INNVEST REIT STRATEGIC OBJECTIVES Presentation - November... · Statements contained in this presentation that are not historical facts may ... (single asset & portfolio sales) ...

INNVEST REIT

November 2013

1

INVESTOR PRESENTATION

FO

RW

AR

D-LO

OK

ING

STA

TEMEN

TS

Statements contained in this presentation that are not historical facts may include forward-looking statements which involve risk and uncertainties, which could cause actual results to differ materially. These factors are discussed in InnVest REIT’s Annual Information Form for the year ended December 31, 2012, which is available on SEDAR.

2

LEA

DER

SHIP

3

Experienced Senior Executive Team

Anthony Messina, President and CEO

•More than 20 years experience in the real estate industry including financial management, hotel development/ownership, asset management and acquisitions.

•Previously served as VP for a global real estate division of the Caisse de dépot et placement du Québec, leading its world-wide real estate acquisitions

George Kosziwka, CFO

•Over 20 years experience in the lodging real estate industry

•Served as VP Finance since the REIT’s inception and held senior finance executive positions for its predecessors

STA

TE OF P

LAY

4

Where Are We Going?

• InnVest has owned most of its assets for 10 years; in late 2012 the REIT undertook a comprehensive review of its portfolio to position it for the long-term

• Re-evaluated every individual hotel to assess its long-term potential

• Objective is to improve the overall quality and geographic diversification of the portfolio to maximize our cash flow potential and stability

• Focus resources on assets with the highest return potential

• Fortify InnVest’s position in key assets through focused capital investments

Investm

ent H

ighligh

ts

5

Investment Rational

Distribution Security • Since inception, InnVest has distributed over $575M to its unitholders • $0.40 annual distribution; 83% LTM payout ratio

Favorable Industry Fundamentals

• Hotel demand growth expected to increase and exceed supply growth, resulting in occupancy and ADR growth

• Industry has significant operating leverage in a growing economy

Scale & Diversification • Diversified portfolio across geography, segment and brand • Canada’s largest publicly-traded hotel real estate owners • Ability to leverage the portfolio’s size to achieve operating efficiencies

Significant Operational Upside

• Significant margin opportunity • Compelling upside from strategic renovation plan and repositionings • Continuing industry growth and recovery

Compelling Valuation • Implied value per key of $87k; significant discount to replacement cost • Trading at historical AFFO discount on recovering cash flow • Presently yielding ~8.9% on sustainable distributions

Management Experience

• Leading hotel management teams (Westmont, Fairmont, Delta, Hilton) with global industry experience

• Aligned ownership interests with 9% insider ownership

STR

ATEG

IC OB

JECTIV

ES

6

• Sale of 24 assets over 24 months (single asset & portfolio sales)

• Generate gross proceeds of $185M; net proceeds of $60M

I – Portfolio Repositioning

• Invest $130M over 24 months

• Renovate and reposition Core portfolio

II - Implement Focused Capital

Plan

• Reduce leverage

• Build liquidity

III - Strengthen our Balance Sheet

• Canadian lodging industry recovering • Leverage renovated product to grow

RevPAR and gain market share

IV – Improve Operations

Improve concentration in high-quality, stable assets

Majority of Core

portfolio will be renovated

Complete re-launch

of the Comfort Inn product

Target below 60%

debt to GBV

Build liquidity for future market cycles

Gain market share and improve margins

INN

VES

T K

EY IN

ITIA

TIV

ES

2012... …2015 Strategic Plan to Create Value Through Improving HOI

2015

I – Po

rtfolio

Rep

ositio

nin

g Portfolio Repositioning Improves Operating Performance

Core asset characteristics:

•Accretive to cost of capital

•Located in stable markets

with favorable

supply/demand dynamics

•Ability to achieve fair

market share within

designated comp set

•Favorable growth prospects

through capital investment

or repositioning

Core assets consistently have stronger key operating metrics vs Non-Core Assets

CORE vs NON-CORE PORTFOLIO METRICS

RevPAR ($) Revenue/ Room (‘000s)

GOP/Room (‘000s)

