NEWS RELEASE TRANSMITTED BY CCNMatthews
FOR: ROYAL HOST REAL ESTATE INVESTMENT TRUST
TSX SYMBOL: RYL.UN RYL.DB
AUGUST 13, 2003 - 08:00 ET
Royal Host Announces Second Quarter Results for 2003
CALGARY, ALBERTA--Royal Host Real Estate Investment Trust (REIT)
today announced its financial results for the three and six
months ended June 30, 2003.
During the second quarter, the Canadian hotel industry was
negatively impacted by the cumulative effects of SARS, recent
airline turmoil and a sluggish economy.
Royal Host's 2003 second quarter revenues were positively
impacted by the recent acquisitions of the Belleville, Trenton
and Calgary hotels and the takeover of operations of the
Yellowknife hotel. As a result total hospitality revenues in
the second quarter of 2003, increased by $2.3 million or 6.7%
compared to the same quarter in 2002.
For the second quarter of 2003, total hospitality expenses
increased by $4.6 million year-over-year. More than $3.8 million
of this increase was due to the inclusion of the operating
results of the four above noted hotels. A further $550,000 of
one-time charges were also recognized in the second quarter.
For the portfolio as a whole, revenue per available room
("RevPAR") decreased by 3.9% to $56.97 in the second quarter of
2003. This decrease compares favorably against industry
statistics which indicate a year-over-year RevPAR decline of
15.7% in the quarter, nationally.
"While the effects of this downturn were somewhat mitigated by
our diversified portfolio and Royal Host's recent hotel
acquisitions, the negative impacts can clearly be seen in our
operating results." said R.B. Royer, President and CEO of Royal
Host. " Based on results to date, we do not assume a market
recovery in 2003, consequently, our Trustees felt it was prudent
to reduce our level of distribution and bring the payout ratio
more in-line with current trends. In addition, we are increasing
our focus on cost controls including immediate staff reductions
at head office and the hotel properties", continued Royer.
LIQUIDITY AND CAPITAL RESOURCES
Royal Host continues to maintain a reasonable level of liquidity,
with a $3.9 million cash balance and $4.9 million in undrawn bank
lines at the end of June 30, 2003. In addition Royal Host has
signed a mortgage term sheet with a lender to advance
approximately an additional $8.0 million to the REIT. This
transaction is expected to close in the third quarter of 2003.
The REIT also has additional borrowing capacity as the debt to
gross book value stood at 33.8% at quarter end compared to a
maximum allowable of 45%.
OUTLOOK
The short term outlook for the hospitality industry remains
challenging at best, due to economic turmoil, the impact of
"SARS" and political uncertainties. Despite these factors, Royal
Host's RevPAR compared favorably against the industry as a whole
in the first half of 2003. As we move forward into the future,
Royal Host's objective is to maintain a strong position of
liquidity, reduce its cost structure and continue to maintain the
quality of its' portfolio through renovations while looking for
accretive hotel acquisitions. Management remains optimistic
about Royal Host's long term prospects.
Hotel Statistics
/T/
-----------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
2003 2002 2003 2002
-----------------------------------------------------------------------
39 Hotel Portfolio
Occupancy 64.5% 65.1% 61.3% 59.6%
ADR $88.30 $91.10 $86.25 $88.81
RevPAR $56.97 $59.28 $52.87 $52.97
-----------------------------------------------------------------------
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.
/T/
Royal Host REIT owns 39 hotels, manages 77 properties and
franchises 116 locations for over 15,500 guestrooms in the
mid-market to upscale segments. Royal Host also operates 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.
A conference call will be held on Wednesday, August 13, 2003 at
11.30 am Eastern Standard Time. Investors and Analysts are
invited to access the call by dialing 1-877-323-2092 or
1-416-695-9724. You will be required to identify yourself and
whether you represent an organization or you are a private
investor. A recording of this call will be made available
beginning August 13, 2003 through August 19th, 2003. To access
the recording please dial 1-866-518-1010 or 1-416-252-1143.
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Financial Statements
For the six months ended June 30, 2003 and June 30, 2002
(Unaudited)
MANAGEMENT DISCUSSION AND ANALYSIS
In the first half of 2003, the war in Iraq, airline difficulties,
SARS and the sluggish economy have negatively impacted Royal
Host's operating results. The impact of these events became more
severe as the year progressed. In response, Royal Host reduced
distributions to unitholders in July 2003 from $.06 per unit per
month to $.02 per unit per month bringing total expected
distributions for calendar 2003 to $.48 per unit. This reduction
will preserve approximately $1.1 million in cash per month for
the REIT. Also, on a go forward basis, this will allow Royal
Host to establish a more conservative pay out ratio relative to
the cash that is generated from operations.
