Holloway Lodging Corporation Reports Q1 2015 Results and Declares Quarterly Dividend

/NOT FOR DISTRIBUTION ON U.S. WIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/

HALIFAX, May 7, 2015 /CNW/ - Holloway Lodging Corporation (TSX: HLC, HLC.DB, HLC.DB.A) ("Holloway") today announced financial results for the three months ended March 31, 2015. All amounts are in Canadian dollars unless otherwise indicated. Readers should refer to Holloway's unaudited interim consolidated condensed financial statements as at March 31, 2015 and its management discussion and analysis which are available on Holloway's website at www.hlcorp.ca and on SEDAR at www.sedar.com.

Key Events

• Holloway generated gains of $8.1 million (or 21%) on the sale of three assets in the first quarter:
  • Ramada® hotel in Trenton, ON was sold for $4.0 million
  • Travelodge® hotel in Toronto, ON was sold for $13.0 million representing a 2.6% cap rate
  • Travelodge® and Thriftlodge® franchise business was sold for $21.0 million
• Holloway repaid $23.4 million of debt (or 9.3% of total debt) and currently has eight unencumbered properties.
• Holloway acquired the Days Inn® hotel in Whitehorse, YT for $8.2 million representing an 11.5% cap rate.
• Holloway internalized all management effective January 30, 2015.
• Holloway commenced the renovation and rebranding of our Hilton® hotel in London, ON to a DoubleTree by Hilton®.

First Quarter Overview and Outlook

Hotel Performance

Holloway's first quarter results reflect the addition of the Royal Host hotels which were acquired on July 1, 2014 and as such, Holloway's 2014 comparative figures do not include these hotels. The base portfolio realized a 3.4% decrease in revenue, a 6.7% decrease in operating income and a 120 basis point decrease in operating income margin to 35.5%, in all cases largely due to lower occupancy in Western Canada. Results in Western Canada in January and February varied depending on hotel location with only select markets experiencing weakness due to unseasonably warm weather and the impact of lower oil and gas prices. By March, however, most of our Western Canada hotels were experiencing lower occupancies due to lower oil and gas prices and an early spring break up.

The Royal Host hotels contributed $12.3 million in revenue and $1.2 million in operating income in the first quarter and had operating margins of 10.1%. Results in the Royal Host portfolio were impacted by major renovations at the Hilton® hotel in London which resulted in our food and beverage operation and several floors of rooms being out of order for the quarter. Our food and beverage operations have since reopened in a beautiful new space and our licensed and operated Starbucks® has commenced operations. The impact of renovations will continue throughout much of 2015 as the Hilton® renovations are expected to continue until the summer while our Chimo hotel in Ottawa is expected to begin its major renovations beginning in the summer. These two major capital projects will lead to elevated capital spending throughout the remainder of 2015 but also improved results for years to come.

We are continuing to work on improving operating margins at the Royal Host hotels and we believe our work is beginning to pay off despite headwinds in Western Canada. In the second half of 2014, we focused on the "low hanging fruit" in terms of cost reductions and operational improvements. We are now pursuing additional changes, including labour productivity improvements, upgrading older properties and shutting down poorly performing parts of our acquired business. As examples, we recently decided to permanently close our food, beverage and banquet operation at the Travelodge® hotel in Ottawa and one of the food and beverage operations in Yellowknife; while these outlets generated in excess of $1.0mn of revenue, they generated nominal to negative cash flow. We would rather focus our time, attention and working capital in more profitable parts of our business.

Finally, on January 30, 2015 we achieved a milestone by severing our relationship with our last remaining third party hotel manager. This change is expected to result in cost savings of $3.0 million over the next three years and simplify our operating structure.

Acquisitions and Dispositions

During the quarter, we sold our Trenton and Toronto properties for gross proceeds of $17.0 million. These properties were acquired through our acquisition of Royal Host and we did not expect the properties to generate meaningful cash flow without significant investments of capital ($275 thousand of cash flow in 2014); even then, the cash flow potential of the properties was dubious. What was particularly compelling about these hotel sales is that we were able to use the cash received to acquire a hotel in Whitehorse that we expect to generate more than $1.0 million of annual cash flow in coming years and also to repay high cost debt. In the aggregate, we believe the sales proceeds from the $275 thousand-cash generating hotels were deployed in a manner that will result in annual cash flows of $1.5 million going forward.

We also sold our franchise business at the end of the first quarter, receiving total consideration of $21.0 million. While the franchise business was capital-light and a consistent cash flow generator, it was not core to Holloway, it was not a business with which management had expertise and it would have received less management attention than a hotel of equivalent value. We used the cash proceeds received on the sale to further reduce debt. In the aggregate, our three asset sales during the quarter generated proceeds of $38.0 million and gains on sale of $8.1 million. This is impressive considering the total equity value of Royal Host at the time of acquisition was $23.0 million.

At the end of the first quarter we acquired a non-performing mortgage loan; we have since commenced foreclosure proceedings with a view to having the mortgage repaid at face value or taking possession of the property.

Balance Sheet

Holloway's debt level was $261.5 million immediately following the acquisition of Royal Host. This was reduced to $250.8 million at year end and has since been reduced further to $231.0 million at March 31, 2015. We anticipate more debt reduction as the year progresses.

Outlook

There is much uncertainty regarding oil and gas prices at the moment and this will negatively impact our Western Canada hotels. To date, occupancy at our Western Canada hotels has decreased however rates have held up well. We are managing our cost structure closely to minimize the impact revenue declines have on cash flow. Ultimately, we believe any performance declines will be temporary.

We expect the weaker Canadian dollar to positively impact our properties in the rest of Canada, particularly those in Northern Canada and Atlantic Canada. We also expect the performance of the Royal Host hotels to continue to improve as the year progresses, although we will see revenue declines, in the short term, at the Hilton® hotel in London and the Chimo hotel in Ottawa due to major renovations that will shut down parts of the hotel during the year.

Dividend Declaration

On May 7, 2015, the Board of Directors declared a quarterly dividend of $0.035 per share, representing an annual dividend of $0.14 per share. The dividend is payable on June 15, 2015 to shareholders of record on May 29, 2015. 

ABOUT HOLLOWAY LODGING CORPORATION

Holloway is a real estate corporation focused on acquiring, owning and operating select and limited service lodging properties and a small complement of full service hotels primarily in secondary, tertiary and suburban markets. Holloway owns 35 hotels with 3,967 rooms. Holloway's shares and debentures trade on the TSX under the symbols HLC, HLC.DB and HLC.DB.A.

This press release contains forward-looking information within the meaning of applicable securities laws. Forward-looking information may relate to Holloway's future outlook and anticipated events or results and may include statements regarding Holloway's future financial position, business strategy, financial results, plans and objectives. In some cases, forward-looking information can be identified by terms such as "may", "will", "should", "expect", "plan", "anticipate", "believe", "intend", "estimate", "predict", "potential", "continue" or other similar expressions concerning matters that are not historical facts. Forward-looking information is subject to certain factors, including risks and uncertainties, that could cause actual results to differ materially from what Holloway currently expects and there can be no assurance that such statements will prove to be accurate. Some of these risks and uncertainties are described under "Risk Factors" in Holloway's annual information form for the year ended December 31, 2014 which is available on Holloway's profile on the SEDAR website at www.sedar.com. Holloway does not intend to update or revise any such forward-looking information should its assumptions and estimates change.

SOURCE Holloway Lodging Corporation

Michael Rapps, Chairman, at [phone] or Jane Rafuse, Chief Financial Officer, at [phone].