Annual 2012

7

33% premium

>2x

8

On Track to Achieve Divestiture Target Objectives

• Closed on the sale of 6 properties in 2013

• Generated gross sales of over $93M

• Repaid $62M of mortgage debt

• Generated net proceeds of $18M

• Achieved cap rates of 3%

• Assets have traded on real estate

values

• Continued progress expected with 6 assets

under contract and 11 others being actively

marketed

I – Po

rtfolio

Rep

ositio

nin

g

Have completed over 50% of our targeted gross sales program

II –CA

PITA

L INV

ESTMEN

T PR

OG

RA

M

9

TOTAL CAPITAL INVESTED

$43

$25

$39

$56

$37

$65 $65

$ millions

‘08 ‘09 ‘10 ‘11 ’12 ‘13P ‘14P

$130M capital program

over the next two years

Funded through:

• $50M FF&E reserve

• $60M asset sales

• $20M incremental

convertible

debenture financing

in Feb 2013

Renovating Core Portfolio

Renovated product will position InnVest to gain market share during industry upcycle and shift business mix to higher rated segments

II – CA

PITA

L INV

ESTMEN

T PR

OG

RA

M

10

Capital Projects in the Pipeline

Delta Winnipeg

Improving market conditions

• Room renovation

• Public space renovation

Delta PEI

Capitalize on $27M

investment in adjacent

convention space

• Room renovation

• Upgrade lobby and F&B

offering

Comfort Inn Portfolio

Revitalize portfolio

• Breakfast room expansion

• Room renovations

• Lobby and exterior

enhancements

Fairmont Palliser

Capitalize on market opportunity

• Public space upgrades

• Room renovation

• Lobby and F&B

enhancements

Sheraton Suites Eau Claire

Capitalize on market opportunity

• Room renovation

• Public space renovation

• Meeting space upgrades

London Hotel & Suites

Maximize real estate value

• Conversion to Holiday Inn

II – CA

PITA

L INV

ESTMEN

T PR

OG

RA

M

11

Comfort Inn Repositioning

Expect to complete 30 Comfort Inn renovations in 2013; balance in 2014

III – STR

ENG

THEN

OU

R BA

LAN

CE S

HEET

12

Proactive Management of our Balance Sheet

Proforma Debt Maturity Schedule

$70 $36

$75

$165

$66$46

$284

$251

Mortgages Debentures

$ millions

‘13 ‘14 ‘15 ‘16 ’17 ‘18

Recently announced over

$250 million of 2014

refinancings, significantly

improving rate and term

Targeting debt reduction

through 2015 to ensure

sufficient liquidity to

withstand market cycles

Leverage: 64.0%

WA Interest: 5.4%

WA term: 4.5 years

Over $250 million of 2014 mortgage refinancings announced

IV – IM

PR

OV

E OP

ERA

TION

S

13

Industry Profitability Well Below Peak Levels

Recoveries Have Historically Exceeded Prior Peaks

• Lodging industry is

recovering

• Profitability

improving but well

below peak levels

• Repositioned

portfolio will position

InnVest to further

capitalize on

industry growth

$0

$2

$4

$6

$8

$10

$12

$14

$40

$45

$50

$55

$60

$65

$70

$75

$80

$85

$90

Industry Net Income Per Room ($000)* RevPAR

RevPAR

Recovery

Recession

9/11

SARS

Recession

Source: PKF Consulting

* Net income per room expressed after 4% management fee and 4% reserve

Canadian Lodging Industry

IV – IM

PR

OV

E OP

ERA

TION

S

14

Considerable Operating Leverage in a Recovery

HOI margin increase of 1% = $6M RevPAR increase of 1% = $3M Revenue

RevPAR Growth Potential

$73.65

$77.71

2012 2008 Peak

HOI Margin Opportunity

18.1%

22.9%

2012 2008 Peak

HOI = hotel operating income after 4% capital reserve

IV – IM

PR

OV

E OP

ERA

TION

S

15

Q3 2013 2012 Change

Occupancy 71.5% 72.2% (0.7pts)

ADR $123.23 $122.28 0.8%

RevPAR $88.16 $88.32 (0.2%)

Revenues $161.1M $173.4M ($12.2M)

Gross operating profit $47.5M $50.1M ($2.6M)

GOP margin 29.5% 28.9% 0.6%

FFO $31.5M $30.9M $0.6M

Distributable income $26.5M $25.3M $1.2M

FFO per unit $0.270 $0.293 ($0.023)

Distributable income per unit $0.226 $0.239 ($0.013)

Q3 2013 Operating Results Review

• Q3 RevPAR growth

of 2% excluding

assets undergoing

renovations

• Asset sales

resulting in YOY

top-line declines

• Aggressively

managing costs to

increase efficiencies

and improve

margins

Occupancy, ADR and RevPAR are based on same-store portfolio

IV – IM

PR

OV

E OP

ERA

TION

S

16

YTD Q3 2013 2012 Change

Occupancy 63.6% 63.8% (0.2pts)

