Press Release: Royal Host Real Estate Investment Trust
April 8, 2002
CALGARY, ALBERTA -- Royal Host Real Estate Investment Trust (REIT) has announced financial results for the fourth
quarter and audited year end December 31, 2001 statements.
``Our diversified portfolio and ability to control costs have enabled Royal Host to outperform the industry in
a difficult economic environment, which included the impact of September 11th,'' said R. B. Royer. ``During the
year management significantly improved the balance sheet, placing the REIT in a strong position to benefit from
the anticipated economic recovery.''
Fourth Quarter Results
During the quarter average room rates increased by 3.2% over the previous year. Revenue per available room (RevPAR)
was 3.0% lower than the fourth quarter of 2000, primarily due to a 6.0% decrease in occupancies. Royal Host's fourth
quarter 3.0% decline in RevPAR from the same quarter in 2000 compares very favourably against a year over year
industry decline of 6.1% during the same quarter, as reported by Pannell Kerr Forster.
Total hospitality revenues declined by $317,000 compared to the same quarter in 2000. This decline was the result
of a $353,000 drop in room revenue, which was partially, offset by a $197,000 increase in food and beverage sales
while lease and other hospitality revenues were $161,000 lower that the previous year.
Fourth quarter 2001 hospitality expenses increased by 1.9% to $23.8 million. This increase is attributable to a
$468,000 one-time write down of receivables, almost all of which related to the Canada 3000 bankruptcy.
As a result, Royal Host's operating margin dropped to 25.55% in the fourth quarter of 2001. However, excluding
the unusual increase in bad debt expenses, Royal Host's operating margin was 27.01%, compared to a margin of 27.66%
in the fourth quarter of 2000.
Year-end Results
In 2001, total revenues declined by $3.8 million to $137.1 million. This decline occurred entirely in other hospitality
revenues, which reflects Management's stated objective of refocusing the timeshare business into lower volume but
higher margin areas. However, revenue in the core operations of rooms and food & beverage were steady year-over-year.
While total hospitality expenses were higher during the fourth quarter, for the full year these expenses were $1.3
million lower for 2001, as management responded to a poor economy by reducing costs.
The operating margin was 30.82% for the twelve months ended December 31, 2001 compared to 31.75% for the same period
in 2000. After adjusting for unusual receivable write-downs, the 2001 operating margin was 31.23%.
Year over year at December 31, 2001 interest income was up $250,000; interest on debt was $650,000 lower; and trust
administration was reduced.
Cash available for distribution in 2001 was $26.4 million compared to $28.2 million in the previous year. After
adjusting for the one-time bad debt expense, cash available for distribution was $27.0 million.
Operating Results
-----------------
Three Months Ended Years Ended
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
------------------------- -------------------------
ADR $84.85 $82.19 $87.50 $84.36
Occupancy 57.6% 61.3% 65.5% 68.0%
RevPAR $48.87 $50.37 $57.31 $57.33
Total Available
Room Nights (000's) 394 394 1,574 1,575
Note: December 2000 figures have been adjusted to conform with current
year's presentation.
Developments
During 2001 Royal Host:
Subsequent to the year ended December 31, 2001, Royal Host completed a $40 million convertible debenture that further
strengthened its balance sheet and significantly reduced its debt refinancing risk.
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
$000
As At
----------------------------
December 31, December 31,
2001 2000
----------------------------
ASSETS
Current Assets
Cash and short-term investments 12,201 6,799
Accounts and notes receivable 8,348 12,320
Deposits and prepaid expenses 2,781 2,603
Inventories 3,471 2,903
Future income tax 255 1,470
----------------------------
27,056 26,095
Capital Assets 327,250 332,916
Long-term Notes Receivable and Other Assets 3,730 4,604
----------------------------
358,036 363,615
----------------------------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued
liabilities 15,595 15,936
Current portion of mortgages
and other debt 68,724 51,802
Current portion of capital leases 1,273 928
Distributions payable 1,636 1,874
Other current liabilities 2,140 2,013
----------------------------
89,368 72,553
Mortgages and Other Debt 83,582 107,051
Capital Leases 2,225 2,205
Future Income Taxes 1,138 1,885
Deferred Revenue 1,235 2,145
Equity 180,488 177,776
----------------------------
358,036 363,615
----------------------------
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Net Earnings and Cash Available for
Distribution
For the periods ended December 31, 2001 and 2000
$000
Three Months Ended Years Ended
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
(unaudited) (unaudited)
---------------------------------------------------
Hospitality Revenues
Rooms 18,730 19,083 89,969 89,989
Food and beverage 6,278 6,081 23,045 23,023
Other hospitality
revenues 7,011 7,172 24,068 27,867
