Look forward. Look up. ANNUAL REPORT. Holloway Lodging Real Estate Investment Trust Annual Report 1

Transcription

1 Look forward. Look up ANNUAL REPORT 2010 Annual Report 1

2 Our Mission To be Canada s top-performing lodging REIT. We will continuously improve unitholder and asset value while maximizing our unit price and distributions by achieving best in class operating metrics and prudently managing our balance sheet. Contents Highlights 3 Message from the CEO 4 Hotel Awards 6 Management s Discussion & Analysis 9 Corporate Profile Holloway Lodging REIT is an open-ended real estate investment trust focused on select and limited service hotels in secondary, tertiary and suburban markets. Currently, Holloway has a portfolio of 22 wholly-owned hotels (2,386 rooms) and another 6 hotels (629 rooms) in which Holloway has a beneficial, minority ownership interest. Holloway s units and convertible debentures trade on the Toronto Stock Exchange (TSX) under the symbols HLR.UN, HLR.DB and HLR.DB.A. Consolidated Financial Statements 46 Corporate Information 81 Senior Officers 81 Board of Trustees 82

3 2010 Highlights For the years ended December Guest Room Distribution By Location Key operating statistics for the period of ownership Revenue per available room (RevPAR) $73.38 $73.72 Average daily rate (ADR) $ $ Occupancy 60.39% 55.85% Operating Results (in millions, except per unit amounts) Hotel revenues $73.4 $74.4 Hotel EBITDA $19.3 $20.3 Distributable income ($1.4) $0.4 Basic and diluted distributable income per unit ($0.04) $0.01 Distributions declared per unit - $0.105 Market Penetration This table illustrates Holloway Lodging RevPAR Market Penetration for markets where the information is shared among competitors. A penetration index of 100% indicates the property is achieving its fair share of revenue per available room. Above 100% indicates over-achievement. Alberta 60% British Columbia 13% Nova Scotia 13% New Brunswick 6% South Carolina 5% Northwest Territories 3% By Brand 160% 140% 120% 100% 80% 60% 40% 20% 0% Super 8 38% Holiday Inn Express 19% Radisson 10% Holiday Inn 6% Best Western 4% Pomeroy Inn 6% Independant 17% Market Penetration by Region 1. Super 8 Fort St. John 145% 2. Super 8 Slave Lake 142% 3. Holiday Inn Hotel & Suites 137% Grande Prairie 4. Holiday Inn Express Kamloops 135% 5. Super 8 Yellowknife 125% 6. Pomeroy Inn & Suites 123% Grande Prairie 7. Holiday Inn Express Halifax/Bedford 121% 8. Radisson Hotel and Suites 121% Fort McMurray 9. Super 8 Drayton Valley 116% 10. Super 8 Whitecourt 116% 11. Best Western Grande Prairie 114% 12. Holiday Inn Express Myrtle Beach 113% 13. Holiday Inn Express 112% Hotel & Suites Moncton 14. Radisson Suite Hotel Halifax 112% 15. Super 8 Truro 110% 16. Super 8 Three Hills 102% 17. Super 8 Grande Prairie 89% Calgary Downtown 86% Suites & Spa Hotel 19. Northwest Inn Slave Lake 61% 120% 115% 110% 105% 100% West Atlantic Annual Report 3

4 Message From the CEO 2010 was a period of recovery in the Canadian economy. The year also saw the emergence of a recovery in the Canadian hotel sector, which experienced significant challenges during Hotel consulting group PKF reported revenue per available room increased by approximately 5% on a national basis in 2010, after experiencing a decline of 12% in The rebound began in the second half of 2010 and continued to gain momentum through to the end of the year. Our business felt the pinch of the downturn in the first two quarters of 2010 while the third and fourth quarters produced improved year over year occupancy growth. Despite the challenging operating environment for a significant portion of the year, Holloway achieved operating metrics which were among the best in its peer group and was able to meet all of its financial obligations. The recovery thus far has mainly been in occupancy growth and has not yet reached the point where demand has driven increases in average room rates. Both business and leisure travelers are still cautious of discretionary travel spending and this coupled with recent room supply increases in many of our markets along with the presence of web-based discounters, continues to impact our ability to increase room rates. Despite these market challenges, we have implemented proactive strategies focused on differentiation, innovation and value added services to increase market share and capture business from non core market segments. As our customers have become more cost conscious, we too have continued to seek efficiencies in all areas of our operations. Holloway s operating margins continue to be some of the best in the industry and while our operations are now leaner, management and staff always keep foremost in our minds the priorities of our customers to ensure we deliver a superior guest experience. Many Holloway properties are located in resource rich Alberta, where the economy has a great deal of reliance on the energy sector. Over the last year there has been a significant increase in the number of active oil rigs in this area which has translated into increases in room demand in many of our markets. The growing confidence in this region as well as in the Canadian economy also bodes well for continued demand growth. While some companies had difficulty in securing debt in 2010, we were able to successfully refinance our mortgage maturities on more favorable terms, while at the same time providing additional funds for capital improvements at the Radisson Suite Hotel Halifax and the Holiday Inn Express Halifax/Bedford. In addition, significant capital rebranding programs were completed at our Holiday Inn and Holiday Inn Express properties located in Grande Prairie, AB; Halifax, NS; Kamloops, BC; Moncton, NB and Myrtle Beach, SC which will allow those properties to be dominant players in their markets. We continue to reinvest capital in all our properties to ensure they remain competitive in their respective markets. We are committed to strengthening our balance sheet. We have strategies in place to address the convertible debenture maturing on August 1, 2011 as well as securing financing for all of our upcoming 2011 and 2012 mortgage maturities. During 2010 there were some notable personnel changes. During the first quarter, Michael Jackson left his position of President and Chief Operating Officer. At the Board level we welcomed three new Trustees, George Armoyan, Richard Grimaldi and Michael Rapps. I wish to express my thanks to the exiting Trustees, Amy Erixon and Wayne Watson and to Walter Keyser who has retired from his positions as Chairman and Trustee. We thank them all for their stewardship and contributions during their time at Holloway. In closing, I would like to thank our talented management team for skillfully managing through the challenges we faced in 2010 and look forward to capitalizing on the opportunities that 2011 will bring to Holloway and our unitholders. Glenn Squires CEO 2010 Annual Report 4

5 Canada Ottawa Halifax United States Washington DC 04 Property Listings 01 Best Western Hotel & Suites Grande Prairie 02 Holiday Inn Express Halifax/Bedford 03 Holiday Inn Express Kamloops 04 Holiday Inn Express Myrtle Beach 05 Holiday Inn Express Hotel & Suites Moncton 06 Holiday Inn Hotel & Suites Grande Prairie 07 Northwest Inn Slave Lake 08 Pomeroy Inn & Suites Grande Prairie 09 Radisson Hotel and Suites Fort McMurray 10 Radisson Suite Hotel Halifax 11 Super 8 Drayton Valley 12 Super 8 Fort Nelson 13 Super 8 Fort St. John 14 Super 8 Grande Prairie 15 Super 8 High Level 16 Super 8 Slave Lake 17 Super 8 Three Hills 18 Super 8 Truro 19 Super 8 Whitecourt 20 Super 8 Yellowknife 21 5 Calgary Downtown Suites & Spa Hotel 22 Super 8 Windsor 2010 Annual Report 5

6 Hotel Awards Canada Alberta Best Western Hotel & Suites Grande Prairie 5 Calgary Downtown Suites & Spa Hotel Holiday Inn Hotel & Suites Grande Prairie Pomeroy Inn & Suites Grande Prairie Radisson Hotel & Suites Fort McMurray Super 8 Drayton Valley Super 8 Grande Prairie Best Western International, Inc. Director s Award (2003, 2006, 2008) top 20% Quality Assurance score for North America Alberta Hotel & Lodging Association Housekeeping Award (2003, 2004, 2005, 2008) - based on annual inspections Goodwill Industries Alberta Employer of the Year (2008) working with employees with special needs Alberta Hotel Lodging Association Employer of Choice Award (2009, 2010) based on sound human resource practices in organizational effectiveness; organizational learning; development & training; staffing; total compensation; employee relations; workplace health & safety and human resource information management Intercontinental Hotels Group Quality Excellence Award (2007) based on guest satisfaction Alberta Hotel & Lodging Association Housekeeping Award (2007, 2008) based on annual inspections Alberta Hotel & Lodging Association Housekeeping Award (2006, 2008) based on annual inspections Radisson Hotels Worldwide Carlson Hotels Aspire Award (2008) greatest percentage increase in year over year RevPAR percentage growth Alberta Hotel & Lodging Association Housekeeping Award (2009, 2010) - based on annual inspections Wyndham International Pride of Super 8 Designation continuously exceeding the chain s standards Clean & Friendly Award (2001) - no customer complaints for a 1 year period Golden Pineapple Hospitality Award (2004) - over & above service to the community Spirit of Super 8 Award (2006) - extraordinary commitment to the community Alberta Hotel & Lodging Association Housekeeping Award (2006, 2007, 2008, 2010) - based on annual inspections Drayton Valley & District Chamber of Commerce Business of the Year Award (2005, 2006) based on annual inspections & community involvement Wyndham International Pride of Super 8 Designation continuously exceeding the chain s standards VIP Challenge Award (2001, 2002, 2003) properties with rooms with the highest VIP program enrollment Alberta Hotel & Lodging Association Housekeeping Award (2001, 2002, 2003, 2004, 2005) based on annual inspections 2010 Annual Report 6

7 Super 8 High Level Super 8 Three Hills Wyndham International Clean & Friendly Award (2002, 2003) no customer complaints for a 1 year period Pride of Super 8 Designation continuously exceeding the chain s standards Alberta Hotel & Lodging Association Housekeeping Award (2007) based on annual inspections Wyndham International Pride of Super 8 Designation continuously exceeding the chain s standards Alberta Hotel & Lodging Association Housekeeping Award (2000, 2001, 2003, 2004, 2005, 2006, 2010) based on annual inspections British Columbia Holiday Inn Express Kamloops Super 8 Fort St. John Intercontinental Hotels Group Newcomer of the Year Award (1995) - based on design, construction & enhanced guest perception Torchbearer Award (1996) given to less than 2% of Holiday Inns in North America, based on overall quality & guest satisfaction Quality Excellence Award (1999, 2000, 2006, 2007) based on guest satisfaction Wyndham International Pride of Super 8 Designation continuously exceeding the chain s standards New Brunswick Holiday Inn Express Hotel & Suites Moncton Intercontinental Hotels Group Newcomer of the Year Award (1997) based on design, construction & enhanced guest perception Tourism Industry Association of New Brunswick (TIANB) & The Canadian Tourism Human Resource Council Human Resource Development Award of the Year (2001) dedication to human resource development 2010 Annual Report 7

8 Northwest Territories Super 8 Yellowknife Wyndham International Pride of Super 8 Designation - continuously exceeding the chain s standards Nova Scotia Holiday Inn Express Halifax/Bedford Radisson Suite Hotel Halifax Super 8 Truro Intercontinental Hotels Group Newcomer of the Year Award (1995) - based on design, construction & enhanced guest perception Torchbearer Award (1996, 1997,1998) given to less than 2% of Holiday Inns in North America based on overall quality & guest satisfaction Quality Excellence Award (1999, 2000, 2001) guest satisfaction Association of Psychologists of Nova Scotia Nova Scotia Psychologically Healthy Workplace Award (2004) commitment to the psychological health & well being of employees Radisson Hotels Worldwide President s Award (1997, 1998, 1999, 2000, 2001, 2002, 2003, 2007) based on guest satisfaction & willingness to return Radisson s top honour Ranked #1 Radisson in the World for Guest Satisfaction (1998) Advocates Award (1998, 2000, 2003) given to the Top 30 Radisson Hotels Worldwide based on guest satisfaction Cleanest Radisson in Canada (2004) based on guest comments Tourism Industry Association of Nova Scotia (TIANS) Commitment to Excellence Award (2003, 2006, 2007, 2010) staff development & training Wyndham International Pride of Super 8 Designation continuously exceeding the chain s standards Golden Pineapple Hospitality Award (2004) - over & above service to the community United States South Carolina Holiday Inn Express Myrtle Beach Intercontinental Hotels Group Quality Excellence Award (2000, 2001, 2002, 2003) guest satisfaction Myrtle Beach Hospitality Myrtle Beach Hospitality Award (2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007) based on annual cleanliness inspections 2010 Annual Report 8

9 Management s Discussion and Analysis For the Three Months and Year Ended December 31, 2010 As at March 9, Annual Report iii 9

