Press Release: Royal Host Real Estate Investment Trust
August 12, 2002
CALGARY, AB -- Royal Host Real Estate Investment Trust (REIT) August 8 announced financial results for the three
and six months ended June 30, 2002.
Royal Host reported operating income of $10.7 million for the second quarter of 2002, a decrease of $1.5 million
compared to the second quarter of 2001. Royal Hosts results reflect continued weakness in certain Ontario markets.
"In these markets, leisure business is performing reasonably well, while corporate business continues to lag.
The Toronto Airport Travelodge has been particularly hard hit due to a reduction in demand as a result of September
11th and the loss of a large airline contract, which has been difficult to replace in a slow market," says
R. B. Royer, President and CEO of Royal Host. "Despite a difficult operating environment, we are confident
that we will be able to maintain our current level of distribution in the foreseeable future. Our balance sheet
is strong, we have recently acquired two hotels which will increase our future earnings; and management is focused
on improving any under-performing hotels," added Royer.
Hotel Statistics
----------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 2002 June 30, 2002
2002 2001 2002 2001
----------------------------------------------------------
36 Hotel Portfolio
------------------
ADR $91.10 $88.29 $88.81 $85.54
Occupancy 65.1% 71.1% 59.6% 64.7%
RevPAR $59.28 $62.77 $52.97 $55.37
----------------------------------------------------------
Note 1: RevPAR is a function of average daily room rate
and occupancy.
Note 2: The figures above reflect the 50% co-tenancy
arrangement and, as a result, include only 50% of
the operations of that property.
SECOND QUARTER
Hospitality Revenues
For the second quarter, total hospitality revenues were $33.8 million, down from $37.0 compared to the same quarter
in 2001. Room revenues were $1.1 million lower due to a decline in occupancy to 65.1% from 71.1%. Primarily due
to lower volumes at the hotels, food and beverage revenue was $728,000 lower compared to 2001. Other hospitality
revenues of $4.6 million, down from $6.0 million in the second quarter of 2001, reflect the continued restructuring
of timeshare operations.
Hospitality Expenses
Second quarter 2002 hospitality expenses at $23.1 million were $1.7 million lower than 2001, as management responded
to a decrease in sales by continuing to cut costs.
Operating Income
Operating income for the second quarter of 2002 was $10.7 million, compared to $12.2 million in the second quarter
of 2001. Operating margins were at 31.5% for the three months ended June 30, 2002 compared to 32.8% for the same
period of 2001.
Cash Available for Distribution
While total revenues were $3.2 million lower in the second quarter of 2002 compared to the same quarter of 2001,
the second quarter 2002 cash available for distribution at $7.2 million was only $1.1 million less than in the
same quarter of 2001. This reflects strong cost controls in an environment of disappointing revenue achievement.
Diluted cash available for distribution was $0.20 per unit in the second quarter of 2002 compared to $0.28 in 2001.
SIX MONTH RESULTS
Lower occupancies and a reduced emphasis on the timeshare business were mainly responsible for total hospitality
revenues being $4.8 lower for the six months ended June 30, 2002 compared to the same period in 2001.
Year to date 2002, management responded by cutting hospitality expenses by almost $2.0 million. However, operating
margins were still 2.3 percentage points lower for the six months ended June 30, 2002 compared to 2001.
For the first six months of 2002, Royal Host reported cash available for distribution of $9.2 million or $0.24
per unit diluted compared to $11.1 million or $0.39 per unit diluted during the same period in 2001.
Royal Host maintains a constant monthly distribution policy even though its business is highly cyclical throughout
the year. Royal Host makes most of its profit in the third quarter (July to September) which means Royal Host distributes
more cash than it makes in the first six months and less cash than it makes in the second half of the year.
Balance Sheet
As at June 30, 2002 Royal Host's balance sheet was in excellent condition with just under $26 million in cash balances
and a debt to gross book value ratio of 30.5%. As a result, Royal Host has more than $100 million in borrowing
capacity for future acquisitions.