During the first six months of 2003, Royal Host's operating
results were positively impacted by the acquisition of the
Belleville, Trenton and Calgary hotels. The Belleville and
Trenton hotels were acquired in July of 2002 and the Calgary
hotel was purchased on April 1, 2003. Royal Host's six month
results were also impacted by the expiration of the lease and
take over of operations, for the Yellowknife hotel in November of
2002.
On April 1st 2003, Royal Host completed the purchase of the 160
room Calgary Best Western Village Park Inn. To help finance the
purchase, the Belleville and Trenton hotels were mortgaged for
gross proceeds of $6.1 million. The mortgages are repayable
after 10 years and have a rate of approximately 8.4% with a 20
year amortization.
Financial results for the three months ended June 30, 2003
HOSPITALITY REVENUES
Total hospitality revenues in the second quarter of 2003
increased by $2.3 million or 6.7% compared to the same quarter in
2002. The increase was due to the inclusion of the Belleville,
Trenton, Calgary and Yellowknife hotels' operating results in the
second quarter of 2003.
ROOM REVENUES
Room revenues in the second quarter of 2003 increased by $1.4
million compared to the second quarter of 2002 due to an
increased number of rooms in the hotel portfolio resulting from
the new acquisitions. For the portfolio as a whole however,
revenue per available room ("RevPAR") decreased year-over-year by
3.9% to $56.97 in the second quarter of 2003, as both occupancies
and average daily rates declined by 0.9% and 3.1% respectively.
FOOD AND BEVERAGE
The addition of food and beverage operations at the new
Belleville, Trenton, Calgary and Yellowknife properties resulted
in food and beverage revenues being $1.6 million higher in the
second quarter of 2003 compared to the same quarter in 2002. As a
result of the new additions, food and beverage revenues have
increased to 20.4% of total revenues in the second quarter of
2003 from 17.2% for the same quarter of 2002.
OTHER HOSPITALITY REVENUES
Other hospitality revenues decreased by $744,000 to $3.8 million
in the second quarter of 2003 from $4.5 million in the same
quarter of 2002. The decrease was due to reduced timeshare
revenues and lower lease revenue associated with the expiration
of the operating lease at the Yellowknife hotel on October 31,
2002.
HOSPITALITY EXPENSES
For the second quarter of 2003, total hospitality expenses
increased by $4.6 million compared to the second quarter of 2002.
More than $3.8 million of this increase was due to the addition
of the operating results of the three newly acquired hotels and
the takeover of the Yellowknife operations. Also, approximately
$550,000 in one-time charges related to receivable allowances,
severance and non-repeatable expenses were realized in the second
quarter of 2003.
GROSS MARGIN
Gross margin decreased to 23.2% in the second quarter of 2003
from 31.5% in the same period of 2002. The three newly acquired
hotels are partially responsible for the decrease in margins as
they have a higher proportion of food and beverage revenues and
consequently operate at lower margins than Royal Host's original
portfolio. As was previously noted, expiration of the Yellowknife
lease, which was in place for most of fiscal 2002, also had a
negative impact on the gross margin in the second quarter of
2003. In 2002 the Yellowknife hotel was leased to a third party
operator who paid Royal Host a flat lease amount of approximately
$500,000 per quarter. In 2003 Royal Host has recognized revenue
and expenses from the Yellowknife hotel based on actual operating
results. This has had the impact of reducing operating margins
for Royal Host in 2003, since the lease revenue in 2002 had no
associated costs.
OTHER (INCOME) AND EXPENSES
Total other (income) and expenses decreased by $577,000 in second
quarter 2003 compared to second quarter 2002. Major variances
include: higher interest expense; increased trust administration;
increased capital and other taxes; and a substantial recovery in
future income taxes and an unrealized foreign currency loss (both
non-cash items).
NET EARNINGS
Earnings in the second quarter of 2003 were $636,000 compared to
$2.4 million in the same quarter of 2002.
CASH AVAILABLE FOR DISTRIBUTION
After adjusting for interest payments on convertible debentures
and distributions on redeemable partnership units for the three
months ended June 30, 2003, cash available for distribution was
$2.1 million compared to $5.3 million in 2002. Distributions to
unitholders, excluding distributions on redeemable partnership
units, totaled $4.5 million ($4.5 million in 2002) for the same
period.
