NEWS RELEASE TRANSMITTED BY CCNMatthews
FOR: ROYAL HOST REAL ESTATE INVESTMENT TRUST
TSX SYMBOL: RYL.UN
TSX SYMBOL: RYL.DB
TSX SYMBOL: RYL.DB.A
NOVEMBER 9, 2004 - 09:15 ET
Royal Host Announces Continued Improvement in Results
for the Fourth Consecutive Quarter and Mortgage
Financing
CALGARY, ALBERTA--(CCNMatthews - Nov. 9, 2004) - Royal Host Real Estate
Investment Trust (TSX: RYL.UN)(TSX: RYL.DB)(TSX: RYL.DB.A), a
diversified hotel Real Estate Investment Trust (REIT), today announced
continued improvements in its third quarter results.
Operating margins continued to increase sharply, from 31.7% in the third
quarter of 2003 to 34.6% in the same quarter of 2004. Total revenues in
the third quarter of 2004 increased by $1.1 million or 2.7% compared to
the third quarter of 2003, while management continued to focus on
reducing costs.
For the portfolio as a whole, revenue per available room ("RevPAR")
increased by 3.7% to $70.23 in the third quarter of 2004 compared to the
third quarter of 2003. Occupancies increased by 1.1 percentage points
(1.5% increase) and average daily rate ("ADR") was $1.99 higher (2.2%
increase). Distributable cash from total operations increased by 15.1%
to $8.5 million in the third quarter of 2004 from $7.4 million in the
third quarter of 2003.
"We are delighted with our third quarter results and the solid
improvement in operating margins," commented Greg Royer, Royal Host's
Chief Executive Officer. "Although we were somewhat disappointed with
the overall increase in the level of Canadian tourism during the months
of July and August, indications are that we can expect to see further
growth opportunities in 2005, particularly in the third quarter."
"We are also very pleased with the initial benefits resulting from our
new business relationship with Humphrey Hospitality Trust, Inc.,"
continued Royer, "and we look forward to both Royal Host and Humphrey
Hospitality continuing to prosper from this arrangement."
Royal Host has completed a $25 million mortgage financing, secured by
the Hilton London and Chimo Ottawa properties in Ontario. The mortgage
has a five-year term and a fixed rate of 7.35%. Proceeds were used to
retire existing debt on these two properties, which had previously
matured.
Together with its Board of Trustees, Royal Host Management, will be
meeting at the end of November to review the Company's Strategic Plan
for 2005, after which the Company will announce a number of business
plan initiatives, including a decision on its distribution policy.
/T/
Hotel Statistics
---------------------------------------------------------------------
Three Months Ended
September 30
2004 2003 Change
---------------------------------------------------------------------
Total Operations
Occupancy 74.2% 73.1% 1.5%
ADR $ 94.66 $ 92.67 2.2%
RevPAR $ 70.23 $ 67.75 3.7%
Gross Margins 14,399 12,886 11.7%
Revenues 41,672 40,595 2.7%
Gross Margins (as a percentage of revenues) 34.6% 31.7% 8.9%
Distributable cash(1) 10,344 8,987 15.1%
Revenues 41,672 40,595 2.7%
Distributable cash
(as a percentage of revenues) 24.8% 22.1% 12.2%
Distributable cash 8,540 7,421 15.1%
Revenues 41,672 40,595 2.7%
Distributable cash/revenues 20.5% 18.3% 12.0%
Distributable cash per unit - Basic 0.35 0.30 16.7%
Distributable cash per unit - Fully diluted 0.26 0.25 4.0%
---------------------------------------------------------------------
((1)Before interest on convertible debentures and distribution on
redeemable partnership units)
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/
A conference call will be held on Wednesday, November 10, 2004 at 11:30
a.m. Eastern Standard Time. Investors and Analysts are invited to access
the call by dialling 1-877-323-2011 or 1-416-695-9726. You will be
required to identify yourself and whether you represent an organization
or you are a private investor. A record of this call will be made
available beginning November 10 through November 17, 2004. To access
this recording, please dial 1-866-518-1010 or 1-416-695-5275.
Royal Host REIT owns 39 hotels, manages 142 properties and franchises
120 locations for over 20,000 guestrooms in the mid-market to upscale
segments. Royal Host also owns the master franchise rights for
Travelodge in Canada and provides hotel and resort management services
for its portfolio and to third party owned properties.
Royal Host is committed to creating stable and repeatable earnings
through high quality assets, efficient operations and exceptional
people. Through strategic management and growth of its assets and
ongoing training, communication and teamwork, it will continue to
achieve ongoing improvements to its bottom line results. Royal Host
units, convertible debentures and convertible debentures series A, are
traded on the Toronto Stock Exchange under the trading symbols "RYL.UN",
"RYL.DB" and "RYL.DB.A", respectively.
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
(unaudited)
For the nine months ended September 30, 2004 and September 30, 2003
MANAGEMENT DISCUSSION AND ANALYSIS
The following Management's Discussion and Analysis (MD&A) of Operations
and Financial Condition relating to Royal Host's third quarter and nine
month financial statements dated September 30, 2004 is the
responsibility of management. The Board of Trustees carries out its
responsibility for review of this discussion and analysis principally
through its Audit Committee.
This MD&A should be read in conjunction with the consolidated financial
statements and notes for the three months and nine months ended
September 30, 2004. The consolidated financial statements are prepared
in accordance with Canadian generally accepted accounting principles
(GAAP).
OVERVIEW
On August 1, 2004 Royal Host successfully took over the management and
operations of 69 US based hotels owned by Humphrey Hospitality, a U.S.
based REIT. Under the terms of the management contract, Royal Host
receives a management fee based on a percentage of the gross sales of
the hotel properties. In 2004, the profit contribution from this
contract is expected to be lower in the first five months of the
contract due to a number of one time costs incurred in setting up the
new management operation which have been expensed.
In addition, during the quarter the Trust continued to negotiate the
potential sales of the four hotels it had previously designated as
property held for sale. The total sale value of these assets is
estimated to be $8.5 million. One of the transactions requires mortgage
lender approval and the second transaction is conditional on a rezoning
application. Royal Host expects to conclude transactions on these
properties in the next twelve months.
During the third quarter of 2004, Royal Host also entered into two
separate loan commitments. The first loan is for a $35 million mortgage
secured by the Grand Okanagan Lakefront Resort and Conference Centre
("The Grand"), funding expected to be completed in the fourth quarter of
2004. The second is a $25 million mortgage secured by the London Hilton
and Ottawa Chimo hotels, funding was completed November 8, 2004.
