January 20, 2019

InnVest Real Estate Investment Trust (INN)

The InnVest Real Estate Investment Trust (INN) has a few office and retail properties under management, but by far the main focus of the REIT has been acquiring hotel real estate.  In fact, they have become specialists within this field.  Innvest (INN) currently owns one of the largest hotel portfolios in Canada, consisting of 145 separate properties, with nearly 20,000 rooms available.  One of the REIT’s main partners is Choice Hotels Canada Inc., which is an extremely large franchisor of hotels in the great white north and franchises such notable brand names as Comfort Inn, QualitySuites, and Quality hotels.  Innvest’s hotels are currently managed by four companies in the hotel management business: Hilton Canada Co., Fairmount Hotels & Resorts, Delta Hotels Limited, and Westmont Hospitality Management Canada Limited.  Although some critics would point out that Innvest REIT’s (INN) holdings are not diversified in terms of property type, they do have assets that cover a broad range of tastes and trends in that their 144 hotels span the entire accommodation continuum.  The REIT has multiple different brands that offer varying degrees of luxury and pricing options.  Since Innvest REIT (INN) started in 2002, they have seen the number of properties they own jump from 114 to the current mark of 145, but more tellingly, they have grown the number of rooms under management by over 65%.

 

The geographical diversity of the hotel properties also bodes well for the trust going forward.  Innvest REIT owns 3,535 rooms in Western Canada, 8,413 rooms in Ontario, 4,242 rooms in Quebec, and 2,696 rooms in Atlantic Canada.  When you combine this with the broad range of experiences that the company has focused on providing, you have a business model that other hotel REITs will have to aspire to.

 

Innvest (INN) recently released their second quarter results for the year.  Kenneth Gibson, Innvest’s President and CEO stated that, “Second quarter results highlight continued improvement in demand to our portfolio. This was particularly encouraging given challenging circumstances during the quarter which included the federal election and its impact on government-related travel in April, weak leisure demand due to poor weather and high gasoline prices, and revenue displacement caused by renovations. These factors, in addition to the prior period benefit from the G8 and G20 meetings held in the Toronto area, limited year-over-year growth in funds from operations and distributable income.”  He went on to say that, “Our strategy through the first half of the year was focused on driving occupancy to the portfolio. We expect rate growth to follow during the busier summer season, aided by recent renovations at two of our largest hotels.”  Hotel revenues were down slightly relative to last year’s 2nd quarter at .4%.  That being said, Innvest’s (INN) net income was in the black by $2 million, which is reassuring to investors after last year’s net loss of $41.3 million.

 

There is little doubt that Innvest REIT (INN) has been hit hard by the global economic downturn.  When you focus on a luxury-driven industry such as hotel accommodation, there are going to by some rough patches in the road (compared to say consumer staples).  The current price on Innvest is $4.33-per unit.  This is down substantially off of a 52-week of $7.29.  With a current price-to-earnings ratio of 2.43, and a dividend yield of 11.70%, I believe this REIT is currently severely undervalued, and will see substantial growth in the mid-term.