Holloway Lodging Real Estate Investment Trust reports 2009 year end results;
Announces intention to convert to a corporation
/NOT FOR DISTRIBUTION ON U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/
HALIFAX, March 16 /CNW/ - Holloway Lodging Real Estate Investment Trust (TSX: HLR.UN, HLR.DB and HLR.DB.A) ("Holloway" or the "REIT") today announced its financial results for the year ended December 31, 2009. All amounts are in Canadian dollars unless otherwise indicated.
OVERVIEW
The year 2009 was challenging for many sectors of the economy and these difficult times had a significant impact on the hospitality industry. According to data compiled by PKF Consulting Inc. ("PKF"), on a national basis hotel room demand declined by 6% and average daily rates fell by 5%. To provide some context to this data, the two prior economic shocks of the last ten years, namely the events of 9/11 and the outbreak of SARS resulted in declines in demand of 4.3% and 3.7%, respectively.
Within specific regions of Canada, the level of volatility in demand was much more pronounced. The region experiencing the largest year over year decline was rural Alberta. It is in this area that close to 50% of the REIT's room supply is located and therefore the REIT experienced significant demand declines in the western region versus the prior year. The primary cause of the decline was the downturn in oil and gas exploration and associated activities. The REIT's hotels in the Atlantic region weathered the recession much better as the sources of business for these hotels are of a much more diversified nature and Atlantic Canada is less prone to volatile economic swings.
Despite these challenges, the REIT has made gains in market share growth and cost containment across its portfolio. Many of our hotels increased their market share versus the prior year. The REIT has also made progress on managing costs in every area of the operation including wages, operating expenses as well as in each area of overhead expenses.
The REIT also completed the sale of the Wingate by Wyndham in Calgary, recognizing a gain of $1.5 million and cash proceeds after mortgage repayment and closing costs of $8.5 million. In addition, subsequent to year-end the REIT refinanced all mortgages maturing in 2010 on more favourable terms.
"As Canada moves further out of the recession and growth in the economy continues, the benefits of our market share gains, operating cost reductions, a relatively young and well maintained hotel portfolio and no near-term debt maturities will position the REIT favourably as we move into 2010 and beyond," commented Glenn Squires, Chief Executive Officer of Holloway Lodging REIT.
OPERATING RESULTS
The following table provides a summary of the operating results for the three months and years ended December 31, 2009 and 2008.
-------------------------------------------------------------------------
Three Three
months months Year Year
(in $000's except ended ended ended ended
number of units December December December December
and per unit results) 31, 2009 31, 2008 31, 2009 31, 2008
-------------------------------------------------------------------------
Hotel revenues 15,939 20,489 71,985 89,332
Hotel expenses 12,508 14,707 52,673 59,701
-------------------------------------------------------------------------
Hotel operating income 3,431 5,782 19,312 29,631
-------------------------------------------------------------------------
Other expenses 15,637 11,422 44,300 35,123
Provision for (recovery of)
future income taxes (413) (712) (3,056) 65
-------------------------------------------------------------------------
Net income (loss) from
continuing operations
for the period - basic
and diluted (11,793) (4,928) (21,932) (5,557)
Income from discontinued
operations 1,361 25 1,595 477
-------------------------------------------------------------------------
Net income (loss) and
comprehensive loss for
the period (10,432) (4,903) (20,337) (5,080)
-------------------------------------------------------------------------
Weighted average basic
units outstanding 39,135,216 39,136,183 39,135,216 39,132,025
Weighted average diluted
units outstanding 39,135,216 39,136,183 39,135,216 39,132,025
Basic income (loss)
per unit (0.27) (0.13) (0.52) (0.13)
Diluted income (loss)
per unit (0.27) (0.13) (0.52) (0.13)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliation to funds
-----------------------
from operations (FFO)
---------------------
Add/(deduct):
Depreciation and
amortization on real
property 3,190 3,302 13,045 13,032
Gain on sale of hotel
property (1,474) - (1,474) -
Provision for impairment
of mezzanine loans and
advances 6,359 3,000 11,059 3,000
Write-off and provision
for impairment of
investments in hotel
properties 1,011 - 1,011 -
Provision for (recovery
of) future income taxes,
continuing operations (413) (482) (3,056) 65
Provision for future
income taxes,
discontinued operations 89 (211) 254 226