10 Introduction The following management s discussion and analysis ( MD&A ) is a discussion of the results of operations and financial condition of ( Holloway or the REIT ) for the three months and year ended December 31, 2010 and should be read in conjunction with the audited consolidated financial statements of the REIT and the notes thereto as at and for the year ended December 31, The financial statements of Holloway are prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) and are presented in Canadian dollars. This MD&A includes forward-looking information. Forward-looking information is subject to certain risks and uncertainties, which could result in actual results differing materially from the forward-looking information. See FORWARD-LOOKING INFORMATION. Additional information about the REIT filed with the applicable Canadian securities regulatory authorities, including the audited financial statements of the REIT and the notes thereto, are available at The REIT s units and convertible debentures are traded on the TSX under the symbols HLR.UN, HLR.DB and HLR.DB.A, respectively. Overview The year 2010 saw the emergence of a recovery in the Canadian hotel sector, which had experienced challenges through Hotel consulting group PKF reported on a national basis, revenue per available room ( RevPAR ) increased by 5.6% in 2010, after experiencing a decline of 12.0% in For 2011, PKF is projecting RevPAR growth of 3.6%. The results for the REIT reflect this recovery, as fourth quarter RevPAR increased by 14% while third quarter RevPAR grew by 5% versus the prior year. Improvements in business conditions resulted in sustained momentum for occupancy growth through the second half of Average room rates continue to be constrained by the proliferation of discounted third party internet booking sites along with an increase in room supply in many markets. On a full year basis, Atlantic, Western and U.S. regions showed an improvement in RevPAR compared to According to statistics compiled by the Canadian Association of Oilwell Drilling Contractors, the average number of active oil rigs in 2010 increased by 49% compared to the prior year. Approximately 60% of Holloway s rooms are located in Alberta and as such are heavily dependent upon oil and gas exploration, drilling and servicing. In addition to the increase in business for the REIT from the oil sector, there have been improved levels of business from an array of other segments including construction, corporate, group and leisure. The Bank of Canada expects levels of business investment to continue to rebound strongly in 2011 due to financial and competitive conditions. The outlook for the REIT remains positive for future growth Annual Report 10

11 Key Events Q4 Revenue for the fourth quarter increased 15% compared to the fourth quarter of 2009; occupancy increases were experienced in all regions; RevPAR increased 14% for the fourth quarter of 2010 compared to the fourth quarter of 2009; and The distributable loss decreased $1.0 million from the fourth quarter of 2009 to $0.5 million for the fourth quarter of Summary of Selected Financial Information The following table provides key financial information for the past three years. (in $000 s except per unit results, number of rooms, ADR and RevPAR) Hotel revenues 73,451 74,427 93,495 Total revenues (hotel and REIT interest income) 73,664 75,166 96,297 Net income (loss) and comprehensive income (loss) (19,907) (20,337) (5,080) Basic and diluted income (loss) per unit (0.51) (0.52) (0.13) Basic and diluted FFO per unit (0.06) Basic and diluted distributable income (loss) per unit (0.04) Distributions declared per unit Total assets 342, , ,386 Total indebtedness (line of credit, mortgages and loans payable, obligations under capital leases, convertible debentures and promissory notes) 227, , ,513 Unitholders equity 105, , ,094 Number of rooms/suites* 2,386 2,320 2,423 Occupancy* 60.39% 55.45% 65.14% ADR* $ $ $ RevPAR* $73.38 $73.02 $ *Excludes discontinued operations. Overview of Holloway Lodging REIT, its Strategies and Objectives Holloway is an open-ended real estate investment trust that was formed under the laws of the Province of Ontario pursuant to its Declaration of Trust on March 28, was the initial year of active operations for the REIT. As at December 31, 2010, the REIT owned 22 hotel properties with 2,386 guest rooms and suites and has equity ownership interests, ranging from 2.52% to 19.06% in six other hotels. The hotels in which the REIT has an equity ownership interest represent an additional 472 rooms. Holloway s Operating Strategy and Objectives Holloway s principal business is to invest, directly or indirectly, in the ownership and operation of hotel properties. Management of the REIT has considerable expertise in hotel operations and management and possesses the resources necessary to maximize revenue and profits from its hotel portfolio. The REIT capitalizes on the hotel operating, development, finance, and transactional experience of its management and trustees. The REIT s objectives are to: expand its asset base and increase its funds from operations through accretive acquisitions and internal growth initiatives; enhance the value of its assets to provide unitholders with long-term unit value through active asset management; and increase cash flow from operations in order to resume distributions to unitholders at the appropriate time Annual Report 11

12 Hotel Portfolio Holloway s portfolio consists primarily of limited service hotels with a small number of full service hotels. The table below provides details on the twenty-two hotels wholly owned by Holloway as at December 31, Property Location No. of Rooms Alberta 5 Calgary Downtown Suites & Spa Calgary 302 Best Western Hotel & Suites Grande Prairie 100 Holiday Inn Hotel & Suites Grande Prairie 146 Northwest Inn Slave Lake 99 Pomeroy Inn and Suites Grande Prairie 152 Radisson Hotel and Suites Fort McMurray 134 Super 8 Drayton Valley 60 Super 8 Grande Prairie 149 Super 8 High Level 81 Super 8 Slave Lake 58 Super 8 Three Hills 82 Super 8 Whitecourt 59 1,422 British Columbia Holiday Inn Express Kamloops 80 Super 8 Fort Nelson 142 Super 8 Fort St. John New Brunswick Holiday Inn Express Hotel & Suites Moncton 151 Northwest Territories Super 8 Yellowknife 66 Nova Scotia Holiday Inn Express Halifax 98 Radisson Suite Hotel Halifax 104 Super 8 Truro 50 Super 8 Windsor South Carolina - USA Holiday Inn Express Myrtle Beach 114 Total Rooms 2, Annual Report 12

13 The table below provides details on the six hotels in which the REIT has minority equity ownership interests. Property Location Percent Ownership No. of Rooms British Columbia Super 8 Langley 8.41% 81 New Brunswick Super 8 Dieppe 6.00% 85 Newfoundland and Labrador Super 8 St. John s 17.63% 82 Nova Scotia Super 8 Amherst 15.72% 50 Ontario Super 8 Barrie 2.52% 82 Super 8 Toronto 19.06% Total Rooms Annual Report 13

14 Operating Results The following table provides a summary of the operating results for the three months and year ended December 31, 2010 and Three months ended Years ended (in $000 s except number December 31, 2010 December 31, 2009 December 31, 2010 December 31, 2009 of units and per unit results) Hotel revenues 18,406 15,939 73,451 71,985 Hotel expenses 14,048 12,508 54,171 52,673 Hotel operating income 4,358 3,431 19,280 19,312 Other expenses 15,112 15,637 41,703 44,300 Provision for (recovery of) future income taxes - (413) (2,516) (3,056) Loss from continuing operations for the period (10,754) (11,793) (19,907) (21,932) Income from discontinued operations - 1,361-1,595 Loss and comprehensive loss for the period (10,754) (10,432) (19,907) (20,337) Weighted average basic units outstanding 39,135,216 39,135,216 39,135,216 39,135,216 Weighted average diluted units outstanding 39,135,216 39,135,216 39,135,216 39,135,216 Basic income (loss) per unit (0.27) (0.27) (0.51) (0.52) Diluted income (loss) per unit (0.27) (0.27) (0.51) (0.52) Reconciliation to funds from operations (FFO) Add/(deduct): Depreciation and amortization on real property 3,232 3,190 12,796 13,045 Provision for (recovery of) future income taxes, continuing operations - (413) (2,516) (3,056) Loss (gain) loss on acquisition or disposal 84 (1,474) 193 (1,474) Write-off and provision for impairment of investments in hotel properties - 1, ,011 Provision for impairment of hotel property 6,768-6,768 - Provision for impairment of mezzanine loans and advances - 6,359-11,059 Provision for future income taxes, discontinued operations Funds from operations basic and diluted (670) (1,670) (2,243) 502 Basic FFO per unit (0.02) (0.04) (0.06) 0.01 Diluted FFO per unit (0.02) (0.04) (0.06) 0.01 Reconciliation to distributable income Add/(deduct): Depreciation and amortization trust and other assets Accretion of mortgages, convertible debentures and deferred financing fees ,093 2,528 Unit-based compensation Unrealized foreign exchange gain (139) (86) (242) (737) FF&E reserve (552) (480) (2,204) (2,233) Distributable income basic and diluted (514) (1,500) (1,391) 368 Basic distributable income per unit (0.01) (0.04) (0.04) 0.01 Diluted distributable income per unit (0.01) (0.04) (0.04) 0.01 Distributions declared Reconciliation of cash flow from operating activities to distributable income Cash flow from operating activities 510 (2,857) 2, Changes in non-cash working capital balances (472) 1,837 (2,037) 2,244 FF&E reserve (552) (480) (2,204) (2,233) Distributable income (514) (1,500) (1,391) Annual Report 14

15 Q4 Operating Results The results of operations for the three months ended December 31, 2010 and 2009 represent the continuing operations of twenty-two hotels for the fourth quarter of 2010 and twenty- one hotels for the fourth quarter of The Super 8 hotel in Windsor, NS was acquired in June Revenue Three months ended (in $000 s) December 31, 2010 December 31, 2009 Variance Room revenue 15,516 13,247 2,269 Other revenue 2,890 2, Total 18,406 15,939 2,467 Room Revenue - Key Performance Measures Three months ended December 31, 2010 December 31, 2009 RevPAR Region Occ. ADR RevPAR Occ. ADR RevPAR Change Atlantic Canada ($Cdn) 59.32% $ $ % $ $ % Western Canada ($Cdn) 62.54% $ $ % $ $ % United States ($US) 38.77% $68.22 $ % $63.83 $ % Weighted Average Total ($Cdn) 60.77% $ $ % $ $ % The Atlantic Canada RevPAR increased 4.1% for the three months ended December 31, 2010, compared to the three months ended December 31, The increase is attributed to higher occupancy and rate in both Moncton and Truro and an occupancy increase in suburban Halifax. In Moncton, there was an encouraging improvement in demand and rate versus last year due to various business expansions and projects which are taking place in the greater Moncton area. The market has continued to perform well, despite a significant increase in room supply over the last several years. In Halifax, there was an increase in demand in the suburban market while in downtown the demand declined versus the prior year. In suburban Halifax, the higher demand was accompanied by a decline in rates due to the business mix and the proportion of business generated from discounted third party internet booking sites. The downtown market had less group and government business which was offset by individual travellers paying higher rates. The result is that the downtown Halifax market had a slight RevPAR decline versus the prior year. In Truro, there were improvements in both occupancy and rate due to successful implementation of several packages and pricing strategies. Four of the REIT hotels in Atlantic Canada exceeded their fair market share in the fourth quarter. The Western Canada RevPAR increased 16.4% compared to the fourth quarter of There was solid occupancy growth in almost all of the markets with exceptional growth in Slave Lake, Three Hills, Fort Nelson and Drayton Valley. There was also very strong occupancy growth in Calgary, Whitecourt, Fort St. John and Grande Prairie. There were lower rates in most of the markets experiencing occupancy growth. However, the strength of the occupancy increases resulted in significant year over year RevPAR gains Annual Report 15

16 Alberta and British Columbia benefitted from resurgence in demand from a multitude of sources. In Slave Lake, there was demand growth due to pipeline construction work. Three Hills benefitted from crew business relating to alternative energy projects taking place in the area. In Fort Nelson, Fort St. John, Whitecourt and Drayton Valley, the markets experienced increases in energy related exploration and well servicing. In Grande Prairie, there has been increased demand from corporate and crew business as well as from sports teams and social organizations. Activity surrounding oil and gas well servicing has also increased versus the prior year. In Calgary, there were increases in both corporate and group business. Fort McMurray experienced higher levels of corporate business. Several of the REIT s hotels in the Western region increased their market share and most achieved in excess of fair share. RevPAR for the Holiday Inn Express in Myrtle Beach, South Carolina increased 17.5% compared to the prior year. There was growth in both demand and rate as a result of increased leisure and group business. Other Revenue Higher food and beverage revenue in Fort McMurray and Grande Prairie accounted for the increase in other revenue. Expenses Three months ended (in $000 s) December 31, 2010 December 31, 2009 Variance Operating expenses 12,420 11,076 1,344 Property taxes and insurance 1,179 1, Management fees Total 14,048 12,508 1,540 Operating Expenses Operating expenses include wages, supplies and overhead expenses such as repairs and maintenance, sales and marketing and administrative expenses related to the operations of the hotels. These expenses have increased $1.3 million when comparing the three months ended December 31, 2010 to the same period in The increase is primarily attributed to the increased occupancy in the hotels, and having one additional hotel in 2010 versus 2009, due to the acquisition of the Super 8 Windsor in June Property Taxes and Insurance Property taxes and insurance expenses have increased marginally for the three months ended December 31, 2010 compared to the fourth quarter of 2009 due to property tax increases in a few markets and having one additional hotel in 2010 versus Management Fees Management fees are based on the hotel revenues which are higher for the fourth quarter of 2010 compared to the fourth quarter of Annual Report 16

17 Hotel Operating Income The following table provides the REIT s hotel operating margins for its portfolio for the three months ended December 31, 2010 and (in $000 s except percentages, # of rooms Three months ended available and HOI per available room) December 31, 2010 December 31, 2009 Variance Hotel revenues 18,406 15,939 2,467 Hotel operating expenses 12,420 11,076 1,344 Hotel gross margin 5,986 4,863 1,123 Percentage 32.5% 30.5% 2.0% Hotel overhead expenses (1) 1,628 1, Hotel operating income (HOI) 4,358 3, Hotel operating income margin 23.7% 21.5% 2.2% Number of rooms available 219, ,440 6,072 HOI per available room $19.85 $16.07 $3.78 (1) Hotel overhead expenses include property taxes, insurance and management fees. Hotel operating income per available room increased by $3.78 to $19.85 from $16.07 for the three months ended December 31, 2010 and 2009, respectively. The hotel operating income margin increased to 23.7% from 21.5%. The increase is attributed to the revenue increase as a consequence of increased occupancy and the resultant economies of scale. Other Income and Expenses Three months ended (in $000 s) December 31, 2010 December 31, 2009 Variance Interest on mortgages and other debt 2,728 2,729 (1) Accretion on convertible debentures, mortgages and deferred financing fees Interest on convertible debentures 1,247 1,247 - Corporate and administrative (89) Interest income (110) (79) (31) Unrealized foreign exchange gain (139) (86) (53) Loss on disposal Provision for impairment of hotel property 6,768-6,768 Write-off and provision for impairment of investments in hotel properties - 1,011 (1,011) Provision for impairment of mezzanine loans and advances - 6,359 (6,359) Depreciation and amortization 3,279 3, Total 15,112 15,637 (525) 2010 Annual Report 17