/T/
For the three months ended
June 30, 2003 June 30, 2002
($000's) ($000's)
-----------------------------------------------------------------------
Cash available for distribution
Net earnings 636 2,355
Add (deduct):
Amortization of capital assets 4,281 4,562
Amortization of deferred
financing fees 168 80
Unrealized loss on translation
of foreign subsidiaries 212 -
Future income tax (recovery) expense (1,281) 184
-----------------------------------------------------------------------
Cash available for distribution 4,016 7,181
Distributions on redeemable
partnership units (567) (567)
Interest on 8% convertible debentures (439) (439)
Interest on 9.25% convertible debentures (923) (923)
-----------------------------------------------------------------------
Basic adjusted cash available for
distribution 2,087 5,252
-----------------------------------------------------------------------
Per unit $ 0.08 $ 0.21
Weighted average units outstanding 24,690,000 24,499,000
/T/
Financial results for the six months ended June 30th 2003
HOSPITALITY REVENUES
Total hospitality revenues in the first six months of 2003
increased by $5.0 million or 8.3% compared to the same period in
2002. The increase was primarily due to the inclusion of the
Belleville, Trenton and Yellowknife hotels' operating results in
the first six months of 2003 and the Calgary Best Western
beginning April 1, 2003.
ROOM REVENUES
For the first six months of 2003, room revenues increased by $3.7
million due to the addition of rooms to the hotel portfolio.
RevPAR was relatively unchanged at $52.87 compared to $52.97
during the same period in 2002, as occupancy increased by 2.9%
and average daily rate decreased by 2.9% in 2003.
FOOD AND BEVERAGE
Year-over-year for the first six months of 2003, food and
beverage revenues increased by approximately $2.2 million,
predominantly due to the addition of food and beverage operations
at the Belleville, Trenton, Calgary and Yellowknife hotels.
OTHER HOSPITALITY REVENUES
Other hospitality revenues were $870,000 lower at $8 million in
the first six months of 2003 compared to $8.9 million in the same
period of 2002. During the first half of 2002, Royal Host
recognized $1 million in lease revenue associated with the
Yellowknife hotel, which was not recognized in the first half of
2003 due to the lease expiration on October 31, 2002. For the
first six months of 2003, the Yellowknife hotel's actual
operations were included in Royal Host's consolidated financial
results.
Approximately 57% of other hospitality revenues is generated
through the ownership and operation of hotel properties, with the
remaining portion generated by other hospitality-related
activities.
HOSPITALITY EXPENSES
Consolidating the operations of the four above-mentioned hotels
into the Royal Host portfolio was primarily responsible for the
$8.1 million increase in hospitality expenses during the first
six months of 2003. In addition, on a same store basis
year-over-year cost increases were experienced in energy,
insurance, labour and property taxes.
GROSS MARGIN
Gross margin decreased to 20.2% in the first six months of 2003
from 26.9% in the same period of 2002. Increased hospitality
expenses were partially responsible for the decrease in margins.
Expiration of the Yellowknife hotel lease had a negative impact
on Royal Host's 2003 gross margin as the lease revenue in 2002
had no associated costs. One-time expenses booked in the second
quarter of 2003 reduced margins as did the four additional hotel
operations, which historically operate at lower margins than
Royal Host's original portfolio.
OTHER (INCOME) AND EXPENSES
Total other (income) and expenses decreased by $2.9 million in
the first half of 2003 compared to 2002. Increases in mortgage
interest, trust administration, amortization, capital and other
taxes, an unrealized foreign currency loss and reduced interest
income were offset by a $3.7 million credit in future income
taxes. Future income taxes, which are a non-cash item and an
estimate, had a substantial recovery in the first half of 2003
compared to 2002.
NET LOSS
For the first six months of 2003, after deducting non-cash
expenses of $5.6 million, Royal Host recorded a loss of $249,000.
CASH AVAILABLE FOR DISTRIBUTION
After adjusting for interest payments on convertible debentures
and distributions on redeemable partnership units, for the first
six month of 2003, cash available for distribution was $1.5
million compared to $5.9 million in 2002. Distributions to
unitholders, excluding distributions on redeemable partnership
units, totaled $8.9 million ($8.8 million in 2002) for the same
period. The difference between cash available and distributions
of $7.4 million was financed out of borrowing and working
capital. This has been done to accommodate level monthly
distributions to unitholders throughout the year and is a common
practice with REIT'S and other income trusts. Royal Host's
business is highly cyclical throughout the calendar year, with
the first quarter of the year being the slowest and the third
quarter the most profitable. Consequently, it is not unusual for
the REIT to finance distributions in the first half of the year
since approximately 50% of the REIT'S annual cashflow is
generated in the third quarter of the year.
