience tocontrol costs through operating efficiencies, as well as
taking advantage of buying power and economies of
scale; and
4 Investing in the portfolio to drive higher returns andenhance the value of the assets.
Notable activities in 2010 included an extensive sales
training program implemented across the limited service
portfolio aimed at engaging each hotels executive staff
in the sales and marketing of their property. Several
profit-improving capital investment projects have also beeninitiated to help our hotels capture greater market share
from their competitors.
InnVests diversification by location, brand, customer
and market position is a core component of i ts operating
strategy. Since individual markets can be affected by local
events and economic conditions, geographic diversification
helps limit the impact of such factors on the overall portfolio.
Diversification across customers and brands allows InnVest
to effectively manage its rooms based on changing demand
drivers, thereby optimizing the financial performance
through improved occupancy and ADR.
Our hotels are managed by four hotel management
companies, each bringing unique expertise to the portfolio.
Westmont Hospitality Canada Limited (Westmont),a division of one of the largest privately held managers
of hotels in the world, manages the majority of InnVests
hotels (128 hotels). InnVest also par tners with other
third party managers including Delta Hotels (10 hotels),
Fairmont Hotels (3 hotels) and Hilton Hotels (2 hotels),
each an experienced hotel manager with recognized brands.
One hotel is classified as an operating lease.
capitalallocationstrategyIn order to drive the long-term profitability of the por tfolio,
InnVest continually evaluates its capital allocation
opportunities. Following its inception, InnVest expanded
its portfolio, broadening its market base and diversifying
its risk profile. In recent years, InnVests capital allocation
efforts have been focused on maximizing the potentialof its existing portfolio by investing capital into internal
profit-improving opportunities.
InnVest constantly evaluates i ts current real estate holdings
to optimize diversification and capitalize on embedded
value or higher return opportunities. From time to time,
certain assets are identified that may not support its
long term objectives given limited growth prospects in
earnings and value.
InnVests ability to recycle capital through hotel sales has
been impacted by constrained financing availability
which has limited the pool of buyers and proceeds offered.
Financing conditions are expected to continue to ease as
the industry and hotel cash flows improve enabling buyer
and seller expectations to converge. InnVest has no currentplans to dispose of hotel assets and will re-examine its
efforts to recycle capital as the hotel transaction market
improves. During 2010, one asset (100 rooms) was
expropriated for net proceeds of $6.0 million.
our
strategy
resPonding toour businessenVironmentInnVests strategy has been influenced, in the near termat least, by the recent economic challenges. Progresshas been made over the last two years in improvingInnVests balance sheet and financial position.
18 Innvest reAL estAte Investment trUst
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cmft i chtttw
capitaltransactionssupport
ourstrategyiV v p f p. ov p , v p f f v, pv v f f f p.
i a , iV $. .% v . t p
p s a .% v ap .
i a , t p - x f F . a p f f, iV p$. f ppp f.
sq f ,iV $. f .%v $. f q.
P f ppv, f fq f pp.
stydg Gph
o,ivj.
f2011.
AnnUAL rePOrt
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1 d Geographic and customer diversity to offsetregional and industry cyclicality.
Well-diversified by market position and brands.
2 s One of Canadas largest hotel real estate ownerswith 144 hotels representing almost 19,000
guest rooms.
Ability to leverage the por tfolios size to achieveoperating efficiencies and reduce costs.
3 b Partner with recognized international brands whichbring name recognition, central reservation systems,
marketing and customer loyalty programs and
quality standards.
Individual hotels are complemented by the brandthat best suits its market, size, location and
customer offerings.
competitivestrengths
schc Strategic 50% investment in Choice Hotels Canada,one of the largest franchisors of hotels in Canada.
Contributes positive net cash flow to InnVest, enablesit to benefit from favourable franchise terms and
provides the advantages of being a franchisor
including control over brand standards and future
new development.
5 e Led by professional hotel management with extensiveCanadian and international industry experience.
Our hotels are managed by four hotel managementcompanies, each bringing unique expertise to the
portfolio to effectively manage through market cycles
and maximize the value of each of our assets.
6 a Strong relationships with lenders and investorssupported by the quality of our hotels and the size
of our portfolio.
Demonstrated consistent ability to access capital togrow the business and address capital needs.
leVeraging ourCompetitivestrengthsOur efforts through the recovery have been focusedon leveraging our locations and brands to improveoccupancy in the portfolio and aggressively managingcosts. We have undertaken many initiatives in 2010to help improve our future financial results includingcapital investments in key assets and organizationalenhancements to help drive revenues.
our ability
to deliverresults
Dt ld am
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expenditures in 2011. These investments are expected
to enable our hotels to increase their rates charged. An
enhanced product, coupled with improving demand and
constrained new supply should enable InnVest to realize
cash flow growth as hotel operating performance improves.