Proceeds from these financings will be used to retire an existing $30
million portfolio loan, which had previously matured, and a $25 million
mortgage scheduled to mature in the third quarter of 2005. Both loans,
totaling $55 million, are classified as current liabilities on the
balance sheet as at September 30, 2004.
The financing on The Grand is conditional on the completion of the
subdivision of a segment of property related to the joint venture
development at the hotel, which is almost complete as of the date of
this document.
Royal Host has adopted the new CICA Handbook Section 3475, Disposal of
Long-Lived Assets and Discontinued Operations. This section requires
that proposed disposals of long-lived assets be classified as held for
sale, and the results of operations and cash flows associated with the
assets disposed and held for sale be reported separately as discontinued
operations, net of applicable income taxes. Consequently, both current
and historic figures have been adjusted to separate the financial
results of these properties held for sale, from the results of the
REIT's continuing operations. These adjusted numbers, excluding the
operations of the hotels held for sale, have been used for all
year-over-year, quarterly and year-to-date comparisons in the MD&A.
Where appropriate, total results including those of the properties held
for sale have been used and clearly identified.
In April 2004, Royal Host completed the placement of a $35 million
unsecured subordinated convertible debenture. Proceeds of the offering
were used to retire an existing $22 million convertible secured
debenture, with the remaining funds being used for working capital and
general corporate purposes.
Both third quarter and year-to-date 2004 operating results from
continuing and total operations showed significant improvement over the
same periods in 2003. Most notably in 2004, sales have continued to
improve, while operating costs have been reduced or remained relatively
flat.
Year-to-date 2004 total revenues from continuing operations are up by
$4.6 million, an increase of 4.5% over the first nine months of 2003.
For the third quarter of 2004, total revenues are $1.7 million or 4.3%
higher than the same period in 2003. Simultaneously, year-to-date
operating costs were reduced slightly and showed a minor increase on a
quarterly basis. The net result has been that the third quarter of 2004
represents the fourth consecutive quarter of solid year-over-year
improvement in operating margins.
Adjusted cash available for distribution for the three and nine months
ended September 30, 2004 increased substantially by $1.1 million and
$4.8 million respectively over the comparable periods of 2003. Adjusted
cash available for distribution is a non-GAAP financial measure, and it
may not be directly comparable to similar measures presented by other
trusts.
SEASONALITY
The hospitality business is seasonal in nature and the third quarter
accounts for almost 30% of Royal Host's total yearly sales and exceeds
50% of the REIT's annual cash available for distribution. Profitability
in the third quarter is key since both the first and fourth quarters are
traditionally very weak.
/T/
FINANCIAL RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------------------------
Selected Quarterly
Financial Data September 30, 2004 September 30, 2003
-----------------------------------------------------------------------
($000's) ($000's)
Total Hospitality Revenues 41,673 40,595
Less Discontinued Operations (1,202) (1,794)
---------------------------------
Continuing Hospitality Revenues 40,471 38,801
---------------------------------
-----------------------------------------------------------------------
Total Hospitality Expenses 27,275 27,709
Less Discontinued Operations (773) (1,345)
---------------------------------
Continuing Hospitality Expenses 26,502 26,364
---------------------------------
-----------------------------------------------------------------------
Total Gross Margin 14,398 12,886
Less Discontinued Operations (429) (449)
---------------------------------
Continuing Operations Gross Margin 13,969 12,437
---------------------------------
Total Operating Margin 34.6% 31.7%
Continuing Operations Operating Margin 34.5% 32.1%
-----------------------------------------------------------------------
-----------------------------------------------------------------------
The following third quarter analysis relates to continuing operations
only, except where identified.
/T/
HOSPITALITY REVENUES
Hospitality revenues in the third quarter of 2004 increased by $1.7
million or 4.3% compared to the same quarter in 2003. The increase in
hospitality revenues was primarily due to a 4.2% improvement in revenue
per available room (RevPAR) across the hotel portfolio as well as
increases in food and beverage revenues and additional management fee
revenue due to the new management contract.
ROOM REVENUES
In the third quarter of 2004, room revenues from continuing operations
increased
by $1 million compared to the same quarter of 2003. This improvement was
due to a 2.1% increase in occupancies to 74.7% and a $1.98 increase in
average daily rate (ADR) to $96.37, which resulted in a 4.2% increase in
RevPAR.
/T/
------------------------------------------------------------------
RevPAR, Occupancy, ADR September 30, 2004 September 30, 2003
3 months 3 months
------------------------------------------------------------------
------------------------------------------------------------------
ADR - Continuing Operations $96.37 $94.39
Total Operations $94.66 $92.67
------------------------------------------------------------------
Occupancy - Continuing Operations 74.7% 73.2%
Total Operations 74.2% 73.1%
------------------------------------------------------------------
RevPAR - Continuing Operations $71.98 $69.07
Total Operations $70.23 $67.75
------------------------------------------------------------------
------------------------------------------------------------------
/T/
FOOD AND BEVERAGE REVENUES
Improved meeting room and conference business in the third quarter of
2004, resulted in a $266,000 increase in food and beverage revenues for
the continuing portfolio compared to the third quarter of 2003. Closing
the food and beverage operations at the Orillia hotel earlier this year
resulted in reduced food and beverage revenues in the total hotel
portfolio. These food services have been replaced by Travelodge's
standard complimentary continental breakfast program.
OTHER HOSPITALITY REVENUES
During the third quarter of 2004 other hospitality revenues increased by
$388,000 to $5.0 million compared to the same period of 2003. This
increase is primarily due to additional management revenues generated
from the new U.S. hotel management contract, which began on August 1,
2004.
HOSPITALITY EXPENSES
Hospitality expenses in 2004 showed only a marginal increase of $138,000
over the third quarter of 2003. Management feels it has successfully
maintained its focus on cost controls despite continued upward pressures
in numerous areas such as energy and wages.
GROSS MARGIN
With revenues increasing and costs staying relatively constant, gross
margin increased by $1.5 million or 12.3% in the third quarter of 2004,
compared to the same quarter of 2003. Operating margins also improved
significantly to 34.5% in the third quarter of 2004 from 32.1% in 2003,
an increase of 7.7%. For total operations, which include the operations
of the four properties held for sale, margins also rose in the third
quarter of 2004 to 34.6% from 31.7% in 2003, an improvement of 8.9%.
Royal Host's management has now been successful in improving the
year-over-year operating margins for four successive quarters.