---------------------------------------------------
32,019 32,336 137,082 140,879
---------------------------------------------------
Hospitality Expenses 23,839 23,391 94,829 96,144
---------------------------------------------------
Operating Income 8,180 8,945 42,253 44,735
---------------------------------------------------
Other (Income) and
Expenses
Interest income (86) (89) (362) (112)
Interest on mortgages
and other debt 3,494 3,582 14,262 14,912
Trust administration 405 156 1,687 1,968
Capital and future
income taxes 178 (221) 735 (837)
Depreciation and
amortization 4,766 5,651 18,877 21,932
---------------------------------------------------
8,757 9,079 35,199 37,863
---------------------------------------------------
Net Earnings (577) (134) 7,054 6,872
Add: Depreciation
and amortization
of capital assets 4,486 5,145 17,694 21,001
Add: Amortization of
deferred financing
fees 280 506 1,183 931
Add (deduct): Future
income tax expense
(recovery) 117 (155) 468 (620)
---------------------------------------------------
Cash Available for
Distribution 4,306 5,362 26,399 28,184
---------------------------------------------------
Per unit cash available for
distribution
- basic 0.14 0.21 0.94 1.15
- diluted 0.14 0.21 0.93 1.10
ROYAL HOST REAL ESTATE INVESTMENT INVESTMENT TRUST
Consolidated Statements of Cash Flow
For the years ended December 31, 2001 and 2000
$000
Years Ended
December 31, December 31,
2001 2000
-------------------------------
CASH PROVIDED BY (USED IN)
Operating Activities
Net earnings 7,054 6,872
Items not affecting cash:
Depreciation and amortization
of capital assets 17,694 21,001
Future income tax expense
(recovery) 468 (620)
-------------------------------
Funds from operations 25,216 27,253
Change in non-working capital:
Decrease (increase) in accounts
and notes receivable 3,972 (4,265)
Increase in deposits and prepaid
expenses (178) (1,589)
Increase in inventories (568) (197)
(Decrease) increase in accounts
payable
and accrued liabilities (341) 3,124
Increase (decrease) in other
current liabilities 127 (1,490)
-------------------------------
28,228 22,836
-------------------------------
Financing Activities
Additions to mortgages and other
debt 15,206 69,355
Principal repayments on
mortgages
and other debt (22,773) (65,666)
Issuance of trust units 22,559 -
Issuance of trust units under
distribution
reinvestment plan 144 -
Unit issue costs (1,409) -
-------------------------------
13,727 3,689
-------------------------------
Investing Activities
Capital expenditures (10,643) (4,924)
Decrease (increase) in long-term
notes receivable and other assets 874 (424)
(Decrease) increase in deferred
revenue (910) 699
-------------------------------
(10,679) (4,649)
-------------------------------
Equity Distributions (25,874) (22,368)
-------------------------------
Net Increase (Decrease) in Cash
and Short-term Investments 5,402 (492)
Cash and Short-term Investments,
beginning of year 6,799 7,291
-------------------------------
Cash and Short-term Investments,
end of year 12,201 6,799
-------------------------------
The 2001 Financial Statements will be included in the Royal Host's Annual Report and mailed to Royal Host's Unitholders
on or about April 29, 2002. Unitholders entitled to receive the Financial Statements may obtain a copy in advance
upon request to Royal Host. Alternatively the Financial Statements are posted on the Company's website or through
the website maintained by the Canadian securities regulators at www.sedar.com.
Royal Host will hold an Analyst conference call on the morning of Friday, April 5, 2002. A recording of this call
will be made available beginning 7:00 p.m. April 5, 2002 through to 11:00 p.m. April 12, 2002. To access this recording,
please dial 1-888-509-0081 or 1-416-695-9728.
Royal Host REIT owns 36 hotels, manages 74 properties and franchises 108 locations for almost 15,500 guestrooms
in the mid-market to upscale segments. Royal Host also owns the Travelodge Master Franchise in Canada, provides
hotel and resort management services for the portfolio and to third party properties, markets vacation intervals
in hotels, resorts, and operates a facility for customers to trade and bank prepaid vacation weeks.
Royal Host maximizes earnings while balancing risk for its unitholders through efficient operations, strong marketing
and a focus on providing travelers with superior accommodations and travel experiences. Royal Host units are traded
on the Toronto Stock Exchange under the trading symbol ``RYL.UN'' and ``RYL.DB''.
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Financial Statements
For the years ended December 31, 2001 and 2000
To the Unitholders of Royal Host Real Estate Investment Trust
We have audited the consolidated balance sheets of Royal Host Real Estate Investment Trust (``Royal Host'') as
at December 31, 2001 and 2000 and the consolidated statement of net earnings and cash available for distribution
and cash flows for the years then ended. These consolidated financial statements are the responsibility of Royal
Host's management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require
that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.