InnVests current portfolio is diversified by geography,
customer and brand. This diversity, combined with
its partnerships with experienced hotel operators,
contributes to the resiliency of the portfolio and positions
InnVest to effectively benefit from the improving
economic environment.
Historically, the lodging industry performance has been
highly correlated with the general economy given the
discretionary nature of leisure and business travel and will
typically lag an economic recovery until businesses and
consumers gain confidence in the sustainability of the
recovery. The Canadian economic recovery has contributed
to improving occupancy trends in our portfolio in 2010.
We expect this trend to continue with firming occupancies
leading to improvements in average daily rate in mid 2011.
We intend to selectively invest in a number of our
full-service and limited-service hotels in 2011 to improve
their competitive positioning and operating performance.
We expect to invest approximately $50 million in capital
OUTLOOK
OPERATINGSUMMARY
RevPAR on a same hotel basis improved 1.2% driven bya 1.2 point improvement in occupancy which offset a
modest 0.7% decline in ADR;
Overall, hotel revenues from continuing operations wererelatively unchanged, up 0.4% or $2.4 million, with room
revenue gains offsetting reduced food and beverage
banquet sales;
HOI declined $4.4 million or 3.1% reflecting inflationarycost increases and non-recurring expenses;
InnVest realized net income of $147.5 million comparedto a net loss of $30.9 million in 2009. InnVest recognized
a $189.5 million future income tax recovery as a result of
its internal reorganization at the end of 2010. Excluding
this adjustment, InnVest would have realized a net loss
of $42.0 million;
Distributable income and funds from operations eachdeclined reflecting the reduced HOI achieved and higher
interest expenses. Proceeds raised through debt
issuances over the year resulted in higher average debt
balances prior to the deployment of funds late in the
third quarter; and
$39.4 million was invested in the portfolio includingprofit-improving projects in strategic assets and
markets. These investments, most of which were
undertaken in the second half of 2010, are expected
to contribute to improved hotel performance infuture periods.
$118.0
06
$140.2
07
$181.9
08
$141.7
09
$137.3
10
$200
$150
$100
$50
$0
HOTEL OPERATING INCOME (HOI)(1)
($ millions)
(1) Includes continuing and discontinued operations.
$392.0
06
$504.8
07
$685.1
08
$609.8
09
$610.2
10
$750
$500
$250
$0
HOTEL REVENUES(1)
($ millions)
(1) Includes continuing and discontinued operations.
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n- For the year ended December 31, 2010, non-room revenues
totalled $133.6 million, down $3.2 million or 2.4% compared
to the prior year despite modest improvements in year-to-
date occupancy. Typically, non-room revenues are directly
impacted by overall occupancy since higher occupancy
results in the increased use of ancillary services offered at
hotels. The annual decline in non-room revenues resulted
from a decline in banqueting revenues during the second
and third quarters given reduced group demand as well as
non-recurring catering events from the prior period.
Hotel exPensesInnVest continually focuses on managing all costs to
maximize overall profitability without impacting the servicelevels offered to guests. It should be noted that savings
opportunities are restricted during lower occupancy
periods, such as the first and fourth quarters, particularly
in smaller limited service hotels, given the minimal
infrastructure in place. In addition, many property level
expenses, including property taxes, leasehold payments
and insurance, are relatively fixed and do not necessarily
change in accordance with overall demand levels.
Hotel expenses for the year ended December 31, 2010
increased $6.8 million or 1.5% when compared to 2009.
This increase reflects incremental costs associated with the
1.2 point improvement in occupancies and inflationary cost
increases generally. Expenses also reflect non-recurring
operating restructuring charges and the implementation of a
new sales training program in late 2010. These non-recurring
initiatives are expected to contribute to improved operating
performance in the coming years. The year-over-year
variance also reflects the benefit of a $1.7 million lease
adjustment realized in the prior year.
Hotel oPeratIng IncomeGrowth in 2010 was focused on driving demand and
occupancy to the portfolio as opposed to ADR growth.
Reduced ADR, combined with non-recurring operating
expenses, contributed to an 80 basis point decline in
hotel operating income margins to 22.5%.
