CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2013

Transcription

1 CONSOLIDATED FINANCIAL STATEMENTS

2 March 12, 2014 To the Shareholders of Temple Hotels Inc.: INDEPENDENT AUDITOR S REPORT We have audited the accompanying consolidated financial statements of Temple Hotels Inc., which comprise the consolidated balance sheets as at December 31, 2013 and 2012 and the consolidated statements of net income and comprehensive income, changes in equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Temple Hotels Inc. as at December 31, 2013 and 2012 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Scarrow & Donald LLP Chartered Accountants Winnipeg, Canada

3 CONSOLIDATED BALANCE SHEETS Assets December 31 Current assets Cash $ 35,340 $ 15,000 Marketable securities (Note 5) ,694 Trade and other receivables (Note 6) 7,040 6,961 Deposits and prepaids (Note 7) 6,292 3,499 Mortgage receivable (Note 8) - 2,925 Income tax receivable Inventories (Note 9) 1, Net investment in lease (Note 10) ,734 71,154 Non-current assets Property and equipment (Note 11) 589, ,202 Net investment in lease (Note 10) 3,945 4,128 Investment in hotel properties (Note 12) 10,495 14,154 Other assets (Note 13) 3,826 3,604 Intangible assets (Note 14) 3,174 1,939 Goodwill 1,608 1,608 Liabilities and Shareholders' Equity $ 663,054 $ 493,789 Current liabilities Accounts payable and other liabilities $ 16,106 $ 14,890 Acquisition note payable (Note 15) - 10,980 Debt (Note 16) 51, ,581 Income tax payable , ,613 Non-current liabilities Debt (Note 16) 425, ,201 Deferred income tax (Note 17) 12,081 5, , ,877 Shareholders' equity 158,075 90,912 $ 663,054 $ 493,789 Approved by the Directors "Arni Thorsteinson" "Brent McLean" 1

4 CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME Year Ended December 31 Revenue Room revenue $ 112,707 $ 69,496 Other hotel revenue 43,705 30, ,412 99,774 Expenses Hotel operating costs 102,473 62,338 Hotel operating income 53,939 37,436 Interest expense, net (Note 18) 28,764 22,953 Share based/unit based compensation General and administrative expenses 3,636 2,153 Depreciation 19,523 10,111 Amortization Net income before equity income, change in fair value of financial instruments and income tax expense 1,478 1,920 Equity income (loss) on investment in hotel properties 504 (26) Gain on expropriation of property (Note 11) 1,630 - Change in fair value of financial instruments (Note 19) (830) 1,661 Net income before income taxes 2,782 3,555 Income tax expense: Current Deferred ,103 Net income and comprehensive income $ 2,313 $ 2,452 Net income per common share (Note 20) Basic $ 0.08 $ 0.10 Diluted $ 0.08 $

5 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY Year Ended December 31 Share capital (Note 21) Balance, beginning of year $ 123,577 $ - Issuance of common shares 77,824 - Common shares issued on conversion of debentures 15 - Common shares issued on exercise of options Value associated with options exercised 62 - Value associated with deferred shares converted Common shares issued as part of the dividend reinvestment plan 2,034 - Issue costs (2,313) - Exchange of trust units for common shares upon completion of Arrangement - 123,577 Balance, end of year 201, ,577 Equity component of convertible financial instruments Balance, beginning and end of year 5,604 - Equity component of convertible debentures issued 2,798 - Issue costs (166) - Convertible debenture repurchases (147) - Equity component of convertible debentures retired (49) - Issuance of convertible financial instruments upon completion of Arrangement - 5,604 Balance, beginning and end of year 8,040 5,604 Contributed surplus Balance, beginning of year Value associated with options exercised (62) - Value associated with deferred shares converted (108) - Value of deferred shares granted Share options issued upon completion of Arrangement Deferred shares issued upon completion of Arrangement Balance, end of year Cumulative earnings Balance, beginning of year 11,609 9,157 Net income 2,313 2,452 Convertible debenture repurchases 12 - Equity component of convertible debentures retired 49 - Balance, end of year 13,983 11,609 Cumulative dividends to shareholders/distributions to unitholders Balance, beginning of year (50,328) (38,008) Dividends/distributions to shareholders/unitholders (15,841) (12,320) Balance, end of year (66,169) (50,328) Trust units (Note 21) Balance, beginning of year - 89,031 Issuance of trust units - 20,125 Trust units issued on conversion of debentures - 13,650 Trust units issued on exercise of options - 1,639 Unit issue costs - (868) Exchange of trust units for common shares upon completion of Arrangement - (123,577) Balance, end of year - - Shareholders' equity $ 158,075 $ 90,912 Common shares issued and outstanding (Note 21) 40,204,792 26,329,491 Deferred common shares outstanding (Note 23) 74,524 72,330 3