18 Interest on Mortgages and Other Debt Interest on mortgages and other debt has remained the same for the three months ended December 31, 2010 compared to the three months ended December 31, The extra interest cost from having one additional hotel was offset by the declining mortgage balances on the portfolio. Interest on Convertible Debentures The total interest on the convertible debentures was $1.2 million for the fourth quarters of 2010 and 2009 as the face value of the debentures payable is the same. Accretion on Convertible Debentures, Mortgages and Deferred Financing Fees The total of the non-cash accretion of the discount on the convertible debentures, mortgages and deferred financing fees has increased $0.1 million to $0.8 million for the fourth quarter of 2010 compared to $0.7 million for the fourth quarter of 2009, as the non-cash accretion on the convertible debentures has increased. The accretion increases over the term to the maturity dates of the debentures. Corporate and Administrative Corporate administrative expenses decreased $0.1 million for the three months ended December 31, 2010 compared to the three months ended December 31, 2009, due to lower expenses for wages and consulting fees. Interest Income During the three months ended December 31, 2010 and 2009, the REIT generated interest income of $0.1 million and $0.1 million respectively from loans receivable. Unrealized Foreign Exchange Gain/Loss The unrealized foreign exchange gain/loss represents the conversion of the US-denominated mortgage on the Holiday Inn Express in Myrtle Beach into Canadian dollars. Depreciation and Amortization Depreciation and amortization has increased marginally for the three months ended December 31, 2010 compared to the fourth quarter of Loss on Disposal The loss on disposal of $0.1 million primarily represents the cost of obsolete franchise items such as signage, as a result of new brand standards introduced by IHG and Wyndham, the franchisors for Holiday Inn and Super 8 brands. Provision for Impairment of Hotel Property The REIT recorded a provision for impairment of $6.8 million during the three months ended December 31, 2010 on the Northwest Inn located in Slave Lake, AB, as the performance of the hotel no longer supported its carrying value. Under Canadian GAAP, the provision represents the difference between the carrying amount and the discounted estimated future cash flows from the hotel Annual Report 18

19 Funds from Operations ( FFO ) FFO for the three months ended December 31, 2010 was ($0.7) million (-$0.02) basic and diluted FFO per unit) compared to ($1.7) million (-$0.04) basic and diluted FFO per unit) for the same period in Distributable Income Distributable income was ($0.5) million (-$0.01 basic and diluted distributable income per unit) for the three months ended December 31, 2010 compared to ($1.5) million (-$0.04 basic and diluted distributable income per unit) for the same period in Distributable income will fluctuate due to market conditions, the seasonality in the hospitality industry and the timing of acquisitions and disposals. The following table shows the reconciliation between standardized distributable cash and distributable income for the three months ended December 31, 2010 and 2009, respectively. Three months ended (in $000 s) December 31, 2010 December 31, 2009 Net Cash Provided by Operating Activities 510 (2,857) Capital expenditures including acquisitions and other assets (553) (486) Standardized Distributable Cash (43) (3,343) Reconciliation to Distributable Income: Standardized Distributable Cash (43) (3,343) Capital expenditures in excess of (less than) FF&E reserve 1 6 Changes in non-cash working capital balances (472) 1,837 Distributable Income (514) (1,500) 2010 Annual Report 19

20 Cash Flow for the Three Months Ended December 31, 2010 and 2009 During the three months ended December 31, 2010, the REIT s cash and cash equivalents increased by $0.5 million from $0.3 million to $0.8 million primarily as a result of revenue increases and the resultant cash flow from operations. or the comparative period in 2009, cash and cash equivalents increased by $3.3 million from $0.5 million to $3.8 million primarily as a result of the sale of the Wingate by Wyndham in Calgary. Three months ended (in $000 s) December 31, 2010 December 31, 2009 Cash provided by (used in) Operating activities Net loss and comprehensive loss from continuing operations for the periods (10,754) (11,793) Charges (credits) to income not involving cash Unit-based compensation - 15 Depreciation and amortization 3,279 3,243 Accretion of mortgages, convertible debentures and deferred financing fees Loss on disposal 84 - Provision for impairment of mezzanine loans and advances - 6,359 Provision for impairment of investments in hotel properties - 1,011 Provision for impairment of hotel property 6,768 - Unrealized foreign exchange gain (139) (86) Recovery of future income taxes - (413) Subtotal 38 (995) Net change in non-cash working capital balances related to operations 472 (1,977) Cash flow from discontinued operations Cash flow from (used in) operating activities 510 (2,857) Investing activities Decrease (increase) in restricted cash Decrease (increase) in capital reserves, continuing operations 442 (169) Decrease (increase) in capital reserves, discontinued operations - (585) Proceeds from sale of property, discontinued operations - 15,636 Increase in mezzanine loans and advances receivable - (30) Additions to property and equipment and other assets (553) (486) Cash flow from (used in) investing activities (94) 14,376 Financing activities Repayment of capital lease obligations (64) (96) Increase in deferred financing fees, continuing operations (100) (29) Repayment of mortgages and loans payable, continuing operations (1,271) (1,175) Repayment of mortgage payable, discontinued operations - (6,912) Repayment of promissory notes (17) - Increase in line of credit 1,519 - Cash flow from (used in) financing activities 67 (8,212) Net change in cash and cash equivalents during the periods 483 3,307 Cash and cash equivalents, continuing operations beginning of periods Cash and cash equivalents, discontinued operations beginning of periods Cash and cash equivalents, continuing operations end of periods 830 3,756 Cash and cash equivalents, discontinued operations end of periods , Annual Report 20

21 Operating Activities Operations provided $0.5 million in cash for the three months ended December 31, The cash flow before changes in working capital items provided $0.04 million in cash. Changes in working capital items provided $0.5 million in cash as accounts receivable decreased $0.8 million and accounts payable and accrued liabilities increased $0.2 million. These sources were offset by an increase in prepaid expenses and deposits of $0.1 million and a decrease in the accrued interest on the convertible debentures of $0.4 million. Operations utilized $2.9 million in cash for the three months ended December 31, The cash flow before changes in working capital items used $1.0 million in cash. Changes in working capital items utilized $2.0 million in cash as prepaid expenses and deposits increased $2.0 million, accounts payable and accrued liabilities decreased $0.6 million and accrued interest on convertible debentures decreased $0.4 million. These uses of cash were offset by the reduction in accounts receivable of $1.0 million. Investing Activities Investing activities utilized $0.1 million during the three months ended December 31, Additions to property and equipment of $0.5 million were made at a number of hotels. The REIT s capital reserves for replacement decreased $0.4 million and were the source of funds for a majority of the additions. Investing activities provided $14.4 million during the three months ended December 31, 2009 due to the net proceeds on the sale of the Wingate by Wyndham in Calgary of $15.6 million. Additions to property and equipment of $0.5 million were made at a number of hotels. In addition, the REIT s capital reserves for replacement increased $0.7 million. Financing Activities Financing activities provided $0.1 million during the three months ended December 31, The REIT made principal repayments on its mortgage debt and loans payable of $1.3 million. The REIT drew $1.5 million on one of its lines of credit during the fourth quarter of The REIT paid a fee of $0.1 million related to the term sheet to finance the repayment of the convertible debentures maturing August 1, Financing activities utilized $8.2 million during the three months ended December 31, The REIT made principal repayments on its continuing operations mortgage debt and loans payable of $1.2 million and repaid the mortgage on the Wingate by Wyndham of $6.9 million during the fourth quarter of Annual Report 21

22 2010 Operating Results The results of operations for the years ended December 31, 2010 represent the operations of twenty-one hotels for the entire year and the Super 8 in Windsor, NS for seven months of Revenue Years ended (in $000 s) December 31, 2010 December 31, 2009 Variance Room revenue 63,174 61,837 1,337 Other revenue 10,277 10, Total 73,451 71,985 1,466 Room Revenue - Key Performance Measures Years ended December 31, 2010 December 31, 2009 RevPAR Region Occ. ADR RevPAR Occ. ADR RevPAR Change Atlantic Canada ($Cdn) 69.36% $ $ % $ $ % Western Canada ($Cdn) 58.60% $ $ % $ $ % United States ($US) 53.91% $81.93 $ % $81.26 $ % Weighted Average Total ($Cdn) 60.39% $ $ % $ $ % The Atlantic Canada RevPAR has increased 0.2% for the year ended December 31, 2010 compared to the year ended December 31, 2009, due to an increase in occupancy in Moncton which was offset by a decline in average rates across the region. The Halifax market had similar demand levels compared to the prior year with a moderate rate decline experienced in the suburban market. Four of the REIT hotels in Atlantic Canada exceeded their fair market share in The Western Canada RevPAR has increased 0.7% for the year ended December 31, 2010 compared to the year ended December 31, The majority of the hotels in the Western region experienced occupancy growth in 2010 compared to the prior year. These increases were offset by rate declines throughout the region, especially in Slave Lake, High Level, Grande Prairie and Fort McMurray. Several of the REIT s hotels in the Western region increased levels of market share and most achieved in excess of their fair market share. The REIT experienced greater year on year revenue growth in the second half of the year than the first six months of RevPAR for the Holiday Inn Express in Myrtle Beach, South Carolina increased 1.6%. Leisure and group business experienced a decline in the first half of the year but has since rebounded Annual Report 22

23 Other Revenue Higher food and beverage revenue in Fort McMurray accounted for the increase in other revenue. Years ended (in $000 s) December 31, 2010 December 31, 2009 Variance Operating expenses 47,696 46,236 1,460 Property taxes and insurance 4,657 4, Management fees 1,818 1,810 8 Total 54,171 52,673 1,498 Operating Expenses Operating expenses include wages, supplies and overhead expenses such as repairs and maintenance, sales and marketing and administrative expenses related to the operations of the hotel. These expenses have increased $1.5 million when comparing the year ended December 31, 2010 to the same period in 2009, as the result of increased occupancy. Property Taxes and Insurance Property taxes and insurance expenses have increased marginally for the year ended December 31, 2010 compared to 2009, due to having one additional hotel for the last seven months of 2010 versus Management Fees Management fees are based on the hotel revenues which are higher for the year ended December 31, 2010 compared to the same period in Hotel Operating Income The following table provides the REIT s operating margins for its portfolio for the year ended December 31, 2010 and (in $000 s except percentages, number of Years ended rooms available and HOI per available room) December 31, 2010 December 31, 2009 Variance Hotel revenues 73,451 71,985 1,466 Hotel operating expenses 47,696 46,236 1,460 Hotel gross margin 25,755 25,749 6 Percentage 35.1% 35.8% (0.7%) Hotel overhead expenses (2) 6,475 6, Hotel operating income (HOI) 19,280 19,312 (32) Hotel operating income margin 26.2% 26.8% (0.6%) Number of rooms available 860, ,800 14,124 HOI per available room $22.39 $22.81 ($0.42) (2) Hotel overhead expenses include property taxes, insurance and management fees. Hotel operating income per available room decreased by $0.42 to $22.39 for the year ended December 31, 2010 from $22.81 for the year ended December 31, The hotel operating income margin decreased to 35.1% from 35.8%. The decrease is attributable to the revenue decline primarily as a consequence of lower average rates, and as such has a greater impact on operating margins. Operations do not have the same ability to cut costs for wages and supplies with rooms sold at reduced rates as would be the case with reduced occupancy Annual Report 23

24 Other Income and Expenses Years ended (in $000 s) December 31, 2010 December 31, 2009 Variance Interest on mortgages and other debt 10,826 10,997 (171) Accretion on convertible debentures, mortgages and deferred financing fees 3,093 2, Interest on convertible debentures 4,989 4,989 - Corporate and administrative 2,880 2, Interest income (213) (739) 526 Unrealized foreign exchange gain (242) (737) 495 Loss on acquisition or disposal Provision for impairment of hotel property 6,768-6,768 Provision for impairment of investments in hotel properties 423 1,011 (588) Provision for impairment of mezzanine loans and advances - 11,059 (11,059) Depreciation and amortization 12,986 12, Total 41,703 44,300 (2,597) Interest on Mortgages and Other Debt Interest on mortgages and other debt has decreased $0.2 million to $10.8 million for the year ended December 31, 2010 compared to $11.0 million for the same period in 2009 due to the decline in the mortgage principal balance. Accretion on Convertible Debentures, Mortgages and Deferred Financing Fees The total of the non-cash accretion of the discount on the convertible debentures, mortgages and deferred financing fees has increased $0.5 million to $3.1 million for 2010 compared to $2.6 million for the same period in 2009, as the non-cash accretion on the convertible debentures increases as the period to maturity decreases. Interest on Convertible Debentures The total interest on the convertible debentures was $5.0 million for 2010 and Corporate and Administrative Corporate administrative expenses were $2.9 million for the year ended December 31, 2010 and $2.2 million for the year ended December 31, The increase is primarily a result of severance expenses of $0.7 million and legal expenses of $0.2 million over last year related to the proposed corporate conversion. On March 19, 2010, the REIT announced the departure of its President and Chief Operating Officer Annual Report 24