-------------------------------------------------------------------------
Funds from operations -
basic and diluted (1,670) 706 502 11,243
-------------------------------------------------------------------------
Basic FFO per unit (0.04) 0.02 0.01 0.29
Diluted FFO per unit (0.04) 0.02 0.01 0.29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliation to
-----------------
distributable income
--------------------
Add/(deduct):
Depreciation and
amortization - trust
and other assets 52 58 244 241
Accretion of mortgages,
convertible debentures
and deferred financing
fees 669 569 2,528 2,170
Unit-based compensation 15 9 64 471
Unrealized foreign
exchange loss (gain) (86) 691 (737) 1,020
FF&E reserve (480) (641) (2,233) (2,805)
-------------------------------------------------------------------------
Distributable income -
basic and diluted (1,500) 1,392 368 12,340
-------------------------------------------------------------------------
Basic distributable
income per unit (0.04) 0.04 0.01 0.32
Diluted distributable
income per unit (0.04) 0.04 0.01 0.32
Distributions declared - 0.08 0.105 0.485
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Reconciliation of cash
----------------------
flow from operating
-------------------
activities to
-------------
distributable income
--------------------
Cash flow from
operating activities (2,857) 2,708 357 16,332
Changes in non-cash
working capital
balances 1,837 (675) 2,244 (1,187)
FF&E reserve (480) (641) (2,233) (2,805)
-------------------------------------------------------------------------
Distributable income (1,500) 1,392 368 12,340
-------------------------------------------------------------------------
THREE MONTHS ENDED DECEMBER 31, 2009 AND 2008
Hotel Revenues
-------------------------------------------------------------------------
Three Months Ended
December 31, 2009
Occu-
Region pancy ADR RevPAR
-------------------------------------------------------------------------
Atlantic Canada ($Cdn) 57.48% $108.47 $62.35
Western Canada ($Cdn) 48.39% $133.10 $64.41
United States ($US) 35.29% $63.83 $22.52
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted Average Total ($Cdn) 49.32% $125.83 $62.06
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended
December 31, 2008 RevPAR
Region Occupancy ADR RevPAR Change
-------------------------------------------------------------------------
Atlantic Canada ($Cdn) 58.80% $115.17 $67.72 (7.9%)
Western Canada ($Cdn) 59.86% $144.45 $86.47 (25.5%)
United States ($US) 36.89% $78.09 $28.81 (21.8%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted Average Total ($Cdn) 58.55% $137.81 $80.69 (23.1%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Atlantic Canada RevPAR has decreased 7.9% for the three months ended December 31, 2009 compared to the three months ended December 31, 2008. In Moncton, there has been an erosion of business due to the increased market penetration from a relatively new market entrant. In Truro, one competitor representing half of the available rooms in the market had a significant ramp up in the fourth quarter compared to last year when they were undergoing renovations. In downtown Halifax, the trend continued among the competitive set of attempting to sustain occupancy via rate discounts. The result was that occupancy and rate were down across the market in equal measure compared to the prior year. The Radisson Halifax, however, achieved healthy RevPAR and market share growth despite these market challenges. In suburban Halifax, the Holiday Inn Express performed relatively well in a down market and increased its market share. Three of the four REIT hotels in Atlantic Canada exceeded their fair market share in the fourth quarter.
The Western Canada RevPAR decreased 25.5% for the three months ended December 31, 2009 compared to the three months ended December 31, 2008. The downturn in the oil and gas sector continued and the associated industry service and supply companies scaled back their accommodation requirements proportionately. According to statistics compiled by the Canadian Association of Oilwell Drilling Contractors, the average number of active oil and gas drilling rigs in the fourth quarter was down by 30% compared to the prior year. The largest hotel occupancy declines were in Whitecourt, Three Hills, Slave Lake, Fort McMurray and Drayton Valley. Compression on rates followed across these markets but to a lesser extent in Fort McMurray than in the other locations. In Whitecourt, a new competitor entered the market in the quarter. Despite this difficult environment, the REIT's hotels in the Western region largely maintained levels of market share and most achieved well in excess of fair market share. In Grande Prairie, the occupancy decline in the quarter also translated into lower rates as clients negotiated rate discounts in a market with constricted demand. However, three of the REIT's four hotels in Grande Prairie achieved growth in market share in the fourth quarter versus the prior year.