In our opinion, there consolidated financial statements, present fairly, in all material respects, the financial
position of Royal Host as at December 31, 2001 and 2000, and the results of its operations and its cash flows for
the years then ended, in accordance with Canadian generally accepted accounting principles.
Signed
``Deloitte and Touche LLP''
Chartered Accountants
Calgary, Canada
March 15, 2002
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
$000
As At
---------------------------
December 31, December 31,
2001 2000
---------------------------
ASSETS
Current Assets
Cash and short-term investments (Note 3) 12,201 6,799
Accounts and notes receivable 8,348 12,320
Deposits and prepaid expenses 2,781 2,603
Inventories 3,471 2,903
Future income tax 255 1,470
---------------------------
27,056 26,095
Capital Assets (Note 6) 327,250 332,916
Long-term Notes Receivable and Other Assets 3,730 4,604
---------------------------
358,036 363,615
---------------------------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities 15,595 15,936
Current portion of mortgages
and other debt (Note 7) 68,724 51,802
Current portion of capital leases (Note 8) 1,273 928
Distributions payable 1,636 1,874
Other current liabilities 2,140 2,013
---------------------------
89,368 72,553
Mortgages and Other Debt (Note 7) 83,582 107,051
Capital Leases (Note 8) 2,225 2,205
Future Income Taxes 1,138 1,885
Deferred Revenue 1,235 2,145
Equity (Note 9) 180,488 177,776
---------------------------
358,036 363,615
---------------------------
See accompanying Notes to Consolidated Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Net Earnings and Cash Available for
Distribution
For the years ended December 31, 2001 and 2000
$000
Years Ended
December 31, December 31,
2001 2000
---------------------------
Hospitality Revenues
Rooms 89,969 89,989
Food and beverage 23,045 23,023
Other hospitality revenues 24,068 27,867
---------------------------
137,082 140,879
---------------------------
Hospitality Expenses 94,829 96,144
---------------------------
Operating Income 42,253 44,735
---------------------------
Other (Income) and Expenses
Interest income (362) (112)
Interest on mortgages and other debt 14,262 14,912
Trust administration 1,687 1,968
Capital and future income taxes 735 (837)
Depreciation and amortization 18,877 21,932
---------------------------
35,199 37,863
---------------------------
Net Earnings (Note 4) 7,054 6,872
Add: Depreciation and amortization of
capital assets 17,694 21,001
Add: Amortization of deferred financing
fees 1,183 931
Add (deduct): Future income tax expense
(recovery) 468 (620)
---------------------------
Cash Available for Distribution 26,399 28,184
---------------------------
Per Unit Cash Available for Distribution
- basic (Note 4) 0.94 1.15
- diluted (Note 4) 0.93 1.10
See accompanying Notes to Consolidated Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
For the years ended December 31, 2001 and 2000
$000
Years Ended
December 31, December 31,
2001 2000
------------------------------
CASH PROVIDED BY (USED IN)
Operating Activities
Net earnings 7,054 6,872
Items not affecting cash:
Depreciation and amortization
of capital assets 17,694 21,001
Future income tax expense (recovery) 468 (620)
------------------------------
Funds from operations 25,216 27,253
Change in non-working capital:
Decrease (increase) in accounts
and notes receivable 3,972 (4,265)
Increase in deposits and prepaid expenses (178) (1,589)
Increase in inventories (568) (197)
(Decrease) increase in accounts payable
and accrued liabilities (341) 3,124
Increase (decrease) in other current
liabilities 127 (1,490)
------------------------------
28,228 22,836
------------------------------
Financing Activities
Additions to mortgages and other debt 15,206 69,355
Principal repayments on mortgages
and other debt (22,773) (65,666)
Issuance of trust units 22,559 -
Issuance of trust units under distribution
reinvestment plan 144 -
Unit issue costs (1,409) -
------------------------------
13,727 3,689
------------------------------
Investing Activities
Capital expenditures (10,643) (4,924)
Decrease (increase) in long-term notes
receivable and other assets 874 (424)
(Decrease) increase in deferred revenue (910) 699
------------------------------
(10,679) (4,649)
------------------------------
Equity Distributions (25,874) (22,368)
------------------------------
Net Increase (Decrease) in Cash
and Short-term Investments 5,402 (492)
Cash and Short-term Investments,
beginning of year 6,799 7,291
------------------------------
Cash and Short-term Investments,
end of year 12,201 6,799
------------------------------
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Financial Statements
As at December 31, 2001 and 2000
1. GENERAL INFORMATION
Royal Host Real Estate Investment Trust (``Royal Host'') was created pursuant to the Declaration of Trust dated
August 27, 1997. Royal Host is an unincorporated closed-end mutual fund trust established for the purpose of investing
in hotel properties and hospitality businesses, under specified guidelines as defined under the Declaration of
Trust.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Accounting
The Royal Host accounting policies and standards of financial disclosure are in accordance with Canadian generally
accepted accounting principles (``GAAP'') as prescribed by the Canadian Institute of Chartered Accountants (``CICA'')
and industry specific accounting principles as published by the Canadian Institute of Public and Private Real Estate
Companies (``CIPPREC'').