25 Interest Income During the year ended December 31, 2010 and 2009, the REIT generated interest income of $0.2 million and $0.7 million respectively from loans receivable and the investment of cash balances. Lower interest revenue was earned on the loan to Pacrim Hospitality Services Inc. as the interest rate on this loan declined to 1% during the fourth quarter of Unrealized Foreign Exchange Gain/Loss The unrealized foreign exchange gain/loss represents the conversion of the US-denominated mortgage on the Holiday Inn Express in Myrtle Beach into Canadian dollars. Depreciation and Amortization Depreciation and amortization has increased marginally for the year ended December 31, 2010 compared to the same period of Loss on Acquisition or Disposal The loss on disposal of $0.2 million includes $0.1 million cost of obsolete franchise items such as signage as a result of new brand standards introduced by IHG and Wyndham. In addition, during the second quarter of 2010, the REIT sold its minority equity investments in the Super 8 hotels is Ste-Foy and Trois-Rivieres, Quebec and incurred a loss on disposal of $0.06 million. On June 1, 2010, the owners of the Super 8 hotel in Windsor, NS, Winport Developments Limited Partnership, a related party relinquished ownership of the hotel to Holloway pursuant to a quit claim. Holloway had provided a $1.9 million mezzanine loan to the property which was in default. Holloway assumed all the assets and liabilities of the hotel. As the net liabilities exceeded the net assets, the REIT recorded a $0.05 loss on acquisition. Provision for Impairment of Investments in Hotel Properties The REIT recorded a provision for impairment of $0.4 million during the year ended December 31, 2010 on its minority investment in the Super 8 in Toronto, ON which represents the total cost of this investment. The performance of the hotel no longer supported the carrying value of the investment. During the year ended December 31, 2009, the REIT recorded a provision for impairment on its minority investment in the Super 8 in Langley, BC and wrote off its investment of $0.5 million in the Super 8 in Midland, ON as it relinquished its ownership interest in the Midland hotel. Provision for Impairment of Mezzanine Loans and Advances In 2009, the REIT recorded a provision for impairment of $11.1 million on the mezzanine loans and advances to the Yorkland Hotel in Toronto, ON and the Super 8 hotel in Windsor, NS. During the second quarter of 2010, the Yorkland Hotel was sold by the receiver. The proceeds of the sale were not sufficient to provide for any recovery on the mezzanine loan and advances. Income from Discontinued Operations The REIT s income from discontinued operations during the 2010 was nil compared with $1.6 million for the prior year, which represents the income from the Wingate by Wyndham hotel in Calgary, AB, which was sold in July, Provision for Impairment of Hotel Property The REIT recorded a provision for impairment of $6.8 million during 2010 on the Northwest Inn located in Slave Lake, AB, as the performance of the hotel no longer supported its carrying value. Under Canadian GAAP, the provision represents the difference between the carrying amount and the discounted estimated future cash flows from the hotel Annual Report 25

26 Funds from Operations ( FFO ) FFO for the year ended December 31, 2010 was ($2.2) million (-$0.06 basic and diluted FFO per unit) compared to $0.5 million ($0.01 basic and diluted FFO per unit) for the same period in The main causes for the decline in FFO are one-time corporate and administrative expenses of $0.7 million, a decrease in interest income of $0.5 million, a decrease in the foreign exchange gain of $0.5 million and an increase in accretion expense of $0.5 million. Distributable Income Distributable income was ($1.4) million (-$0.04 basic and diluted distributable income per unit) for the year ended December 31, 2010 compared to $0.4 million ($0.01 basic and diluted distributable income per unit) for the same period in Distributable income will fluctuate due to market and economic conditions, the seasonality in the hospitality industry and the timing of acquisitions and disposals. The following table shows the reconciliation between standardized distributable cash and distributable income for the year ended December 31, 2010 and 2009, respectively. Years ended (in $000 s) December 31, 2010 December 31, 2009 Net Cash Provided by Operating Activities 2, Capital expenditures including acquisitions and other assets (3,594) (1,545) Standardized Distributable Cash (744) (1,188) Reconciliation to Distributable Income: Standardized Distributable Cash (744) (1,188) Capital expenditures in excess of (less than) FF&E reserve 1,390 (688) Changes in non-cash working capital balances (2,037) 2,244 Distributable Income (1,391) Annual Report 26

27 Cash Flow for the Year Ended December 31, 2010 and 2009 During the year ended December 31, 2010, the REIT s cash and cash equivalents decreased by $3.0 million from $3.8 million to $0.8 million primarily as a result of capital improvements at several hotels, one-time corporate expenses and mortgage repayments. For the comparative period in 2009, cash and cash equivalents decreased by $1.2 million from $5.0 million to $3.8 million. Years ended (in $000 s) December 31, 2010 December 31, 2009 Cash provided by (used in) Operating activities Net loss and comprehensive loss from continuing operations for the years (19,907) (21,932) Charges (credits) to income not involving cash Unit-based compensation Depreciation and amortization 12,986 12,969 Accretion on mortgages, convertible debentures and deferred financing fees 3,093 2,578 Loss on acquisition or disposal Unrealized foreign exchange gain (242) (737) Provision for impairment of investments in hotel properties 423 1,011 Provision for impairment of mezzanine loans and advances - 11,059 Provision for impairment of hotel property 6,768 - Recovery of future income taxes (2,516) (3,056) Subtotal 813 1,956 Net change in non-cash working capital balances related to operations 1,988 (2,719) Cash flow from discontinued operations 49 1,120 Cash flow from (used in) operating activities 2, Investing activities Decrease (increase) in restricted cash 9 93 Decrease (increase) in capital reserves (758) (1,746) Increase in mezzanine loans and advances receivable - (885) Proceeds from repayment of mezzanine loan - 3,000 Proceeds from sale of (increase in) investments in hotel properties 271 (283) Proceeds from sale of property, discontinued operations - 15,636 Additions to property and equipment and other assets (3,594) (1,545) Cash flow from (used in) investing activities (4,072) 14,270 Financing activities Increase in line of credit 2,519 - Repayment of capital lease obligations (285) (350) Proceeds from mortgages and loans payable, net of deferred financing fees 10,120 1,040 Repayment of mortgages and loans payable, continuing operations (13,849) (4,589) Repayment of mortgage and capital leases, discontinued operations - (7,140) Repayment of promissory notes (239) - Distributions paid to unitholders - (4,794) Cash flow from (used in) financing activities (1,734) (15,833) Net change in cash and cash equivalents during the years (2,956) (1,206) Cash and cash equivalents, continuing operations beginning of years 3,756 4,860 Cash and cash equivalents, discontinued operations beginning of years ,786 4,992 Cash and cash equivalents, continuing operations end of years 830 3,756 Cash and cash equivalents, discontinued operations end of years , Annual Report 27

28 Operating Activities Operations provided $2.9 million in cash for the year ended December 31, This is a significant improvement compared to the prior year which was $0.4 million. The cash flow before changes in working capital items provided $0.8 million in cash. Changes in working capital items provided an additional $2.0 million in cash as prepaid expenses and deposits decreased $1.9 million and accounts payable and accrued liabilities increased $0.6 million. These sources of cash were offset by the increase in accounts receivable of $0.5 million. Cash flow from operations was $0.4 million for the year ended December 31, 2009 reflecting the cash generated by the hotels and the corporate operations of the REIT. The cash flow before changes in working capital items provided $2.0 million in cash. Changes in working capital items utilized $2.7 million as prepaid expenses and deposits increased $2.3 million and accounts payable and accrued liabilities decreased $1.3 million while accounts receivable decreased $0.9 million. The cash flow from discontinued operations provided $1.1 million in cash. Investing Activities Investing activities utilized $4.1 million during the year ended December 31, Additions to property and equipment of $3.6 million were made at Holiday Inn Express hotels in Myrtle Beach, Halifax and Kamloops and at a number of other hotels. In addition, the REIT s capital reserves for replacement increased $0.8 million, including a $1.0 million reserve arranged in conjunction with the refinancing of the Radisson hotel in Halifax, NS. Holloway received proceeds of $0.3 million from the sale of its minority equity ownership investments in two hotels. Investing activities generated $14.3 million during the year ended December 31, The REIT received $3.0 million in February, 2009 as a result of the repayment of one of its mezzanine loans. These proceeds were offset by a $1.7 million increase in Holloway s capital reserves for replacement and $0.9 million in additional advances to The Yorkland Hotel in Toronto, ON and the Super 8 in Windsor, NS where the REIT had provided mezzanine loans. The REIT also provided $0.3 million to hotels in which it has minority ownership interests. Additions to property and equipment of $1.5 million were made at a number of the hotels. The net proceeds from the sale of the Wingate by Wyndham in Calgary were $15.6 million. Financing Activities Financing activities utilized $1.7 million during the year ended December 31, The REIT made principal repayments on its mortgage debt and loans payable of $13.8 million, which included $8.9 million for the mortgages on the Holiday Inn Express and Radisson Suite hotels in Halifax which were re-financed during the first quarter. The REIT received $10.1 million, net of financing fees, from new mortgages placed on these two properties. Holloway drew $2.5 million on one of its available lines of credit during year. Pursuant to the sale of its minority equity ownership in two hotels, the REIT repaid $0.2 million on the promissory notes. Financing activities utilized $15.8 million during the year ended December 31, The REIT obtained an additional $1.0 million net of financing fees in mortgage financing on the Radisson Hotel and Suites in Fort McMurray, AB. The REIT made principal repayments on its mortgage debt and loans payable of $4.6 million and paid distributions to unitholders of $4.8 million. Regular principal repayments on the mortgage on the Wingate hotel before the sale and the repayment on closing utilized $7.1 million in cash Annual Report 28

29 Balance Sheet The following table outlines the significant changes in the consolidated balance sheet from December 31, 2009 to December 31, A as at As at December 31, December 31, Increase (in $000 s) (Decrease) Explanantion Assets Cash and cash equivalents 830 3,756 (2,926) See the Cash flow for the Year Ended December 31, 2010 and 2009 in the previous section. Accounts receivable 2,962 2, The increase is primarily due to an increase in the balances on billing accounts for hotel customers and the number of guests in-house at the hotels at December 31. Prepaid expenses 2,608 4,479 (1,871) The decrease is primarily due to a refund of the $1.9 and deposits million on deposit at December 31, 2009 for the potential acquisition for The Yorkland Hotel, which was terminated in 2010 and the deposit refunded. Capital reserve - restricted 5,440 4, The increase is related to the capital reserve contributions held by the mortgage lenders including an additional $1.0 million arranged in conjunction with the Radisson Suite Hotel Halifax refinancing. Property and equipment 313, ,465 (13,091) The decrease is the net of additions of $6.7 million (including the Super 8 in Windsor, NS of $3.1 million) and the depreciation for the year of $12.8 million and the provision for impairment on the Northwest Inn in Slave Lake, AB of $6.8 million. Investments in 1,217 1,961 (744) The decrease is a result of the sale of the investments in hotel properties two properties and the provision for impairment on the Super 8 hotel in Toronto, ON recorded in 2010 which reduced the balance by $0.3 million and $0.4 million, respectively. Future income taxes 7,082 4,566 2,516 The future income tax asset represents temporary differences between income or losses for accounting purposes and income or losses for tax purposes which are expected to reverse in the future. Liabilities and Unitholders Equity Line of credit 2,519-2,519 Holloway drew $2.5 million on one of its available lines of credit during Accounts payable 8,595 7, The increase is primarily a result of increases in accounts and accrued liabilities payable and accruals due to increased occupancy in the hotels. Current portion of 41,034 4,953 36,081 The balance has increased as Holloway has five mortgages mortgages and maturing in 2011 as well as one maturing in 2012 that was loans payable re-classified to current as a result of not obtaining a waiver, which was required due to loan covenant violations. Current portion of 19,138-19,138 The 8% debentures which mature August 1, 2011 have been convertible debentures reclassified to current liabilities. Mortgages and 111, ,530 (36,971) The balance of long-term mortgages and loans payable has loans payable decreased as six mortgages are now included in current liabilities. Convertible debentures 49,597 65,935 (16,338) The decrease is due to the reclassification to current liabilities of the debentures that mature in 2011 and the accretion on the convertible debentures. Unitholders equity 105, ,712 (19,892) The decrease represents the loss for the year ended December 31, Annual Report 29