Approximately $11.3 million of the cash on hand was used in July to acquire two hotel properties. Subsequent to
the end of the second quarter of 2002, Royal Host completed debt financing arrangements in the amount of $5 million.
Proceeds of this financing, which are expected to be drawn down in the latter part of 2002, will be used to renovate
hotels.
Corporate Development
On July 12, 2002 Royal Host completed the purchase of the Ramada Inn Belleville and the Holiday Inn Trenton. Combined,
the two properties have 233 rooms and both are leaders in their respective markets.
The two properties were purchased using $11.3 million in cash on hand and will provide Royal Host with a greater
than 13% return on its investment after replacement reserves and management fees.
Outlook
"The second quarter was disappointing in that our corporate business did not turn around. June was a particularly
difficult month, especially in the Ontario market. We remain optimistic that the latter half of 2002 will be an
improvement," says Mr. Royer.
"Our recent acquisitions are a perfect fit for our portfolio and will help improve our future results. In
addition, because of our low level of debt we still have acquisition capacity to further balance out our portfolio,"
added Mr. Royer. "We are taking this opportunity to continue to improve the quality of our existing hotel
portfolio by committing another $12 million for improving and repositioning our hotels. We expect to begin seeing
returns from this investment by the middle of 2003," continued Royer.
Royal Host will host a conference call today at 11:30 a.m. Eastern Time to discuss these results. Please dial 1-416-695-9714
or 1-877-323-2092 to access the call. You will be required to identify yourself and the organization on whose behalf
you are participating. Media will be in listen-only mode for the duration of the call. A recording of this call
will be made available beginning on August 8, 2002 through to August 15, 2002. To access the recording of this
conference call, please dial 1-416-695-9728 or 1-888-509-0081.
Royal Host REIT owns 38 hotels, manages 76 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's objective is to maximize 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".
This press release contains certain forward-looking statements relating, but not limited to, Royal Host's operations,
anticipated financial performance, business prospects and strategies. Forward-looking information typically contains
statements with words such as "anticipate", "believe", "expect", "plan"
or similar words suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties
and other factors, which could cause actual results to differ materially from future results expressed, projected
or implied by such forward-looking statements. Such factors include, but are not limited to economic, competitive
and lodging industry conditions. Royal Host disclaims any responsibility to update any such forward-looking statements.
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Financial Statements
For the six months ended June 30, 2002 and June 30, 2001
(unaudited)
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
$000 (unaudited)
As At
June 30, December 31,
2002 2001
----------------------
ASSETS
Current Assets
Cash and short-term investments (Note 4) 25,798 12,201
Accounts and notes receivable 8,228 8,348
Deposits and prepaid expenses 3,257 2,781
Inventories 3,499 3,471
----------------------
40,782 26,801
Capital Assets (Note 7) 320,944 327,250
Long-term Notes Receivable and Other Assets 4,384 3,730
----------------------
366,110 357,781
----------------------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities 18,272 15,595
Current portion of mortgages and
other debt (Note 8) 50,031 68,724
Current portion of capital leases (Note 9) 1,314 1,273
Distributions payable 1,663 1,636
Other current liabilities 1,847 2,140
----------------------
73,127 89,368
Mortgages and Other Debt (Note 8) 81,987 83,582
Capital Leases (Note 9) 1,640 2225
Future Income Taxes 1,118 883
Deferred Revenue 1,385 1,235
Equity (Note 10) 206,853 180,488
----------------------
366,110 357,781
----------------------
See accompanying Notes to Consolidated Interim Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Net (Loss) Earnings and
Cash Available for Distribution
For the six months ended June 30, 2002 and June 30, 2001
$000 (unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-----------------------------------
Hospitality Revenues
Rooms 23,446 24,514 41,600 43,430
Food and beverage 5,808 6,536 10,368 11,141