The RevPAR for the Holiday Inn Express in Myrtle Beach, South Carolina decreased 21.8% due to the drop in average rate as clientele are exceedingly price conscious due to the prevailing economic conditions, the availability of online discounts and the willingness of the competitive set to negotiate rate concessions.
Hotel Expenses
Operating expenses include wages, supplies and overhead expenses such as repairs and maintenance, sales and marketing and administrative expenses related to the operations of the hotel. These expenses have decreased $1.8 million when comparing the three months ended December 31, 2009 to the same period in 2008. Substantial savings were achieved as a result of lower wage costs due to the lower occupancy along with cost containment in operating expenses such as guest consumables as well as from efficiencies realized in maintenance, administrative and marketing departments. Utility costs were also lower as a function of the lower occupancy. Management fees are based on the hotel revenues which have declined from 2008.
Other Expenses
Interest on mortgages and other debt and accretion of deferred financing fees has decreased $0.1 million to $2.7 million for the three months ended December 31, 2009 compared to the three months ended December 31, 2008 due to the decline in the mortgage principal outstanding.
The total debenture interest expense and the non-cash accretion of the discount on the debentures has increased $0.1 million to $1.9 million for the fourth quarter of 2009 compared to $1.8 million for the fourth quarter of 2008 as the non-cash accretion on the convertible debentures has increased. The accretion increases over the term to the maturity dates of the debentures.
Corporate administrative expenses were $0.5 million for the three months ended December 31, 2009 and $0.6 million for the three months ended December 31, 2008 as a result of declines in wages, legal fees and expenses related to non-acquired properties. The REIT has ongoing cost-control measures in place across all of areas of corporate expenses.
During the three months ended December 31, 2009 and 2008, the REIT generated interest income of $0.1 million and $0.7 million respectively from loans receivable and the investment of cash balances.
Depreciation and amortization has increased marginally for the three months ended December 31, 2009 compared to the fourth quarter of 2008. The increase in depreciation represents depreciation on capital additions made to the properties.
The REIT believes that the loans to Winport Developments Limited Partnership and Pacrim North York Limited Partnership are impaired. The loans are in default and the REIT issued a demand notice for payment earlier in the year. On August 6, 2009, a court-appointed receiver on behalf of the first mortgagor for the property was named, with a mandate to sell the property and maximize the return to the debt-holders. The REIT's loans and advances have been written down to zero as the REIT does not expect to realize on its security.
The REIT believes that the mezzanine loan and advances to Windsor 8 Motel Limited are impaired. The loan is currently in default. Holloway is progressing with a quit claim to obtain title of the property in 2010. As the appraised value of the property is approximately equal to the first mortgage debt on the property, the REIT's mezzanine loan and advances have been written down to zero. Holloway recorded a total provision for impairment of $6.4 million on its mezzanine loans and advances during the three months ended December 31, 2009.
The REIT recorded a provision for impairment of $0.5 million during the three months ended December 31, 2009 against its investment in the Super 8 in Langley, BC which represents the total cost of this investment. This provision was taken as the performance of this hotel no longer supports the carrying value of the investment.
In addition, the REIT wrote off its investment of $0.5 million in the Super 8 in Midland, ON, as it has relinquished its ownership interest in this hotel. Holloway also recorded a provision for impairment of $0.5 million on its investment in the Super 8 in Langley, BC as the performance of this hotel no longer supports the carrying value of the investment.
The REIT's income from discontinued operations during the fourth quarter of 2009 was $1.5 million, which represents the gain on the sale of the Wingate by Wyndham hotel in Calgary, AB. On October 5, 2009, the REIT sold this property to an arm's length purchaser for $16.5 million. After repayment of the mortgage and closing costs on the property, net cash proceeds were $8.5 million.
Distributable Income
Distributable income was ($1.5) million (($0.04) basic and diluted distributable income per unit) for the three months ended December 31, 2009 compared to $1.4 million ($0.04 basic and diluted distributable income per unit) for the same period in 2008. Distributable income will fluctuate due to market conditions, the seasonality in the hospitality industry and the timing of acquisitions and disposals.