30 Quarterly Results The following table provides a summary of the quarterly operating results: (in $000 s except Q4 Q4 Q3 Q3 Q2 Q2 Q1 Q1 per unit results) Total revenues 18,516 16,018 21,211 19,977 17,314 18,007 16,621 18,722 Hotel revenues 18,406 15,939 21,173 19,800 17,291 17,782 16,581 18,464 Hotel expenses 14,048 12,508 14,486 13,588 13,028 12,897 12,587 13,680 Hotel operating income 4,358 3,431 6,687 6,212 4,263 4,885 3,994 4,784 Other (income) expenses 15,112 15,637 8,556 7,842 9,044 12,434 9,013 8,387 Future income tax expense (recovery) - (413) - (412) (1,176) (1,131) (1,340) (1,100) Net income (loss) for the period from continuing operations (10,754) (11,793) (1,869) (1,218) (3,605) (6,418) (3,679) (2,503) Income from discontinued operations - 1, Net income (loss) for the period (10,754) (10,432) (1,869) (1,139) (3,605) (6,286) (3,679) (2,480) Per Unit Results: Basic and diluted loss per unit (0.27) (0.27) (0.05) (0.03) (0.09) (0.16) (0.09) (0.06) Basic and diluted FFO per unit (0.02) (0.04) (0.04) 0.02 (0.05) (0.01) Basic and diluted distributable income per unit (0.01) (0.04) (0.02) 0.01 (0.04) 0.00 Occupancy 60.77% 49.32% 69.94% 61.95% 56.60% 54.82% 53.81% 55.72% ADR $ $ $ $ $ $ $ $ RevPAR $70.68 $62.06 $85.70 $81.69 $69.06 $72.63 $67.67 $75.77 Capital Structure The REIT defines capital as the aggregate of unitholders equity and interest-bearing debt. The objectives of the REIT s capital management program are to maintain a level of capital that complies with the investment and debt restrictions according to the REIT s Declaration of Trust, complies with existing debt covenants, optimizing the cost of capital, funds its business strategies and builds long-term unitholder value. In managing its capital structure, the REIT monitors performance throughout the year to ensure anticipated working capital requirements and capital expenditures are funded from operations, available cash on deposit and, where applicable, bank borrowings. The REIT will make adjustments to its capital structure to meet the objectives of the broader corporate strategy or in response to changes in economic conditions and risk. In order to maintain or adjust the capital structure, the REIT may issue debt and/or issue or redeem units. The REIT monitors capital using the following financial metrics, including (but not limited to): a Debt Service Coverage ratio defined as earnings before interest, income taxes, depreciation, amortization, impairment provision on hotel property, non-cash accretion of deferred financing fees and unit-based compensation (earnings base) to the sum of the annual principal and interest payments of mortgages, loans, promissory notes and capital leases (debt service); and a Debt to Gross Book Value (Debt to GBV) ratio defined as line of credit, mortgages and loans payable, obligations under capital leases, the face value of promissory notes and the face value of the convertible debentures (Debt) divided by total assets plus accumulated depreciation, amortization and impairments (GBV). The REIT s Declaration of Trust states that Holloway s debt to GBV should not exceed 60% Annual Report 30

31 Capital Management as at as at (in $000 s except ratios) December 31, 2010 December 31, 2009 Capital structure Line of credit 2,519 - Obligations under capital leases Mortgages and loans payable 152, ,483 Convertible debentures 68,735 65,935 Promissory notes 3,203 3,405 Total debt 227, ,330 Unitholders equity 105, ,712 Total capital 333, ,042 Ratios Total debt 227, ,330 Adjustment of convertible debentures to face value 3,347 6,147 Adjustment of promissory notes to face value Debt 230, ,623 Gross book value 396, ,025 Debt to GBV ratio 58.2% 58.4% Year ended Year Ended December 31, 2010 December 31, 2009 Earnings base 16,612 18,909 Debt service 20,994 21,520 Debt service coverage ratio The total debt (including line of credit, obligations under capital leases, mortgages and loans payable and promissory notes) to gross book value ( GBV ) was 40.0% at December 31, 2010 (December 31, %) and the total debt plus the face value of the convertible debentures to GBV was 58.2% at December 31, 2010 (December 31, %). The REIT is also subject to financial covenants on its mortgages and loans payable, the majority of which are measured on an annual basis and include customary terms and conditions for borrowings of this nature. These include the Debt Service ratio presented above. The REIT is in compliance with or has obtained waivers for all of its financial covenants except one. The two mortgages, on hotels in Fort McMurray and Drayton Valley with this lender are included in current liabilities and mature in October, 2011 and January, As a result of discussions with this lender, management believes the loans will not be called prior to maturity. Mortgages Payable As at December 31, 2010, the REIT had total mortgage debt outstanding of $152.6 million, net of deferred financing fees of $1.0 million compared to $153.4 million outstanding at December 31, The interest rates on the mortgages range from 5.88% to 9.06% per annum, with a weighted average interest rate of 6.75% per annum. There is no mortgage debt at floating rates. A first charge on the majority of the properties is pledged as security for the mortgages. The mortgages mature on various dates from June, 2011 to July, The weighted average maturity is 4.7 years. On March 1, 2010, the REIT refinanced the two mortgages that were due to mature on April 1, 2010 at an interest rate of 6.6% for a five year term Annual Report 31

32 Convertible Debentures Payable As at December 31, 2010 and 2009, Holloway had two series of debentures outstanding totaling $72.1 million. The $ million, 8.0% debentures mature on August 1, 2011 and are convertible to REIT units at $5.40 per unit. The $ million, 6.5% debentures mature on June 30, 2012 and are convertible to REIT units at $6.15 per unit. The weighted average interest rate is 6.9% (December 31, %) and the weighted average maturity is 1.2 years (December 31, years). The REIT has the option to repay the principal amount of the 6.5% debentures, in whole or in part, at maturity, by issuing the number of units calculated by dividing the aggregate principal amount by 95% of the current market price of the units on the maturity date. This alternative does not exist with the 8.0% debentures. The REIT has signed a term sheet to finance the repayment of the debentures that mature on August 1, The Board and management continue to explore other alternatives to raise funds to repay the debenture holders which may include other debt financing, the sale of certain properties or some combination thereof. expense over five years, the expected term of the promissory notes. The principal of the promissory notes is repayable on the sale of Holloway s ownership interests or the sale of the underlying properties. During the third quarter of 2010, Holloway repaid $0.2 million on the $3.0 million promissory notes as a result of the sale of its interests in two hotels. The notes mature on December 22, 2011, at which time the REIT can pay all or a portion of the notes in cash, by the issuance of units or extend the term of either or both of the notes at its sole discretion. As the REIT can extend the term of the notes, they are presented as a long-term liability in the financial statements. Line of Credit The REIT has two available lines of credit for $5.0 million and $0.5 million. As at December 31, 2010, the REIT had drawn $2.5 million of the $5.0 million line of credit. This line of credit bears interest at prime plus 2.5%, is payable on demand and is secured by a demand collateral mortgage and charge on the Holiday Inn Express in Kamloops, BC. Promissory Notes Payable Pursuant to the purchase of equity ownership interests in a number of hotel properties on December 22, 2008, the REIT issued two promissory notes for $3.0 million and $0.5 million, respectively to Winport Developments Limited Partnership. The notes were assigned by Winport Developments Limited Partnership to its partners/owners. The partners include various Dynamic mutual funds, a Gluskin Sheff mutual fund, Canadian Mortgage Capital Corporation, Holloway Investments Inc., a related party and SLC Development Corporation, a related party. The $3.0 million promissory note bears interest at 6.0% per annum until December 22, 2011 and 12.0% per annum, thereafter. The $0.5 million promissory note does not bear interest and was discounted by $0.2 million at the date of issuance, representing the net present value of the implicit interest. The discount is being accreted to interest 2010 Annual Report 32

33 Financial Commitments The following chart summarizes the REIT s future financial commitments as at December 31, (in $000 s) Thereafter Mortgages payable - principal 41,030 11,244 3,305 3,533 11,948 82,570 Mortgages payable - interest 9,985 7,318 6,673 6,445 5,787 8,203 Obligations under capital leases Vehicle loans - principal Convertible debentures - principal 20,238 51, Convertible debentures - interest 4,989 1, Land lease minimum payment ,968 Operating leases Promissory notes principal - - 3, Promissory notes interest Total 76,799 72,677 13,772 10,121 17,865 96,741 Liquidity and Working Capital Liquidity refers to the REIT s having or generating sufficient cash to meet its liabilities when due as well as to maintain compliance with liquidity covenants on financing agreements and its capital management requirements and objectives. The REIT regularly monitors and forecasts it cash balances and cash flows generated from operations. At December 31, 2010, the REIT had a working capital deficit of approximately $64 million, including $36 million in mortgage maturities and $19 million in debenture maturities. Cash from operations will fluctuate due to the seasonality in the hospitality industry. At December 31, 2010, the REIT had drawn $2.5 million on its available operating lines of credit which total $5.5 million. With the Debt to GBV ratio at 58.2% at December 31, 2010, the REIT could incur additional indebtedness of approximately $17 million and not exceed the 60% Debt to GBV ratio. This calculation assumes the additional indebtedness results in a corresponding increase in the assets of the REIT. The REIT has $25.4 million of mortgages maturing in The REIT expects to refinance its maturing mortgages at similar or better terms with existing or other lenders. The REIT also has $20.2 million in convertible debentures that mature on August 1, The REIT has a signed term sheet to finance the repayment of the debentures. The Board and management continue to explore other alternatives to raise funds to repay the debenture holders which may include other debt financing, the sale of certain properties or some combination, thereof. Based on the overall cash generation capability and overall financial position, while there can be no assurance, management believes the REIT will be able to meet its financial obligations as they become due Annual Report 33

34 Unit Information The following table provides the total units outstanding (including the Class B limited partnership units of Holloway Lodging Limited Partnership, a subsidiary of the REIT which are convertible into units of the REIT) as well as the impact of outstanding options, if exercised and the conversion of convertible debentures to REIT units. as at as at December 31, 2010 December 31, 2009 Units outstanding 39,135,216 39,135,216 Options outstanding (exercisable) 973,841 1,139,837 Conversion of convertible debentures (conversion price $5.40) 3,747,778 3,747,778 Conversion of convertible debentures (conversion price $6.15) 8,429,919 8,429,919 Total units reflecting exercise and conversion 52,286,754 52,452,750 Unitholder Rights Plan In November, 2008, Holloway s Board of Trustees adopted a Unitholder Rights Plan. The purpose of the rights plan is to provide the Board sufficient time to develop and implement alternatives intended to maximize value for all unitholders in the event of an unsolicited bid for Holloway and to enhance Holloway s ability to prevent unfair acquisition tactics. The Board s actions were not related to any specific acquisition proposal. Holloway is unaware of any take-over bid activity underway at this time. The rights plan is also not intended to, and would not hinder full and fair offers for Holloway that are made to all unitholders. In particular, the rights plan contains a standard permitted bid exclusion that makes it inapplicable to a take-over bid made to all unitholders that is open for acceptance for at least 60 days and otherwise complies with customary permitted bid requirements. The Unitholder Rights Plan was approved by unitholders at the 2008 Annual General Meeting of the REIT held on May 12, 2009 and is effective for three years from the date of unitholder approval. Non-GAAP Lodging Industry Performance Indicators The following describes the key performance measures and financial indicators commonly used by lodging REITs. Occupancy, Average Daily Rate and Revenue per Available Room The key performance measures used to measure performance in the lodging industry are occupancy, average daily rate ( ADR ) and revenue per available room ( RevPAR ). These are non-gaap measures. Occupancy represents the number of rooms sold compared to the total number of rooms in the hotel. Average daily rate is defined as room revenue divided by the number of rooms occupied/sold. RevPAR for any given period is defined as total room revenue divided by the total number of rooms in the hotel multiplied by the number of days in the period. RevPAR is relevant as it is the most commonly used indicator of market performance for hotels and represents the combination of the ADR and the average occupancy rate achieved during a period. RevPAR does not include food and beverage or other ancillary revenues generated by a hotel Annual Report 34

35 Funds from Operations ( FFO ) Funds from operations ( FFO ) is a non-gaap financial measure commonly used in the lodging industry. The calculations presented may differ from similar calculations reported by other entities and accordingly, may not be comparable. The Real Property Association of Canada ( REALpac ) defines FFO as net income excluding depreciation and amortization on real property, extraordinary items, gains or losses on the sale of assets, provisions for impairment and future income taxes. Holloway calculates FFO in accordance with this definition. FFO provides another useful measure of the REIT s performance as net income incorporates depreciation and amortization on real estate assets, which may not necessarily occur and is based on historical cost accounting. FFO should not be construed as an alternative to net income or cash flow from operating activities. Distributable Income Distributable income is another non-gaap financial measure commonly used by real estate investment trusts as an indication of financial performance. The definition of distributable income is defined in the REIT s Declaration of Trust and is summarized below. Distributable income reflects the ability of the REIT to earn income and make cash distributions to unitholders. It should not be seen as a measurement of liquidity or a substitute for comparable metrics prepared in accordance with GAAP. Distributable income may differ from similar calculations reported by other entities and accordingly, may not be comparable. Distributable income is defined as the consolidated net income of the REIT and its subsidiaries for the period computed in accordance with GAAP adjusted for the following items: Add backs: depreciation and amortization; impairment of hotel property; future income tax expense; losses on dispositions of assets; amortization of any net discount on long-term debt assumed from vendors of properties at rates of interest less than fair value; and amortization of deferred financing fees; Deductions: reserve for replacement of FF&E; future income tax credits; interest on convertible debentures to the extent not already deducted in computing net income; gains on dispositions of assets; and amortization of any net premium on long-term debt assumed from vendors of properties at rates of interest greater than fair value; Other adjustments as determined by the Trustees of the REIT in their discretion: non-cash unit-based compensation; and unrealized gains or losses on foreign exchange. Readers should refer to the table OPERATING RESULTS for the three months and years ended December 31, 2010 and 2009 for the reconciliation of net income to FFO and to distributable income. CSA Distributable Cash This MD&A is in all material respects in accordance with the recommendations provided in the CICA s publication Standardized Distributable Cash in Income Trusts and Other Flow-Through Entities: Guidance on Preparation and Disclosure. Standardized distributable cash is defined as the periodic cash flows from operating activities as reported in the financial statements in accordance with GAAP, including the effects of changes in non-cash working capital and any operating cash flows provided from or used in discontinued operations less adjustments for: total capital expenditures as reported in the GAAP financial statements; and restrictions on distributions arising from compliance with financial covenants restrictive at the date of the calculation of standardized distributable cash and limitations arising from the existence of a minority interest in a subsidiary. Hotel Operating Income Hotel operating income, a commonly used non-gaap measure of performance in the lodging industry, is defined as hotel revenues less hotel expenses. Hotel operating income measures hotel results before interest and depreciation and amortization Annual Report 35