ADR $120.78 $120.15 0.5%

RevPAR $76.81 $76.72 0.1%

Revenues $446.2M $464.3M ($18.1M)

Gross operating profit $104.4M $108.8M ($4.4M)

GOP margin 23.4% 23.4% -

FFO $51.4M $51.9M ($0.6M)

Distributable income $38.0M $37.4M $0.6M

FFO per unit $0.499 $0.531 ($0.032)

Distributable income per unit $0.377 $0.390 ($0.013)

YTD 2013 Operating Results Review

• Asset sales

resulting in YOY

top-line declines

• Aggressively

managing costs to

increase efficiencies

and improve

margins

Occupancy, ADR and RevPAR are based on same-store portfolio

INNVEST REAL ESTATE INVESTMENT TRUST

Co

mp

any O

verview

18

ONTARIO

7,991 Rooms

67 Hotels

QUEBEC

4,145 Rooms

31 Hotels

ATLANTIC

2,687 Rooms

22 Hotels

WESTERN

3,280 Rooms

19 Hotels

139 hotels distributed and diversified across Canada

ONTARIO 62 hotels

7,481 rooms

QUEBEC 30 hotels

3,434 rooms

ATLANTIC 22 hotels

2,687 rooms

WESTERN 17 hotels

2,977 rooms

131 hotels distributed and diversified across Canada

Largest Publicly-Traded Canadian Hotel Real Estate Portfolio

CO

MP

AN

Y OV

ERV

IEW

19

35%

22%

28%

15% Ontario

Atlantic

Western Quebec

Portfolio Diversification

InnVest’s portfolio has strong geographic, segment and brand diversification

Geographic Diversification (% of 2012 Revenues)

34%

66%

Segment Diversification (% of 2012 Revenues)

Full Service

Limited Service

CO

MP

AN

Y OV

ERV

IEW

20

58%

20%

15%

7%

Portfolio Diversification

Affiliated with leading operators and strong global brands

Operator Diversification (% of Total Hotel Revenues) Brand Diversification

For the 2012 annual period

CO

MP

AN

Y OV

ERV

IEW

21

Choice Hotels Canada

• 50% ownership of Choice Hotels Canada – Master Franchisor for Canada

• Over 300 locations nationwide

• InnVest is the largest owner of Choice-branded hotels in Canada (85 hotels)

• Investment benefits as both owner and franchisor:

• Strategic partnership with Choice Canada

• Influence over brand standards & future development

INNVEST REAL ESTATE INVESTMENT TRUST

Valu

ation

Metrics

23

Leading Hotel Investment Opportunity in Canada

Portfolio Overview

Total Assets $1.3B

# of Hotels 131

# of Rooms 16,579

# of Brands 14

# of Property Managers 4

Q3 YTD Occupancy 63.6%

Q3 YTD ADR $120.78

Q3 YTD RevPAR $76.81

Q3 YTD RevPAR Growth +0.1%

Based on results at November 18, 2013 where applicable

Financial Overview

Recent Unit Price $4.48 (18/11/2013)

Number of Units 93.8M

Total Enterprise Value $1.4B

Debt / Gross Asset Value 64.0%

Mortg Wtd. Avg. Maturity 4.5 years

Mortg Wtd. Avg. Interest 5.4%

Annual Distribution $0.40

Distribution yield 8.9%

Q3 TTM Payout Ratio 83%

Valu

ation

Metrics

24

Compelling Valuation

Legend: INN.UN – InnVest REIT SHO – Sunstone Hotel Investors HST – Host Hotels and Resorts LHO – LaSalle Hotel Properties DRH – Diamond Rock Hospitality AHT – Ashford Hospitality Trust CHSP – Chesapeake Lodging Trust HT – Hersha Hospitality Trust INN – Summit Hotel Properties HPT – Hospitality Properties Trust

DIVIDEND YIELD 2014 AFFO MULTIPLE

ENTERPRISE VALUE PER KEY ($000s)

A $10,000 change in per key

value results in a value per unit

increase of almost $2

Priced as of November 18, 2013

Source:SNL Financial

Priced as of November 18, 2013

Source:SNL Financial

Priced as of November 18, 2013

Source: SNL Financial for comparable companies, internal sources for INN.UN