b) Use of Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and revenue and expenses for the reported
period. Actual results could differ from those estimates.
c) Principles of Consolidation
These consolidated financial statements include the accounts of Royal Host and its wholly-owned subsidiaries and
the accounts of all partnerships and co-tenancy to the extent of the Royal Host proportionate interest in their
respective assets, liabilities, revenues, expenses and cash flows. All inter-company transactions and balances
have been eliminated.
d) Revenue Recognition
Revenue is recognized upon performance of hotel and related services and delivery of food and beverages. Revenue
from prepaid vacations is recorded when the purchaser has complied with all major conditions of the sale, including
the payment of the full purchase price or the arrangement of appropriate financing. Ongoing credit evaluations
are performed and an allowance for potential credit losses is provided against the portion of accounts receivable
which is estimated to be uncollectible. Certain portions of revenue from prepaid vacations are deferred until earned
by Royal Host.
e) Capital Assets
Hotel properties are recorded at the lower of net book value or net recoverable amount. The net recoverable amount
represents the undiscounted projected future net cash flow generated from the property throughout its useful life,
including its residual value, and is intended to determine recovery of an investment and is not an expression of
a property's fair market value.
Hotel properties are depreciated using the straight-line method over their estimated useful lives of between 25
and 40 years. Hotel construction, condition and location characteristics are evaluated on a periodic basis by management
and useful life estimates are revised accordingly, as may be necessary from time to time.
Maintenance and repair costs are expensed against operations as incurred, while significant improvements, replacements
and major renovations are capitalized to hotel properties. Furniture, equipment and certain improvements are depreciated
on a straight-line basis over periods of up to ten years.
Properties under development consist of properties under construction and are recorded at the lower of cost, including
pre-development expenditures, and their net recoverable amount.
Goodwill comprises the unamortized balance of the excess of the Royal Host acquisition cost over the fair value
of the identifiable net assets of Royco Hotels & Resorts (``Royco'') and R.V.I. Holiday Limited Partnership
(``RVI''). To December 31, 2001, goodwill has been amortized on a straight-line basis over periods between five
and 15 years.
Goodwill is regularly evaluated by comparing estimated future net cash flows against the net book value of goodwill
to assess the recoverability of goodwill. Any permanent impairment would be written down in the period identified
and charged against earnings.
Effective January 1, 2002, Royal Host will adopt the recommendations of the CICA Handbook Section 3062 regarding
Goodwill and Other Intangible Assets, which requires for years beginning after January 1, 2002, non-amortization
of goodwill. Goodwill will be assessed quarterly for impairment, which will be measured as the difference between
the book value of the goodwill and its fair value. Goodwill will be written down in the period if an impairment
loss has been identified.
f) Capitalized Costs
Costs associated with the acquisition of the hotel properties are capitalized to the respective hotel property.
These costs typically include realty agent commissions, property transfer taxes, legal fees, environmental studies,
engineering and other direct expenses.
The cost of hotel properties under development includes all expenditures incurred in connection with the activities
of acquiring, developing and constructing these properties. These expenditures consist of all direct costs including
debt interest and an appropriate allocation of general and administrative costs incurred.
g) Inventory
Inventory consists of food, beverages, china, silverware, glassware, linen and general supplies. These items are
recorded at lower of cost or net replacement value and are determined on a first-in, first-out basis.
h) Financing Costs
Debt financing costs are deferred and amortized on a straight-line basis over the terms of the related loans.
i) Income Taxes
Royal Host is taxed as a ``mutual fund trust'' for income tax purposes. Pursuant to the Declaration of Trust, the
Trustees intend to distribute all taxable income directly earned by Royal Host to its Unitholders and to deduct
such distributions and designations for income tax purposes.
Effective January 1, 2000, Royal Host adopted the recommendations of Abstract 107 of the Emerging Issues Committee
of the CICA regarding future income taxes, which requires recording a future tax amount for temporary differences
existing in subsidiaries of the Trust. This accounting change has been applied retroactively without restatement.