36 Related Party Agreements Hotel Management Agreement On June 7, 2006, the REIT entered into a long-term management agreement with Pacrim Hospitality Services Inc. ( PHSI ), a related party, to manage certain hotels purchased by the REIT, with an initial term of ten years and an automatic renewal for successive five-year terms commencing on the last day of the initial term. PHSI is entitled to a base management fee of 3% of gross hotel revenues, an incentive fee, a purchasing fee of 4% of the cost of exceptional operating supplies and furniture, fixtures and equipment, a construction fee of 3% of the cost of construction materials, labour and equipment in connection with any construction or capital expenditures and an accounting fee per hotel which currently ranges from $23 to $33 per year depending on the size of the hotel when accounting services are provided by PHSI. In addition, Intergy, a division of PHSI provides central reservation services and website development and maintenance for the hotels purchased by the REIT. A commission of 10% is paid on reservations made through Intergy. On November 24, 2006, the parties entered into an amending agreement such that the initial term with respect to each hotel shall commence on the date on which the REIT acquires the hotel for a term of ten years and automatic renewals for successive five-year terms. On June 22, 2007, the REIT entered into a management agreement with Pomeroy Hospitality Ltd. ( Pomeroy ) to manage ten hotels purchased by the REIT, with a term of five years. On February 1, 2008, PHSI acquired management of ten of the REIT s hotel properties located in northern Alberta and British Columbia from Pomeroy. The REIT acquired the hotels (the Pomeroy Hotels ) from affiliates of Pomeroy in June, Under the terms of an agreement among the REIT, PHSI and Pomeroy, Pomeroy assigned its interest in the hotel management agreement between Pomeroy and the REIT to PHSI on February 1, 2008 in return for a $6.35 million one-time payment from PHSI. At the same time, the existing hotel management agreement between the REIT and PHSI was amended to include the Pomeroy Hotels. Among other things, the amended hotel management agreement between the REIT and PHSI provides that PHSI receive reimbursable expenses plus a base management fee for the Pomeroy Hotels that is significantly lower than the base management fee payable under the previous hotel management agreement with Pomeroy until the REIT generates distributable income that exceeds certain targets. In order to facilitate the assignment, the REIT loaned PHSI the funds paid to Pomeroy in consideration of the assignment. This loan has a ten year term, is pre-payable at any time without penalty and bears interest at the lesser of 13% and the trailing three-month yield plus 1% on Holloway s units thereafter. As the yield on Holloway s units declined to 0% with the suspension of distributions, the interest rate on the loan became 1% effective October 1, Upon certain change of control events, as set out in the Hotel Management Agreement, PHSI is entitled to terminate the entire Hotel Management Agreement upon 60 days prior written notice to Holloway Lodging Limited Partnership and the REIT and to receive a lump sum payment of $1.5 million in connection with such termination, without detracting from any other remedies available to it under the terms of the Hotel Management Agreement. In addition, PHSI shall be entitled to receive a one-time fee in the amount of the aggregate outstanding principal and accrued and unpaid interest on the loan as of the termination date of the Hotel Management Agreement. Such fee shall be withheld by Holloway Lodging Limited Partnership and used directly to repay the loan in full. On July 7, 2010, pursuant to the acquisition of the Super 8 hotel in Windsor, NS, PHSI agreed to defer its management and accounting fees until June 30th of each calendar year. PHSI is entitled to receive a payment calculated as 3/5 th of 50% of the hotel s free cash flow for the prior twelve months (thirteen months for ). Free cash flow is defined as net operating income less first mortgage debt service and 3% of total revenues for reserve for replacement. The payment is due on or before July 25th of each year. Any unpaid balance of the fees will be applied against the principal of the loan receivable from PHSI. The terms of the agreement will be revisited annually before June 30th for the foregoing twelve months Annual Report 36

37 Legal Proceedings In the course of the REIT s ordinary activities, the REIT is involved in administrative proceedings, litigations and claims. The REIT believes that either there are valid defences to any actions or that the outcome will not have a material impact on the REIT s consolidated financial position or results of operations. Significant Accounting Policies 2010 Changes to Canadian GAAP Management of the REIT monitors new accounting pronouncements issued by the Canadian Institute of Chartered Accountants ( CICA ) to assess the applicability and impact on the financial statements and note disclosures of the REIT. No new accounting standards have been adopted by Holloway during Future Changes to Canadian GAAP International Financial Reporting Standards ( IFRS ) On February 13, 2008, the Canadian Accounting Standards Board (AcSB) confirmed the mandatory changeover date to International Financial Reporting Standards ( IFRS ) for all Canadian profit-oriented publicly accountable entities. This means that the REIT will be required to prepare IFRS financial statements for interim periods and fiscal years beginning in The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by the REIT for the year ended December 31, 2010 and the opening balance sheet date of January 1, The REIT has completed an assessment of the key differences between Canadian GAAP as currently applied by Holloway and IFRS. The assessment includes a summary of the key decisions that have been made regarding accounting policy and reporting changes under IFRS and key IFRS disclosure requirements. The REIT expects that the conversion to IFRS will adversely impact certain lending covenants and ratios given the value adjustments at conversion as described below. Interest and debt service coverage ratios are not expected to be materially impacted. While the adoption of IFRS will not have an impact on the determination of cash flows from operations, the REIT does expect it to affect reported financial position and results of operations as further described below. The International Accounting Standards Board continuously reviews and amends numerous IFRS accounting standards that may be applicable to the REIT. The evaluation of any potential impact on the REIT s consolidated financial statements will be an ongoing process as new standards and amendments to existing standards may be issued during the transitional period. Work on the detailed analysis of the impacts is substantially complete and preliminary adjustments to financial statements as at January 1, 2010 are currently being reviewed and finalized. The activities, deadlines and status of the major components of Holloway s transition plan to IFRS are presented in the table on the following page Annual Report 37

38 Activitiy Accounting Policies: Review accounting policy alternatives and determine selection. Document and implement policies. Information Technology and Data Systems: The REIT will use existing accounting systems for IFRS. Additional data gathering will be required for disclosures. Internal Control Over Financial Reporting: The REIT will modify its internal controls as required as a result of the policy changes selected. Additional controls may need to be implemented as a result of policy selections. Disclosure Controls and Procedures: The REIT will modify its disclosure controls as required as a result of the policy changes selected. Additional controls may need to be implemented as a result of policy selections. Financial Reporting Expertise: IFRS expertise includes existing internal resources, additional resources hired and the use of an external audit firm. Business Activities: Financial Covenants Declaration of Trust Implications. Taxation and Reporting Review impacts on presentation and measurement of income taxes and document potential changes to future disclosure. Deadline Decisions made on policy elections in Q3, Additional system requirements and reports completed in Q4, Work continues; to be completed in Q1, Updated controls to be in place in Q1, Team fully in place Q2, Lenders advised of differences in Q4, Summary report created in Q3, Work continues; to be completed in Q1, Status Team has reviewed alternatives and compiled documentation. Management and Audit Committee have formalized and approved all accounting policy elections. Team has compiled documentation and finalized testing of system changes. The process for recording and documenting conversions under IFRS at the date of transition has been finalized. Team has reviewed existing controls and continues to implement additional controls as a result of policy selections. Team has reviewed existing controls and continues to implement additional controls as a result of policy selections. Summary for review by management and Audit Committee to be completed in Q1, Existing staff have been tasked with IFRS functions over the last year. Full time resources added in Q2, 2010 to lead implementation and complete detailed scoping and analysis. Key supporting staff attended training courses on IFRS and are engaged in transitional testing and review of financial statement impacts. All senior management and Audit Committee members have reviewed requirements and policy changes for implementation of IFRS. All lenders have been notified of potential impacts to existing lending covenants as a result of transition to IFRS. Declaration of Trust implications have been reviewed by management and the Audit Committee with concurrence by our external auditors. Detailed analysis of potential impacts on income tax reporting and measurement continues by internal staff and third party tax advisors Annual Report 38

39 The REIT has identified the significant differences between IFRS and Canadian GAAP in relation to the REIT s primary financial statement items. The REIT has made its conclusions on the selection of accounting policies and the exceptions and exemptions available under IFRS 1. The key differences are described below. Property, Plant and Equipment The REIT s property and equipment are accounted for under IAS-16 Property, Plant and Equipment. Under IFRS, the REIT may choose the cost model or the revaluation model. Under the cost model, each component of property, plant and equipment is carried at cost less accumulated depreciation and any impairment. Under the revaluation model, the hotel properties will be revalued periodically. Gains are recorded as a separate component of unitholders equity. Losses are netted against any previously recorded gains. If the loss exceeds the previously recognized gains, the excess is recorded in income. The cost model is generally consistent with Canadian GAAP in that separate components are recognized for each significant part of an asset and are carried at their cost less any accumulated depreciation and any accumulated impairment losses. However, requirements to identify different components of property, plant and equipment under IFRS are more explicit than those existing under Canadian GAAP. As a result the REIT has identified five or six additional components of its building assets. The REIT will use the cost model when preparing its financial statements under IFRS. IFRS 1 First-time adoption of IFRS In general, the conversion to IFRS requires an entity to present its financial statements as if it had always reported under IFRS. IFRS 1 provides guidance on the initial adoption of IFRS and provides certain exceptions and exemptions which an entity may elect. Under IFRS 1, an entity may record individual items of its property, plant and equipment at fair value on transition to IFRS. The fair value will be the new cost or deemed cost. The REIT intends to make this election for certain hotel properties as at January 1, The REIT largely finalized the asset valuation process during the latter part of A significant sample of the hotel portfolio has been subject to external valuation with the remainder being valued by management and validated externally following the same methodology. The fair value of each hotel was determined based upon a discounted cash flow method of valuation with some consideration given to comparable per room values. Capitalization rates and price per room values were established based on individual markets and where available, recent comparable hotel sales activity. Impairment Under IFRS, an entity is required to recognize an impairment loss if the recoverable amount is less than the carrying amount (net book value). The recoverable amount is defined as the higher of: a) the estimated fair value less costs to sell; or b) value in use. Value in use is defined as the present value of the estimated future cash flows from the use of the asset and from its disposal at the end of its useful life. When the recoverable amount is higher than the carrying amount, previously recognized impairment losses are reversed. Impairment losses cannot be reversed under Canadian GAAP. As discounted cash flows are used under IFRS, entities may have more impairments. IFRS also allows the reversal of an impairment loss when the recoverable amount is higher than the carrying value (to no more than what the depreciated amount of an asset would have been had the impairment not occurred). Based on the impairment testing requirements at the January 1, 2010 transition date the REIT expects that opening property and equipment balances will be reduced by approximately $87 million (net of fair value increases to certain hotel properties). Business Combinations Under IFRS, costs related to an acquisition must be expensed whereas under Canadian GAAP, these costs were capitalized as part of the asset. IFRS 1 allows entities to elect to implement the Business Combinations standard either: a) prospectively from the date of transition to IFRS; or b) retrospectively from a previous date onwards. The REIT has elected to apply the standard prospectively commencing January 1, Trust Units Under GAAP, the REIT S units are presented as equity. IAS 32 Financial Instruments defines a financial instrument as a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. Under IFRS, REIT units would likely be considered a liability as the Declaration of Trust requires the REIT to distribute its taxable income to unitholders. The REIT changed its Declaration of Trust at its Annual Meeting held on May 12, 2009 to eliminate the mandatory distribution. Thus, the REIT s units are expected to be presented as equity under IFRS Annual Report 39

40 Critical Accounting Estimates Note 2 to the audited consolidated financial statements for the year ended December 31, 2010 provides a summary of the REIT s significant accounting policies. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Management believes the estimates described below are the ones most subject to estimation and judgment in the REIT s financial statements. Valuation of Hotel Properties GAAP requires that long-lived assets, consisting of property and equipment (hotel properties), be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset might not be recoverable. Long-lived assets are reviewed at the individual hotel level, the lowest level for which identifiable cash flows are largely independent when testing and measuring for impairment. A two-step process is used to assess the impairment of long-lived assets held for use, with the first step determining when an impairment is recognized and the second step measuring the amount of the impairment. Impairment losses are recognized when the net book value of the long-lived asset exceeds the sum of the undiscounted cash flows expected to result from their use and eventual disposition. The amount of the impairment loss is the amount by which the long-lived asset s carrying value exceeds its fair value. The future cash flows expected from the use and eventual disposition involve assumptions of occupancy, room rates, revenues, expenses and the residual or terminal value for the property. In addition to these estimates, management assessed the effect of new competition in the individual markets and the hotel industry predictions for recovery from the recession. These estimates and assumptions are subject to change. During the year ended December 31, 2010, the REIT recorded an impairment loss on a hotel property of $6.8 million as a result of an annual impairment test of all of its long-lived assets. Management determined that the carrying amount of the Northwest Inn in Slave Lake, AB exceeded its fair value at December 2010 as the carrying amount exceeded the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The amount of the impairment loss is the amount by which the carrying value exceeds the discounted cash flows of the hotel. This non-cash loss is included in earnings as a provision for impairment of hotel property. Valuation of Loans Receivable GAAP requires that loans receivable be classified as impaired when, in the opinion of management, there is a reasonable doubt as to the timely collection of principal, interest and the underlying security of the loan. The carrying value of a loan receivable classified as impaired is reduced to its estimated fair value. Valuation of Investments in Hotel Properties GAAP requires the carrying value of investments to be reduced when there has been a significant adverse change in the expected timing or amount of future cash flows. The REIT has equity ownership interests in six hotel partnerships or co-tenancies ranging from 2.52% to 19.06%. The investments are accounted for using the cost method. During the year ended December 31, 2010, the REIT recorded a provision for impairment of $0.4 million on its investment in the Super 8 in Toronto, ON, which represents the total cost of this investment. Amortization of Property and Equipment The REIT records amortization on its property and equipment using the straight-line method over the estimated useful life of each category. The two largest categories are buildings which are amortized up to 40 years and furniture, fixtures and equipment, which are amortized up to 7 years. If the estimated useful life of the assets or different amortization methods were used, the impact on the REIT s net income could be material. Fair Value of Mortgages and Debentures Payable Management determines and discloses the fair value of the REIT s mortgages and debentures payable in the notes to the financial statements. Management uses an internally developed model to estimate fair value based on discounting the future payments based on current market rates. The estimated current market rate is based on management s experience in obtaining similar financings and the current market conditions. Changes in the current market for credit, interest rates and credit spreads will impact the estimates used and the fair values reported Annual Report 40