For the year ended December 31, 2010, InnVest generated
HOI of $137.2 million, down 3.1% or $4.4 million as
compared to the prior year. The decline reflects inflationarycost increases and non-recurring expenses which offset
the modest top line growth achieved. Regional results
are reflective of the RevPAR achieved, and its impact on
profitability over the period given the considerable amount
of fixed operating costs in the business. The HOI variance
for the western region also reflects the $1.7 million lease
adjustment which benefitted the prior year.
r Room revenues for the year ended December 31, 2010
increased 1.2%, or $5.7 million, to $476.0 million with
strength through the last three quarters offsetting softness
in the first quarter of 2010. Regional performance varied
based on broader regional factors.
Room revenue variance Ya dd Dcb 31, 2010
nb f vaiac vaiac h 2009 2009
Base Portfolio
Ontario 8,005 $ 5,232 2.9%
Quebec 4,242 2,522 2.4%
Atlantic 2,696 (46) (0.1%)
Western 3,535 (1,919) (1.7%)
Sub-total 18,478 5,789 1.2%
Other 408 (137) (2.2%)
Total 18,886 $ 5,652 1.2%
The Ontario region led growth this year with room revenue
increasing 2.9% based on occupancy improvements across
most markets. This growth was led by the Greater Toronto
Area (GTA) which experienced RevPAR growth of over 12%
for the year. The Toronto downtown core benefitted from
the G20 meetings held in June which helped drive demand
in surrounding GTA markets.
The Quebec region realized a 2.4% increase in room revenue
with growth realized across all markets. The Montreal
market benefitted from the return of the Grand Prix in thesecond quarter and improving group activity in Montreal
generally. Displacement due to meeting space and
guest room renovations at the Hilton Quebec City through
the second half of the year negatively affected annual
performance. Meeting space renovations at this hotel
were completed in the third quarter. The room renovation
program is scheduled for completion in the second
quarter of 2011.
Room revenue in the Atlantic region is largely unchanged
year-over-year. Growth in New foundland was offset by
declines in Prince Edward Island following strong group
business in the prior year.
InnVests Base Portfolio of Western hotels realized a room
revenue decrease of 1.7% driven by occupancy declines.Lower group activity has been experienced in key markets
as compared to the prior year given typical group
rotational calendars. This has been somewhat offset by
improving corporate transient demand. Room renovations
at The Fairmont Palliser in Calgary also contributed to
displaced business volumes through the second half of
the year. RevPAR at this hotel was down almost 6% for
the year. Room renovations at the hotel are expected to
be completed early in the second quarter of 2011.
2010OPERATINGRESULTS REVIEW(cONT.)
r h d 31,2010 i 1.2%, $5.7 ii, $476.0 ii ihh hh h
h i i h i 2010.
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net Income (loss)Discontinued operations reflect one hotel which was
expropriated in the third quarter of 2010 resulting in a gai
on sale of $327. InnVest recorded a non-cash impairment
charge of $226 during the prior period. At December 31,
2010, no hotels remain classified as held for sale.
For the year ended December 31, 2010, InnVest recorded
net income of $147.5 million, or $1.492 per unit diluted
compared to a net loss of $30.9 million, or $0.400 per un
diluted for the same period in 2009. Excluding the effect
non-cash future income tax recoveries and hotel property
writedowns in the two years, InnVest realized a net loss of
$36.1 million in 2010 compared to a loss of $19.0 million i
2009. The $17.1 million variance primarily reflects lower
HOI achieved over the period combined with higher intere
expenses following capital financing transactions during t
year. The decline in per unit results also reflects the highe
number of units outstanding in 2010 as compared to 200
given an equity offering of 12,658,500 units in October
2009 and the convertible debentures issued in Decembe
2009 and August 2010.
funds from oPeratIonsFor the year ended December 31, 2010, InnVest generate
FFO of $61.2 million or $0.673 per unit diluted. This
compares to FFO of $72.7 million in the prior period ($0.9
per unit diluted). The decline is primarily attributable to th
reduction in HOI and higher interest expenses incurred. T
decline in per unit results also reflects the higher number
units and convertible debentures outstanding in 2010. Se
Non-GAAP Financial Measures for a reconciliation of
GAAP net income to FFO.
dIstrIbutable IncomeFor the year ended December 31, 2010, InnVest generate
distributable income of $42.2 million ($0.469 per unit
diluted) compared to $51.5 million in the prior year ($0.6
per unit diluted). The decline is primarily attributable to th
reduction in HOI and higher interest expenses incurred. T
decline in per unit results also reflects the higher number
of units and convertible debentures outstanding in 2010.
See Non-GAAP Financial Measures for a reconciliation
of GAAP net income to distributable income.