6 CONSOLIDATED STATEMENTS OF CASH FLOWS Cash provided by (used in) operating activities Net income $ 2,313 $ 2,452 Items not affecting cash Depreciation 19,523 10,111 Amortization Amortization of transaction costs 1, Accretion 1,374 - Change in fair value of financial instruments 830 (1,661) Deferred income taxes Share/unit based compensation Gain on debenture repurchases (39) - Gain on disposal of assets (1,630) - Equity income (loss) on investment in hotel properties (504) 26 Transaction costs in net income - 4,500 24,207 16,971 Working capital adjustments (Note 24) (2,478) (6,166) Net cash flow from operating activities 21,729 10,805 Cash provided by (used in) financing activities Proceeds of common share/trust unit offering 65,324 20,125 Proceeds of debenture offering 38,000 80,500 Proceeds of long-term debt 115,842 36,548 Exercise of options 477 1,418 Debt repaid on refinancing (97,083) (6,429) Retirement of debentures (19,856) (1,893) Lump sum principal payments on mortgage loans (35,239) (10,205) Regular repayment of principal on mortgage loans (11,655) (7,926) Expenditures on transaction costs (3,850) (5,879) Common share/trust unit issue costs (3,375) (1,159) Convertible debenture repurchases (2,059) - Dividends/distributions paid on common shares/trust units (13,807) (12,320) Net cash flow from financing activities 32,719 92,780 Cash provided by (used in) investing activities Hotel properties acquired (56,938) (46,595) Equity investment in hotel properties (18,075) (3,200) Capital expenditures on completed hotel properties (10,357) (3,616) Cash distribution on equity investments 8,120 - Franchise rights (188) (162) Marketable security transactions (Note 5) Proceeds 40,980 55,384 Purchases (70) (90,640) Receipt of net investment in lease Investment in mortgage receivable - (2,800) Change in other assets (222) (1,997) Proceeds on expropriation of property 2,472 - Net cash flow from investing activities (34,108) (93,484) Change in cash 20,340 10,101 Cash, beginning of period 15,000 4,899 Cash, end of period $ 35,340 $ 15,000 4

7 1 Organization Temple Hotels Inc. ("Temple" or the "Company") is a corporation and is the successor entity to Temple Real Estate Investment Trust (the "REIT") following the completion of the conversion of the REIT from an open ended income trust to a corporation by way of a plan of arrangement (the "Arrangement") under the Canada Business Corporations Act effective December 31, 2012 (Note 25). Temple owns and operates hotel property investments in Canada. The head office for the Company is located at 2600 Seven Evergreen Place, Winnipeg, Canada. Temple is listed on the Toronto Stock Exchange ("TSX"). The following schedule reflects securities of Temple, which trade on the TSX and the related trading symbol: Common shares Series C Convertible Debentures Series D Convertible Debentures Series E Convertible Debentures Series F Convertible Debentures TPH TPH.DB.C TPH.DB.D TPH.DB.E TPH.DB.F The consolidated financial statements for the year ended December 31, 2013 were approved for issue in accordance with a resolution of the Board of Directors on March 12, Basis of presentation The consolidated financial statements of Temple as of December 31, 2013 (the "Financial Statements") have been prepared on a going concern basis. The Financial Statements have been prepared on an historical cost basis except for marketable securities and the interest rate swap liability which are carried at fair value. On June 30, 2013, the Company's wholly owned subsidiaries Temple Limited Partnership and Temple General Partner Inc. were wound up into the Company. On July 1, 2013, 1330 Pembina Limited Partnership and Canada Inc., the general partner of 1330 Pembina Limited Partnership were wound up into the Company. On July 1, 2013 the Company amalgamated with its wholly owned subsidiary Temple Gardens Mineral Spa Inc. Statement of compliance The Financial Statements have been prepared in accordance with International Financial Reporting Standards. 5

8 3 Significant accounting policies (a) Principles of consolidation The financial statements of Temple reflect the operations of Temple and TREIT Holdings 21 Inc., which is a wholly owned subsidiary under its control. Subsidiaries are fully consolidated from the date of acquisition, being the date on which Temple obtains control, and continue to be consolidated until the date that such control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as Temple, using consistent accounting policies. All intra-group balances, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full. Where a hotel property is acquired through the acquisition of corporate interests, management considers the substance of the assets and activities of the acquired entity in determining whether the acquisition represents the acquisition of a business. Where such acquisitions are not judged to be an acquisition of a business, they are not treated as business combinations. Rather, the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the acquisition date. Where an acquisition is not judged to be an acquisition of a business, no goodwill or additional deferred taxation arises. Otherwise corporate acquisitions are accounted for as business combinations. (b) Cash Cash on the balance sheet comprise demand deposits at the bank. (c) Trade and other receivables Trade and other receivables are recognized and carried at the lower of their original invoiced value and recoverable amount. Where the time value of money is material, receivables are carried at amortized cost. Allowance is made when there is objective evidence that the Company will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote. (d) Inventories Inventories of supplies and goods for sale are stated at the lower of cost and net realizable value, on a first-in, first-out basis. Cost is comprised of the purchase price, plus associated, non-recoverable taxes and delivery costs. Net realizable value is the estimated selling price in the normal course of business less the estimated costs necessary to make the sale. 6