41 Income taxes Under the provisions of Bill C-52, Budget Implementation Act, 2007, the REIT became a specified investment flow-through ( SIFT ) and became subject to tax in 2007 due to exceeding the growth guidelines as outlined in Act. The REIT uses the asset and liability method for accounting for income taxes. Under this method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases (temporary differences). Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the date of enactment or substantive enactment. The estimates of future taxable income, the years when the temporary differences are expected to reverse and the tax rates in those years have an impact of the future income tax asset recorded on the balance sheet. Disclosure Controls and Procedures and Internal Controls over Financial Reporting Holloway maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports filed or submitted under applicable securities legislation is accumulated and communicated to management, including the Chief Executive Officer ( CEO ) and the Chief Financial Officer ( CFO ), as appropriate to allow timely decisions regarding required public disclosure. During 2010, Holloway s management evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in National Instrument , Certification of Disclosure in Issuers Annual and Interim Filings), under the supervision of, and with the participation of the CEO and CFO. As at December 31, 2010, based on the evaluation, the CEO and CFO have concluded that the REIT s disclosure controls and procedures were appropriately designed and were operating effectively. Management is also responsible for establishing and maintaining internal controls over financial reporting, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. During 2010, Holloway s management also evaluated the design and operating effectiveness of the internal controls over financial reporting (as defined in National Instrument , Certification of Disclosure in Issuers Annual and Interim Filings), using the Committee of Sponsoring Organizations Internal Control Integrated Framework, under the supervision of, and with the participation of the CEO and CFO. As at December 31, 2010, based on the evaluation, the CEO and CFO have concluded that the REIT s internal controls over financial reporting were appropriately designed and were operating effectively. It is important to note that all systems of internal controls and procedures can only provide reasonable, rather than absolute assurance that all control issues will be detected. Misstatement and errors may not be detected and controls can be circumvented by collusion among individuals or management override. In addition, the design of any system of control is also based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future events. Holloway continues to review and document its disclosure controls and procedures, including its internal controls over financial reporting so as to enhance the effectiveness of its systems of controls and procedures. Tax Rules for Income Trusts On October 31, 2006, The Minister of Finance (Canada) announced proposals (the SIFT Proposals ) to amend the Tax Act to change the taxation regime applicable to certain specified investment flow-through entities ( SIFTs ), including certain income trusts and their investors. Under the provisions of Bill C-52, Budget Implementation Act, 2007, which was substantively enacted on June 12, 2007, the REIT, as a publicly traded income trust, is considered a SIFT. Under Bill C-52, certain distributions from a SIFT will no longer be deductible in computing a SIFT s taxable income, and a SIFT will be subject to tax on such distributions at a rate that is substantially equivalent to the general tax rate applicable to a Canadian corporation. Distributions paid by a SIFT as returns of capital generally will not be subject to the tax. As the REIT has exceeded the normal growth rates as defined in the guidelines issued by the Department of Finance, the REIT became subject to the tax commencing in Accordingly, the REIT has recorded future income tax based on temporary differences that are expected to reverse in the future at the substantively enacted tax rates, which will be in effect at the time the temporary differences are expected to reverse. Distributions from the REIT will be subject to the tax unless they qualify as returns of capital. Since inception, the REIT s distributions have been 100% return of capital Annual Report 41

42 Risks and Uncertainties Risks Related to the Business of the REIT Hotel Industry The REIT directly or indirectly owns and operates hotels. As a result, the REIT is subject to the operating risks inherent in the hotel industry. In addition to the specific conditions discussed in more detail below, these risks include: cyclical downturns arising from changes in general and local economic conditions; changes in the level of business and commercial travel and tourism; increases in the supply of accommodations in local markets which may adversely affect the results of operations; competition from other hotels; the recurring need for renovation, refurbishment and improvement of hotel properties; changes in wages, product costs, energy costs, property taxes and construction and maintenance costs that may result from inflation, government regulations, changes in interest rates or currency fluctuations; availability of financing for operating and/or capital requirements; seasonal fluctuations in hotel operating income generated throughout the year; increases in operating costs due to inflation which may not necessarily be offset by increased room rates; and other factors, including medical concerns related to traveling to Canada, acts of terrorism, natural disasters, extreme weather conditions and labour shortages, work stoppages or disputes. Competition The hotel industry is highly competitive. The REIT s properties face significant local competition from other hotels. Some of the competitors of the hotels in the REIT s portfolio may have greater marketing and financial resources than the REIT. The number of competitive hotel properties in a particular area could have a material adverse effect on the occupancy rates and average daily rate of properties in that particular area. New competitors entering markets in which the REIT operates can also adversely affect business levels. Customer Concentration In some of the markets in which the REIT operates, the customer base may be concentrated due to the type of industries established in those markets. The business levels achieved by the REIT in these markets rely on the ongoing presence and financial stability of these customers. If these customers withdrew from these markets, the REIT could experience a decline in revenue. Changes to the Alberta Oil and Gas Royalties A majority of the REIT s properties are located in the province of Alberta. In October 2007, the Government of Alberta released a new royalty framework which increased the royalties charged to oil and gas producers by the Government of Alberta. The increases are on a sliding scale basis based on the price of the related commodity. In November 2008, the Government of Alberta offered companies drilling certain new wells a one-time option of selecting new transitional royalty rates for the period from 2009 to All current wells moved to the new royalty framework on January 1, Companies that adopt the transitional rates will be required to shift to the new royalty framework on January 1, On March 11, 2010, the Government of Alberta announced recommendations for royalty adjustments. Among the changes are reduced maximum royalty rates at higher price levels to become effective January 1, The transitional royalty framework for oil and gas producers introduced in November 2008 will continue until its original announced expiration on December 31, Effective January 1, 2011, no new wells will be allowed to select the transitional royalty rates. Wells that have already selected the transitional royalty rates will have the option to stay with those rates or switch to the new rates effective January 1, As the REIT s properties in Alberta derive a substantial portion of their revenue from customers in the oil and gas sector, any decline in activity in this sector could result in a decline in revenue for the REIT Annual Report 42

43 Availability of Additional Capital The acquisition of hotels, as well as ongoing renovations, refurbishment and improvements required to maintain and operate hotels, are capital intensive. The REIT sets aside a portion of revenues for the replacement of furniture, fixtures and equipment and capital improvements ( FF&E reserve ). Where the cost of capital improvements exceeds the capital reserve, or the cost of certain capital improvements reduces the reserve to significantly lower levels, the REIT will be required to fund these activities principally by incurring additional indebtedness or from operations. Access to markets for additional borrowing depends on prevailing market conditions and the acceptability of the terms offered. If the REIT were unable to secure additional funding for acquisitions or required improvements, it would be required to curtail these activities, which could have an adverse effect on its results of operations and financial condition. Debt Financing The REIT incurred debt in connection with the acquisition of its properties, including mortgage financing, capital leases and other borrowings. Therefore, the REIT is subject to the risks associated with debt financing, including the risks that cash flow from operations will be insufficient to meet required payments of principal and interest, the risk that existing debt will not be able to be refinanced or that terms of such refinancing will not be as favourable to the REIT and the risk that necessary capital expenditures for such purposes as renovations and other improvements will not be able to be financed on favourable terms or at all. In such circumstances, if the REIT were in need of capital to repay indebtedness, it could be required to liquidate one or more of its hotel properties at times which may not permit realization of the maximum return on such investments or could be required to agree to additional financing on unfavourable terms. The REIT s financing agreements contain covenants that could restrict its ability to operate its business. If the REIT fails to comply with the restrictive covenants in its financing agreements, its lenders may be able to accelerate payment of the related debt. In connection with its financing agreements, the REIT has granted security interests over the majority of its hotel properties. If the REIT is not able to meet its debt service obligations, it risks the loss of some or all of its assets to foreclosure or sale. Dependence on and Relationship with Pacrim Hospitality Services Inc. (PHSI) PHSI provides hotel management services to the REIT pursuant to the Hotel Management Agreement and the REIT depends on PHSI for all aspects of the day-to-day management of its hotels. There can be no assurance that if PHSI stopped providing these services, a suitable replacement would be found in a timely manner or at all. In addition, PHSI is in the business of owning, acquiring and managing hotels independently of the REIT. These properties may in some circumstances compete with properties owned by the REIT. PHSI is not required to provide services exclusively to the REIT and may in some circumstances manage hotels on behalf of competitors of the REIT. Risks Related to Real Property Ownership General The REIT owns hotel properties and therefore, is subject to risks generally incident to the ownership of real property. The underlying value of the properties and the REIT s income depends on the ability of the REIT to maintain or increase revenues from the properties and to generate income in excess of operating expenses. Income from the properties may be adversely affected by changes in national or local economic conditions, changes in interest rates and in the availability, cost and terms of mortgage financing, the impact of present or future environmental legislation and compliance with environmental laws, the ongoing need for capital improvements, particularly in older structures, changes in real estate assessed values and property taxes payable on such values (including as a result of possible increased assessments as a result of the acquisition of the properties by the REIT) and other operating expenses, changes in governmental laws, regulations, rules and fiscal policies, changes in zoning laws, civil unrest, acts of God, including earthquakes and other natural disasters and acts of terrorism or war (which may result in uninsured losses). When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult to both acquire and sell real property. Finally, governments can, under eminent domain laws, expropriate or take real property for less compensation than an owner believes the property is worth. Almost all of these factors are beyond the REIT s control Annual Report 43

44 Liquidity Real estate investments are relatively illiquid, with the degree of liquidity generally fluctuating in relation to demand for and the perceived desirability of such investments. Such illiquidity may limit the REIT s ability to vary its portfolio promptly in response to changing economic or investment conditions. If the REIT were to need to liquidate a property, the proceeds to the REIT might be significantly less than the aggregate carrying value of such property. In addition, by concentrating on hotel properties, the REIT is exposed to the adverse effects on that segment of the real estate market. Environmental Matters The REIT and its properties are subject to various federal, provincial and municipal laws relating to environmental matters. These laws provide that the REIT could be liable for the costs of removal of certain hazardous, toxic or regulated substances released on or in the properties or disposed of at other locations sometimes regardless of whether the REIT knew of or was responsible for their presence. The failure to remove, remediate or otherwise address such substances or locations, if any, could adversely affect the REIT s ability to sell such real estate or to borrow using such real estate as collateral and could potentially also result in claims against the REIT by private plaintiffs. In addition, environmental laws and regulations may change in the future and the REIT may become subject to more stringent environmental laws and regulations. Compliance with more stringent environmental laws and regulations could have a material adverse effect on the REIT s business, financing condition or results of operations. Risks Related to the Structure of the REIT The REIT s units trade on the TSX. The market price of the units may be affected by changes in the economy, changes in general market conditions, fluctuations in the market demand for equity securities and numerous other factors beyond the control of the REIT. A holder of a unit does not hold a share of a body corporate. As holders of units, the unitholders do not have statutory rights normally associated with ownership of shares of a corporation including, for example, the right to bring oppression or derivative actions. The rights of unitholders are based primarily on the REIT s Declaration of Trust. There is no statue governing the affairs of the REIT equivalent to the Business Corporations Act (Ontario) or the Canada Business Corporations Act which sets out the rights and entitlements of shareholders of corporations in various circumstances. Additional information on these and other risks and uncertainties are described under Risk Factors in Holloway s Annual Information Form ( AIF ), dated March 26, 2010 which is available at Risks Related to the General Economic Environmet As with any commercial enterprise, the REIT is subject to risks associated with general economic conditions. These risks include the degree to which the overall economy is expanding or contracting, rate of inflation, unemployment rate, level of consumer confidence and the effects of government initiatives. Any deterioration in general economic conditions may adversely affect business levels of the REIT Annual Report 44