Distributions declared in the year ended December 31, 20totalled $44.4 million compared to $51.3 million in the pr
year. InnVest reduced its monthly distribution to $0.0417
per unit beginning in September 2009 (from $0.0625 pe
unit). This reduction was somewhat offset by distribution
associated with additional units outstanding in 2010.
HOI variance Ya dd Dcb 31, 2010
nb f vaiac vaiac h 2009 2009
Base Portfolio
Ontario 8,005 $ 1,350 2.9%
Quebec 4,242 80 0.3%
Atlantic 2,696 (1,521) (7.3%)
Western 3,535 (4,660) (10.1%)
Sub-total 18,478 (4,751) (3.4%)
Other 408 390 39.6%
Total 18,886 $ (4,361) (3.1%)
otHer Income and exPensesOther income and expenses for the year ended December 31,2010 were down $17.2 million to $179.7 million. The variance
primarily reflects a non-cash $5.9 million impairment
provision for one hotel taken in 2010 compared to a
$36.5 million impairment taken in the prior year. The 2010
charge was taken on one leasehold hotel which may not
renew its existing licence agreement. Excluding the
writedowns, other income and expenses would have been up
$13.4 million relating to a $5.6 million increase in convertible
debentures interest and accretion (in aggregate, InnVest
issued $125.0 million and redeemed $45.7 million in
convertible debentures) and a $1.6 million increase in
interest on mortgages (refinanced a maturing mortgage
at a higher rate in the third quarter of 2009). InnVest also
experienced a $3.5 million increase in non-cash depreciationand amortization over the period. Corporate and
administrative expenses were up $2.4 million reflecting
non-recurring costs associated with InnVests internal
reorganization completed at the end of 2010 as well as
incremental costs associated with the preparation for
the upcoming change to IFRS accounting standards.
Income taxesFor the year ended December 31, 2010, InnVest generated a
future income tax recovery of $189.5 million as compared to
$24.5 million in 2009. The future income tax recovery in
2010 primarily reflects the elimination of net future income
tax liabilities previously recognized following InnVests
reorganization to a stapled REIT. The future income tax
recovery realized in 2009 reflects the provincial SIFT tax ratechange which was enacted in March 2009 along with the
reclassification of certain assets as held for sale in that year.
For 2010, 67 % of the $44.4 million distributions made to
unitholders will not be taxable to unitholders (2009 70%).
th i i 2010 pii h iii i iiii piiz iIv izi p reIt.
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The fourth quarter of 2010 reflects the completion of
InnVest internal reorganization on December 31, 2010.
The reorganization resulted in a non-cash future income
tax recovery of $187.6 million. Fourth quarter results also
include a non-cash $5.9 million impairment provision for
one hotel property compared to a $29.8 million impairment
taken in the prior year. Excluding these non-cash items,
InnVest realized a net loss of $17.6 million in the fourth
quarter of 2010 compared to a loss of $11.2 million in 2009.
The variance reflects higher interest expenses as well as
corporate costs incurred to complete the reorganization.
the issuance of additional units or other equity instruments.
When issued, additional equity is most often used to finance
acquisitions or repay debt. InnVest issued $75.0 million
of convertible debentures during the third quarter of 2010
which was partially used to satisfy the early redemption of
a $45.7 million convertible debenture which was due in April
of 2011. During the first quarter of 2011, InnVest announced
the issuance of $50.0 million of convertible debentures and
$25.2 million of equity.
Management believes that InnVests credit facilities, cash
on hand and expected cash flow from operations, when
combined with the potential to sell assets or access debt
and equity markets, will allow InnVest to meet all its financial
commitments. 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 HandAt December 31, 2010, InnVest has cash on hand totalling
$12.8 million, of which $3.8 million is restricted under its
Declaration of Trust for the replacement of furniture,
fixtures, and equipment and for capital improvements.
Each year, InnVest sets aside an FF&E reserve totaling
between 3% and 5% of total hotel revenue. Capital
expenditures totaling $39.4 million in 2010 were largely
funded through the FF&E reserve of $25.1 million.
Incremental capital above the FF&E reserve was funded
with cash on hand or available credit facilities.
Operating highlights for the fourth quarter include:
RevPAR increased 3.0% led by a 1.8 point improvementin occupancy which offset a modest 0.2% decline in ADR;
HOI was down 2.0% to $27.2 million. The HOI declinereflects higher operating costs associated with the
occupancy improvement, displacement due to hotel
renovations as well as non-recurring costs associated
with management training and severances. HOI margin
declined to 18.3% compared to 19.2% in 2009;
FFO and distributable income were down $3.2 millionand $2.0 million, respectively, reflecting the lower HOI
achieved as well as higher interest expense given higher
convertible debenture debt balances outstanding
during the quarter.