Other hospitality revenues 4,576 5,982 8,892 11,110
-----------------------------------
33,830 37,032 60,860 65,681
-----------------------------------
Hospitality Expenses 23,166 24,878 44,470 46,463
-----------------------------------
Operating Income 10,664 12,154 16,390 19,218
-----------------------------------
Other (Income) and Expenses
Interest income (136) (113) (219) (127)
Interest on mortgages
and other debt 3,117 3,470 6,422 7,272
Trust administration 444 404 841 806
Capital and future income taxes 242 189 360 365
Depreciation and amortization 4,642 4,513 8,994 9,301
-----------------------------------
8,309 8,463 16,398 17,617
-----------------------------------
Net (Loss) Earnings (Note 5) 2,355 3,691 (8) 1,601
Add: Depreciation and
amortization of capital assets 4,562 4,323 8,586 8,747
Add: Amortization of
deferred financing fees 80 190 408 554
Add (deduct): Future income tax
expense (recovery) 184 117 235 234
-----------------------------------
Cash Available
for Distribution (Note 2 (c)) 7,181 8,321 9,221 11,136
-----------------------------------
Per unit cash available for
distribution (Note 2 (c))
- basic (Note 5) 0.21 0.30 0.24 0.39
- diluted (Note 5) 0.20 0.28 0.24 0.39
See accompanying Notes to Consolidated Interim Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statement of Cash Flows
For the six months ended June 30, 2002 and June 30, 2001
$000 (unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------------------------------
CASH PROVIDED BY (USED IN)
Operating Activities
Net (loss) earnings 2,355 3,691 (8) 1,601
Items not affecting cash:
Depreciation and amortization
of capital assets 4,562 4,323 8,586 8,747
Future income tax
expense (recovery) 184 117 235 234
------------------------------------
Funds from operations 7,101 8,131 8,813 10,582
Change in non-cash working capital:
Increase (decrease) in accounts
and notes receivable (1,903) (1,665) 120 2,051
Increase in deposits
and prepaid expenses (116) (4) (476) (442)
Increase in inventories (113) (143) (28) (574)
Increase in accounts payable
and accrued liabilities 2,270 1,469 2,677 1,219
Decrease (increase) in other
current liabilities 38 713 (293) 194
------------------------------------
7,277 8,501 10,813 13,030
------------------------------------
Financing Activities
Additions to mortgages
and other debt - - - 1,206
Principal repayments on mortgages
and other debt and
capital leases (1,103) (2,250) (20,888) (9,962)
Issuance of trust units 22 2,558 22 22,559
Issuance of trust units
under distribution
reinvestment plan 174 - 321 -
Issuance of convertible
debenture - - 40,000 -
Unit issue costs (157) (207) (1,879) (1,298)
------------------------------------
(1,064) 101 17,576 12,505
------------------------------------
Investing Activities
Capital expenditures (1,145) (2,079) (2,224) (3,618)
Increase in long-term notes
receivable and other assets (603) (364) (654) (37)
Increase (decrease) in
deferred revenue 163 (421) 150 (326)
------------------------------------
(1,585) (2,864) (2,728) (3,981)
------------------------------------
Equity Distributions (6,335) (6,942) (12,064) (12,996)
------------------------------------
Net Change in Cash
and Short-term Investments (1,707) (1,204) 13,597 8,558
Cash and Short-term Investments,
beginning of period 27,505 16,561 12,201 6,799
------------------------------------
Cash and Short-term Investments,
end of period 25,798 15,357 25,798 15,357
------------------------------------
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Interim Financial Statements
As at June 30, 2002 and June 30, 2001
(unaudited)
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.
These consolidated interim financial statements follow the same accounting policies and methods as the most recent
annual financial statements, except for changes provided in Section 3062 - Goodwill and Other Intangible Assets
(Note 3(a)). These financial statements include all adjustments necessary to present fairly the results for the
interim period. Certain information and footnote disclosures normally included in the year-end consolidated financial
statements have been condensed or omitted. In the opinion of Management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have been included. Operating results for the six
months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2002 due to the seasonal nature of operations. These interim financial statements should be read in
conjunction with the most recent annual financial statements and notes included in the Company's annual report
for the year ended December 31, 2001.
