Press Release: Royal Host Real Estate Investment Trust
May 13, 2002
CALGARY, AB -- Royal Host Real Estate Investment Trust (REIT) has announced its financial results for the three
months ended March 31, 2002.
As expected, Royal Hosts' first quarter operating results reflect a continued weakness in corporate spending. During
the quarter, revenue per available room (RevPAR) was 2.8% lower than during the same period in 2001. This decline
in RevPAR in 2002 was the result of a 6.9% decrease in occupancy, which was partially offset by a 4.4% increase
in average daily rate.
Royal Host however outperformed the Canadian hotel industry as Pannell Kerr Forster reported a national RevPAR
decline of 4.4% during the first quarter of 2002.
"Although we outperformed the industry and controlled our costs well during the first quarter of 2002, Royal
Host has been negatively impacted by the sluggish economy," says R. B. Royer, President and CEO of Royal Host.
"The first quarter is our slowest and most dependant on the corporate traveler. The corporate travel market
is precisely the area of the economy that has been slow to recover," added Royer.
Hotel Statistics
-----------------------------------------------------------------------
For the First Quarter
2002 2001 % Change
-----------------------------------------------------------------------
36 Hotel Portfolio
ADR 86.23 82.60 4.4%
Occupancy 53.9% 57.9% (6.9%)
RevPAR 46.45 47.81 (2.8%)
-----------------------------------------------------------------------
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.
Hospitality Revenues
Total hospitality revenues declined by $1.6 million or 5.6% compared to the same quarter in 2001. This decline
was the result of a $762,000 reduction in room revenue, a $45,000 reduction in food and beverage sales and a $812,000
reduction in other hospitality revenues.
Ongoing changes to the timeshare business are largely responsible for the reduction in other hospitality revenues.
Hospitality Expenses
First quarter of 2002 hospitality expenses, at $21.3 million, were $281,000 lower than in 2001 despite cost increases
in property taxes (7.4% increase), insurance (81.4% increase) and utilities (6.4% increase) over the same period.
This confirms that Royal Host continues to manage its controllable expenses.
During the quarter, operating income was $5.7 million in 2002, or $1.3 million lower than the first quarter of
2001. Operating margins were at 21.18% for the three months ended March 31, 2002 compared to 24.66% for the same
period of 2001.
Other Expenses
Interest expenses of $3.3 million for the first quarter of 2002 reflect savings of almost $500,000 due to less
debt outstanding and lower interest rates. Trust administration expenses remained flat from the same quarter in
2001.
Cash Available for Distribution
Year over year cash available for distribution decreased by $775,000 to $2.0 million for the first quarter of 2002
from $2.8 million in 2001.
Balance Sheet
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 $38.1 million. Royal Host used $18.6 million of the net proceeds of the
debentures to reduce its outstanding bank indebtedness. The balance of the net proceeds will be used to upgrade
and reposition existing hotel properties, reduce other indebtedness, for working capital and general trust purposes
including acquisitions.
As at March 31, 2002, Royal Host's total cash position increased to $27.5 million, while current liabilities were
$18.6 million lower than at December 31, 2001.
Outlook
Pannell Kerr Forster ("PKF") forecasts that for the 2002 year, RevPAR will increase by 4.2% over 2001.
PKF believes that much of the demand lost, subsequent to the events of September 11, 2001, will be recovered in
2002. The recovery in demand levels will be enhanced by modest economic growth.
"With a strong balance sheet and an extremely low debt to gross book value ratio of 31.7%, Royal Host is well
prepared to weather this short downturn in the economy," says Royer. "In addition, we are poised to take
advantage of future growth opportunities in an improving economy.