InnVest has several sources of liquidity including
the following:
Cash generated from hotel operations: InnVests
operations are seasonal with the second and third quarters
typically being the strongest earning periods, given the
higher level of business and leisure travel during these
months. In 2010, InnVest generated HOI of $137.2 million
which is used primarily to fund distributions to unitholders,
capital expenditures and debt service requirements.
Line of credit: InnVest has a line of credit of up to
$40.0 million with a major banking institution to finance
temporary shortfalls in cash resulting from business
seasonality and working capital fluctuations. The credit
facility may also be used to provide short-term financing in
the event of the acquisition of a new hotel. At December 31,
2010, $7.2 million was drawn on InnVests line of credit.
Issuing additional debt: InnVest also has the ability to
raise funds by mortgaging its properties or by issuing either
debt or convertible debt securities. InnVest typically uses
long-term debt financing to refinance existing debt or to
finance an acquisition. The choice of debt instrument
used is dependent on then-current market conditions.
The ability to secure debt financing on reasonable terms
is ultimately dependent on market conditions and the
lenders determination of InnVests creditworthiness.
At December 31, 2010, substantially all of InnVests assets
have been pledged as security under debt agreements.
Issuing additional equity securities: InnVests listing on
The Toronto Stock Exchange gives it the ability to access,
subject to market conditions, additional equity through
QUARTERLYRESULTS ANDREVIEW OFFOURTH QUARTERPERFORMANcE(cONT.)
LIQUIDITYAND cAPITALRESOURcES
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The global financial credit markets have experienced
significant volatility since August 2008. As a result, the
availability of credit for hotel lending has deteriorated and
credit spreads offered have widened. While credit spread
are wider than spreads previously achieved, the underlyin
bond yields have also decreased such that the overall cos
of debt, if available, remains relatively attractive. During t
third quarter of 2010, InnVest successfully completed the
early one-year extension of a mortgage originally schedu
to mature in February 2011. As part of the early refinancin
InnVest repaid $95.0 million of mortgage principal plus
yield maintenance and other fees funded by cash on hand
This early renewal enabled InnVest to secure its one-year
extension interest rate on the remaining principal of
$174.2 million beginning February 28, 2011 at a rate of 3.5compared to the prior rate on the mortgage of 5.4%. The
reduced rate on the remaining mortgage balance will resu
in annual interest savings of approximately $3.3 million
beginning in March 2011. The mortgage includes one
additional one-year extension (to February 28, 2013), at
InnVests option, subject to certain minimum thresholds
at the time of maturity. The second renewal term would b
based on the one-year Composite Swap Rate plus 1.85%
calculated as at February 28, 2012.
adjusted debt to gross booK valuesInnVest is not permitted to exceed certain financial levera
amounts under the terms of the Declaration of Trust.
InnVest is permitted to hold indebtedness, excluding
convertible debentures, up to a level of 50% of gross assevalue (60% including convertible debentures). InnVest
calculates indebtedness in accordance with GAAP exclud
non-interest bearing indebtedness, trade accounts payab
and any future income tax liability. Gross asset value is
calculated as the total book value of assets on its balance
sheet plus accumulated depreciation and amortization, le
any future income tax liabilities. InnVest expects to amen
its Declaration of Trust in the first quarter of 2011 to addre
these leverage restrictions in light of the impact of the
upcoming accounting change to International Financial
Reporting Standards which will result in the reduction of
the book value of assets as well as the elimination of
accumulated depreciation and amortization (Refer to Fut
Accounting Changes IFRS for a complete discussion).
The following chart shows the changes in the restricted
FF&E reserve cash balance for the year ended December 31,
2010, along with the comparable period:
Ya dd Dcb 31
2010 2009
Opening balance $ 3,815 $ 3,013
FF&E reserve 25,081 25,085
Transferred from
operating cash 14,376 997
Capital expenditures (39,441) (25,280)
Closing balance $ 3,831 $ 3,815
credIt facIlIty/brIdge loanInnVests operations are seasonal (see Quarterly Results).InnVests credit facility ensures that the seasonal fluctuation
in cash flows will not affect its ability to operate in the normal
course of business.