2. SIGNIFICANT ACCOUNTING POLICIES
a) Capital Assets
Hotel properties are recorded at the lower of net book value or net recoverable amount. The net recoverable amount
represents the estimated 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 quarterly basis by
management and useful life estimates are revised, 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.
Effective January 1, 2002, Royal Host adopted the recommendations of the Canadian Institute of Chartered Accountants
("CICA") Handbook Section 3062 regarding Goodwill and Other Intangible Assets, which requires non-amortization
of goodwill (see Note 3 (a)), for years beginning after January 1, 2002.
b) Unit Option Plan
Royal Host has a unit option plan as described in Note 10(d). No compensation expense is recognized for the plan
when options are granted. Consideration received on exercise of options is credited to Unitholders' equity. See
Note 3 (b) for changes in accounting policy related to Stock Based Compensation Plans.
c) Non-GAAP Measures Reporting
Cash available for distribution is calculated as net earnings before depreciation and amortization of capital assets,
amortization of deferred financing fees and future income tax expense less the capital replacement reserve. This
amount is determined in accordance with the Declaration of Trust and is intended to approximate Royal Host's taxable
income, which is distributed to unitholders. Special charges and the capital replacement reserve are determined
at the discretion of the Board of Trustees. Readers are cautioned that cash available for distribution is not a
defined measure of performance under Canadian generally accepted accounting principles ("GAAP"). Royal
Host's calculation of cash available for distribution may be different than the calculation used by other entities.
3. CHANGES IN ACCOUNTING POLICY
a) Goodwill & Intangible Assets
Effective January 1, 2002, the Trust has adopted Section 3062 - Goodwill and Other Intangible Assets of the Handbook
of the CICA. In accordance with the changes provided in this section, Management has evaluated the goodwill balance
at January 1, 2002, totaling approximately $21.7 million, for reclassification to intangible assets versus the
traditional classification of goodwill. Upon evaluating goodwill, Management reclassified goodwill to two categories
of intangible assets: (1) franchise rights and management contracts, and (2) customer lists and intellectual and
human capital. Management evaluated the estimated useful lives of the corresponding intangible assets to ensure
the amortization periods being used appropriately reflected the period of remaining benefit. Effective January
1, 2002, intangible assets - franchise rights and management contracts have been amortized on a straight-line basis
over periods between three and ten years, with intangible assets - customer lists and intellectual and human capital
amortized on a straight-line basis over periods between one and seven years.
Intangible assets are recorded at the lower of net book value or net recoverable amount. Any permanent impairment
would be written down in the period identified and charged against earnings.
This change in accounting policy affects calculations of net earnings (loss) and net earnings (loss) per unit,
but does not impact cash available for distribution and cash available for distribution per unit calculations.
The following table depicts the impact of adopting this accounting policy:
For the six months ended: June 30, June 30,
2002 2001
(000's) (000's)
-----------------------
Loss per Unit
Adjusted basic net loss (note 5) (3,323) (783)
Items to reflect comparative pro forma 2001 balance:
Add: Goodwill amortization - 1,929
Less: Intangible assets amortization - 2001 pro
forma - (1,964)
-----------------------
Adjusted net loss (2001 pro forma) (3,323) (818)
-----------------------
-----------------------
Basic loss per unit
Adjusted net loss for per unit calculations (0.14) (0.04)
Add: Goodwill amortization - 0.09
Less: Intangible assets amortization - (0.09)
-----------------------
Adjusted net loss (0.14) (0.04)
-----------------------
-----------------------
Diluted loss per unit
Adjusted net loss for per unit calculations (0.14) (0.04)
Add: Goodwill amortization - 0.09
Less: Intangible assets amortization - (0.09)
-----------------------
Adjusted net loss (0.14) (0.04)
-----------------------
-----------------------
Weighted average units 24,312,257 22,230,718
b) Stock Based Compensation Plans
Effective January 1, 2002, the Trust adopted Section 3870 - Stock Based Compensation Plans of the Handbook of the
CICA with respect to the accounting and disclosure of stock based compensation plans, which recommends that awards
to employees be valued using fair-value method of accounting.