OTHER (INCOME) AND EXPENSES
A $2.2 million reduction in a future income tax expense (a non-cash
item) resulted in other expenses being reduced by $1.7 million in the
third quarter of 2004 compared to the same period of 2003. Actual cash
expenses increased marginally by $127,000 year-over-year in 2004, due to
an increase in interest charges on mortgages and other debt.
/T/
NET EARNINGS (LOSS)
For the Three Months Ended September 30, 2004.
------------------------------------------------------------------------
Selected Quarterly Data September 30, 2004 September 30, 2003
------------------------------------------------------------------------
Net Earning (Loss) ($000's)
- Total Operations 5,044 1,634
- Continuing Operations 4,593 1,387
(Note 6 to financial statements)
------------------------------------------------------------------------
Adjusted Net Earnings (Loss) Per Unit
Continuing Operations
- Basic $0.11 ($0.01)
- Fully Diluted $0.11 ($0.01)
------------------------------------------------------------------------
------------------------------------------------------------------------
Primarily due to the substantial improvement in hotel operations, Royal
Host's net earnings increased by $3.2 million in the third quarter of
2004, over the same period in 2003.
CASH AVAILABLE FOR DISTRIBUTION
For the Three Months Ended September 30, 2004
-----------------------------------------------------------------------
Adjusted Cash Available
for Distribution for
the three months: September September September September
30, 30, 30, 30,
2004 2004 2003 2003
Continuing Total Continuing Total
Operations Operations Operations Operations
-----------------------------------------------------------------------
-----------------------------------------------------------------------
000's 000's 000's 000's
Basic earnings 2,789 3,240 (179) 68
(Note 6 financial statements)
Add non-cash items (1) 5,353 5,330 7,154 7,353
Deduct draw down of tax
allowance (30) (30) - -
-------------------------------------------
Adjusted cash available
for distribution from
operations (2) 8,112 8,540 6,975 7,421
-------------------------------------------
-------------------------------------------
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Basic per unit cash
available for
distribution: $0.33 $0.35 $0.28 $0.30
Fully diluted per unit cash
available for
distribution: $0.25 $0.26 $0.24 $0.25
Note (1) Includes amortization
of capital assets,
amortization for deferred
finance charges, unrealized
gain/loss on translation of
foreign subsidiaries and
future income taxes.
Note (2) Adjusted cash
available for distribution
is calculated after interest
payments on convertible
debentures and distributions
on redeemable partnership
units.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
/T/
For the third quarter of 2004, adjusted cash available for distribution
from total operations was $8.5 million, an increase of $1.1 million or
15.1% over the same quarter of 2003. Adjusted cash available for
distribution from continuing operations was $8.1 million or $1.1 million
(16.3%) greater than the comparable quarter of 2003. This is the fourth
consecutive quarter of year-over-year improvement in adjusted cash
available for distribution.
FINANCIAL RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
/T/
HOSPITALITY REVENUES
-----------------------------------------------------------------------
Nine Months Ended
September 30, 2004 September 30, 2003
-----------------------------------------------------------------------
000's 000's
Total Hospitality Revenues 109,726 106,477
Less Discontinued Operations (2,978) (4,370)
Hospitality Revenues from -------------------------------------------
Continuing Operations 106,748 102,107
-------------------------------------------
/T/
Hospitality revenues in the first nine months of 2004 increased by $4.6
million or 4.6% compared to the same period in 2003. The increase is
largely due to improved year-over-year hotel operating conditions.
Higher revenues were also recorded due to the inclusion of nine months
of operations in 2004 for the Calgary Best Western hotel, versus only
six months beginning April 1, in 2003, and the new management contract,
which began on August 1, 2004.
ROOM REVENUES
For the first nine months of 2004, room revenues increased by $4.2
million due to a 5.5% improvement in RevPAR, to $62.49 from $59.25 in
the same period of 2003. Occupancy increased by 2.3 percentage points
and the average daily rate increased by $1.58 to $91.83 compared to 2003.
FOOD AND BEVERAGE REVENUES
Nine-month food and beverage revenues in 2004 increased by $625,000
year-over-year compared to 2003. Part of the increase is due to the
additional food and beverage operations at the Calgary Best Western
hotel as well as improved revenues at Travelodge Ottawa West, The Grand
and London Hilton hotels.
OTHER HOSPITALITY REVENUES
Year-to-date, other hospitality revenues were $231,000 lower in 2004
compared to 2003. This reduction is primarily due to the continuing
restructuring of the timeshare operations, especially in the first two
quarters of 2004. The reduction in timeshare revenues was partially
offset by an increase in management fees from the new management
contract.
/T/
HOSPITALITY EXPENSES
-----------------------------------------------------------------------
Nine Months Ended
September 30, 2004 September 30, 2003
-----------------------------------------------------------------------
($000's) ($000's)
Total Hospitality Expenses 78,833 80,293
Hospitality Expenses from Continuing
Operations 76,313 76,603
-----------------------------------------------------------------------
/T/
During the first nine months of 2004, hospitality expenses were $290,000
lower than in 2003. On a comparative basis, the reduction in costs is
actually greater than it looks since the 2004 results include nine
months of operating expenses from the Calgary Best Western Hotel
compared to only six months in 2003.
/T/
GROSS MARGIN
-----------------------------------------------------------------------
Nine Months Ended
September 30, 2004 September 30, 2003
-----------------------------------------------------------------------
($000's) ($000's)
Total Gross Margins 30,893 26,184
Gross Margin from Continuing
Operations 30,435 25,504
Operating Margin
Total Operations 28.2% 24.6%
Continuing Operations 28.5% 25.0%
-----------------------------------------------------------------------
/T/
For the first nine months of 2004, gross margin from continuing
operations increased by 19.3% or $4.9 million compared to the same
period in 2003. Operating margins for continuing operations also
improved to 28.5% from 25.0% in 2003, an improvement of 14.1%.
OTHER (INCOME) AND EXPENSES
Other (income) expenses increased by $407,000 during the first nine
months of 2004. Interest on debt increased by $494,000 from 2003,
reflecting a greater amount of debt in 2004. This increase was partially
offset by lower Trust administration expenses and capital and other
taxes.
/T/
NET EARNINGS (LOSS)
-----------------------------------------------------------------------
Nine Months Ended
September 30, 2004 September 30, 2003
-----------------------------------------------------------------------
($000's) ($000's)
Net Earnings (Loss)
Total Operations 5,742 1,385
Continuing Operations 5,587 1,063
Basic Per Unit Earnings:
Total Operations $0.03 ($0.16)
Continuing Operations $0.02 ($0.17)
Fully Diluted Per Unit Earnings:
Total Operations $0.03 ($0.17)
Continuing Operations $0.02 ($0.18)
-----------------------------------------------------------------------
/T/
Net earnings from continuing and total operations improved by $4.5
million and $4.4 million respectively, during the first nine months of
2004, compared to the same period in 2003.