InnVest has a $40.0 million line of credit secured by 13
unencumbered assets. The credit facility expires in August
2012. The amount of the operating line is subject to a
mortgageability test which is based on the operating results
of the secured properties. Interest rates are based on the
lesser of (i) Canadian prime rate plus 2.5% and (ii) the
Canadian Bankers Acceptance rate plus 3.5%. Based on
the operating results of the secured properties for the four
quarters ended December 31, 2010, InnVest qualifies for
$39.8 million of availability under the line of credit. At
December 31, 2010, $7.2 million was drawn on the creditfacility. Letters of credit totalling $3.6 million (December 31,
2009 $3.6 million) were drawn against the facility.
InnVest also has a bridge loan secured by one hotel. The
bridge loan bears interest at the Canadian Bankers
Acceptance rate plus 3.5% and requires interest payments
only. In March 2010, this bridge loan was extended to March
1, 2011 and included a pay-down of $1.0 million to an
outstanding balance of $6.0 million (December 31, 2009
$7.0 million). In February 2011, the bridge loan was fur ther
extended to mature March 1, 2012.
mortgages Payable and convertIble debenturesAt December 31, 2010, InnVest had mortgages payable of
$834.0 million with a weighted average term of 2.8 years
and a weighted average interest rate of 6.0%. Approximately11.4% of InnVests mortgage debt is at floating rate.
InnVest also has four series of fixed-rate convertible
debentures which mature bet ween 2013 and 2017.
At December 31, 2010, InnVest has $258.5 million in
convertible debentures outstanding (December 31, 2009
$240.7 million). In the first quarter of 2011, InnVest
announced the issuance of an additional $50.0 million
of convertible debentures due in 2018.
a d 31, 2010,
Iv h p $834.0 iiih ih 2.8 ih i 6.0%.
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LIQUIDITYAND cAPITALRESOURcES(cONT.)
long-term caPItal oblIgatIonsInnVests long-term capital obligations consist primarily of
fixed-term mortgage financing and unsecured debentures.
The maturity dates for these obligations have been
staggered to lower the overall refinancing risk. The estimated
interest payments on mortgage debt and convertible
debentures include scheduled interest payments on fixed
and variable rate debt outstanding at December 31, 2010.
The estimated interest payments on variable rate mortgages
are based on interest rates prevailing at December 31, 2010.
Considering its overall leverage and demonstrated access
to capital markets, InnVest expects that all maturities will
be refinanced or repaid in the normal course of business.
InnVest has one $50.9 million mortgage maturing in 2011
secured by two full service hotels.
As at December 31, 2010, InnVest has approximately
$134.7 million of mortgages secured by conduit financing
maturing in 2014 and 2015.
InnVest has leasehold interests in 12 of its hotels. The
leaseholds require minimum annual lease payments
and the leases expire between 2016 and 2088. There are
also future rental charges determined as a percentage of
revenue that are not included in the amounts reflected
below. Capital and operating leases primarily relate to
equipment and office leases.
At December 31, 2010, InnVests leverage excluding
and including convertible debentures was 38.3%
(December 31, 2009 45.1%) and 50.0% (December 31,
2009 56.4%), respectively.
December 31, 2010
Total assets per consolidated
balance sheet $1,800,033
Accumulated depreciation
and amortization 414,482
Future income tax liability (2,537)
Gross asset value $2,211,978
Book value of mortgages
and other indebtedness(1) $ 847,229 38.3%
Convertible debentures(2) 258,454 11.7%
Total debt $1,105,683 50.0%
(1) Adjusted to eliminate financing issuance costs and include
long-term debt related to assets held for sale.
(2) Adjusted to face value.
The following table summarizes InnVests contractual obligations as at December 31, 2010.
2016 ad 2011 2012 2013 2014 2015 haf ta
Bridge loan
principal $ 1,750 $ 4,250 $ $ $ $ $ 6,000
interest 246 33 279
Operating line of credit
principal 7,200 7,200
interest 396 264 660
Mortgages payable
principal 81,058 201,776 163,892 297,181 72,900 17,223 834,030
interest 46,944 42,534 22,613 10,751 3,335 1,779 127,956
Capital lease
principal 189 199 217 229 243 622 1,699
interest 239 239 239 59 776
Convertible debentures
principal 74,980 70,000 113,474 258,454
interest 15,692 15,692 13,067 9,486 7,097 8,524 69,558
Long-term land leases 4,802 4,802 4,802 4,826 4,826 83,225 107,283
Operating equipment
and office leases 172 50 35 257
Capital expenditures
commitment 9,716 9,716
$ 161,204 $ 277,039 $ 279,845 $ 392,532 $ 88,401 $ 224,847 $1,423,868
Given available liquidity, access to capital and improving economic and operating trends, management expects to be able to
fund all commitments in the normal course of business.