/T/
For the six months ended
June 30, 2003 June 30, 2002
($000's) ($000's)
-----------------------------------------------------------------------
Cash available for distribution
Net loss (249) (8)
Add (deduct):
Amortization of capital assets 8,793 8,586
Amortization of deferred
financing fees 352 408
Unrealized loss on translation
of foreign subsidiaries 212 -
Future income tax (recovery) expense (3,730) 235
-----------------------------------------------------------------------
Cash available for distribution 5,378 9,221
Distributions on redeemable
partnership units (1,135) (1,135)
Interest on 8% convertible debentures (872) (872)
Interest on 9.25% convertible debentures (1,836) (1,308)
-----------------------------------------------------------------------
Basic adjusted cash
available for distribution 1,535 5,906
-----------------------------------------------------------------------
Per Unit $ 0.06 $ 0.24
Weighted Average Units Outstanding 24,669,000 24,312,000
/T/
BALANCE SHEET
Assets
Current Assets
Cash and short-term investments decreased from $16.1 million at
December 31, 2002 to $3.9 million at June 30, 2003 a reduction of
$12.2 million. A portion of this reduction relates to the
purchase of the Calgary Best Western Village Park Inn which was
completed on April 1st, 2003 and approximately $8.2 million in
capital expenditures.
At June 30, 2003, total current assets decreased by $6.9 million
from December 31, 2002, consisting of the aforementioned decrease
in total cash, decrease in accounts and notes receivable, offset
by increases in property under development, inventories, deposits
and prepaids and future income taxes.
All of these changes are due to normal business activities. The
increase in property under development relates to the
construction of the Royal Private Residence Club ("PRC") at the
Grand Okanagan Lakefront Resort and Conference Center in Kelowna.
Restricted Cash
For 2003, Royal Host adopted the practice of classifying
restricted cash held by lenders as a non-current item. At June
30, 2003 restricted cash of $4.2 million (December 31, 2002 -
$4.2 million) represents a substantial portion of the year's
capital expenditure requirements for certain hotels.
Purchase of Capital Assets
On April 1, 2003, Royal Host purchased the Calgary Best Western
Village Park Inn, adding 160 guestrooms, for a purchase price of
$12.8 million. The operating results for this hotel were
included in Royal Host's financial statements in the second
quarter of 2003.
Capital Assets
Throughout the first half of 2003, Royal Host continued to make
substantial investments to its existing properties. Total
spending on capital expenditures was approximately $8.2 million
in the first half of 2003 versus $2.2 million in the same period
of 2002.
Liabilities and Equity
Current Liabilities
The current portion of mortgages and other debt increased to
$43.6 million at June 30, 2003 from $36.3 million at December 31,
2002.
Mortgages and Other Debt
During the first six months of 2003, Royal Host's long-term
portion of debt increased by $9 million to $113.9 million from
$104.9 million at December 31, 2002. Total mortgages and other
debt increased by $16.3 million to $157.5 million at June 30,
2003 compared to $141.2 million at December 31, 2002. During the
first half of 2003, Royal Host obtained debt financing totaling
$18.3 million, with funds advanced of $14.2 million as at June
30, 2003.
Equity
During 2003, Royal Host's equity decreased by $12.4 million to
$190.3 million at June 30, 2003 from $202.7 million at December
31, 2002. This decrease was mainly due to equity distributions
and interest paid on convertible debentures.
LIQUIDITY AND CAPITAL RESOURCES
Royal Host continues to maintain a reasonable level of liquidity,
with a $3.9 million cash balance and $4.9 million in undrawn bank
lines at the end of June 30, 2003. In addition Royal Host has
signed a mortgage term sheet with a lender to advance
approximately an additional $8.0 million to the REIT. This
transaction is expected to close in the third quarter of 2003.
The REIT also has additional borrowing capacity as the debt to
gross book value stood at 33.8% at quarter end compared to a
maximum allowable of 45%.
OUTLOOK
The short term outlook for the hospitality industry remains
challenging at best, due to economic turmoil, the impact of
"SARS" and political uncertainties. Despite these factors, Royal
Host's RevPAR compared favorably against the industry as a whole
in the first half of 2003. As we move forward into the future,
Royal Host's objective is to maintain a strong position of
liquidity, reduce its cost structure and continue to maintain the
quality of its' portfolio through renovations while looking for
accretive hotel acquisitions. Management remains optimistic
about Royal Host's long term prospects.