9 3 Significant accounting policies (continued) (e) Joint arrangements The company classifies its interests in joint arrangements as either joint operations or joint ventures depending on the Company's rights to the assets and obligations for the liabilities of the arrangements. When making this assessment, management considers the structure of the arrangements, the legal form of any seperate vehicles, the contractual terms of the arrangement and other facts and circumstances. The Company's interests in the Moose Jaw casino complex property co-ownership is classified as joint operations since the Company has rights to the assets and is obligated for the liabilities. The Company recognizes its proportionate share of assets, liabilities, revenue and expenses of the co-ownership in the respective lines in the consolidated financial statements. For the Company's interest in hotel properties consisting of limited partnerships, the Company has determined that these arrangements are joint ventures since the Company has rights to and is liable for the net assets of the arrangement. The Company reports its interests in joint ventures using the equity method and are recorded on the consolidated balance sheets at cost plus the Company's share of income or losses to date plus contributions less distributions received. Subsequent to the acquisition date, the Company's share of income and losses is recognized in the share of net earnings from equity accounted investments in the statement of net income and comprehensive income. Accounting policies of equity accounted investments have been changed where necessary to ensure consistency with the policies adopted by the Company. (f) Property and equipment Property and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. The application of this policy requires an estimate of the useful life of the asset and its residual value. Temple provides for depreciation of property and equipment so as to apply the cost of the assets over the estimated useful lives as follow. Method Rate Buildings Straight-line 2.5% Furniture and equipment Straight-line 10% Paving Straight-line 10% Signage Straight-line 10% Computer equipment Straight-line 20% Vehicles Straight-line 20% 7

10 3 Significant accounting policies (continued) (g) Intangible assets Franchise fees represent application, initial and transfer franchise fees and are charged to amortization expense on a straight-line basis over the term of the franchise agreement. Royalty and marketing assessments payable under the terms of the franchise agreements are included in hotel operating costs. Lease intangibles represent the value of in-place tenant leases and tenant relationships associated with in-place operating leases identified in a business combination. The amounts recognized are charged to amortization expense on a straight-line basis over the term of the lease. (h) Goodwill Goodwill represents the future economic benefits arising from other assets acquired in business combinations that are not individually identified and separately recognized. Goodwill is measured at cost less any accumulated impairment losses and is not amortized. Goodwill relates to Temple Garden Mineral Spa. The recoverable amount for impairment testing is based on the value less cost of disposal as determined by third party appraisals. (i) Impairment of non-financial assets Temple assesses at the end of each reporting period whether there is any indication that an asset may be impaired. Property and equipment and investments in joint arrangements are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. Assets, including goodwill, that do not generate independent cash flows are combined into cash-generating units. Cash generating units to which goodwill has been allocated are tested for impairment at the end of each reporting period and whenever there is an indication that the cash-generating unit may be impaired. If the carrying values exceed the estimated recoverable amount, the assets or cashgenerating units are written down to their recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. Value in use is assessed based on estimated future cash flows discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is recognized for the amount by which the asset's carrying amount exceeds its recoverable amount and is recorded as an expense. Assets or cash-generating units that have been impaired in prior periods are tested for possible reversal of impairment whenever events or changes in circumstances indicate that the impairment has reversed. If the impairment has reversed, the carrying amount of the asset or cash-generating unit (excluding goodwill) is increased to its recoverable amount but not beyond the carrying amount that would have been determined had no impairment loss been recognized for the asset in the prior periods. A reversal of an impairment loss is recognized in net income. Impairment losses for goodwill are not reversed. 8

11 3 Significant accounting policies (continued) (j) Provisions Provisions are recognized when Temple has a present legal or constructive obligation as a result of past events, for which it is probable that an outflow of economic benefits will occur and where a reliable estimate can be made of the amount of the obligation. Where the effect of discounting is material, provisions are determined by discounting the expected future cash flows. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. The amount recognized as a provision is the best estimate at the reporting date of the expenditure required to settle the obligation. (k) Mortgage loans Mortgage loans are initially recognized at fair value less directly attributable transaction costs. After initial recognition, interest bearing loans are subsequently measured at amortized cost using the effective interest rate method. Transaction fees, costs, discounts and premiums directly related to mortgage loans are recognized in net income over the term of the borrowings. Interest payable is recognized on an accrual basis. Principal payments on mortgage loans due more than twelve months from the date of the balance sheet are classified as non-current liabilities. Notwithstanding the previous statement, all principal on mortgage loans that are in breach of a debt covenant such that the debt becomes payable on demand and for which the Company has not obtained a cure for said breach at the balance sheet date, are classified as current liabilities. (l) Convertible debentures and convertible mortgages Convertible debentures and convertible mortgages are separated into debt and equity components based on the respective fair values at the date of issue. The value of the debt component is calculated at the estimated fair value of the future interest and principal payments due under the terms of the convertible debentures and convertible mortgages. The value assigned to the equity component represents the value of the conversion feature. Transaction fees, costs, discounts and premium directly related to the debt component of convertible debentures and convertible mortgages are recognized in net income over the term of the borrowings. Transaction fees, costs, discounts and premiums directly related to the equity component of convertible debentures and convertible mortgages are recognized in to the value of the equity component, net of deferred income tax. Subsequent to initial recognition, the liability component of convertible debentures and convertible mortgages are measured at amortized cost using the effective interest method. The equity component is not measured subsequent to initial recognition. 9