The impact of the change was to record a future tax liability and a charge to Unitholders' equity at January 1,
2000 of $1,035,000. Temporary differences consist primarily of loss carry-forwards and book versus tax values of
capital assets.
j) Unit Option Plan
Royal Host has a unit option plan as described in Note 9(d). No compensation expense is recognized for the plan
when options are granted. Consideration received on exercise of options is credited to Unitholders' equity.
3. RESERVED CASH
Included in cash is an amount of $3,194,000 (2000 - $3,727,000) of reserved cash representing funds on deposit
with lenders for future planned capital expenditures within the next 12 months.
4. PER UNIT COMPUTATIONS
There were 24,115,846 trust units outstanding as at December 31, 2001 (2000 - 20,267,412). Per unit computations
are based on the weighted average number of trust units outstanding for the year, after adjusting the net earnings
and cash available for distribution for payments on the convertible debenture of $1,760,000 (2000 - $1,760,000)
and payments on the redeemable partnership units of $2,836,000 (2000 - $3,025,000).
For the twelve months
ended: December 31, 2001 December 31, 2000
---------------------------------------------------
($000's) Weighted Per ($000's) Weighted Per
Average Unit Average Unit
Units Units
(000's) (000's)
Earnings per unit
Net earnings 7,054 6,872
Less:
Interest on
convertible
debenture (1,760) (1,760)
Distributions on
redeemable
partnership units (2,836) (3,025)
---------------------------------------------------
Basic and diluted
earnings per unit 2,458 23,172 0.11 2,087 20,267 0.10
---------------------------------------------------
Cash available for
distribution
Net earnings 7,054 6,872
Add (deduct):
Depreciation and
amortization
of capital assets 17,694 21,001
Amortization of
deferred
financing fees 1,183 931
Future income tax
expense (recovery) 468 (620)
Distributions on
redeemable
partnership units (2,836) (3,025)
Interest on
convertible
debenture (1,760) (1,760)
---------------------------------------------------
Basic cash available
for distribution per
unit 21,803 23,172 0.94 23,399 20,267 1.15
Add back:
Distributions on
redeemable
partnership units 2,836 3,151 3,025 3,151
Interest on
convertible
debenture 1,760 2,000 1,760 2,127
---------------------------------------------------
Diluted cash
available for
distrbution per unit 26,399 28,323 0.93 28,184 25,545 1.10
---------------------------------------------------
Under the Royal Host capital replacement reserve policy, 3% of total hotel revenue is deducted from cash available
for distribution to allow for the upkeep and renovation of the hotel properties. This policy may be amended from
time to time at the discretion of the Trustees. On this basis, the reserve provided for the year ended December
31, 2001 would have been $3,641,000 (2000 - $3,671,000). As Royal Host spent $10.6 million excluding capital leases
in 2001 (2000 - $4.9 million) to renovate and reposition the hotel properties, the Trustees have determined that
no reserve would be provided for in 2001 and 2000.
Royal Host has complied with the new requirements of the Canadian Institute of Chartered Accountants (``CICA'')
with respect to the calculation of earnings and diluted earnings per unit. Comparative figures have been restated
to conform to these new accounting standards.
5. RELATED PARTY TRANSACTIONS
During 2001, Royal Host transferred a portion of its accounts receivable, aggregating $2,761,000, to a company
of which certain officers of Royal Host hold, in aggregate, a 45% interest. No gain or loss was recognized, and
this transaction was conducted at amounts approximating fair market value.
6. CAPITAL ASSETS
(in $000's)
-------------------------------
Accumulated
Gross Depreciation Net
Book and Book
Value Amortization Value
-------------------------------
2001
Land 37,303 - 37,303
Buildings 276,435 35,142 241,293
Furniture, fixtures and equipment 37,586 20,712 16,874
Paving and other 1,195 152 1,043
-------------------------------
352,519 56,006 296,513
Properties under development 9,008 - 9,008
Goodwill 34,276 12,547 21,729
-------------------------------
395,803 68,553 327,250
-------------------------------
2000
Land 37,303 - 37,303
Buildings 274,227 28,171 246,056
Furniture, fixtures and equipment 35,745 14,311 21,434
Paving and other 1,173 108 1,065
-------------------------------
348,448 42,590 305,858
Properties under development 1,457 - 1,457
Goodwill 34,276 8,675 25,601
-------------------------------
384,181 51,265 332,916
-------------------------------
Royal Host re-evaluated the useful lives of its properties for depreciation purposes. The result was to extend
the estimated useful lives of hotel and resort buildings from 25 years to between 25 and 40 years, commencing January
1, 2001. Had the previous estimates been used, depreciation and amortization expense would have been $21,814,000
for the year ended December 31, 2001.
