July 13, 2007
On June 22nd, Lakeview closed its $26.5 million
purchase of the 120-room Marriot Residence Inn located near the Calgary
International Airport. The four story, all suite hotel will be the largest
hotel in Lakeview’s portfolio (which currently averages 72 rooms per hotel). Keeping in line with the REIT’s
brand strategy, the hotel will be re-flagged with the Lakeview banner. This
acquisition represents a new direction for the REIT in many respects. The
Calgary area is a departure from the secondary markets that have been
Lakeview’s focus to date. Lakeview’s current portfolio consists of limited
service hotels located in markets that serve the oil & gas industry. In
contrast, this new airport focused hotel caters to sophisticated travelers
that demand the best services and comfort. In fact, the new hotel’s average
room rate of $135 is 20% higher than the $112 nightly rate of the current
portfolio.
While the hotel presents a new strategic focus, we believe
the acquisition is positive. Most importantly, we believe Lakeview’s management
team has the experience necessary to not only navigate the Calgary market
successfully but increase the market position of the hotel. On balance, the
purchase metrics are accretive to Lakeview’s net asset value and cash flow. The
capitalization rate of the acquisition at approximately 8.5% is well above
Lakeview’s recent 6.5% convertible debenture financing. The 200 basis point
spread should provide a meaningful bump to this year’s FFO and AFFO figures.
From a marketing perspective, having a presence in a major urban center will
raise the profile of the Lakeview name and is an important step to building a
nationally recognized brand. We suspect that by year end Lakeview will be in
position to raise its distribution and transition to the TSX.
September 14, 2007
On August 30th, Lakeview announced Q2 results. Total
revenue for the period was $6.6 million, an increase of 60% over last
year. Cash provided by operating activities during the second quarter
decreased to $403,873. For the first six months of 2007, cash from
operations was $2.31 million, roughly the same as the $2.32 million
recorded during the first six months of last year. With the exception of
higher average room rates, all performance measures were lower compared to
Q2 2006. Average daily RevPAR (revenue per available room) was $61.20,
down from $73.03. Occupancy came in at 55.54% compared to the 72.19% rate
experienced last year.
Overall, Q2 results were below management’s
expectations. Soft natural gas prices, coupled with a prolonged spring
breakup, reduced travel to Lakeview’s properties. High levels of snow
cover restricted road access to the remote natural gas drilling areas in
Alberta and BC. These factors translated to an occupancy rate of 55.5%,
down from 72.2% for the same period last year. The REIT’s Fort Nelson, BC
and Edson, AB properties were particularly weak during the second quarter.
Due to Lakeview’s small portfolio, one or two poorly performing hotels can
have a big impact on total results. As a consequence, the payout ratio for
the first half of the year stood at 155%.
Going forward, as the REIT adds hotels with less
exposure to natural gas and oil drilling, operating results will become
more stable and less dependent on commodity prices. For example, the
recently purchased 120-room Marriot Residence Inn at the Calgary Airport
will provide a balance against the REIT’s remote locations that are
directly linked to drilling activity. Lakeview management expects that as
drilling activity increases in late 2007 and the recently acquired Marriot
becomes reflected in results, the REIT will see a significant improvement
in its cash flow and, as a result, a much lower payout ratio.
November 30, 2007
On November 28th, Lakeview reported Q3 results. Overall, the Trust’s Q3 results were a substantial improvement over Q2 and demonstrate that Lakeview’s management team is doing a good job of navigating turbulent markets. Most importantly, the Trust’s payout ratio came in below 100%, which should give comfort to investors. Looking at the income statement, total revenue for the period increased by 73% to $9.7 million. The increase in revenue for the third quarter was a result of including room, food and beverage contribution from fifteen hotels versus nine hotels for the comparable period last year. Revenue from licensing increased by 28%, reflecting the contribution from the six new Lakeview Inns & Suites banners added to the portfolio since last year.
Despite impressive top line growth, Lakeview’s hotel performance numbers continue to reflect reduced oil & gas activity in Western Canada. Lower occupancy in the quarter offset higher room rates to bring RevPAR (revenue per available room) down to $78.80 from the $86.06 achieved during the same period last year. Negatively impacting the performance numbers is the slower than expected start of two newly developed hotels purchased in 2007. Excluding these two hotels, occupancy, rate, and RevPAR would have been essentially on par with 2006 numbers.
Like many REITs, Lakeview’s stock price declined after the subprime/asset backed commercial paper turmoil surfaced in August. Additionally, a temporary payout ratio in excess of 100% during Q2 further bothered investors who then went on to seek larger capitalization, well-known names. As a result, Lakeview’s unit price now trades at a discount of approximately 50% to our calculation of net asset value. With the credit market stabilizing, T-bill rates nearing multi-year lows, and hotel fundamentals remaining firm, we believe that Lakeview’s discount to NAV positions it as a prime takeover candidate.