12 3 Significant accounting policies (continued) (m) Borrowing costs Borrowing costs attributable to the acquisition, construction or production of qualifying assets are capitalized to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognized as interest expense in net income in the period in which they are incurred. (n) Income taxes Current tax Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities including interest. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax assets and liabilities are recognized in respect of temporary differences between the tax base and carrying value of assets and liabilities and unrealised tax losses. Deferred tax assets are recognized to the extent that it is regarded as probable that the deductible temporary differences can be realized. The recoverability of all tax assets is reassessed at the end of each reporting period. Deferred tax is calculated at the tax rates that are expected to apply in the periods in which the asset or liability will be settled, based on rates enacted or substantively enacted at the end of the reporting period. (o) Share capital and trust units On December 31, 2012, the trust units in the REIT were exchanged for common shares upon the Arrangement (Note 25). As the common shares have neither a puttable feature nor a required distribution, the common shares qualify for classification as an equity instrument. Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from equity, net of any tax effects. (p) Share based/unit based compensation Temple has a share option plan and the REIT had a trust unit option plan available for officers, employees and Directors/Trustees of Temple as well as management company employees of Temple including Shelter Canadian Properties Limited and consultants retained by Temple including investor relations consultants. Consideration paid by option holders on exercise of share options is credited to Equity. In addition, Temple has a deferred share plan and the REIT had a deferred unit plan available for Directors/Trustees, officers, employees, or consultants of Temple under which, any Director/Trustee, officer, employee, or consultant of Temple have their annual bonus, annual board retainer or board meeting fees payable to that person by Temple paid in the form of deferred shares/deferred units. 10

13 3 Significant accounting policies (continued) (p) Share based/unit based compensation (Continued) The fair value based method of accounting is applied to all share based compensation. Compensation expense for share option awards is recognized when share options/trust options are granted over the vesting periods. Compensation expense for deferred share/deferred unit based compensation is recognized when the deferred shares are granted. Awards of share options related to private placements or public offerings of common share/trust units are treated as share issue costs. The fair value of the share options/trust unit options granted is estimated on the date of grant using the Black-Scholes option pricing model. At the end of each reporting period, the estimate of share options expected to vest is revised and compensation expense in regard to options granted to officers, employees and Directors is recognized over the vesting period. (q) Dividends Temple pays dividends on its shares, at the discretion of the Board of Directors. Dividends are recorded as a reduction of retained earnings and are presented as a liability in the period in which the dividends are approved by the Board of Directors. (r) Dividend reinvestment plan The dividend reinvestment plan ("DRIP") feature allows for all or a portion of an eligible shareholder's monthly dividend payment to be automatically reinvested in additional common shares of the Company. The purchase price of the common shares will be equal to the weighted average closing price of the shares for the five day trading preceding the dividend payment date ("Average Market Price"). With each reinvestment, shareholders will receive a bonus dividend equal to 4% of the amount reinvested ("Bonus Dividend"), which will also be reinvested into common shares at the Average Market Price. Shareholders who participate in the DRIP may elect to make a cash purchase of additional shares on any dividend payment date, without incurring any commissions, service charges or brokerage fees. A shareholder must invest a minimum amount $1 with each cash purchase request, and subject to the terms and conditions of the DRIP, may invest up to $10 with each cash purchase request. Shares purchased by way of additional cash payment will be purchased at the Average Market Price. A Bonus Dividend is not available with an optional cash purchase of shares. (s) Net income per share/trust unit Basic net income per share/trust unit is computed by dividing net income by the weighted average number of shares/trust units outstanding during the period. Diluted net income per share/trust unit is calculated based on the weighted average number of shares/trust units outstanding during the period plus the effect of dilutive share/trust unit equivalents such as convertible debentures, options or deferred shares/trust units. The treasury stock method is used to calculate the dilutive effect on per share/trust unit amounts resulting from outstanding share/trust unit options. Under this method, the weighted average number of additional shares/trust units is calculated assuming the proceeds that arise from the exercise of the outstanding options are used to purchase shares/trust units of the Company/REIT at their average market price for the period. 11