All hotel properties are wholly-owned by Royal Host, except one hotel property representing less than 5% of total
capital assets, which is jointly owned by Royal Host and the vendor. Pursuant to the Exchange Agreement dated September
11, 1998, the vendor has an option to exchange its 50% ownership interest for units of Royal Host. The valuation
of such exchange is to be determined based on a specified capitalization rate and the units of Royal Host are to
be priced based on a 20 day weighted average trading price per unit. This calculation has been taken into consideration
in the diluted per unit calculations in Note 4 and determined to be anti-dilutive.
For discussion of capital replacement reserves in 2001 and 2000, see Note 4.
Properties under development include interest expense capitalized of $Nil in 2001 (2000 - $66,000). The Royal Host
commitment to complete properties under development in 2001 is estimated at $2,307,000 (2000 - $747,000).
7. MORTGAGES AND OTHER DEBT
(in $000's)
--------------------------
December 31, December 31,
2001 2000
--------------------------
Mortgages and other debt secured by
hotel properties 152,306 158,853
Less current portion 68,724 51,802
--------------------------
Long-term obligations 83,582 107,051
--------------------------
Years ended December 31 (in 000's)
2002 68,724
2003 3,316
2004 2,349
2005 2,567
2006 2,776
Subsequent 72,574
-----------
152,306
-----------
--------------------------
Supplementary Information: December 31, December 31,
2001 2000
--------------------------
Cash interest paid in the year 13,753 13,949
Mortgages and other debt bear interest at rates ranging from 4.75% to 12.0% (2000 - 8.0% to 12.0%) with a weighted
average year-end rate of 9.02% (2000 - 9.24%) and mature between 2002 and 2018. The mortgages and other debt are
secured by fixed charges over specified hotel properties. Monthly principal and interest payments pursuant to the
indebtedness are $1,488,000 at December 31, 2001 (2000 - $1,541,000).
Financing charges are deferred and amortized over the term of the related debt. In 2001, $1,183,000 was included
in amortization (2000 - $931,000).
In 2001, there was a net reduction of $6.6 million of long term debt. Royal Host intends to use approximately $18.5
million of the estimated net proceeds of the 9.25% Convertible Unsecured Subordinated Debentures issued in February
2002 to reduce its outstanding current bank indebtedness (see Note 17).
8. OBLIGATIONS UNDER CAPITAL LEASES
The company has entered into various capital lease obligations to acquire computers and hotel furniture, fixtures
and equipment. The present values of minimum lease payments under capital lease as of December 31, 2001 are as
follows:
(in $000's)
--------------------------
December 31, December 31,
2001 2000
--------------------------
Present value of future minimum lease
payments 3,498 3,133
Less current portion 1,273 928
--------------------------
Long-term obligations 2,225 2,205
--------------------------
For the years ending December 31 (in 000's)
2002 1,563
2003 1,343
2004 675
2005 321
2006 111
Subsequent 34
-----------
Future minimum lease payments 4,047
Amounts representing interest 549
-----------
Present value of future minimum lease payments 3,498
-----------
9. EQUITY
(in $000's)
--------------------------
December 31, December 31,
2001 2000
--------------------------
Balance, beginning of year 128,276 146,681
Adjustment for future income taxes (Note 2(i)) - (1,035)
--------------------------
As restated 128,276 145,646
Net earnings 7,054 6,872
Issuance of trust units - public offering 22,559 -
Issuance of trust units - distribution
reinvestment plan 144 -
Unit issue costs (1,409) -
Equity distributions on:
Trust units (21,040) (19,457)
Redeemable partnership units (2,836) (3,025)
Interest paid on convertible debentures (1,760) (1,760)
--------------------------
130,988 128,276
--------------------------
Convertible Equity
Redeemable partnership units 27,500 27,500
Convertible debenture 22,000 22,000
--------------------------
49,500 49,500
--------------------------
Balance, end of year 180,488 177,776
--------------------------
a) Unit Capital
Number
of units (in $000's)
----------------------------
Balance, December 31, 1998 18,829,487 187,142
Issuance of trust units under private
placement 1,435,530 10,006
Issuance of trust units under distribution
reinvestment plan 2,395 17
----------------------------
Balance, December 31, 2000 and 1999 20,267,412 197,165
Issuance of trust units under public
offering
March 27, 2001 3,390,000 20,001
April 23, 2001 433,600 2,558
Issuance of trust units under
distribution reinvestment plan 24,834 144
----------------------------
Balance December 31, 2001 24,115,846 219,868
----------------------------
On March 27, 2001, pursuant to a prospectus, Royal Host issued 3,390,000 units at a unit price of $5.90 for total
gross proceeds of $20,001,000. On April 23, 2001, Royal Host issued 433,600 units at a unit price of $5.90 for
total gross proceeds of $2,558,000 pertaining to the over-allotment option granted in the March 27, 2001 prospectus.