Under CICA Section 3870, companies that elect a method other than fair-value method of accounting are required
to disclose pro forma net income and earnings per share information, using a pricing model such as the Black-Scholes
model, as if the fair-value method of accounting had been used. These new rules do not apply to pre-existing awards
except for those awards that call for settlement in cash and other assets.
The adoption of Handbook Section 3870 has no financial impact to the Trust on the unit options, under the existing
unit option plan, which were issued prior to the date of adoption.
c) Foreign Currency Translation
Effective January 1, 2002, the Trust adopted the amendments to Section 1650 - Foreign Currency Translation of the
Handbook of the CICA. These amendments deal with elimination of the deferral and amortization for unrealized translation
gains and losses on non-current monetary assets and liabilities and the requirement to disclose the exchange gains
and losses included in net earnings.
The Trust has no material deferred unrealized translation gains or losses on non-monetary assets and liabilities,
and therefore required no adjustments to net earnings at January 1, 2002 or June 30, 2002.
4. RESERVED CASH
Included in cash is an amount of $2,541,000 (December 2001 - $3,194,000) of reserved cash representing funds on
deposit with lenders for future planned capital expenditures within the next 12 months.
5. PER UNIT COMPUTATIONS
There were 24,565,601 trust units outstanding as at June 30, 2002 (2001 - 24,091,012). Per unit computations are
based on the weighted average number of trust units outstanding for the period, after adjusting the net earnings
(loss) and cash available for distribution for payments on the convertible debentures of $2,180,000 (2001 - $871,000)
and payments on the redeemable partnership units of $1,135,000 (2001 - $1,513,000).
For the six months ended:
June 30, 2002 June 30, 2001
-------------------------- --------------------------
($000's) Weighted Per ($000's) Weighted Per
Average Unit Average Unit
Units Units
(000's) (000's)
Loss per unit
Net (loss) earnings (8) 1,601
Less:
Interest on
convertible
debentures (2,180) (871)
Distributions on
redeemable
partnership units (1,135) (1,513)
-------------------------- --------------------------
Basic loss per unit (3,323) 24,312 (0.14) (783) 22,231 (0.04)
Unit options 907 907
Unit option
repurchase (1,375) (1,470)
-------------------------- --------------------------
Diluted loss per
unit (3,323) 23,844 (0.14) (783) 21,668 (0.04)
-------------------------- --------------------------
Cash available for
distribution
Net (loss) earnings (8) 1,601
Add (deduct):
Depreciation and
amortization
of capital assets 8,586 8,747
Amortization of
deferred
financing fees 408 554
Future income tax
expense 235 234
Distributions on
redeemable
partnership units (1,135) (1,513)
Interest on
convertible
debentures (2,180) (871)
-------------------------- --------------------------
Basic and diluted
cash available for
distribution
per unit 5,906 24,312 0.24 8,752 22,231 0.39
-------------------------- --------------------------
For the three months ended:
June 30, 2002 June 30, 2001
------------------------------------------------------
($000's) Weighted Per ($000's) Weighted Per
Average Unit Average Unit
Units Units
(000's) (000's)
Earnings per unit
Net earnings 2,355 3,691
Less:
Interest on
convertible
debentures (1,362) (438)
Distributions on
redeemable
partnership units (567) (756)
------------------------------------------------------
Basic and diluted
earnings per unit 426 24,499 0.02 2,497 23,986 0.10
Cash available for
distribution
Net earnings 2,355 3,691
Add (deduct):
Depreciation and
amortization
of capital assets 4,562 4,323
Amortization of
deferred
financing fees 80 190
Future income tax
expense 184 117
Distributions on
redeemable
partnership units (567) (756)
Interest on
convertible
debentures (1,362) (438)
------------------------------------------------------
Basic cash available
for
distribution per
unit 5,252 24,499 0.21 7,127 23,986 0.30
Add back:
$22M convertible
units - - 438 2,091
$40M convertible
units 922 5,714 - -
Distributions on
redeemable
partnership units 567 3,152 756 3,151
------------------------------------------------------
Diluted cash
available for
distribution per
unit 6,741 33,365 0.20 8,321 29,228 0.28
------------------------------------------------------------------------
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 six months ended June
30, 2002 would have been $1,677,000 (2001 - $1,765,000). As Royal Host spent $2,209,000, excluding capital leases,
to date at June 30th in 2002 (2001 - $3,618,000) to renovate and reposition the hotel properties, the Trustees
have determined that no reserve would be provided for in 2002 and 2001.