14 3 Significant accounting policies (continued) (t) Revenue recognition Revenue from services provided and products sold is recognized at the time the service is provided and the products are delivered to the customer. Lease revenue from leases with contractual rent increases is recognized on a straight-line basis over the term of the respective leases. Interest income is recognized using the effective interest method. Gift certificates are recorded as a liability when sold and revenue is recognized upon redemption of the gift certificate. Revenue recognized on unused gift certificates is estimated based on applicable industry performance and redemption rates, as well as general business and economic conditions that prevail or are expected to prevail. Assumptions underlying the measurement of gift certificate revenues are limited by the uncertainty of predictions concerning future events. By its nature the evaluation of gift certificate revenue is subjective and does not necessarily result in precise determinations. Should an adjustment become necessary it will be adjusted in the period in which it becomes known. Future income related to the finance-type lease is recognized in a manner that produces a constant rate of return on the net investment in the lease. Amounts due from lessees are recorded as net investment in lease at the amount of the net present value. (u) Financial instruments Financial instruments are measured at fair value on initial recognition. The measurement in subsequent periods and classification of financial assets and liabilities is dependent on the purpose for which the instruments were acquired or issued, their characteristics and Temple's designation of such instruments. Financial assets and financial liabilities classified as fair value through net income are subsequently measured at fair value with gains and losses recognized in net income. Financial assets classified as held to maturity, loans and receivables, and other liabilities are subsequently measured at their amortized cost, using the effective interest method. Available for sale financial assets are subsequently measured at fair value with unrealised gains and losses recognized in other comprehensive income until the financial asset is disposed of. Financial Statement Item Classification Measurement Cash Loans and receivables Amortized cost Marketable securities Fair value through net income Fair value Trade and other receivables Loans and receivables Amortized cost Deposits Loans and receivables Amortized cost Mortgage receivable Loans and receivables Amortized cost Other assets Loans and receivables Amortized cost Accounts payable and other liabilities Other liabilities Amortized cost Acquisition note payable Other liabilities Amortized cost Mortgage loans Other liabilities Amortized cost Interest rate swap liability Fair value through net income Fair value Convertible mortgage loans Other liabilities Amortized cost Convertible debentures Other liabilities Amortized cost 12

15 3 Significant accounting policies (continued) (u) Financial instruments (continued) Temple assesses impairment of all financial assets, except those classified as fair value through net income. Management considers whether there has been a breach in contract, such as a default or delinquency in interest or principal payments in determining whether objective evidence of impairment exists. Impairment is measured as the difference between the asset's carrying value and its fair value. Impairment is included in net income. (v) Operating segments Operating segments are reported in a manner consistent with internal reporting to management. Reportable operating segments are distinguishable components of Temple that are engaged in providing related services that are subject to risks and rewards that are different from those of other reportable segments. Temple's reportable segments are Fort McMurray, Other, Acquisition and Corporate/Trust. (w) Current and future changes to significant accounting policies The following standards were implemented with a January 1, 2013 effective date: IFRS 10 - Consolidated Financial Statements - the adoption of IFRS 10 did not result in any change to the consolidation status of any of the Company's subsidiaries; IFRS 11 - Joint Arrangements - the adoption of IFRS 11 did not result in any changes in the accounting methods for the Company's joint arrangements; IFRS 13 - Fair Value Measurement - the adoption of IFRS 13 did not require any changes to the valuation techniques used by the Company to measure fair value and did not result in changes to fair values as at January 1, The following standards will be effective for subsequent annual periods. The Company is currently evaluating the impact of these standards on its financial statements. IFRS 9 - Financial Instruments replaces IAS 39 - Financial Instruments: Recognition and Measurement. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple classification options in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of its financial assets. The effective date for the standard has been deferred indefinitely. IFRIC 21 - Levies: Clarifies that the obligating event giving rise to a liability to pay a levy is the activity described in the relevant legislation that triggers payment of the levy. Effective for years beginning on or after January 1,

16 4 Significant accounting judgments, estimates and assumptions The preparation of Temple's financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected. Management bases their judgments, estimates and assumptions on factors they believe to be reasonable in the circumstances, but which may be inherently uncertain and unpredictable. (a) Judgements other than estimates Business combinations Temple acquired subsidiaries that own real estate. At the time of the acquisitions, Temple considers whether the acquisition represents the acquisition of a business. The Company accounts for an acquisition as a business combination when an integrated set of activities is acquired in addition to the real estate. More specifically, the following criteria are considered: The number of items of land and buildings owned by the subsidiary The extent to which significant processes are acquired and in particular the extent of ancillary services provided by the subsidiary (e.g., maintenance, cleaning, security, bookkeeping, hotel services, etc.) Whether the subsidiary has allocated its own staff to manage the property and/or to deploy any processes (including all relevant administration such as invoicing, cash collection, provision of management information to the entity's owners and tenant information) When the acquisition of a subsidiary does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities. The cost of the acquisition is allocated to the assets and liabilities acquired based upon their relative fair values, and no goodwill is recognized. Temple has determined that all acquisitions were acquisitions of a business. Classification of joint arrangements Temple makes judgments as to whether its joint arrangements provide it with rights to the assets, and obligations for the liabilities, relating to the arrangement or the net assets of the arrangement. Temple makes judgements as to whether its joint arrangements are jointly operations or joint ventures. (b) Estimates Accounting estimates are included in financial statements to approximate the effect of past business transactions or events, or to approximate the present status of an asset or liability. Examples include the estimated useful life of an asset. It is possible that changes in future conditions could require changes in the recognized amounts for accounting estimates. These estimates are reviewed periodically, and, as adjustments become necessary, they are reported in the period in which they become known. Significant areas of estimation by management include the impairment of property and equipment and other non-financial assets, the useful lives of property and equipment, the expected tax rate, the fair value of share based/unit based compensation, the fair value of financial instruments and allowance for doubtful accounts. 14