b) Distributions to Unitholders
Cash available for distribution for the year ended December 31, 2001 was $26,399,000 (2000 - $28,184,000) and distributions
declared to Unitholders, excluding distributions on redeemable partnership units, aggregated $21,040,000 (2000
- $19,457,000) for the same period.
c) Distribution Reinvestment Plan
Royal Host has established a Distribution Reinvestment Plan (``DRIP'') that is administered by its transfer agent
and has reserved 500,000 units for issue under this Plan. For the period January 2001 to July 2001, the transfer
agent purchased DRIP units on the open market. Subsequent to July 2001, the company has issued new units for DRIP
participants out of the previously authorized reserved units.
d) Unit Options
Royal Host has reserved 1,883,000 units under its unit option plan. As at December 31, 2001, Royal Host has unit
options outstanding to certain directors, employees and consultants to purchase an aggregated total of 907,500
units (2000 - 990,000 units), ranging from $10.00 to $10.50 per unit (in 2001 and 2000, the weighted average exercise
price is $10.03). These options expire on October 31, 2007 and on March 23, 2008. During 2001, no options were
issued or exercised, but 82,500 units expired.
e) Redeemable Partnership Units
Holders of redeemable partnership units (``Holders'') are entitled to receive distributions indirectly from Royal
Host equivalent to the distributions paid by Royal Host to its Unitholders, commencing on January 1, 1999. Each
partnership unit is redeemable by the Holders after January 1, 2000 at a cash price equal to the market value of
a Royal Host unit, or at the option of Royal Host and subject to regulatory approval, one Royal Host unit or a
combination thereof.
Under certain circumstances, including a change of control (``Trigger Event''), the Holders have the right to redeem
the partnership units for cash proceeds of $27.5 million. If the Trigger Event occurs after the issuance of redeemable
units but prior to January 1, 2004, then the Holders may redeem the then outstanding redeemable partnership units
for cash, at the greater of $9.00 per unit or the market price of the Royal Host units. Change in control is defined
as ownership by any one entity or a group of related entities of more than 20% of the outstanding units of Royal
Host.
For accounting purposes, the redeemable partnership units have equity characteristics and accordingly, they are
classified as equity instruments.
f) Convertible Debentures
The convertible debentures bear interest at 8% per annum and are payable monthly, at Royal Host's option, in either
cash or Royal Host units of an equivalent value. In addition, upon maturity in 2003, Royal Host has the option
to repay the debentures in either cash or in equivalent units of Royal Host.
Based on certain conditions, the debentures are convertible at $11.00 per trust unit for the period from October
1, 2001 to September 30, 2003.
For accounting purposes, the convertible debentures have equity characteristics and accordingly, they are classified
as equity instruments.
g) Employee Unit Purchase Program
During 2000, Trustees approved the issue of up to 400,000 units from treasury for an employee unit purchase program.
Under this program, certain Royal Host employees will be eligible to finance the purchase of units from treasury
at $5.80 per unit. To date, no units have been issued under the plan.
10. COMMITMENTS
a) Energy Contracts
Royal Host has entered into long-term supply arrangements with two electrical utility companies and two natural
gas providers to supply electricity and natural gas requirements for certain Alberta and Ontario properties. The
electricity contracts are for a term of five years at a blended rate of approximately 6.09 cents per kilowatt-hour
for annual usage of approximately 33.7 million kilowatt-hours in 2002 (2001 - 9.23 cents per kilowatt-hour for
5.7 million kilowatt hours). The natural gas contracts are for terms of two, three, and five years, at a blended
rate of approximately 19.45 cents per cubic meter, excluding delivery, on annual usage of approximately 4.74 million
cubic meters for 2002 (2001 - 28.85 cents per cubic meter for 3.60 million cubic meters). Royal Host is not required
to guarantee usage levels for any contracts.
b) Vacation Club Transactions
Effective December 18, 2001 Royal Host management, acting in its capacity as authorized officers of a unincorporated
vacation club society (``Society'') entered into a lease agreement with a party to secure, on behalf of the Society,
the right to use a vacation property. The lease agreement temporarily obligates a Royal Host subsidiary to lease
the particular vacation property for three successive 15-year terms followed by a final 5-year term. The renewal
terms are automatic and substantially obligate the lessee to renew the lease for a full term of 50 years.