CASH AVAILABLE FOR DISTRIBUTION
After adjusting for interest payments on convertible debentures and
distributions on redeemable partnership units for the nine months ended
September 30, 2004, cash available for distribution improved by $4.8
million from continuing operations and by $4.7 million from total
operations, compared to the same period of 2003. Included in the nine
months ended September 30, 2004, adjusted cash available for
distribution, is a cash gain on disposition of $196,000.
/T/
CASH AVAILABLE FOR DISTRIBUTION
-----------------------------------------------------------------------
Cash Available for September September September September
Distribution for the 30, 30, 30, 30,
Nine Months ended: 2004 2004 2003 2003
Continuing Total Continuing Total
Operations Operations Operations Operations
-----------------------------------------------------------------------
-----------------------------------------------------------------------
000's 000's 000's 000's
Basic earnings 487 642 (4,345) (4,023)
(Note 6 - Financial
Statement)
Add non-cash items (1)
deducted from earnings 12,782 13,268 12,630 12,980
Deduct drawdown of tax
allowance (221) (221) - -
-----------------------------------------------------------------------
Adjusted cash available
for distribution from
operations: (2) 13,048 13,689 8,285 8,957
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Basic per unit cash
available for
distribution: $0.53 $0.56 $0.34 $0.36
Fully diluted per unit
cash available for
distribution: $0.48 $0.50 $0.34 $0.36
Note (1) Includes
amortization of capital
assets, amortization for
deferred finance charges,
unrealized gain/loss on
translation of foreign
subsidiaries and future
income taxes.
Note (2) Adjusted cash
available for distribution
is calculated after
interest payments on
convertible debentures and
distributions on
redeemable partnership
units.
-----------------------------------------------------------------------
-----------------------------------------------------------------------
/T/
BALANCE SHEET
ASSETS
Current Assets
Cash and short-term investments as at September 30, 2004 were $9.3
million compared to $5.2 million at December 31, 2003, an improvement of
$4.1 million. The increase is partially due to seasonality as well as
the impact of the $35 million convertible debenture completed in April.
At September 30, 2004, total current assets increased by $19.7 million
from December 31, 2003, consisting of the aforementioned increase in
total cash, as well as increases in accounts and notes receivable,
deposits and prepaid expenses, property under development, future income
taxes and the reclassification of the four properties held for sale. The
increase in property under development relates to the Royal Private
Residence Club ("PRC") project at The Grand in Kelowna, which is planned
to be sold to third party purchasers as privately owned, luxury
condominiums. The increased future income taxes asset represents
operating losses available to reduce future taxable income.
Restricted Cash
Royal Host classifies restricted cash held by lenders as a non-current
item. At September 30, 2004, restricted cash was $5.6 million and
represents a substantial portion of the year's capital expenditure
requirements for certain hotels and will be drawn down on an ongoing
basis as part of a planned capital program.
Capital Assets
Throughout the first nine months of 2004, Royal Host continued to invest
in its existing hotel properties. Spending on capital expenditures and
property under development totaled $4.4 million and $3.3 million
respectively. The current capital expenditure program is expected to
total approximately $8.5 million in 2004, some of which will not be
completed until 2005.
LIABILITIES AND EQUITY
Current Liabilities
Current liabilities of $85 million at September 30, 2004, increased from
$61.2 million at December 31, 2003. The main reason for the increase is
the reclassification of the $25 million mortgage on The Grand from
long-term to current debt. The mortgage is scheduled to mature in
September of 2005. Royal Host has already received a commitment from the
existing lender, effectively increasing the principal amount to $35
million and extending the maturity date to 2009. This loan is expected
to be funded in the fourth quarter of 2004.
Also during the third quarter of 2004, Royal Host entered into a $25
million first mortgage loan commitment to be secured by the London
Hilton and Ottawa Chimo hotels. This financing was completed and funded
on November 8, 2004.
Both these financings would effectively retire $55 million in debt
presently classified as current liabilities. Any additional proceeds,
net of expenses, will be used as working capital for the REIT.
Changes to other current liabilities reflect normal seasonal adjustments
from the hotel business.
Mortgages and Other Debt
During the first nine months of 2004, Royal Host's long-term portion of
debt decreased by $27.3 million to $94.4 million from $121.7 million at
December 31, 2003. The main reason for this large decrease was the
reclassification of the $25 million mortgage on The Grand, as noted
above. Total mortgages and other debt, including the current portion,
decreased by $5.9 million to $155.3 million at September 30, 2004
compared to $161.2 million at December 31, 2003 reflecting stronger
operating results and a stronger balance sheet.
Equity
During the first nine months, Royal Host's equity increased by $7.8
million to $190.7 million at September 30, 2004 from $182.9 million at
December 31, 2003. Equity increased primarily due to the issuance of
convertible debentures in the second quarter of 2004, as well as a
significant turn around in earnings.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, Royal Host has $9.3 million in cash and short
term investments and $12.3 million in undrawn working capital bank
lines. The REIT also has additional borrowing capacity as the debt to
gross book value stood at 32.4% at the end of the third quarter 2004
compared to a maximum allowable of 45%.
Based on operating results to date, Royal Host can easily support the
current level of cash distributions to unitholders, as well as meet its
capital expenditure and working capital requirements. Assuming no
significant deterioration in operating results from the current level,
Royal Host has sufficient resources to meet its liquidity requirements
for the next 12 months.
INTERPRETATION OF OUR FINANCIAL RESULTS
Significant Accounting Policies
The critical accounting policies utilized in the interim financial
statements remain consistent with those disclosed in the December 31,
2003 financial statements of Royal Host, with the exception of the
adoption of CICA Handbook Section 3475, Disposal of Long-Lived Assets,
as previously discussed.
Significant Estimates and Assumptions
The preparation of the consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements and revenue and expenses for the reported periods.
Areas of significant estimates and assumptions by management include the
carrying values of capital assets and property under construction,
deferred charges and intangibles, accounts receivable and notes
receivable, future tax balances, amortization, allocation of the joint
venture costs and fair values of financial instruments. Actual results
could differ from those estimates.
Off Balance Sheet Arrangements
As at September 30, 2004, Royal Host had no undisclosed off balance
sheet arrangements.