May 2, 2008
On April 29th, Lakeview reported its financial results for 2007. As expected, key performance measures were down compared to 2006. Operating results at Lakeview’s Alberta and British Columbia properties were impacted by a cyclical downturn in natural gas drilling activity. Natural gas prices hovered between $5-$7 per Mcf for most of 2007, down significantly from the $10-$15 range recorded during the last half of 2006. Drilling budgets were slashed even further when the Alberta government announced its royalty regime change in October. New hotel acquisitions completed during the second half of 2007 failed to deliver anticipated occupancy and disproportionately skewed the results of the entire portfolio. Looking at Lakeview’s key performance measures, occupancy for 2007 was 61.87%, down from 73.68% recorded for 2006. RevPar – revenue per available room – declined 9% to $70.49. A higher average room rate of $113.93, up from $105.30, helped to mitigate the impact of lower occupancy numbers.
Looking ahead, Lakeview is expecting much stronger results for 2008. Drilling activity has started to return to normalized levels. Natural gas prices now hover around $10 and the Alberta government has relaxed its previously announced royalty rate changes. While properties located in places such as the Montney Region, Fort Nelson, and Fredericton will benefit as drilling activity resumes, management has made an effort to diversify the portfolio away from the cyclical nature of natural gas drilling activity. New acquisitions in Calgary, Slave Lake, and Prince George have reduced Lakeview’s exposure to oil & gas activity to 40% from 50%. Initiatives to spark organic growth should pay dividends. Lakeview’s recently announced mezzanine financing package speaks to management’s creativity. Lakeview will extend the facility to a private developer for the construction of properties in BC, Alberta, and Saskatchewan. Yielding over 14% for the REIT, the facility transfers all development and start up risk to the developer. Additionally, Lakeview receives the right to purchase the properties at today’s prices for up to two years after construction. With a cost of financing around 8.5%, Lakeview will enjoy a 5.5% spread on the loan.
Surprisingly, Lakeview continues to trade at a discount to NAV and replacement value. Our estimated NAV is between $5.00 - $5.50 after accounting for the value of the REIT’s 49% interest in Lakeview Flag Licensing Partnership. The REIT has sufficient cash flow to cover its distribution (with cash of approximately $4 million on its balance sheet) and management fully expects to maintain the current distribution. Now yielding over 13%, the units represent one of the highest yields in the REIT sector, an unusual anomaly relative to other junior REITs which have yet to fully grow into their distributions. In summation, as industry conditions improve we expect Lakeview to garner more investor attention resulting in a narrowing of its NAV discount and an improvement in its unit price.
May 30, 2008
On May 23rd Lakeview reported its Q1 2008 results. As expected, occupancy during the period was down over last year. Occupancy for the quarter came in at 62.5%, compared to 66.8% during Q1 2007. However, room rates increased to $115.98 from $111.77, which resulted in RevPar of $72.44, down only 3%. As highlighted in previous updates, the slowdown in drilling activity in Western Canada has severely impacted business travel in Lakeview’s key markets. Considering the severity and length of the current cyclical downturn, we view the REIT’s 3% decline in RevPar as modest.
Total revenues increased 34.7% to $9.46 million. The increase in revenues reflects a total of 1,197 rooms owned during the period versus 862 rooms during Q1 2007. Licensing revenue from the Lakeview Flag Licensing Partnership increased to $161,385. Reported ‘below the line’ after expenses, this cash flow stream grows as new hotels are added to the portfolio. At the end of Q1, 16 hotels contributed to the Partnership. We view Lakeview’s 49% interest in the Partnership as a hidden asset that will grow over time. FFO (funds from operations) during the quarter was 0.06 per unit, down from 0.11 per unit last year. In consequence, Lakeview’s quarterly distribution of 0.11 per unit exceeded FFO during the quarter. We expect Lakeview to resume covering its distribution on a quarterly basis by the end of 2008.
Looking to the remainder of the year, Lakeview’s outlook is unchanged since its year-end update. Lakeview is expecting much stronger results on the back of higher oil and natural gas prices. Additionally, new hotels added during the last half of 2007 that opened with lower than expected numbers should ramp up to more normalized levels. Our NAV estimate remains at $5.00 - $5.50 per unit based upon several factors such as replacement value, Lakeview’s growing brand awareness, and recurring cash flow from the REIT’s investment in Lakeview Flag Licensing Partnership. Finally, as its occupancy improves we expect Lakeview’s NAV discount to narrow.