Royal Host has complied with the new requirements of the CICA with respect to the calculation of earnings and diluted
earnings. Comparative figures have been restated to conform to these new accounting standards (Note 3 (a)).
6. 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.
7. CAPITAL ASSETS
(in $000's)
------------------------------------ --------
June 30, December
2002 31, 2001
------------------------------------ --------
Gross Accumulated Net Net
Book Depreciation Book Book
Value and Amortization Value Value
------------------------------------ --------
Land 37,303 - 37,303 37,303
Buildings 282,402 38,499 243,903 241,293
Furniture, fixtures and
equipment 39,411 24,255 15,156 16,874
Paving and other 1,195 297 898 1,043
------------------------------------ --------
360,311 63,051 297,260 296,513
Properties under development 2,924 - 2,924 9,008
Goodwill - - - 21,729
Intangible assets
-Franchise rights and
management contracts 27,528 8,952 18,576 -
-Customer lists and
intellectual and human
capital 7,270 5,086 2,184 -
------------------------------------ --------
398,033 77,089 320,944 327,250
------------------------------------ --------
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 5 and determined to be anti-dilutive.
For discussion of capital replacement reserves in 2002 and 2001, see Note 5.
8. MORTGAGES AND OTHER DEBT
(in $000's)
-----------------------------
June 30, December 31,
2002 2001
-----------------------------
Mortgages and other debt
secured by hotel properties 132,018 152,306
Less current portion 50,031 68,724
-----------------------------
Long-term obligations 81,987 83,582
-----------------------------
Twelve months ending June 30
(in 000's)
2003 50,031
2004 2,870
2005 2,458
2006 2,681
2007 2,857
Subsequent 71,121
-------------
132,018
-------------
-----------------------------
Supplementary Information: June 30, June 30,
2002 2001
-----------------------------
Cash interest paid in the period 6,352 7,133
-----------------------------
9. 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 June 30, 2002 are as follows:
(in $000's)
-----------------------------
June 30, December 31,
2002 2001
-----------------------------
Present value of future
minimum lease payments 2,954 3,498
Less current portion 1,314 1,273
-----------------------------
Long-term obligations 1,640 2,225
-----------------------------
Twelve months ending June 30
(in 000's)
2003 1,552
2004 1,023
2005 519
2006 195
2007 85
Subsequent 4
---------------
Future minimum lease payments 3,378
Amounts representing interest 424
---------------
Present value of future
minimum lease payments 2,954
---------------
10. EQUITY
(in $000's)
-------------------------------
June 30, December 31,
2002 2001
-------------------------------
Balance, beginning of period 130,988 128,276
Net (loss) earnings (8) 7,054
Issuance of trust units
-Public offering - 22,559
-Distribution reinvestment plan 321 144
-Employee unit purchase program
(Note 10(g)) 2,320 -
Employee loans pursuant to
employee unit purchase program
(Note 10 (g)) (2,298) -
Unit issue costs (1,879) (1,409)
Equity distributions on:
Trust units (8,776) (21,040)
Redeemable partnership units (1,135) (2,836)
Interest paid on convertible
debentures (2,180) (1,760)
-------------------------------
117,353 130,988
-------------------------------
Convertible Equity
Redeemable partnership units 27,500 27,500
Convertible debentures 62,000 22,000
-------------------------------
89,500 49,500
-------------------------------
Balance, end of period 206,853 180,488
-------------------------------
a) Unit Capital
Number
of units (in $000's)
-----------------------------
Balance, December 31, 2000 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
Issuance of trust units under
Employee unit purchase
program (Note 10(g)) 400,000 2,320
Distribution reinvestment plan 49,755 321
-----------------------------
Balance June 30, 2002 24,565,601 222,509
-----------------------------
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 six months ended June 30, 2002 was $9,221,000 (2001 - $11,136,000) and