/T/
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Balance Sheets
$000's (Unaudited)
As At
June 30, December 31,
2003 2002
----------------------------------------------------------------------
ASSETS
Current Assets
Cash and short-term investments 3,884 16,106
Accounts and notes receivable 8,591 9,430
Deposits and prepaid expenses 4,765 3,783
Inventories 4,076 3,885
Future income taxes 3,620 195
----------------------------------------------------------------------
26,816 33,739
Restricted Cash (Note 3) 4,228 4,159
Capital Assets (Note 5) 340,124 327,818
Long-term Notes Receivable
and Other Assets 5,119 5,012
----------------------------------------------------------------------
376,287 370,728
----------------------------------------------------------------------
----------------------------------------------------------------------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities 21,629 18,366
Current portion of mortgages
and other debt (Note 6) 43,591 36,307
Current portion of capital leases (Note 7) 931 1,208
Distributions payable 1,672 1,667
Other current liabilities 1,771 2,118
----------------------------------------------------------------------
69,594 59,666
Mortgages and Other Debt (Note 6) 113,902 104,933
Capital Leases (Note 7) 825 1,125
Future Income Taxes 487 792
Deferred Revenue 1,200 1,478
Equity (Note 8) 190,279 202,734
----------------------------------------------------------------------
376,287 370,728
----------------------------------------------------------------------
----------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Statements of Net (Loss) Income
For the three and six months ended June 30, 2003 and June 30, 2003
$000's (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-----------------------------------------------------------------------
Hospitality Revenues
Rooms 24,876 23,446 45,248 41,600
Food and beverage 7,377 5,808 12,610 10,368
Other hospitality
revenues 3,832 4,576 8,024 8,892
-----------------------------------------------------------------------
36,085 33,830 65,882 60,860
-----------------------------------------------------------------------
Hospitality Expenses 27,717 23,166 52,584 44,470
-----------------------------------------------------------------------
Gross Margin 8,368 10,664 13,298 16,390
-----------------------------------------------------------------------
Other (Income) and Expenses
Interest income (30) (136) (113) (219)
Interest on mortgages and
other debt 3,514 3,117 6,656 6,422
Trust administration 685 444 1,145 841
Capital and other taxes 183 58 232 125
Future income taxes
(recovery) (1,281) 184 (3,730) 235
Amortization 4,449 4,642 9,145 8,994
Loss on translation
of foreign subsidiaries 212 - 212 -
-----------------------------------------------------------------------
7,732 8,309 13,547 16,398
-----------------------------------------------------------------------
Net (Loss) Income (Note 4) 636 2,355 (249) (8)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Per unit net (loss) income
- basic (Note 4) (0.05) 0.02 (0.17) (0.14)
- diluted (Note 4) (0.05) 0.02 (0.17) (0.14)
See accompanying Notes to Consolidated Interim Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Statements of Cash Flow
For the three and six months ended June 30, 2003 and June 30, 2002
$000's (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
-----------------------------------------------------------------------
CASH PROVIDED BY (USED IN)
Operating Activities
Net (loss) income 636 2,355 (249) (8)
Items not affecting cash:
Amortization of capital
assets 4,281 4,562 8,793 8,586
Future income tax
(recovery) expense (1,281) 184 (3,730) 235
Funds from operations
(Note 2) 3,636 7,101 4,814 8,813
-----------------------------------------------------------------------
Change in non-cash working capital:
Decrease (increase) in
accounts and notes receivable (289) (1,903) 839 120
Increase in deposits and
prepaid expenses (743) (116) (982) (476)
Increase in inventories (264) (113) (191) (28)
Increase in accounts payable
and accrued liabilities 2,818 2,270 3,263 2,677
(Decrease) increase in other
current liabilities
and deferred revenue (159) 201 (625) (143)
Amortization of deferred
finance costs 168 80 352 408
-----------------------------------------------------------------------
5,167 7,520 7,470 11,371
-----------------------------------------------------------------------
Financing Activities
Additions to mortgages and
other debt 7,560 - 18,963 -
Principal repayments on
mortgages and other debt
and capital leases (2,294) (1,103) (3,417) (20,888)
Payments on trust units under
employee unit purchase plan 37 22 74 22
Issuance of convertible
debentures - - - 40,000
Equity financing issue costs - (157) - (1,879)
Equity distributions
(Note 8(b)) (6,164) (6,161) (12,275) (11,743)
-----------------------------------------------------------------------
(861) (7,399) 3,345 5,512
-----------------------------------------------------------------------
Investing Activities
(Increase) decrease restricted
cash (Note 3) 120 756 (69) 653
Capital expenditures (5,227) (1,145) (20,969) (2,224)
Property under development (773) - (1,540) -
Increase in long-term notes
receivable and other assets 324 (683) (459) (1,062)
-----------------------------------------------------------------------
(5,556) (1,072) (23,037) (2,633)
-----------------------------------------------------------------------
Net Change in Cash
and Short-term Investments (1,250) (951) (12,222) 14,250
Cash and Short-term Investments,
beginning of period 5,134 24,208 16,106 9,007
-----------------------------------------------------------------------
Cash and Short-term Investments,
end of period 3,884 23,257 3,884 23,257
-----------------------------------------------------------------------
See accompanying Notes to Consolidated Interim Financial Statements
/T/
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Interim Financial
Statements As at June 30, 2003 and June 30, 2002
(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. 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,
2003 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2003 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 Royal Host's annual
report for the year ended December 31, 2002.