YEARS ENDED DECEMBER 31, 2009 AND 2008
Hotel Revenues
-------------------------------------------------------------------------
Year Ended
December 31, 2009
Occu-
Region pancy ADR RevPAR
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Atlantic Canada ($Cdn) 67.32% $119.12 $80.19
Western Canada ($Cdn) 52.93% $137.78 $72.92
United States ($US) 53.48% $81.26 $43.46
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted Average Total ($Cdn) 55.45% $131.69 $73.02
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year Ended
December 31, 2008 RevPAR
Region Occupancy ADR RevPAR Change
-------------------------------------------------------------------------
Atlantic Canada ($Cdn) 70.73% $123.98 $87.69 (8.6%)
Western Canada ($Cdn) 64.32% $146.13 $93.99 (22.4%)
United States ($US) 56.10% $93.81 $52.63 (17.4%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Weighted Average Total ($Cdn) 65.03% $139.90 $90.98 (19.7%)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The Atlantic Canada RevPAR has decreased by 8.6% for the year ended December 31, 2009 compared to the year ended December 31, 2008 due to reduced occupancy at three of the four properties in the Atlantic region and a decline in rates primarily in the Halifax market. Two of the four REIT hotels in the Atlantic region increased their market share versus the competitive set from the previous year and three of the four rank first in market share.
Western Canada RevPAR decreased 22.4% for the year ended December 31, 2009 compared to the year ended December 31, 2008. Within the Western region, the combination of sharply lower demand, room supply increases in many markets and the resulting downward pressure on rates produced substantial declines in RevPAR for the year. The largest occupancy declines were in Fort McMurray, Drayton Valley, Slave Lake, Fort St. John and Whitecourt. The decline in gas and oil activity has a major effect on many of our Alberta and northern British Columbia hotels as demand is largely reliant on this business. A substantial increase in available room supply has also been a major factor in Grande Prairie, Slave Lake, Drayton Valley and Fort St. John. However, many of the REIT's hotels in the Western region have posted solid growth in market share year over year.
RevPAR at the Holiday Inn Express in Myrtle Beach, South Carolina decreased 17.4% due to the drop in average rate due to lower leisure and group activity on account of the prevailing economic conditions in the United States. Despite this, the hotel has achieved healthy growth in market share and it well exceeds fair market share.
Hotel Expenses
Operating expenses include wages, supplies and overhead expenses such as repairs and maintenance, sales and marketing and administrative expenses related to the operations of the hotel. The expenses have decreased $6.3 million when comparing the year ended December 31, 2009 to the same period in 2008. The hotels are economizing with staff scheduling and cutting operating expenses as a result of the lower business levels. Savings were achieved throughout all operating and overhead departments, with wages representing the largest savings area. Operating supplies expenses were down, as were fees calculated as a percent of revenue, maintenance expenses and utilities. Property taxes and insurance expenses decreased due to lower assessments in several Western region hotels.
Other Expenses
Interest on mortgages and other debt has decreased marginally when comparing the year ended December 31, 2009 to the year ended December 31, 2008. This is due to a decrease in mortgage interest expense as principal balances are paid down, offset by a $0.2 million increase in interest expense on the promissory notes issued in December, 2008.
The total debenture interest expense for the years ended December 31, 2009 and 2008 has remained constant at $5.0 million. The accretion on mortgages, convertible debentures and deferred financing fees has increased $0.4 million to $2.6 million from $2.2 million for the years ended December 31, 2009 and 2008, respectively. The increase relates primarily to the increase in the non-cash accretion on the convertible debentures which increases over the term to the maturity dates of the debentures.
Corporate and administrative expenses were $2.2 million for the year ended December 31, 2009 and $2.8 million for the year ended December 31, 2008. This decrease is due in part to a $0.4 million decrease in unit-based compensation. In addition, there were two additional corporate employees during the first half of 2008 whose positions were eliminated during 2008, resulting in quarterly savings of $60,000. The REIT eliminated another corporate position and out-sourced another position during the third quarter of 2009 resulting in additional on-going savings. In addition, all other corporate expenses are strictly controlled.
During the years ended December 31, 2009 and 2008, the REIT generated interest income of $0.7 million and $2.8 million, respectively from loans receivable and the investment of cash balances. There was lower interest revenue from the loan to Pacrim Hospitality Services Inc. as the interest rate on that loan declined at the beginning of the fourth quarter of 2009. In addition, the REIT is recording an allowance against all of the interest income from the mezzanine loans as the loans are considered impaired and collectability is uncertain.
The unrealized foreign exchange gain/loss represents the conversion of the US- denominated mortgage on the Holiday Inn Express in Myrtle Beach into Canadian dollars.