distributions declared to Unitholders, excluding distributions on redeemable partnership units, aggregated $8,776,000
(2001 - $10,917,000) 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, Royal Host 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 June 30, 2002, Royal Host has unit options
outstanding to certain directors, employees and consultants to purchase an aggregated total of 907,500 units (2001
- 907,500 units), ranging from $10.00 to $10.50 per unit. In 2002 and 2001, the weighted average exercise price
is $10.03. These options expire on October 31, 2007 and on March 23, 2008. During 2002, no options were issued
or exercised, and no units expired.
The adoption of Handbook Section 3870 - Stock Based Compensation Plans has no financial impact on the stock options
under the existing stock option plan, which were issued prior to the date of adoption (see Note 3 (b)).
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
i) 8.00% Convertible Secured Debentures
The convertible debentures of $22,000,000 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.
ii) 9.25% Convertible Unsecured Subordinated Debentures
The convertible debentures of $40,000,000 bear interest at 9.25% per annum and are payable semi-annually in arrears
on March 1 and September 1 in each year commencing September 1, 2002. In addition, upon maturity in 2007, Royal
Host has the option to repay the debentures in either cash or in equivalent units of Royal Host. The number of
units to be issued will be determined by dividing the principal amount of the debentures by 95% of the current
market price of the units on the maturity date.
Based on certain conditions, the debentures are convertible at $7.00 per trust unit from date of issue to March
1, 2007.
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 approved Royal Host employees (excluding certain senior executives) were eligible to
finance the purchase of units from treasury at $5.80 per unit at that time.
On April 1, 2002, 400,000 units were issued under this plan. The employee unit purchase program represents a financing
program for selected employees to purchase units of Royal Host. Royal Host has recorded employee loans receivable
of $2,320,000 in respect to this transaction, which bear interest at a fixed rate of 5.0%, a rate established based
on consideration of existing institutional rates and Canadian Customs and Revenue Agency ("CCRA") guidelines
for employee loan rates at that time. This plan structure does not meet the definition of stock based compensation
plans, and therefore does not fall under the new Handbook Section 3870 - Stock Based Compensation Plans (Note 3
(b)).
In accordance with EIC ("Emerging Issues Committee") 44, for accounting purposes, these employee loans
receivable have been offset against the corresponding trust units equity.
11. COMMITMENTS
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 June 30, 2002 is approximately $3.2 million.
12. SUBSEQUENT EVENTS
a) Acquisitions
On July 12, 2002, Royal Host acquired 2 hotel properties from a single vendor, adding 233 guestrooms, for an aggregate
purchase price of $11,300,000. Cash consideration was paid from the net proceeds of the 9.25% Convertible Unsecured
Subordinated Debenture issued February 21, 2002.
b) Financing
On July 3, 2002, Royal Host completed financing arrangements in the amount of $5,000,000, the proceeds to be used
to renovate certain hotel properties. The loan is interest bearing at the bank's floating base rate, which is currently
6.0%. The loan is secured by first mortgages on the land and general security registered against certain hotel
properties.
13. COMPARATIVE FIGURES
Certain prior year's figures have been reclassified to conform with the presentation adopted for 2002; also certain
of the 2001 figures have been restated to reflect the adoption of new accounting methods.
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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