2. NON-GAAP MEASURES REPORTING
Funds from operations are calculated as the equivalent of
earnings before the amortization of capital assets and future
income tax (recovery) expense. This amount is determined in
accordance with the Canadian Institute of Public and Private Real
Estate Companies ("CIPREC") guidelines and is intended to present
the funds generated before changes in the non-cash balance sheet
operating accounts. It essentially displays the funds generated
using the accrual basis of accounting. Readers are cautioned that
funds from operations are not a defined measure of performance
under Canadian generally accepted accounting principles ("GAAP").
Royal Host's calculation of funds from operations may be
different than the calculation used by other entities.
3. RESTRICTED CASH
Restricted cash is $4,228,000 (December 31, 2002 - $4,159,000)
representing funds on deposit with lenders for future planned
capital expenditures within the next 12 months.
4. PER UNIT COMPUTATIONS
There were 24,713,807 trust units outstanding as at June 30, 2003
(2002 - 24,565,601). Per unit computations are based on the
weighted average number of trust units outstanding for the
period, after adjusting the net (loss) earnings for payments on
the convertible debentures of $2,708,000 (2002 - $2,180,000) and
payments on the redeemable partnership units of $1,135,000 (2002
- $1,135,000).
/T/
For the six months ended: June 30, 2003 June 30, 2002
---------------------- ------------------------
($000's)Weighted Per ($000's) Weighted Per
Average Unit Average Unit
Units Units
(000's) (000's)
---------------------- ------------------------
Loss
Net loss (249) (8)
Less:
Distributions on redeemable
partnership units (1,135) (1,135)
Interest on 8%
convertible debentures (872) (872)
Interest on 9.25%
convertible debentures (1,836) (1,308)
--------------------- -----------------------
Basic loss (4,092) 24,669 (0.17) (3,323) 24,312 (0.14)
--------------------- -----------------------
Unit options 907 907
Unit option repurchase (1,721) (1,375)
--------------------- -----------------------
Diluted loss (4,092) 23,855 (0.17) (3,323) 23,844 (0.14)
--------------------- -----------------------
For the three months ended: June 30, 2003 June 30, 2002
---------------------- ------------------------
($000's)Weighted Per ($000's) Weighted Per
Average Unit Average Unit
Units Units
(000's) (000's)
---------------------- ------------------------
(Loss) Earnings
Net Earnings 636 2,355
Less:
Distributions on redeemable
partnership units (567) (567)
Interest on 8%
convertible debentures (439) (439)
Interest on 9.25%
convertible debentures (923) (923)
--------------------- -----------------------
Basic (loss) earnings (1,293) 24,690 (0.05) 426 24,499 0.02
--------------------- -----------------------
Unit options 907 -
Unit option repurchase (1,788) -
--------------------- -----------------------
Diluted (loss) earnings (1,293) 23,809 (0.05) 426 24,499 0.02
--------------------- -----------------------
/T/
In computing the diluted loss per unit for the six months ended
June 30, 2003 and 2002, the convertible debentures and redeemable
partnership units had an anti-dilutive impact on earnings and
therefore did not impact the calculation.
In computing the diluted (loss) earnings per unit for the three
months ended June 30, 2003 and 2002, the convertible debentures
and redeemable partnership units had an anti-dilutive impact on
earnings and therefore did not impact the calculation. For the
three months ended June 30, 2002, unit options were also
anti-dilutive and excluded from that calculation.
/T/
5. CAPITAL ASSETS
(in $000's)
-----------------------------------
Gross Book Accumulated Net Book
Value Amortization Value
---------- ------------ --------
June 30, 2003
Land 41,365 - 41,365
Buildings 304,716 46,278 258,438
Furniture, fixtures and equipment 36,552 28,340 8,212
Furniture, fixtures and equipment
under capital leases 5,810 2,566 3,244
Paving and other 1,283 368 915
------- ------- -------
389,726 77,552 312,174
Properties under development 10,339 - 10,339
Intangible assets
Franchise rights and
management contracts 27,612 11,437 16,175
Customer lists and intellectual
and human capital 7,270 5,834 1,436
------- ------- -------
434,947 94,823 340,124
------- ------- -------
------- ------- -------
December 31, 2002
Land 38,233 - 38,233
Buildings 294,237 42,185 252,052
Furniture, fixtures and equipment 35,486 25,758 9,728
Furniture, fixtures and equipment
under capital leases 5,679 2,062 3,617
Paving and other 1,239 333 906
------- ------- -------
374,874 70,338 304,536
Properties under development 4,051 - 4,051
Intangible assets
Franchise rights and
management contracts 27,655 10,196 17,459
Customer lists and intellectual
and human capital 7,270 5,498 1,772
------- ------- -------
413,850 86,032 327,818
------- ------- -------
------- ------- -------
/T/
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 industry average historic capitalization
rate and the units of Royal Host are to be priced based on a 20
day weighted average trading price per unit. This specified
capitalization rate is not determined with reference to a
base-lending rate such as prime rate. This calculation has been
taken into consideration in the diluted per unit calculations in
Note 4 and determined to be anti-dilutive.