August 29, 2008
On August 27th, Lakeview announced results for the second quarter of 2008. All key operating metrics demonstrated improvement compared to the same period last year. Occupancy increased to 59.89%, up from 55.54%. More importantly, these occupancy gains were achieved at a higher average room rate of $120.20. Higher occupancy and room rates translated into RevPar growth of 17.5% over last year. Overall, Lakeview’s Q2 improvement demonstrates that despite ongoing volatility in energy prices, drilling activity in Western Canada has started to stabilize. For the remainder of the year, Lakeview expects results to continue to improve over last year.
Lakeview recorded total revenue of $19.1 million for the first six months of the year, up 39% over last year. The increase in revenue can be attributed to the operation of 17 hotels versus 15 hotels for the same period last year, and improved key operating metrics across the whole portfolio. Despite improved Q2 2008 cash flow, substantially lower drilling activity during Q1 2008 compared to Q1 2007 led to a decrease in funds from operations. For the same period, funds from operations decreased to $1.9 million from $2.6 million.
Lakeview’s portfolio continued to evolve during the second quarter. On April 3rd, a 74-room Four Points Sheraton located in Prince George, British Columbia was added to the portfolio. Known as British Columbia’s northern capital, Prince George is located at the intersection of Highways 97 and 16. The city serves as a hub for forestry, oil refining, and mining. Subsequent to the quarter, an agreement to purchase the Days Inn – Ottawa Airport was struck. The $10.5 million purchase price will be made with the REIT’s credit facilities. These two additions will further diversify Lakeview’s portfolio away from the cyclical nature oil & gas drilling activity. At the end of the quarter, Lakeview owned 17 hotels with 1271 rooms.
Despite these improved results and signs that many of Lakeview’s markets hit bottom during Q2 2007, Lakeview’s unit price continues to hover around $3.20. This is substantially below our net asset value estimate of $5.00. We believe lingering concerns about the credit crisis, broader economic health, and investor apathy towards small cap securities is behind Lakeview’s current discount to net asset value. Interestingly, insider activity has increased recently. During August, over 60,000 units were purchased by insiders.
February 27, 2009
Units of Lakeview Hotel REIT have been under serious pressure as the credit crisis, economic turmoil and deteriorating oil and gas prices have combined to create a perfect storm. The Western Canadian-based lodging provider is obviously protecting liquidity and preparing to weather a serious downturn. Distributions have been cut in recent months, first to $0.01 per month on November 25, 2008 and were then eliminated in an announcement released February 24, 2009. This decision will save the Company approximately $2.3 million per year until conditions improve.
Recent operating data, including occupancy rates, average room rates, RevPar or number of rooms occupied are almost irrelevant. Given the elimination of the distribution, the statistics must have deteriorated dramatically in the yet-to-be-reported fourth quarter and the first months of 2009. However, after discussions with management, we believe that the Company has sufficient liquidity to survive through 2009. The Company has cash on the balance sheet, has no significant debt maturities until 2011, remains current on its mortgages and is onside with respect to its debt covenants.
Management assured us that the current market price of the units is not reflective of the Company’s underlying net asset value. In support of this statement, insiders, including the Company’s President Keith Levit, have been buying units in the open market this year. Once oil and gas prices recover from their slump and drilling resumes in the Western Canadian Basin, management’s emphasis on net asset value and balance sheet protection over short-term distribution needs should be validated. Investors who bought into the story for income purposes may no longer wish to continue to hold the units. Net asset value buyers with a longer time horizon, however, should watch the debt situation closely; they should eventually be rewarded for their patience.
February 5, 2010
Shares of Lakeview Hotel Real Estate Investment Trust came under severe pressure in 2009, falling to a low of $0.24 per unit. Weak natural gas prices led to reduced drilling activity in Western Canada. In turn, occupancy rates, average room rates and RevPar were all lower on a year over year basis. Under the circumstances, the Board of Trustees determined that it was prudent to suspend monthly distributions.
We would like to highlight to investors that Lakeview is closely linked to natural gas drilling in Alberta and British Columbia. Although commodity prices have rebounded off the lows and drilling activity is beginning to show signs of recovery, the Trust is not “out of the woods” yet. Most notably, Lakeview Hotel REIT was not in compliance with a fixed charge coverage ratio for six of its hotel properties. Although the trust obtained an agreement from its lender to forbear its rights and remedies as a result of the covenant breach, the Trust had to put up additional cash collateral. Further, the Trust’s primary mortgage lender has extended a $4.2 million short-term loan that seems to be due on demand. On a more positive note, the Trust was current on its debt as of the end of the third quarter and only $2.7 million of mortgage principal is due in 2010.
Again, we would caution investors to monitor the situation closely and examine the Company’s financial statements with great care while the natural gas related activity normalizes. If Lakeview can withstand the current turmoil, we believe that the shares could continue to recover from the lows, even after bouncing 67% over the past two months.
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