Management intends to fully transfer the entitlements and obligations associated with this lease agreement to the
Society, and the Society has agreed to accept the entitlements and obligations associated with the lease agreement
pending finalization of legal and contractual documentation pertaining to the transfer of the lease entitlements
and obligations to the Society.
It is anticipated that the finalization of such transfer of lease entitlements and obligations will occur in the
near future. Should matters arise that result, for whatever reason, in the entitlements and obligations of the
lease agreement not transferring to the Society, Royal Host may record such entitlements and obligations in its
consolidated financial statements at that time. The current estimated fair value of each of the future entitlements
and of the obligations at December 31, 2001 is $3.2 million.
11. OTHER HOSPITALITY REVENUES
Other hospitality revenues include rental income from one hotel property that is leased to the previous owner for
a fixed fee of $2,015,000 per annum. The lease is renewable at the option of the tenant for a further three additional
5-year terms, commencing October 31, 2002, at an amount equal to the base lease adjusted by the consumer price
index. The lease may be terminated if the property is sold by Royal Host, upon due notice, along with payment of
a penalty calculated in accordance with the lease agreement.
12. FRANCHISE AGREEMENTS
Under the terms of the hotel franchise agreements expiring at various dates commencing October 31, 2007 through
to December 12, 2021, annual payments for franchise expenses (including fees, reservation and advertising services)
are due to external parties for 33 of the 36 hotels owned by Royal Host (2000 - 33 of the 36 hotels). In 2001,
a hotel property in which Royal Host is a 50% co-tenant was converted to the Travelodge brand, of which Royal Host
is the master franchisor in Canada. There were no Royal Host owned hotels converted to the Travelodge brand in
2000. The franchise royalties to external parties are computed based upon percentages of defined revenues and amounted
to $2,061,000 for the year (2000 - $1,931,000).
13. OPERATING LEASES
Certain property and equipment are leased under operating lease agreements expiring at varying intervals. The following
is a five-year schedule for future minimum rental payments required under these leases as at December 31, 2001:
Year ending December 31 ($000's)
2002 1,296
2003 764
2004 498
2005 226
2006 110
---------
Total future minimum rental payments 2,894
---------
14. RISK MANAGEMENT
Royal Host's key financial risk exposures include credit risks arising from receivables from corporate accounts
and amounts owed by purchasers of prepaid vacations, commodity price risk on utilities and interest rate risk arising
from fluctuations in interest rates.
Credit risks are minimized, as amounts due from any one debtor are not significant and routine credit assessments
are carried out prior to credit being granted. The accounts receivable from prepaid vacation owners are secured
by the prepaid vacations purchased.
Commodity price risk is managed through the use of fixed price contracts for the stable supply of natural gas and
electricity in the jurisdictions where such commodities have been de-regulated.
Interest rate risk is continually monitored and managed through limiting the amount of variable rate debt as well
as the total amount of debt. The amount of variable rate debt aggregated $21,332,000 or 14% of the Royal Host total
debt portfolio as at December 31, 2001 ($40,060,000 or 25% of the Royal Host total debt portfolio as at December
31, 2000). Variable rates ranged from prime plus 3/4% to prime plus 2% for 2001 and 2000.
15. FAIR VALUES
Current assets and liabilities approximate their carrying values at December 31, 2001, due to their short-term
nature. The fair values of the non-current portion of mortgages and other debt and convertible equity instruments
are as follows:
($000's)
-----------------------
Carrying Fair
values values
Mortgages and other debt 83,582 84,053
Capital leases 2,225 1,998
Redeemable partnership units and convertible
debenture 49,500 46,321
Fair value estimates are made at a specific point in time based on relevant market information. These are estimates
and involve uncertainties and matters of significant judgment and cannot be determined with precision. Changes
in assumptions and estimates could significantly affect fair values.
16. COMPARATIVE FIGURES
Certain prior year's figures have been reclassified to conform with the presentation adopted for 2001; also certain
of the 2000 figures have been restated to reflect the adoption of future income taxes and the new accounting standards
for per unit computations. There was no material change to the consolidated statement of net earnings.
17. SUBSEQUENT EVENTS
On February 21, 2002, pursuant to a prospectus, Royal Host issued $40,000,000 of 9.25% Convertible Unsecured Subordinated
Debentures due 2007 for net proceeds of $38,100,000. Royal Host intends to use approximately $18.5 million of the
estimated net proceeds of the Debentures to reduce its outstanding bank indebtedness and the balance to reduce
other indebtedness, upgrade and reposition its existing properties, for working capital and general trust purposes
including acquisitions.
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Contact: Royal Host Real Estate Investment Trust Peter Sikora Chief Financial Officer Phone: (403) 259-9800 Fax: (403) 259-8580 Email: investorinfo@royalhost.com Website: www.royalhost.com