17 5 Marketable securities December 31 December 31 Marketable equity securities $ 55 $ 15,038 Marketable debentures - 6,328 Guaranteed investment certificates ,328 The following chart summarizes marketable securities: $ 454 $ 41,694 Year Ended December 31 Balance, beginning of period $ 41,694 $ 451 Purchase of guaranteed investment certificates 70 75,000 Redemption of guaranteed investment certificates (20,000) (55,000) Purchase of marketable equity and debenture securities - 15,640 Sale of marketable equity and debenture securities (20,980) (384) Change in fair value of marketable securities (330) 5,987 Balance, end of period $ 454 $ 41,694 Marketable equity securities consist of equity interests in publicly traded hotel real estate entities. Guaranteed investment certificates bear interest at 0.80% % (December 31, % %) with maturity dates in 2014 (December 31, ). 6 Trade and other receivables December 31 December 31 Trade receivables $ 6,536 $ 6,727 Less: allowance for doubtful accounts (226) (134) 6,310 6,593 Straight-line rent receivable Other receivables Deposits and prepaids $ 7,040 $ 6,961 December 31 December 31 Deposits $ 2,220 $ 1,745 Deposits on potential acquisitions 1,750 1,450 Prepaid expenses 2, $ 6,292 $ 3,499 15

18 8 Mortgage receivable Temple invested in a 12% second mortgage loan receivable secured by a charge against the Acclaim Hotel, Calgary Airport, a 225 unit hotel property. The funds were advanced pursuant to a purchase and sale agreement dated August 9, The loan was repaid in full on the purchase of the Acclaim Hotel on November 1, Inventories During the year ended December 31, 2013, inventory consumed was $10,330 ( $7,637) and is included in hotel operating costs. 10 Net investment in lease The Moose Jaw casino complex property co-ownership completed the development of a 23,400 square foot building and 140 parking stalls in The entire property is subject to a 25 year lease and the tenant must acquire ownership of the property at the end of the lease term for consideration of $1. Under the terms of the lease, the tenant is responsible for all and every cost arising from or related to the leased premises, including the cost of replacement of the structure and foundation. Pursuant to the terms of the co-ownership agreement, the Company and its co-owner each hold a 50% interest in the co-ownership, with all contributions, distributions, and net income allocations being made on this same 50% basis. Future income related to the finance-type lease is recognized in a manner that produces a constant rate of return on the net investment in the lease. The investment in the lease for purposes of income recognition is comprised of net minimum lease payments and unearned finance income. The effective interest rate of the net investment in the lease is 7.52%. The net investment in lease includes the following: December 31 December 31 Total minimum lease payments receivable $ 6,526 $ 7,003 Unearned income (2,398) (2,705) Net investment in lease 4,128 4,298 Less current portion (183) (170) Future lease payments are summarized as follows: $ 3,945 $ 4,128 Minimum Twelve Months Ended Lease Unearned December 31 Payments Income 2014 $ 478 $ Thereafter 4,136 1,074 16

19 10 Net investment in lease (continued) Summarized financial information of Temple's interest in the jointly controlled entity, which has been proportionately consolidated, is as follows: December 31 December 31 Current assets $ 217 $ 200 Non-current assets $ 3,945 $ 4,128 Current liabilities $ 168 $ 157 Non-current liabilities $ 3,124 $ 3,271 Year Ended December 31 Interest revenue $ 307 $ 318 Expenses $ 236 $ Property and equipment December 31, 2013 Accumulated Net Book Cost Depreciation Value Land $ 75,146 $ - $ 75,146 Buildings 492,727 (40,739) 451,988 Furniture and equipment 53,972 (12,997) 40,975 Paving 22,991 (4,022) 18,969 Signage 1,135 (99) 1,036 Computer equipment 1,393 (365) 1,028 Vehicles 260 (130) 130 $ 647,624 $ (58,352) $ 589,272 December 31, 2012 Accumulated Net Book Cost Depreciation Value Land $ 53,506 $ - $ 53,506 Buildings 342,506 (30,252) 312,254 Furniture and equipment 27,746 (5,986) 21,760 Paving 10,925 (2,305) 8,620 Signage 443 (25) 418 Computer equipment 745 (150) 595 Vehicles 158 (109) 49 $ 436,029 $ (38,827) $ 397,202 17