Royal Host purchased the Calgary Best Western Village Park Inn,
adding 160 guestrooms, for a purchase price of $12.8 million.
This transaction closed on April 1, 2003.
Under the Royal Host capital replacement reserve policy, 3% of
total hotel revenue is deducted from cash 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, 2003 would have been $1,877,000 (2002 - $1,677,000). As Royal
Host spent $8,172,000, excluding the purchase price for the Best
Western Village Park Inn and capital leases to June 30, 2003
(2002 - $2,224,000) to renovate and reposition the hotel
properties, the Trustees have determined that no reserve would be
provided for the six months ended June 30, 2003 and 2002.
/T/
6. MORTGAGES AND OTHER DEBT
(in $000's)
--------------------
June 30, December 31,
2003 2002
------- -----------
Mortgages and other debt secured
by hotel properties 157,493 141,240
Less current portion 43,591 36,307
------- -------
Long-term obligations 113,902 104,933
------- -------
------- -------
Years ending June 30 (in 000's)
2004 43,591
2005 2,874
2006 28,154
2007 3,351
2008 20,199
Subsequent 59,324
-------
157,493
-------
------- -------
Supplementary Information: June 30, June 30,
2003 2002
------- -------
Cash interest paid in the periods ending 6,397 6,352
------- -------
------- -------
/T/
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. The loan is secured by first mortgages
on the land and general security registered against certain hotel
properties. As at June 30, 2003, Royal Host had received net
advances of funds in the amount of $4,226,000 related to the
arranged financing.
On February 6, 2003, Royal Host completed financing in the amount
of $6.0 million, the proceeds to be used for general working
capital purposes. This is a revolving operating loan, repayable
on demand, available to the Trust at prime rate plus 2.0% payable
monthly in arrears or as a First Bank Acceptance with a Stamping
Fee of 3.0% per annum. The loan is secured by a certain hotel
property. As at June 30, 2003, Royal Host had received advances
of funds in the amount of $4,500,000 related to the arranged
financing.
On February 5, 2003, Royal Host completed financing in the amount
of $6.2 million, the proceeds to be used for working capital and
corporate purposes. This is an operating loan, repayable on
demand, bearing interest at prime plus 1% per annum, with
interest payable monthly. The loan is secured by a certain hotel
property. As at June 30, 2003, Royal Host had received net
advances of funds in the amount of $3,640,000 related to the
arranged financing.
On March 27, 2003, Royal Host completed two financings with one
lender in the amounts of $2.4 and $3.7 million, the proceeds to
be used for working capital and corporate purposes. These are 20
year term mortgage loans, secured by certain hotel properties.
The interest is adjusted semi-annually and is the greater of:
/T/
a) 3.2% over the yield on the Government of Canada mortgage
benchmark bond; and
b) A floor of 7.9% per annum.
/T/
All funds have been advanced by the lender.
Financing charges are deferred and amortized over the term of the
related debt. In 2003, $352,000 has been included in amortization
(2002 - $408,000).
7. OBLIGATIONS UNDER CAPITAL LEASES
Royal Host 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, 2003 are as follows:
/T/
------- -----------
June 30, December 31,
2003 2002
------- -----------
Present value of future minimum lease payments 1,756 2,333
Less current portion 931 1,208
----- -----
Long-term obligations 825 1,125
----- -----
----- -----
Years ending June 30 (in 000's)
2004 1,057
2005 564
2006 238
2007 97
2008 11
-----
Future minimum lease payments 1,967
Amounts representing interest 211
-----
Present value of future minimum lease payments 1,756
-----
-----
8.EQUITY
(in $000's)
--------------------
June 30, December 31,
2003 2002
------- -----------
Balance, beginning of period 113,234 130,988
Net (loss) earnings (249) 8,136
Issuance of trust units
Distribution reinvestment plan 422 720
Employee unit purchase program (Note 8(g)) - 2,320
Employee loans pursuant to
employee unit purchase program (Note 8(g)) - (2,320)
Employee loan payments pursuant to
employee unit purchase program (Note 8(g)) 74 95
Equity financing issue costs - (1,892)
Equity distributions
Trust units (8,859) (17,611)
Redeemable partnership units (1,135) (2,269)
Interest paid on convertible debentures (2,708) (4,933)
------- -------
100,779 113,234
------- -------
Convertible Equity
Redeemable partnership units 27,500 27,500
Convertible debentures 62,000 62,000
------- -------
89,500 89,500
------- -------
Balance, end of period 190,279 202,734
------- -------
------- -------
a)Unit Capital
Number
of units (in $000's)
---------- ---------
---------- ---------
Balance, December 31, 2001 24,115,846 219,868
Issuance of trust units
Employee unit purchase program (Note 8(g)) 400,000 2,320
Distribution reinvestment plan 119,130 720
---------- -------
Balance, December 31, 2002 24,634,976 222,908
Issuance of trust units
Distribution reinvestment plan 78,831 422
---------- -------
Balance, June 30, 2003 24,713,807 223,330
---------- -------
---------- -------
/T/
As is common with REITs and other income trusts, Royal Host
distributes cash in excess of the net earnings, and accordingly
an accumulated deficit results, which at June 30, 2003 amounts to
$122,316,000 (December 31, 2002 - 109,674,000).