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 Interim Financial Statements
For the three months ended March 31, 2002 and 2001
(unaudited)
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
$000(unaudited)
As At
March 31, December 31,
2002 2001
---------- -----------
ASSETS
Current Assets
Cash and short-term investments (Note 4) 27,505 12,201
Accounts and notes receivable 6,325 8,348
Deposits and prepaid expenses 3,141 2,781
Inventories 3,386 3,471
Future income tax 1,239 255
---------- -----------
41,596 27,056
Capital Assets (Note 7) 324,305 327,250
Long-term Notes Receivable and Other Assets 3,781 3,730
---------- -----------
369,682 358,036
---------- -----------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities 16,002 15,595
Current portion of mortgages
and other debt (Note 8) 50,011 68,724
Current portion of capital leases (Note 9) 1,304 1,273
Distributions payable 1,637 1,636
Other current liabilities 1,809 2,140
---------- -----------
70,763 89,368
Mortgages and Other Debt (Note 8) 82,828 83,582
Capital Leases (Note 9) 1,876 2,225
Future Income Taxes 2,173 1,138
Deferred Revenue 1,222 1,235
Equity (Note 10) 210,820 180,488
---------- -----------
369,682 358,036
---------- -----------
See accompanying Notes to Consolidated
Interim Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Net Loss and Cash Available for Distribution
For the three months ended March 31, 2002 and 2001
$000(unaudited)
Three Months Ended
March 31, March 31,
2002 2001
----------- ----------
Hospitality Revenues
Rooms 18,154 18,916
Food and beverage 4,560 4,605
Other hospitality revenues 4,316 5,128
----------- ----------
27,030 28,649
----------- ----------
Hospitality Expenses 21,304 21,585
----------- ----------
Operating Income 5,726 7,064
----------- ----------
Other (Income) and Expenses
Interest income (83) (14)
Interest on mortgages and other debt 3,305 3,802
Trust administration 397 402
Capital and future income taxes 118 176
Depreciation and amortization 4,352 4,788
----------- ----------
8,089 9,154
----------- ----------
Net Loss (Note 5) (2,363) (2,090)
Add: Depreciation and amortization of capital
assets 4,024 4,424
Add: Amortization of deferred financing fees 328 364
Add: Future income tax expense 51 117
----------- ----------
Cash Available for Distribution 2,040 2,815
----------- ----------
Per Unit Cash Available for Distribution
- basic (Note 5) 0.03 0.08
- diluted (Note 5) 0.03 0.08
See accompanying Notes to Consolidated
Interim Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
For the three months ended March 31, 2002 and 2001
$000(unaudited)
Three Months Ended
March 31, March 31,
2002 2001
----------- -----------
CASH PROVIDED BY (USED IN)
Operating Activities
Net loss (2,363) (2,090)
Items not affecting cash:
Depreciation and amortization
of capital assets 4,024 4,424
Future income tax expense 51 117
----------- -----------
Funds from operations 1,712 2,451
Change in non-working capital:
Decrease in accounts and notes receivable 2,023 3,716
Increase in deposits and prepaid expenses (360) (438)
Decrease (increase) in inventories 85 (431)
Increase (decrease) in accounts payable
and accrued liabilities 407 (250)
Decrease in other current liabilities (331) (519)
----------- -----------
3,536 4,529
----------- -----------
Financing Activities
Additions to mortgages and other debt - 1,206
Principal repayments on mortgages
and other debt and capital leases (19,785) (7,712)
Issuance of trust units - 20,001
Issuance of trust units under distribution
reinvestment plan 147 -
Issuance of 9.25% convertible debenture 40,000 -
Debenture and unit issue costs (1,722) (1,091)
----------- -----------
18,640 12,404
----------- -----------
Investing Activities
Capital expenditures (1,079) (1,539)
(Increase) decrease in long-term notes
receivable and other assets (51) 327
(Decrease) increase in deferred revenue (13) 95
----------- -----------
(1,143) (1,117)
----------- -----------
Equity Distributions (5,729) (6,054)
----------- -----------
Net Increase in Cash
and Short-term Investments 15,304 9,762
Cash and Short-term Investments,
beginning of period 12,201 6,799
----------- -----------
Cash and Short-term Investments,
end of period 27,505 16,561
----------- -----------
See accompanying Notes to Consolidated
Interim Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Interim Financial Statements
As at March 31, 2002 and 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 three
months ended March 31, 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 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.
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 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. See
Note 3 (b) for changes in accounting policy related to Stock Based Compensation Plans.
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 three months ended: March 31, March 31,
2002 2001
(000's) (000's)
--------------------------
Loss per Unit
Adjusted basic net loss (note 5) (3,749) (3,280)
Items to reflect comparative pro forma 2001
balance:
Add: Goodwill amortization - 961
Less: Intangible assets amortization - 2001
pro forma - (980)
--------------------------
Adjusted net loss (2001 pro forma) (3,749) (3,299)
--------------------------
Basic loss per unit
Adjusted net loss for per unit calculations (0.16) (0.16)
Add: Goodwill amortization - 0.05
Less: Intangible assets amortization - (0.05)
--------------------------
Adjusted net loss (0.16) (0.16)
--------------------------
Diluted loss per unit
Adjusted net loss for per unit calculations (0.16) (0.17)
Add: Goodwill amortization - 0.05
Less: Intangible assets amortization - (0.05)
--------------------------
Adjusted net loss (0.16) (0.17)
--------------------------
Weighted average units 24,122,807 20,455,745
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-market 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 March 31, 2002.
4. RESERVED CASH
Included in cash is an amount of $3,297,000 (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 24,138,035 trust units outstanding as at March 31, 2002 (2001 - 23,657,412). 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 $819,000 (2001 - $433,000)
and payments on the redeemable partnership units of $567,000 (2001 - $756,000).