20 11 Property and equipment (continued) Transactions in property and equipment for the year ended December 31, 2013 are summarized as follows: Depreciation Opening net Net book value for the Closing net December 31, 2013 book value Additions of disposals period book value Land $ 53,506 $ 22,482 $ (842) $ - $ 75,146 Buildings 312, ,221 - (10,487) 451,988 Furniture and equipment 21,760 26,226 - (7,011) 40,975 Paving 8,620 12,065 - (1,716) 18,969 Signage (74) 1,036 Computer equipment (214) 1,028 Vehicles (21) 130 $ 397,202 $ 212,435 $ (842) $ (19,523) $ 589,272 On November 20, 2013, a portion of the surface parking lots which serve the Nomad Hotel was expropriated for gross proceeds of $2,700 and net proceeds of $2,472 after deducting legal and other fees resulting in a gain on expropriation of property of $1,630. Transactions in property and equipment for the year ended December 31, 2012 are summarized as follows: Depreciation Opening net for the Closing net December 31, 2012 book value Additions period book value Land $ 30,316 $ 23,190 $ - $ 53,506 Buildings 218, ,808 (7,350) 312,254 Furniture and equipment 11,074 12,633 (1,947) 21,760 Paving 2,060 7,245 (685) 8,620 Signage (25) 418 Computer equipment (83) 595 Vehicles (21) 49 $ 262,590 $ 144,723 $ (10,111) $ 397,202 Property and equipment additions for the year ended ended December 31, 2013 include $170 of incremental borrowing costs directly related to property renovations (December 31, $45). Schedule 1 provides a summary of the assets acquired in the acquisition transactions. The acquisition transactions conform with Temple's strategy of creating a portfolio of income producing properties which focus on maximizing the return of the hotel portfolio. Temple has accounted for these business combinations using the acquisition method. The initial accounting for the assets and liabilities recognized upon the acquisition of the properties acquired during the year ended December 31, 2013 has been completed provisionally with respect to the valuations of property and equipment, fair value calculations of assumed debt, deferred income taxes and working capital, net. Accordingly, the initial accounting has not been finalized and remains subject to adjustment. 18

21 12 Investment in hotel properties The net investment in hotel properties is carried using the equity method of accounting and is comprised of the following: December 31 December 31 Limited Partnership units of Market Square Inn Limited Partnership $ 7,317 $ 11,080 Limited Partnership units of Colborne Street Limited Partnership 3,178 - Limited Partnership units of 1330 Pembina Limited Partnership - 3,074 $ 10,495 $ 14,154 The following is a summary of equity transactions: Year Ended December 31 Balance, beginning of period $ 14,154 $ - Equity income (loss) 504 (26) Acquisitions: Market Square Limited Partnership ,080 Colborne Street Limited Partnership 6, Pembina Limited Partnership - 3,100 Deemed Disposition Pembina Limited Partnership (3,100) - Cash distributions: Mortgage proceeds (7,000) - Operating cash flow (1,120) - Balance, end of period $ 10,495 $ 14,154 On January 31, 2013 Temple acquired 56,140 Limited Partnership units of Colborne Street Limited Partnership representing a 50% ownership interest in the Residence Inn for $6,361. On January 31, 2013, Temple acquired the remaining 146 units of 1330 Pembina Limited Partnership for $3,100 thereby establishing a 100% ownership interest in the property. The acquisition transaction resulted in a deemed disposition of the equity investment and an acquisition of a hotel property which is consolidated into the accounts of the Company. A gain on step acquisition of $38 was recorded on the transaction and is included in equity income on investment in hotel properties. On December 31, 2012, Temple acquired 34,240 limited Partnership units of Market Square Inn Limited Partnership representing a 50% ownership interest in the Marriott Courtyard Hotel, Ottawa, Ontario. On November 29, 2012, Temple acquired 73 Limited Partnership units, representing a 50% interest in the Holiday Inn South, Winnipeg, Manitoba. 19

22 12 Investment in hotel properties (continued) The following represents the 100% share of the assets, liabilities, revenue, expenses, net income (loss) and cash flows since acquisition: December 31 December 31 Marriott Courtyard Hotel Assets Cash $ 357 $ 357 Other current assets 1,402 1,584 Non-current assets 31,131 26,514 $ 32,890 $ 28,455 Liabilities and Equity Current liabilities $ 1,193 $ 824 Non-current liabilities 17,064 5,471 Equity 14,633 22,160 $ 32,890 $ 28,455 Year Ended December 31 Revenue $ 8,466 $ - Interest Expense Depreciation and amortization Other expenses 6,469 - Net income $ 602 $ - Cash flow from operating activities $ 2,724 $ - Cash flow from financing activities $ (1,504) $ - Cash flow from investing activities $ (1,220) $ - December 31 December 31 Residence Inn Assets Cash $ 361 $ - Other current assets Non-current assets 13,009 - $ 14,293 $ - Liabilities and Equity Current liabilities $ 656 $ - Non-current liabilities 7,281 - Equity 6,356 - $ 14,293 $ - 20