Iv -pi ii ipii i- ii .th i h iih h ii ik.
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For the year ended December 31, 2010, distributions of $44.4 million were declared, of which $1.7 million was distributed
in units as part of the DRIP. This represents annual distributions declared of $0.5004 per unit (2009 $0.6668 per unit).
For the year, InnVests payout ratio was 105.2% or 101.2% on a cash basis (excluding the non-cash distributions made
through the DRIP). The payout ratio reflects the negative impact of capital raised in December 2009 which was deployed
late in the third quarter of 2010 to repay indebtedness.
Ya dd Dcb
2010 2009 2008 2007 20
Distributable income $ 42,203 $ 51,524 $ 85,540 $ 71,995 $ 62,7
Distributions 44,384 51,297 78,473 70,758 59,6
Distributable income (less than)
in excess of distributions (2,181) 227 7,067 1,237 3,1
Non-cash distributions made
through the DRIP 1,688 2,756 13,234 10,606 4,1
Distributable income (less than)in excess of cash distributions $ (493) $ 2,983 $ 20,301 $ 11,843 $ 7,3
Payout ratios:
Total distributions 105.2% 99.6% 91.7% 98.3% 95.0
Cash distributions (total
distributions minus DRIP) 101.2% 94.2% 76.3% 83.6% 88.3
DISTRIBUTIONS TOUNITHOLDERS
Based on current market conditions, management expects
the current level of cash distributions to be sustainable.
However, if there were a deterioration in business trends,
future distributions could be impacted.
Liquidity to fund distributions is generated from cash flow
from operations, cash on hand, available bank operating
lines and by the ability to finance certain unencumbered or
under-leveraged assets. First and fourth quarter distributions
are typically partially funded through cash on hand or
InnVests credit facility given the seasonality of earnings in
contrast to costs which are fixed through the year.
Distributions to unitholders are approved by InnVests
Board of Trustees. Each month, InnVest may distribute su
percentage of its estimated distributable income as the
Trustees determine in their discretion. In exercising their
discretion to approve the level of distributions, the Truste
use forecasts prepared by management and other financ
information to determine if sufficient cash flow will be
available to fund distributions. Such financial informationis subject to change due to the nature of the Canadian
hotel industry which can be difficult to predict, even in
the short-run (see Risks and Uncertainties).
diii
ih pp Iv b t. eh h,Iv iih p ii iii h ti i hiii.
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FFO should not be considered a substitute for net income
or cash flow from operating activities determined in
accordance with GAAP. InnVests method of calculating
FFO may be different from that of other organizations.
InnVest currently calculates FFO by using net income and
adjusting for:
i) Depreciation, amortization and accretion, excluding
amortization of deferred financing costs;
ii) Future income tax expense or recovery;
iii) Non-cash executive and trustee compensation expen
iv) Non-cash writedown of assets held for sale as well as
the impairment provision on hotel properties; and
v) Non-recurring costs that may impact cash flow.
A reconciliation of GAAP net income (loss) to FFO is
as follows:
Ya dd Dcb
2010 20
Net income (loss) $ 147,457 $ (30,9
Add/(deduct):
Depreciation and
amortization(1) 94,678 91,1
Future income tax recovery (189,497) (24,5
Net (gain) writedown on,
and sale of,
assets held for sale (327) 2
Writedown ofhotel properties 5,907 36,4
SIFT transition expenses 2,756
Non-cash executive and
trustee compensation 212 2
FFO $ 61,186 $ 72,7
FFO per unit:
Basic $ 0.690 $ 0.9
Weighted average units 88,652,017 77,269,2
Diluted $ 0.673 $ 0.9
Weighted average units 100,079,570 81,016,1
(1) For purposes of calculating FFO, amortization of deferred
financing costs is excluded from depreciation and amortization
Included in this MD&A are certain non-GAAP financial
measures, which are measures of InnVests historical or
future financial performance that are not calculated and
presented in accordance with GAAP. These non-GAAP
financial measures are unlikely to be comparable to similar
measures presented by other entities. The following
discussion defines non-GAAP measures used by InnVest
and presents why management believes they are useful
supplemental measures of InnVests performance.
Hotel oPeratIng Income (HoI)HOI is defined as hotel revenues less hotel expenses.
HOI is a commonly used measure by lodging real estate
owners which, when considered with GAAP measures,
gives management a more complete understanding ofproperty level results before debt service. It also facilitates
comparisons between InnVest and its competitors.
Management believes that HOI is one of InnVests key
performance indicators since it helps management, lenders
and investors evaluate the ongoing hotel profitability.