OUTLOOK
Management will continue to focus on improving revenues, reducing costs
and improving operating margins, with the objective of maintaining a
strong position of liquidity, maintaining the quality of its hotel
portfolio through renovations, and looking for accretive hotel
acquisitions. On August 1, 2004, Royal Host successfully took over
management of 69 U.S. hotel properties pursuant to a newly acquired
management contract. Management believes that this contract will
contribute positively to Royal Host's future profitability. Assuming no
significant deterioration in operating results from the current level,
Royal Host has sufficient resources to meet its liquidity requirements
for the next 12 months. We should be well positioned to continue to
improve our balance sheet as well as pursue accretive acquisition
opportunities.
/T/
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Balance Sheets
$000's
(unaudited)
As At
September 30, December 31,
2004 2003
-----------------------------
ASSETS
Current Assets
Cash and short-term investments 9,312 5,183
Accounts and notes receivable 10,124 8,609
Deposits and prepaid expenses 5,582 3,453
Inventories 3,700 3,739
Property held for sale (Notes 2 and 4) 8,533 -
Property under development (Note 3) 5,362 2,068
Future income taxes 726 583
-----------------------------
43,339 23,635
Restricted Cash (Note 5) 5,626 4,247
Capital Assets (Note 7) 321,638 338,336
Long-term Notes Receivable and
Other Assets 2,704 3,297
-----------------------------
-----------------------------
373,307 369,515
-----------------------------
-----------------------------
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable and accrued liabilities 21,004 18,330
Current portion of mortgages and
other debt (Note 8) 60,903 39,515
Current portion of capital leases (Note 9) 635 864
Distributions payable 559 558
Other current liabilities 1,796 1,929
-----------------------------
84,897 61,196
Mortgages and Other Debt (Note 8) 94,371 121,650
Capital Leases (Note 9) 1,079 1,490
Future Income Taxes 1,460 1,350
Deferred Revenue 797 963
Equity (Note 10) 190,703 182,866
-----------------------------
-----------------------------
373,307 369,515
-----------------------------
-----------------------------
See accompanying Notes to Consolidated Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Statements of Net Earnings
For the nine months ended September 30, 2004 and September 30, 2003
$000's
(unaudited)
Three Months Ended Nine Months Ended
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
---------------------------------------------
Hospitality Revenues
Rooms 29,388 28,372 76,237 71,990
Food and beverage 6,131 5,865 18,484 17,859
Other hospitality revenues 4,952 4,564 12,027 12,258
---------------------------------------------
40,471 38,801 106,748 102,107
---------------------------------------------
Hospitality Expenses 26,502 26,364 76,313 76,603
---------------------------------------------
Gross Margin 13,969 12,437 30,435 25,504
---------------------------------------------
Other (Income) and Expenses
Interest income (22) (21) (50) (134)
Interest on mortgages and
other debt 3,529 3,409 10,556 10,062
Trust administration 465 459 1,420 1,604
Capital and other taxes 52 50 140 279
Future income taxes (recovery) 1,065 3,229 129 (321)
Amortization 4,143 4,039 12,563 12,893
Gain on foreign currency
translation 144 (115) 90 58
---------------------------------------------
9,376 11,050 24,848 24,441
---------------------------------------------
Earnings from
continuing operations
(Note 6) 4,593 1,387 5,587 1,063
Earnings from discontinued
operations, net of tax
(Notes 4 and 6) 451 247 155 322
---------------------------------------------
Net earnings 5,044 1,634 5,742 1,385
---------------------------------------------
---------------------------------------------
Basic per unit net
earnings
- from continuing
operations 0.11 (0.01) 0.02 (0.17)
- from discontinued
operations 0.02 0.01 0.01 0.01
---------------------------------------------
Basic per unit net
earnings (Note 6) 0.13 - 0.03 (0.16)
---------------------------------------------
Diluted per unit net
earnings
- from continuing
operations 0.11 (0.01) 0.02 (0.18)
- from discontinued
operations 0.02 0.01 0.01 0.01
---------------------------------------------
Diluted per unit net
earnings (Note 6) 0.13 - 0.03 (0.17)
---------------------------------------------
---------------------------------------------
See accompanying Notes to Consolidated Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Interim Statements of Cash Flows
For the nine months ended September 30, 2004 and September 30, 2003
$000's
(unaudited)
Three Months Ended Nine Months Ended
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
---------------------------------------------
CASH PROVIDED BY (USED IN)
Operating Activities
Net earnings 5,044 1,634 5,742 1,385
Net (earnings) on
discontinued operations
(Note 4) (451) (247) (155) (322)
Items not affecting cash:
Amortization of capital
assets 3,986 3,887 12,101 12,389
Future income tax
expense(recovery) 1,065 3,229 129 (321)
---------------------------------------------
9,644 8,503 17,817 13,131
Change in non-cash working
capital:
Increase in accounts and
notes receivable (1,838) (1,252) (1,515) (671)
Increase in deposits and
prepaid expenses (75) (57) (2,040) (1,039)
(Increase) decrease in
inventories (116) 221 39 30
Increase (decrease) in
accounts payable and accrued
liabilities 2,098 (2,293) 2,674 822
Decrease in other current
liabilities and deferred
revenue (192) (135) (296) (760)
Amortization of deferred
finance costs 157 152 462 504
---------------------------------------------
Cash flows from continuing
operations 9,678 5,139 17,141 12,017
Funds from discontinued
operations 507 438 489 625
Net change in property for
sale - - (498) -
---------------------------------------------
Cash flows from operating
activities 10,185 5,577 17,132 12,642
---------------------------------------------
---------------------------------------------
Financing Activities
Additions to mortgages
and other debt - 12,877 5,750 31,840
Principal repayments on
mortgages, other debt and
capital leases (3,971) (7,067) (12,571) (10,484)
Issuance of trust units
under employee unit
purchase plan 4 12 12 86
Issuance of convertible
debentures, net of retirements
(Note 10(d)(ii)) - - 13,000 -
Equity financing issue costs 16 - (1,648) -
Equity distributions
(Note 10(b)) (3,194) (4,033) (9,268) (16,308)
---------------------------------------------
(7,145) 1,789 (4,725) 5,134
---------------------------------------------
Investing Activities
Restricted cash (Note 5) (688) (70) (1,379) (139)
Capital expenditures (1,847) (2,668) (4,391) (23,637)
Property under development (2,052) 460 (3,294) (1,080)
Net cash from sale of
properties - - 654 -
(Increase) decrease in
long-term notes receivable
and other assets (19) (202) 132 (256)
---------------------------------------------
(4,606) (2,480) (8,278) (25,112)
---------------------------------------------
Net Change in Cash
and Short-term Investments (1,566) 4,886 4,129 (7,336)
Cash and Short-term
Investments, beginning
of period 10,878 3,884 5,183 16,106
---------------------------------------------
Cash and Short-term
Investments, end of period 9,312 8,770 9,312 8,770
---------------------------------------------
---------------------------------------------
See accompanying Notes to Consolidated Financial Statements
ROYAL HOST REAL ESTATE INVESTMENT TRUST
Notes to Consolidated Interim Financial Statements
As at September 30, 2004 and September 30, 2003
(unaudited)
/T/
1. GENERAL INFORMATION
Royal Host Real Estate Investment Trust ("Royal Host" or the "Trust")
was created pursuant to the Declaration of Trust dated August 27, 1997.