b) Distributions to Unitholders
For the six months ended June 30, 2003, distributions declared to
Unitholders, excluding distributions on redeemable partnership
units, aggregated $8,859,000 (2002 - $8,776,000) for the same
period. The distributions to holders of redeemable partnership
units for 2003 was $1,135,000 (2002 - $1,135,000) and interest on
convertible debentures was $2,708,000 (2002 - $2,180,000).
On the consolidated statement of cash flows distributions paid
are net of distribution reinvestment plan contributions of
$422,000 for the six months ended June 30, 2003 (2002 -
$321,000). Accordingly, gross distributions for the period were
$12,702,000 (2002 - $12,091,000).
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, 2003, Royal Host has unit options
outstanding to certain directors, employees and consultants to
purchase an aggregated total of 907,500 units (2002 - 907,500
units), ranging from $10.00 to $10.50 per unit. In 2003 and 2002,
the weighted average exercise price is $10.03. All unit options
were issued prior to 1999 and were fully vested and exercisable
at June 30, 2003 and December 31, 2002. These options expire on
October 31, 2007 and on March 23, 2008. During 2003 and 2002, no
options were issued or exercised and no options 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.
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 on
the basis that one unit has a value equal to the weighted average
trading price of a unit on the Toronto Stock Exchange ("TSE") for
the twenty (20) trading days immediately preceding the maturity
date.
Based on certain conditions, the debentures are convertible, at
the holders' discretion, at $11.00 per trust unit for the period
from October 1, 2001 to maturity at 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.
On redemption or at maturity on March 1, 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. The term "current
market price" is defined in the Indenture to mean the weighted
average trading price of the units on the TSE for the twenty (20)
consecutive trading days ending on the fifth (5) trading day
preceding the date of maturity.
The debentures will not be redeemable on or before March 1, 2005.
Thereafter, the debentures will be redeemable, in whole at any
time or in part from time to time, at the option of Royal Host on
at least 30 days prior notice at a price equal to the principal
amount thereof, plus accrued and unpaid interest, provided that
the current market price preceding the date upon which notice of
redemption is given is at least 125% of the conversion price of
$7.00 per unit.
Based on certain conditions, the debentures are convertible, at
the holders' discretion, at $7.00 per trust unit from date of
issue to maturity at 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, the Trustees approved the issuance 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
Handbook Section 3870 - Stock Based Compensation Plans.
In accordance with EIC ("Emerging Issues Committee") 44, for
accounting purposes, these employee loans receivable have been
offset against the corresponding trust units equity.
9. CONTINGENT LIABILITIES
Effective December 18, 2001, Royal Host management, acting in its
capacity as manager of an unincorporated, independent 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 Society is not owned or controlled by
Royal Host. 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,
2003 is approximately $3.285 million.
10. COMPARATIVE FIGURES
Certain prior year's figures have been reclassified to conform
with the presentation adopted for 2003. Commencing December 31,
2002, Royal Host has adopted the practice of classifying
restricted cash held by lenders (see Note 3) as a non-current
item. This classification has been applied on a comparative
basis.
11. SUBSEQUENT EVENTS
On July 21, 2003, Royal Host announced a decrease in the monthly
distribution from $0.06 per unit to $0.02 per unit, effective for
the July 2003 distribution payable August 29, 2003 to the
unitholders of record as of August 15, 2003.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Royal Host Real Estate Investment Trust
Peter Sikora
Chief Financial Officer
(403) 259-9800
(403) 259-8580 (FAX)
Email: investorinfo@royalhost.com
Website: www.royalhost.com