Management believes hotel operating income to be a
meaningful indicator of hotel performance.
HOI has been calculated as follows:
Ya dd Dcb 31
2010 2009
Hotel revenues $ 609,566 $ 607,139
Hotel expenses 472,416 465,628
Hotel operating income $ 137,150 $ 141,511
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
InnVests 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 GAAP, and it adjusts for items included in
GAAP net income that do not necessarily provide the
best indicator of operating performance, such as gains
or losses on the sale of, and provisions for impairmentagainst, hotel properties.
NON-GAAPFINANcIALMEASURES
HoI i i h
hp. HoI i i hih, hi ih gaaP, i p i pp i.
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Distributable income is one measure used by industry
analysts in the determination of InnVests per unit value,
its ability to fund distributions and investment returns
for current or potential investors. Distributable income is
also used by management and the Board of Trustees 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.
In addition, when evaluating acquisition opportunities,
the distributable income to be generated by the asset is
reviewed by management to determine whether a proposed
acquisition will generate an increase in distributable
income per unit. Therefore, distributable income is an
important measure for management as a guideline through
which operating and financial decisions are made and isan integral part of the investment decision for investors
and potential investors.
The following table reconciles cash flows from operating
activities to distributable income in accordance with
Canadian Securities Administrators Staff Notice 41-201
Income Trusts and Other Indirect Offerings. Management
considers distributable cash to be equivalent to
distributable income. The reconciliation has been prepared
using reasonable and supportable assumptions which
reflect InnVests planned courses of action given
managements judgment about the most probable set
of economic conditions.
The reconciliation of cash flow from operating activities to
distributable income is as follows:
Ya dd Dcb 31
2010 2009
Cash flow from
operating activities $ 71,317 $ 74,721
Changes in non-cash
working capital (6,581) (401)
Other 2,548 2,289
FF&E reserve (25,081) (25,085)
Distributable income $ 42,203 $ 51,524
dIstrIbutable IncomeDistributable income is commonly used in the real estate
investment trust industry to measure performance.
Distributable income is intended to approximate cash
earnings. It is defined in InnVests Declaration of Trust
to mean net income of InnVest and its consolidated
subsidiaries as reported in its consolidated financial
statements adjusted for:
i) Depreciation, amortization and accretion and future
income tax (recovery) expense;
ii) Any gains or losses on the disposition of any
real property;
iii) The reserve for replacement of furniture, fixtures and
equipment and capital improvements; and
iv) Any other adjustment determined by the Trustees in
their discretion.
A reconciliation of GAAP net income (loss) to distributable
income is as follows:
Ya dd Dcb 31
2010 2009
Net income (loss) $ 147,457 $ (30,923)
Add/(deduct):
Depreciation and
amortization 94,678 91,195
Future income tax recovery (189,497) (24,547)
FF&E reserve (25,081) (25,085)
Non-cash portion of
convertible debenture
interest and accretion 3,791 2,142
Non-cash portion
of mortgage
interest expense 2,209 1,680
Non-cash executive and
trustee compensation 212 268
Net (gain) writedown on,
and sale of, assets
held for sale (327) 226
Writedown of
hotel properties 5,907 36,489
SIFT transition expenses 2,756
Other 98 79
Distributable income (DI) $ 42,203 $ 51,524
DI per unit:
Basic $ 0.476 $ 0.667
Weighted average units 88,652,017 77,269,226
Diluted $ 0.469 $ 0.666
Weighted average units 100,079,570 77,354,999
NON-GAAPFINANcIALMEASURES(cONT.)
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In addition to the base management fee and incentive fee
Westmont is entitled to reasonable fees based on a
percentage of the cost of purchasing certain goods and
supplies and certain construction costs and capital
expenditures, fees for accounting services, reasonable
out-of-pocket costs and expenses, other than general and
administrative expenses or overhead costs except as
otherwise provided in the Agreements, and project
management and general contractor service fees related
hotel renovations managed by Westmont. Also, for certa
hotels owned by InnVest and not managed by Westmont,
Westmont is entitled to an asset management fee based
a fixed percentage of the purchase price of the hotel or a
fixed percentage of HOI, subject to an annual minimum fe
Total management and other fees paid to Westmont for tyear ended December 31, 2010 were $17.5 million (2009
$17.2 million). These fees represent approximately 66%
(2009 64%) of total hotel management and other fees
paid by InnVest to the four hotel management companies
with which it partners.
Hotel managementOn July 26, 2002, InnVest entered into a management
agreement for hotel management and accounting
services and an administrative services agreement
(the Agreements) with Westmo