Royal Host is an unincorporated open-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 nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2004 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, 2003.
2. CHANGE IN ACCOUNTING POLICY - DISPOSAL OF LONG LIVED ASSETS
Effective January 1, 2004, the Trust adopted the new CICA Handbook
Section 3475, Disposal of Long-Lived Assets and Discontinued Operations.
The recommendations of this section requires that disposals of
long-lived assets be classified as held for sale, and the results of
operations and cash flows associated with the assets disposed and held
for sale be reported separately as discontinued operations, net of
applicable income taxes. A long-lived asset is classified by the Trust
as an asset held for sale at the point in time when it is available for
immediate sale, management has committed to a plan to sell the asset and
is actively locating a buyer for the asset at a sales price that is
reasonable in relation to the current fair value of the asset, and the
sale is probable and expected to be completed within a one-year period.
For unsolicited interest in a long-lived asset, the asset is classified
as held for sale if all the conditions of the purchase and sale
agreement have been met, a sufficient purchaser deposit has been
received and the sale is probable and expected to be completed shortly
after the end of the current period. The impact of adopting the new
recommendations for disposals of long-lived assets is disclosed in Note
4.
3. PROPERTY UNDER DEVELOPMENT
In accordance with Royal Host's Declaration of Trust, which permits the
development of new facilities on property adjacent to existing REIT
properties, a subsidiary of Royal Host is participating in a joint
venture to develop a portion of the property at the Grand Okanagan
Lakefront Resort and Conference Center in Kelowna, British Columbia for
resale. Property under development reflects Royal Host's proportionate
share of the costs incurred to date to develop the property.
Construction of the first phase of the project, a parkade, commenced
January 2004. Revenue from the sale of land or property is recorded on
closing or, where sold by way of an agreement of purchase and sale, when
the agreement is duly executed and delivered. Profit from the sale of
land or property is recorded on closing or, where sold by way of an
agreement of purchase and sale, when the collection of the sale proceeds
is reasonably assured and all other material conditions are met.
Royal Host accounts for its subsidiary's interest in the above joint
venture on a proportionate consolidation basis. Accordingly, these
financial statements reflect Royal Host's undivided interest in the
assets, liabilities, revenues and expenses in the joint venture. As a
joint venture participant, Royal Host is subject to the normal
development risks associated with property development activity.
4. PROPERTY HELD FOR SALE, DISPOSAL OF LONG-LIVED ASSETS, AND
DISCONTINUED OPERATIONS
During the second quarter of 2004, the Trust decided to sell certain
properties and has pending sales to two separate, unrelated buyers. The
first pending sale involves an offer to purchase of $5.8 million in net
consideration for three properties with a total of 190 rooms in Western
Canada, two of which are conditional on mortgage lender approval. The
second pending sale involves an offer to purchase of $2.7 million in net
consideration for one property with 95 rooms in Ontario, which is
conditional on a rezoning application. The expected completion dates of
these transactions is prior to June 30, 2005. Revenue will be recognized
within the next year in accordance with provisions as specified in
accordance with Canadian generally accepted accounting principles (GAAP).
On May 28, 2004 the Trust completed the sale of a marina and
recreational vehicle facility in Oklahoma, USA for $1.2 million.
The following table sets forth the results of operations associated with
the above noted long-lived assets, separately reported as discontinued
operations for the current and prior periods.
/T/
Three Months Ended Nine Months Ended
September September September September
30, 2004 30, 2003 30, 2004 30, 2003
----------------------------------------------
Hospitality Revenues
Rooms 1,098 1,213 2,507 2,843
Food and beverage 81 391 283 1,007
Other hospitality
revenues 23 190 188 520
----------------------------------------------
1,202 1,794 2,978 4,370
----------------------------------------------
Hospitality Expenses 773 1,345 2,520 3,690
----------------------------------------------
Gross Margin 429 449 458 680
----------------------------------------------
Other Expenses
Interest on mortgages
and other debt - - 5 3
Capital and other taxes 1 2 8 5
Amortization - 133 196 424
(Gain) loss on foreign
currency translation (79) 8 (44) 47
----------------------------------------------
(78) 143 165 479
----------------------------------------------
Operating earnings from
discontinued operations
before income taxes 507 306 293 201
Future income taxes
(recovery) expense 56 59 (182) (121)
----------------------------------------------
Operating earnings from
discontinued operations 451 247 475 322
Property impairment
provision - - (498) -
Gain on disposition - - 196 -
Future income taxes
(recovery) - - (18) -
----------------------------------------------
Net earnings from
discontinued operations 451 247 155 322
----------------------------------------------
----------------------------------------------
/T/
5. RESTRICTED CASH
Restricted cash is $5,626,000 (December 31, 2003 - $4,247,000)
representing funds on deposit with lenders for future planned capital
expenditures within the next 12 months.
6. PER UNIT COMPUTATIONS
There were 24,809,250 trust units outstanding as at September 30, 2004
(2003 - 24,743,660). Per unit computations are based on the weighted
average number of trust units outstanding for the period, after
adjusting the net earnings for payments on the convertible debentures of
$4,533,000 (2003 - $4,084,000) and payments on the redeemable
partnership units of $567,000 (2003 - $1,324,000).