23 12 Investment in hotel properties (continued) Year Ended December 31 Revenue $ 3,957 $ - Interest expense Depreciation and amortization Expenses 3,033 - Net income $ 354 $ - Cash flow from operating activities $ 902 $ - Cash flow from financing activities $ (744) $ - Cash flow from investing activities $ (189) $ - December 31 December 31 Holiday Inn South Assets Cash $ - $ 409 Other current assets Non-current assets - 12,021 $ - $ 12,923 Liabilities and Equity Current liabilities $ - $ 5,381 Non-current liabilities - 1,393 Equity - 6,149 $ - $ 12,923 Year Ended December 31 Revenue $ 436 $ - Interest expense 19 - Depreciation and amortization 32 - Expenses Net loss $ (25) $ - Cash flow from operating activities $ (77) $ - Cash flow from financing activities $ (26) $ - Cash flow from investing activities $ (12) $ - 21

24 13 Other assets December 31 December 31 Credit union member equity $ 109 $ 109 Reserves required by mortgage loan agreements 3,717 3, Intangible assets $ 3,826 $ 3,604 December 31, 2013 Accumulated Net Book Cost Amortization Value Franchise fees $ 485 $ (55) $ 430 Lease intangibles 3,259 (515) 2,744 $ 3,744 $ (570) $ 3,174 December 31, 2012 Accumulated Net Book Cost Amortization Value Franchise fees $ 298 $ (20) $ 278 Lease intangibles 1,830 (169) 1,661 $ 2,128 $ (189) $ 1,939 Transactions in intangible assets for the year ended December 31, 2013 and 2012 are summarized as follows: Amortization Opening net for the Closing net 2013 book value Additions period book value Franchise fees $ 279 $ 186 $ (35) $ 430 Lease intangibles 1,660 1,430 (346) 2,744 $ 1,939 $ 1,616 $ (381) $ 3,174 Amortization Opening net for the Closing net 2012 book value Additions period book value Franchise fees $ 135 $ 162 $ (18) $ 279 Lease intangibles 129 1,700 (169) 1,660 $ 264 $ 1,862 $ (187) $ 1, Acquisition note payable Acquisition note payable was comprised of an unsecured note payable bearing interest at 3.0% and was paid in full at the January 11, 2013 due date. 22

25 16 Debt December 31 December 31 Secured debt Mortgage loans (a) $ 348,276 $ 250,814 Interest rate swap liability (b) Convertible mortgage loans - 4,500 Total secured debt 348, ,314 Unsecured debt Convertible debentures (c) 131, ,903 Unamortized transaction costs Mortgage loans (2,000) (1,435) Convertible debentures (c) (1,623) - Total unamortized transaction costs (3,623) (1,435) Total debt 476, ,782 Less current portion Mortgage loans 51,894 97,348 Convertible debentures - 19,863 Transaction costs - mortgages (679) (630) Total current debt 51, ,581 Total non-current debt $ 425,577 $ 255,201 (a) Mortgage loans Principal payments and principal maturities at face value for the 12 months period ending December 31 are as follows: Mortgage loans Principal Principal Convertible Payments Maturities Debentures Total (at face value) 2014 $ 10,575 $ 40,607 $ - $ 51, ,057 41,220-50, ,920 59,301 22,975 90, ,383 72,247 79, , ,719 86,774 36, ,941 Thereafter 1,635 9,838-11,473 $ 38,289 $ 309,987 $ 139,276 $ 487,552 23

26 16 Debt (continued) (a) Mortgage loans (continued) December 31 December 31 First mortgage loans $ 332,276 $ 246,727 Second mortgage loans 16,000 4,087 Total $ 348,276 $ 250,814 Weighted average interest rate - fixed rate First mortgage loans of $264,682 (2012-$229,327) 4.95 % 5.21 % Second mortgage loans of $16,000 (2012-$4,087) 5.00 % 6.00 % Total 4.95 % 5.23 % Weighted average interest rate - variable rate First mortgage loans of $67,594 (2012-$17,400) 5.00 % 5.77 % As a condition of certain mortgage loans, the Company is required to maintain annual debt service coverage ratios and/or debt to equity ratios and capital expenditures may not exceed certain maximums. As of December 31, 2013, the Company was in compliance with all covenants. Mortgage loans are secured by charges registered against specific hotel properties and an assignment of the net investment in a lease. (b) Interest rate swap liability The Company has entered into an interest rate swap arrangement whereby the interest rate on a variable rate mortgage loan in the amount of $10,826 has a fixed rate of 7.44% and matures in Settlement on both the fixed and variable portion of the interest rate swap occurs on a monthly basis. The interest rate swap liability is a financial instrument classified as fair value through profit and loss. The financial statements therefore reflect an interest rate swap asset or liability related to the swap at the net present value of future mortgage payments based on current interest rates with a corresponding charge to change in fair value of financial instruments. Change in fair value of financial instruments expense of $500 for the year ended December 31, 2013 ( $nil) was recorded to reflect the fair value of the interest swap. (c) Convertible debentures During the year ended December 31, 2013, Temple completed an offering of Series F convertible debentures in the amount of $35,000 plus an over allotment of $3,000 for gross proceeds of $38,000. Under the Arrangement, the convertible debentures convertible to trust units were assumed by Temple and, as a result, such convertible debentures are convertible to common shares. The convertible debentures were allocated to debt and equity components based on the net present value of future principal and interest payments with an estimated cost of borrowing of 9.5%. 24