For the three months ended:
March 31, 2002 March 31, 2001
----------------------------------------------------
($000's) Weighted Per ($000's) Weighted Per
Average Unit Average Unit
Units Units
(000's) (000's)
Loss per unit
Net loss (2,363) (2,090)
Less:
Interest on
convertible
debentures (819) (433)
Distributions on
redeemable
partnership units (567) (757)
----------------------------------------------------
Basic loss per unit (3,749) 24,123 (0.16) (3,280) 20,456 (0.16)
Unit options 907 962
Unit purchase
buy-back (1,396) (1,545)
----------------------------------------------------
Diluted loss per
unit (3,749) 23,634 (0.16) (3,280) 19,873 (0.17)
----------------------------------------------------
Cash available for
distribution
Net loss (2,363) (2,090)
Add (deduct):
Depreciation and
amortization
of capital assets 4,024 4,424
Amortization of
deferred
financing fees 328 364
Future income tax
expense 51 117
Distributions on
redeemable
partnership units (567) (757)
Interest on
convertible
debentures (819) (433)
----------------------------------------------------
Basic and diluted
cash available for
distribution per
unit 654 24,123 0.03 1,625 20,456 0.08
----------------------------------------------------
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 three months ended
March 31, 2002 would have been $590,000 (2001 - $766,000). As Royal Host spent $1,079,000, excluding capital leases,
to date in 2002 (2001 - $1,539,000) 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 (see 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)
------------------------------------------------
March 31, December 31,
2002 2001
------------------------------------------------
Accumulated
Gross Book Depreciation Net Book Net Book
Value and Amortization Value Value
------------------------------------------------
Land 37,303 - 37,303 37,303
Buildings 277,553 36,567 240,986 241,293
Furniture, fixtures and
equipment 37,934 22,411 15,523 16,874
Paving and other 1,195 279 916 1,043
------------------------------------------------
353,985 59,257 294,728 296,513
Properties under
development 8,619 - 8,619 9,008
Goodwill - - - 21,729
Intangible assets
- Franchise rights and
management contracts 19,285 603 18,682 -
- Customer lists and
intellectual and human
capital 2,444 168 2,276 -
------------------------------------------------
384,333 60,028 324,305 327,250
------------------------------------------------
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)
------------------------
March 31, December 31,
2002 2001
------------------------
Mortgages and other debt secured by
hotel properties 132,839 152,306
Less current portion 50,011 68,724
------------------------
Long-term obligations 82,828 83,582
------------------------
Twelve months ending March 31 (in 000's)
2003 50,011
2004 3,129
2005 2,405
2006 2,623
2007 2,309
Subsequent 72,362
------------------------
132,839
------------------------
------------------------
Supplementary Information: March 31, March 31,
2002 2001
------------------------
Cash interest paid in the period 3,211 3,998
------------------------
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 March 31, 2002 are as follows:
(in $000's)
------------------------
March 31, December 31,
2002 2001
------------------------
Present value of future minimum lease payments 3,180 3,498
Less current portion 1,304 1,273
------------------------
Long-term obligations 1,876 2,225
------------------------
Twelve months ending March 31 (in 000's)
2003 1,550
2004 1,176
2005 559
2006 253
2007 93
Subsequent 13
------------------------
Future minimum lease payments 3,644
Amounts representing interest 464
------------------------
Present value of future minimum lease payments 3,180
------------------------
10. EQUITY
(in $000's)
------------------------------
March 31, December 31,
2002 2001
------------------------------
Balance, beginning of period 130,988 128,276
Net (loss) earnings (2,363) 7,054
Issuance of trust units - public offering - 22,559
Issuance of trust units - distribution
reinvestment plan 147 144
Unit issue costs (1,722) (1,409)
Equity distributions on:
Trust units (4,344) (21,040)
Redeemable partnership units (567) (2,836)
Interest paid on convertible debentures (819) (1,760)
------------------------------
121,320 130,988
------------------------------
Convertible Equity
Redeemable partnership units 27,500 27,500
Convertible debentures 62,000 22,000
------------------------------
89,500 49,500
------------------------------
Balance, end of period 210,820 180,488
------------------------------
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
distribution reinvestment plan 22,189 147
-------------------------------
Balance March 31, 2002 24,138,035 220,015
-------------------------------
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 three months ended March 31, 2002 was $2,040,000 (2001 - $2,815,000) and
distributions declared to Unitholders, excluding distributions on redeemable partnership units, aggregated $4,344,000
(2001 - $5,135,000) 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 March 31, 2002, Royal Host has unit options
outstanding to certain directors, employees and consultants to purchase an aggregated total of 907,500 units (2001
- 962,500 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
For accounting purposes, the convertible debentures have equity characteristics and accordingly, they are classified
as equity instruments.
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.
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 are eligible to finance the purchase of units from treasury at
$5.80 per unit.
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 the REIT. 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 (see Note 3 (b)).
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 March 31, 2002 is approximately $3.2 million.
12. 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 standards.
-------------------------------------------------------------
Contact:
Royal Host Real Estate Investment Trust Peter Sikora Chief Financial Officer Phone: (403) 259-9800 Fax: (403) 259-8580 Website: www.royalhost.com Email: investorinfo@royalhost.com