/T/
For the nine
months ended: September 30, 2004 September 30, 2003
-----------------------------------------------------------------------
Weighted Weighted
Average Average
Units Per Units Per
($000's) (000's) Unit ($000's) (000's) Unit
-----------------------------------------------------------------------
Earnings
Net earnings -
continuing
operations 5,587 1,063
Less:
Distributions
on redeemable
partnership
units (567) (1,324)
Interest on 8%
convertible
debentures (524) (1,316)
Interest on
9.25%
convertible
debentures (2,770) (2,768)
Interest on
7.90%
convertible
debentures (1,239) -
-----------------------------------------------------------------------
Basic earnings
(loss) -
continuing
operations 487 24,566 0.02 (4,345) 24,689 (0.17)
Basic earnings
- discontinued
operations 155 0.01 322 0.01
-----------------------------------------------------------------------
Basic earnings
(loss) - total
operations 642 24,566 0.03 (4,023) 24,689 (0.16)
Unit options - 907
Unit option
repurchase - (1,842)
-----------------------------------------------------------------------
Diluted
earnings
(loss)
- total
operations 642 24,566 0.03 (4,023) 23,754 (0.17)
-----------------------------------------------------------------------
Diluted
earnings
- discontinued
operations 155 24,566 0.01 322 23,754 0.01
Diluted
earnings (loss)
- continuing
operations 487 24,566 0.02 (4,345) 23,754 (0.18)
/T/
In computing the per unit diluted earnings from total operations for the
nine months ended September 30, 2004 and 2003, the convertible
debentures and redeemable partnership units had an anti-dilutive impact
on earnings from total operations and therefore did not impact this
calculation.
/T/
For the three
months ended: September 30, 2004 September 30, 2003
-----------------------------------------------------------------------
Weighted Weighted
Average Average
Units Per Units Per
($000's) (000's) Unit ($000's) (000's) Unit
-----------------------------------------------------------------------
Earnings
Net earnings -
continuing
operations 4,593 1,387
Less:
Distributions
on redeemable
partnership
units (189) (189)
Interest on 8%
convertible
debentures 10 (444)
Interest on
9.25%
convertible
debentures (930) (933)
Interest on
7.90%
convertible
debentures (695) -
-----------------------------------------------------------------------
Basic earnings
(loss) -
continuing
operations 2,789 24,581 0.11 (179) 24,727 (0.01)
Basic earnings
- discontinued
operations 451 0.02 247 0.01
-----------------------------------------------------------------------
Basic earnings
- total
operations 3,240 24,581 0.13 68 24,727 0.00
Distributions
on redeemable
partnership
units 189 3,151 - -
Unit conversion - 907
Unit option
repurchase - (2,018)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Diluted
earnings -
total
operations 3,429 27,732 0.12 68 23,616 0.00
-----------------------------------------------------------------------
Diluted
earnings
- discontinued
operations 451 27,732 0.02 247 23,616 0.01
Diluted
earnings (loss)
- continuing
operations 2,978 27,732 0.11 (179) 23,616 (0.01)
/T/
In computing the per unit diluted earnings from total operations for the
three months ended September 30, 2004, the convertible debentures and
the unit options had an anti-dilutive impact on earnings from total
operations and therefore did not impact this calculation.
In computing the per unit diluted earnings from total operations for the
three months ended September 30, 2003, the convertible debentures and
redeemable partnership units had an anti-dilutive impact on earnings
from total operations and therefore did not impact this calculation.
/T/
7. CAPITAL ASSETS
(in $000's)
--------------------------------------
Gross Book Accumulated Net Book
Value Amortization Value
--------------------------------------
September 30, 2004
Land 39,112 - 39,112
Buildings 307,795 54,648 253,147
Furniture, fixtures and equipment 36,705 31,402 5,303
Furniture, fixtures and equipment
under capital leases 7,446 3,780 3,666
Paving and other 1,319 449 870
--------------------------------------
392,377 90,279 302,098
Capital assets under development 5,570 - 5,570
Intangible assets
Franchise rights and
management contracts 27,414 14,419 12,995
Customer lists and intellectual
and human capital 7,270 6,295 975
--------------------------------------
432,631 110,993 321,638
--------------------------------------
--------------------------------------
(in $000's)
--------------------------------------
Gross Book Accumulated Net Book
Value Amortization Value
--------------------------------------
December 31, 2003
Land 41,433 - 41,433
Buildings 315,680 50,201 265,479
Furniture, fixtures and equipment 39,221 30,179 9,042
Furniture, fixtures and equipment
under capital leases 7,292 3,126 4,166
Paving and other 1,319 400 919
--------------------------------------
404,945 83,906 321,039
Capital assets under development 1,164 - 1,164
Intangible assets
Franchise rights and
management contracts 27,612 12,679 14,933
Customer lists and intellectual
and human capital 7,270 6,070 1,200
--------------------------------------
440,991 102,655 338,336
--------------------------------------
--------------------------------------
/T/
Under the Royal Host capital replacement reserve policy, 3% of total
hotel revenue is reserved 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 nine
months ended September 30, 2004 would have been $3,136,000 (2003 -
$3,010,000). As Royal Host has spent $4,391,000 (2003 - $10,678,000) to
renovate and reposition the hotel properties, excluding capital lease
additions totaling $200,000 (2003 - $130,000), the Trustees have
determined that no reserve would be provided for in nine months ended
September 30, 2004 and 2003.
/T/
8. MORTGAGES AND OTHER DEBT
-----------------------------
September 30, December 31,
2004 2003
-----------------------------
Mortgages and other debt secured by
hotel properties 155,274 161,165
Less current portion 60,903 39,515
-----------------------------
Long-term obligations 94,371 121,650
-----------------------------
-----------------------------
Principal repayments required
for the years ending September 30:
2005 60,903
2006 3,311
2007 20,324
2008 3,474
2009 3,081
Subsequent 64,181
--------------
155,274
--------------
--------------
-----------------------------
Supplementary Information: September 30, September 30,
2004 2003
-----------------------------
Cash interest paid in the periods ended 10,318 10,262
-----------------------------
-----------------------------
/T/
The current portion of the long-term debt includes a $30.0 million
portfolio loan, which became due March 31, 2004 (see Note 12).
Financing charges are deferred and amortized over the term of the
related debt. For the nine months ended September 30, 2004, $462,000 was
included in amortization (2003 - $504,000).