Depreciation and amortization has increased by $0.2 million to $13.0 million from $12.8 million for the years ended December 31, 2009 and 2008, respectively. The increase in depreciation represents depreciation on capital additions made to the properties.
As indicated in the fourth quarter narrative, the REIT recorded impairment provisions on its mezzanine loans and investments in hotel properties in addition to a provision recorded earlier in the year, resulting in mezzanine loans receivable being written down to zero at year-end.
The income from discontinued operations represents the income from the Wingate by Wyndham hotel in Calgary, AB, as further explained in the fourth quarter narrative.
Distributable Income
The REIT generated $0.4 million in distributable income ($0.01 basic and diluted distributable income per unit) for the year ended December 31, 2009 compared to $12.3 million ($0.32 basic and diluted distributable income per unit) in 2008. A distribution of $0.0175 per unit per month was declared for January to June, 2009. Distributions declared and paid totalled $4.1 million for the year ended December 31, 2009. Distributions were suspended on July 21, 2009. The REIT's 2009 distributions exceeded its distributable income. Excess, un-deployed cash was used to fund the distribution shortfall. Distributable income will fluctuate due to the seasonality in the hospitality industry, market conditions and the timing of acquisitions and disposals.
CONVERSION
Holloway also announced today its intention to convert from an income trust to a growth-oriented corporation (the "Conversion"). Under Holloway's current trust structure, it is difficult for the REIT to attract sufficient capital to fund or pursue future growth initiatives and acquisitions. Furthermore, the nature of Holloway's assets and operations means that Holloway does not currently qualify for the "REIT exception" from the tax on "specified investment flow through entities" ("SIFTs") that was adopted in 2007 and currently applies to the REIT (due to the REIT having exceeding its "normal growth" rates as defined in the guidelines issued by the Department of Finance). Holloway has considered various alternatives for restructuring its assets and operations in a manner that would allow it to qualify for the REIT exception and has determined that all of these alternatives are not commercially feasible. Therefore, remaining as an income trust does not provide any meaningful benefits to Holloway or its unitholders.
"The conversion is a prudent response to the constraints facing publicly traded income trusts and provides a number of compelling and strategic benefits, including allowing us to better weather unpredictable market conditions, the ability to reposition Holloway as a growth-oriented corporation removing limits on non-resident investors and creating a structure that does not limit our growth and through which we can more effectively access the capital markets. We believe that a conversion to a corporate structure is important to the future success of our business" said Glenn Squires, Chief Executive Officer of the REIT.
The proposed Conversion would be undertaken pursuant to a statutory plan of arrangement under applicable corporate legislation and is subject to unitholder, Toronto Stock Exchange, court, regulatory and other approvals. If approved, it is expected that the Conversion will be completed on a tax free "rollover" basis for Canadian income tax purposes and unitholders will receive, for each unit of Holloway or Class B limited partnership unit of Holloway Lodging Limited Partnership held, one common share of the new public corporation. A special meeting of unitholders will be held in conjunction with the REIT's annual general meeting on May 25, 2010 (the "Meeting"). Unitholders of record in connection with the Meeting will be entitled to vote on the Conversion, with the closing expected to occur at the end of the year.
Holloway Lodging Real Estate Investment Trust
Holloway is a real estate investment trust 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 currently owns 21 hotels with 2,320 rooms. Holloway's units and convertible debentures trade on the Toronto Stock Exchange under the symbols HLR.UN, HLR.DB and HLR.DB.A, respectively.
This press release contains forward-looking information within the meaning of applicable securities laws. Forward-looking information may relate to the REIT's future outlook and anticipated events or results and may include statements regarding the future financial position, property acquisition strategies and opportunities, business strategy, financial results and plans and objectives of the REIT. Particularly, statements regarding the REIT's future operating results, property acquisition strategies and opportunities and economic performance are forward-looking statements. 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 the REIT 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 ("AIF"), dated March 30, 2009 which is available at www.sedar.com. The REIT does not intend to update or revise any such forward-looking information should its assumptions and estimates change.
%SEDAR: 00023845E
For further information: Mr. Glenn Squires, Chief Executive Officer of the REIT, (902) 404-3499; Mr. Michael Jackson, President and Chief Operating Officer of the REIT, (902) 404-3499; Ms. Tracy Sherren, Chief Financial Officer of the REIT, at (902) 404-3499
Share this article