9. 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 September 30,
2004 are as follows:
/T/
-----------------------------
September 30, December 31,
2004 2003
-----------------------------
Present value of future minimum
lease payments 1,714 2,354
Less current portion 635 864
-----------------------------
Long-term obligations 1,079 1,490
-----------------------------
-----------------------------
Years ending September 30
2005 757
2006 516
2007 367
2008 315
2009 3
--------------
Future minimum lease payments 1,958
Amounts representing interest 244
--------------
Present value of future minimum
lease payments 1,714
--------------
--------------
10. EQUITY
(in $000's)
-----------------------------
September 30, December 31,
2004 2003
-----------------------------
Balance, beginning of period 93,366 111,261
Net earnings 5,742 19
Issuance of trust units
Distribution reinvestment plan 233 629
Employee loans pursuant to
employee unit purchase program 12 8
Equity financing issue costs (1,648) -
Contributed surplus - 89
Equity distributions
Trust units (4,402) (11,667)
Redeemable partnership units (567) (1,513)
Interest on convertible debentures (4,533) (5,460)
-----------------------------
88,203 93,366
-----------------------------
Convertible Equity
Redeemable partnership units 27,500 27,500
Convertible debentures 75,000 62,000
-----------------------------
102,500 89,500
-----------------------------
Balance, end of period 190,703 182,866
-----------------------------
-----------------------------
a) Unit Capital
Number
of units (in $000's)
-----------------------------
Balance, December 31, 2002 24,634,976 222,908
Issuance of trust units
Distribution reinvestment plan 127,368 629
-----------------------------
Balance, December 31, 2003 24,762,344 223,537
Issuance of trust units
Distribution reinvestment plan 46,906 233
-----------------------------
Balance, September 30, 2004 24,809,250 223,770
-----------------------------
-----------------------------
/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 September 30, 2004 amounts to $135,567,000 (at
December 31, 2003 - $130,171,000).
b) Distributions to Unitholders
For the nine months ended September 30, 2004, distributions declared to
Unitholders, excluding distributions on redeemable partnership units,
aggregated $4,402,000 (2003 - $10,339,000). The distributions to holders
of redeemable partnership units for the nine months ended September 30,
2004 were $567,000 (2003 - $1,324,000) and interest on convertible
debentures was $4,533,000 (2003 - $4,084,000).
On the consolidated statements of cash flows, distributions paid are net
of distribution reinvestment plan contributions of $233,000 for the nine
months ended September 30, 2004 (2003 - $548,000). Accordingly, gross
distributions for the nine months ended September 30, 2004 were
$9,502,000 (2003 - $15,747,000).
c) Unit Options
Royal Host has reserved 1,883,000 units under its unit option plan. As
at September 30, 2004, Royal Host has unit options outstanding to
certain board members, employees and consultants to purchase an
aggregate total of 137,500 units (December 31, 2003 - 852,500 units), at
an exercise price of $10.00 per unit (December 31, 2003 - weighted
average exercise price of $10.03). All unit options were issued prior to
1999 and were fully vested and exercisable at the end of September 30,
2004 and December 31, 2003. The options currently outstanding expire on
October 31, 2007. Of the options outstanding December 31, 2003, 797,500
options were to expire as of October 31, 2007 and 55,000 options as of
March 23, 2008. During 2004 and 2003, no options were issued or
exercised and no options expired in the nine months ended September 30,
2004 (December 31, 2003 - 55,000). As per agreements signed April 21,
2004, 715,000 options held by board members and executives of Royal Host
were cancelled and terminated by agreement of the Board of Trustees. Of
these cancelled unit options, 660,000 options were to expire October 31,
2007 and 55,000 options were to expire on March 23, 2008.
d) Convertible Debentures
i) 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
TSX 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.
ii) 7.90% Convertible Unsecured Subordinated Debentures, Series A
During the quarter ended June 30, 2004, $35,000,000 convertible
unsecured subordinated debentures were issued. These debentures bear
interest at 7.90% per annum and are payable semi-annually in arrears on
April 30 and October 31 in each year commencing October 31, 2004.
The Series A debentures may not be redeemed by Royal Host prior to the
maturity date. At maturity on April 30, 2009, 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 TSX for the twenty (20)
consecutive trading days ending on the fifth (5) trading day preceding
the date of maturity.
Based on certain conditions, the debentures are convertible, at the
holders' discretion, at $6.00 per trust unit at any time from the date
of issue to close of business on the day prior to the maturity date,
April 30, 2009.
Royal Host used approximately $22.0 million of the net proceeds of the
Debentures to retire its 8.00% Convertible Secured Debentures and the
balance will be used for working capital and general trust purposes,
including acquisitions.
For accounting purposes, the convertible debentures have equity
characteristics and accordingly they are classified as equity
instruments.
11. CONTRACTUAL GUARANTEE
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.
Effective July 8, 2003, Royal Host management fully transferred the
entitlements and obligations associated with the aforementioned lease
agreement to the Society. The Society has agreed to accept the
entitlements and obligations associated with the lease.
Royal Host has agreed to guarantee the lease obligations of the Society
for a period of five years, effective from the lease commencement date
of January 1, 2002, should the Society default on any obligations. Royal
Host has avenues to pursue recourse with the Society for the full extent
of any default on the lease payments. The maximum potential amount of
future payments for the period from October 1, 2004 to December 31, 2006
is approximately $498,000. The estimated fair value of this obligation
is $454,000. As at September 30, 2004, the Society has not defaulted on
any lease payments.
12. SUBSEQUENT EVENTS
a) $35 Million Mortgage Loan
On July 5, 2004, Royal Host committed to extend the term of an existing
first mortgage to August 31, 2009, which has a current principal balance
outstanding of $25 million and to provide a loan increase up to $10
million for a maximum loan amount of $35 million. This mortgage is
secured by the Grand Okanagan Lakefront Resort and Conference Centre
("The Grand") property in Kelowna, British Columbia.
The interest for the refinanced loan will be compounded monthly at a
rate equal to the lender's benchmark 5-year Government of Canada Bond
yield plus 3.75% per annum with a minimum aggregate rate of 8.00%. The
difference between the existing loan rate of 8.50% and the refinanced
loan rate will be prepaid to the lender calculated from the closing date
of the refinanced loan to August 31, 2005. The financing arrangements
are continuing and are conditional upon completion of the subdivision of
a segment of the property related to the joint venture development at
The Grand (see Note 3). The arrangements are expected to close in the
fourth quarter of 2004, at that time the final interest rate will be
fixed.
b) $25 Million Portfolio Mortgage Loan
On July 5, 2004, Royal Host committed to a financing arrangement for a
$25 million, 5-year term mortgage, which will be secured by The Hilton,
London, Ontario and The Chimo Hotel, Ottawa properties. The proceeds
will be used to retire the principal balance outstanding on an existing
$30 million portfolio mortgage which matured March 31, 2004.
The interest for the refinanced loan will be paid quarterly at a rate
equal to 7.35% per annum. The financing was completed and funded on
November 8, 2004.
13. COMPARATIVE FIGURES
Certain prior year's figures have been reclassified to conform to the
presentation adopted for 2004.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Royal Host REIT
Peter Sikora
Chief Financial Officer
(403) 259-9800
(403) 259-8580 (FAX)
Email: investorinfo@royalhost.com
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