45 Outlook According to the Bank of Canada, the recovery in Canada is proceeding broadly as anticipated, with a period of modest growth. Overall, the Bank projects the economy will expand by 2.4% in 2011 and 2.8 % in 2012 a slightly firmer profile than had been anticipated in October, The Bank continues to expect the economy will return to full capacity by the end of The contribution of government spending is expected to wind down this year, consistent with previously announced fiscal plans. The level of personal debt is expected to restrain the pace of consumption growth and residential investment. In contrast, business investment will likely continue to rebound strongly, owing to financial conditions and competitive pressures. According to statistics compiled by the Canadian Association of Oilwell Drilling Contractors, the average number of active oil rigs in 2010 increased by 49% compared to the prior year. Hotel consulting group PKF reported on a national basis, revenue per available room increased by 5.6% in 2010, after experiencing a decline of 12.0% in For 2011, PKF is projecting RevPAR growth of 3.6%. These growth projections for the wider economy along with the strength of the specific sectors relative to the REIT s business are encouraging indicators for the REIT and the markets in which it operates. Forward-Looking Information This MD&A contains forward-looking information within the meaning of applicable securities laws. Forward-looking information may relate to the REIT s future outlook and anticipated events or results and may include statements regarding the future financial position, property acquisition strategies and opportunities, business strategy, financial results and plans and objectives of the REIT. Particularly, statements regarding the REIT s future operating results, property acquisition strategies and opportunities and economic performance are forward-looking statements. In some cases, forward-looking information can be identified by terms such as may, will, should, expect, plan, anticipate, believe, intend, estimate, predict, potential, continue or similar expressions concerning matters that are not historical facts. Forward-looking information is subject to certain facts, including risks and uncertainties, that could cause actual results to differ materially from what the REIT currently expects and there can be no assurance that such statements will prove to be accurate. Some of these risks and uncertainties are described under Risk Factors in Holloway s Annual Information Form ( AIF ), dated March 26, 2010 which is available at The REIT does not intend to update or revise any such forward-looking information should its assumptions and estimates change Annual Report 45

46 Consolidated Financial Statements December 31, 2010 and Annual Report 46 iii

47 Management s Responsibility for Financial Reporting March 8, 2011 The accompanying consolidated financial statements of Holloway Lodging Real Estate Investment Trust (the REIT ) have been prepared by the REIT s management. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and contain estimates based on management s judgment. Internal control systems are maintained by management to provide reasonable assurances that assets are safeguarded and financial information is reliable. The Board of Trustees of the REIT is responsible for ensuring that management fulfils its responsibilities for financial reporting and is ultimately responsible for reviewing and approving the consolidated financial statements and the accompanying management discussion and analysis. The Board of Trustees carries out this responsibility principally through its Audit Committee. The Audit Committee is appointed by the Board of Trustees and all of its members are independent. It meets with the REIT s management and auditors and reviews internal control and financial reporting matters to ensure that management is properly discharging its responsibilities before submitting the consolidated financial statements to the Board of Trustees for approval. (signed) W. Glenn Squires Chief Executive Officer (signed) Tracy C. Sherren Chief Financial Officer 2010 Annual Report 47

48 Independent Auditor s Report March 8, 2011 To the Trustees of We have audited the accompanying consolidated financial statements of consolidated which comprise the balance sheet as at December 31, 2010 and the statements of operations and comprehensive loss, unitholders equity and cash flow for the year then ended, and the related notes including a summary of significant accounting policies. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of 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 audit. We conducted our audit 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 financial statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the 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 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 financial statements. We believe that the audit evidence we have obtained 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 as at December 31, 2010 and its financial performance and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants 2010 Annual Report 48

49 Consolidated Balance Sheet As at December 31, 2010 and 2009 (in thousands of dollars) $ $ Assets Current assets Cash and cash equivalents (note 14) 830 3,756 Capital reserve Restricted cash Accounts receivable 2,962 2,438 Inventories Prepaid expenses and deposits 2,608 4,479 Assets of discontinued operations 717 8,133 13,142 Capital reserve restricted 5,440 4,691 Loans receivable from related parties (note 3) 6,398 6,509 Investments in hotel properties (note 5) 1,217 1,961 Property and equipment (note 6) 313, ,465 Other assets (note 7) Future income taxes (note 21) 7,082 4, , ,211 Liabilities Current liabilities Line of credit (note 8) 2,519 Accounts payable and accrued liabilities 8,595 7,856 Accrued interest on convertible debentures Current portion of obligations under capital leases (note 9) Current portion of mortgages and loans payable (note 10) 41,034 4,953 Current portion of convertible debentures (note 12) 19,138 Liabilities of discontinued operations ,093 14,407 Obligations under capital leases (note 9) Mortgages and loans payable (note 10) 111, ,530 Promissory notes payable (note 11) 3,203 3,405 Convertible debentures (note 12) 49,597 65, , ,499 Unitholders Equity 105, , , ,211 Commitments and contingencies (note 17) Approved on behalf of the Board of Trustees: As signed by As signed by George Armoyan James Howe Chairman of the Board Chairman of the Audit Committee 2010 Annual Report 49

50 Consolidated Statement of Unitholders Equity As at December 31, 2010 and 2009 (in thousands of dollars) Equity component of Accumulated Class B Contributed convertible income Accumulated Units LP units surplus debentures (losses) distributions Total $ $ $ $ $ $ $ (note 13) (note 13) Balance, December 31, , ,295 9,596 (4,768) (36,784) 150,094 Unit-based compensation related to options Net loss (20,337) (20,337) Distributions (4,109) (4,109) Balance, December 31, , ,359 9,596 (25,105) (40,893) 125,712 Unit-based compensation related to options Exchange of units 460 (460) Net loss (19,907) (19,907) Balance, December 31, , ,374 9,596 (45,012) (40,893) 105, Annual Report 50

51 Consolidated Statement of Operations and Comprehensive Loss For the years ended December 31, 2010 and 2009 (in thousands of dollars except per unit amounts) $ $ Hotel revenues Rooms 63,174 61,837 Other 10,277 10,148 73,451 71,985 Hotel expenses Operating expenses 47,696 46,236 Property taxes and insurance 4,657 4,627 Management fees 1,818 1,810 54,171 52,673 Hotel operating income 19,280 19,312 Other (income) expenses Interest on mortgages and other debt 10,826 10,997 Interest on convertible debentures 4,989 4,989 Accretion on convertible debentures, mortgages and deferred financing fees 3,093 2,578 Corporate and administrative 2,880 2,173 Interest income (213) (739) Unrealized foreign exchange gain (242) (737) Depreciation and amortization 12,986 12,969 Loss on acquisition or disposal 193 Provision for impairment of mezzanine loans and advances 11,059 Provision for impairment of investments in hotel properties 423 1,011 Provision for impairment of hotel property 6,768 41,703 44,300 Loss before income taxes from continuing operations (22,423) (24,988) Recovery of future income taxes (note 21) (2,516) (3,056) Loss from continuing operations (19,907) (21,932) Income from discontinued operations (note 15) 1,595 Net loss and comprehensive loss for the years (19,907) (20,337) Basic and diluted earnings (loss) per unit (note 13) - from continuing operations (0.51) (0.56) - from discontinued operations Annual Report 51

52 Consolidated Statement of Cash Flows For the years ended December 31, 2010 and 2009 (in thousands of dollars) $ $ Cash provided by (used in) Operating activities Net loss and comprehensive loss from continuing operations for the years (19,907) (21,932) Charges (credits) to income not involving cash (note 14) 20,720 23, ,956 Net change in non-cash working capital balances related to operations (note 14) 1,988 (2,719) Cash flow from discontinued operations 49 1,120 Cash flow from operating activities 2, Investing activities Decrease in restricted cash 9 93 Increase in capital reserves (758) (1,746) Issuance of mezzanine loans and advances (885) Proceeds from repayment of mezzanine loan 3,000 Proceeds from sale of (increase in) investments in hotel properties 271 (283) Additions to property and equipment and other assets, continuing operations (3,594) (1,545) Proceeds from sale of property, discontinued operations 15,636 Cash flow from (used in) investing activities (4,072) 14,270 Financing activities Increase in line of credit 2,519 Repayment of capital lease obligations (285) (350) Proceeds from mortgages and loans, net of deferred financing fees 10,120 1,040 Repayment of mortgages and loans payable, continuing operations (13,849) (4,589) Repayment of promissory notes (239) Distributions paid to unitholders (4,794) Repayment of mortgages and capital leases, discontinued operations (7,140) Cash flow used in financing activities (1,734) (15,833) Net change in cash and cash equivalents during the years (2,956) (1,206) Cash and cash equivalents, continuing operations Beginning of years 3,756 4,860 Cash and cash equivalents, discontinued operations Beginning of years ,786 4,992 Cash and cash equivalents, continuing operations End of years 830 3,756 Cash and cash equivalents, discontinued operations End of years ,786 Supplemental cash flow information (note 14) 2010 Annual Report 52

53 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 1 Basis of presentation and nature of operations ( Holloway Lodging REIT or the REIT ) is an open-ended real estate investment trust that was formed under the laws of the Province of Ontario pursuant to its Declaration of Trust on March 28, The objectives of the REIT are: (a) to expand its asset base and increase its funds from operations through accretive acquisitions and internal growth initiatives; (b) to enhance the value of its assets to maximize long-term unit value through active management of its assets; and (c) to increase cash flow from operations in order to resume distributions to unitholders at the appropriate time. As at December 31, 2010, the REIT owned 21 hotels in Canada and 1 hotel in the United States with 2,386 guest rooms and suites and held minority ownership interests in six other hotels. 2 Significant accounting policies The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ) and reflect the following policies: a) Consolidation The consolidated financial statements include the accounts of the REIT and its wholly-owned subsidiaries, Holloway Lodging Limited Partnership, Holloway Lodging II Limited Partnership, HL Trust, HL General Partner Inc., Holloway Lodging Canada, Inc., Holloway Lodging US, Inc., HL US General Partner, Inc. and HL (1290 Paradise Circle) US LP. Any reference to the REIT throughout these consolidated financial statements refers to the REIT and its subsidiaries. All transactions between the REIT and its subsidiaries have been eliminated. b) Cash and cash equivalents Cash and cash equivalents include cash on hand, balances with banks and highly liquid temporary investments with original maturities of three months or less. c) Inventories Inventories consist of linen, food, beverages and other supplies. Inventories are valued at the lower of cost and net realizable value. Cost is determined on a first-in, first-out basis. d) Capital reserve The capital reserve account represents funds held by mortgagors or funds internally restricted for improvements to the properties. e) Investments in hotel properties The investments in hotel properties represent equity ownership interests in six hotel partnerships or co-tenancies ranging from 2.52% to 19.06%. The investments are accounted for using the cost method. When there has been a loss in value that is other than a temporary decline, an impairment loss is recognized Annual Report 53

54 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 2 Significant accounting policies (continued) f) Property and equipment Property and equipment, including land, buildings, furniture, fixtures and equipment, are stated at cost less accumulated amortization or estimated net recoverable amount, adjusted for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Amortization is provided on a straight-line basis at rates designed to write-off the assets over their estimated economic lives as follows: Land lease Buildings Furniture, fixtures and equipment Paving Signage Landscaping Computer equipment Vehicles Term of the lease 40 years 7 years 10 years 10 years 5 years 3 years 3 years g) Impairment of long-lived assets The REIT s long-lived assets, consisting of property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset might not be recoverable. Long-lived assets are reviewed at the individual property level, the lowest level for which identifiable cash flows are largely independent, when testing for and measuring impairment. A two-step process is used to assess the impairment of long-lived assets held for use, with the first step determining when impairment is recognized and the second step measuring the amount of the impairment. Impairment losses are recognized when the carrying amount of long-lived assets exceeds the sum of the undiscounted cash flows expected to result from their use and eventual disposition and are measured as the amount by which the long-lived asset s carrying amount exceeds its fair value. h) Impairment of loans receivable Loans receivable are classified as impaired when, in the opinion of management, there is a reasonable doubt as to the timely collection of principal, interest and the underlying security of the loan. The carrying amount of a loan receivable classified as impaired is reduced to its estimated fair value. i) Other assets Other assets consist of franchise fees and other agreements. Application and initial franchise fees are amortized on a straight-line basis over the term of the franchise agreement and the amortization is included in depreciation and amortization in these consolidated financial statements. The Non-competition, Right of First Opportunity and Participation Agreement (note 15) is amortized on a straight-line basis over the five-year term of the agreement Annual Report 54

55 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 2 Significant accounting policies (continued) j) Leases Leases entered into by the REIT in which substantially all of the benefits and risks of ownership are transferred to the REIT are recorded as capital leases and classified as property and equipment and obligations under capital leases. Obligations under capital leases reflect the present value of future lease payments, discounted at an appropriate interest rate and are reduced by lease payments net of imputed interest. Assets under capital leases are amortized based on the estimated useful life of the asset. All other leases are classified as operating leases and lease payments are expensed in the period in which they are incurred. k) Revenue recognition Revenues are generated primarily from room occupancy, food and beverage services and parking. Revenues are recognized when the services are provided and collection is reasonably assured. l) Income taxes Under the provisions of Bill C-52, Budget Implementation Act, 2007, which was substantively enacted on June 12, 2007, the REIT, as a publicly traded income trust, is considered a specified investment flow-through ( SIFT ). As the REIT has exceeded the normal growth rates as defined in the guidelines issued by the Department of Finance, the REIT became subject to tax in The REIT uses the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the year the date of enactment or substantive enactment is expected. Certain of the REIT s subsidiaries are corporations and are subject to income taxes. These subsidiaries use the liability method to account for income taxes, under which future income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities, and are measured using the substantively enacted income tax rates and laws that are expected to be in effect in the years in which the future income tax assets or liabilities are expected to be settled or realized. The effect of changes in income tax rates on future income tax assets and liabilities is recognized in the period in which the change occurs. Valuation allowances are recorded unless it is more likely than not that a future income tax asset will be realized Annual Report 55

56 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 2 Significant accounting policies (continued) m) Earnings per unit Basic earnings per unit are computed based on the weighted average number of units outstanding during the reporting period. The REIT follows the treasury stock method in computing diluted earnings per unit. n) Unit repurchases If the REIT repurchases its own units as the result of a unit buy-back, those units are deducted from equity and the associated units are cancelled. No gain or loss is recognized and the consideration paid including any directly attributable incremental costs is recognized directly in unitholders equity. o) Unit-based compensation The REIT accounts for unit options issued under its unit option plan using the fair value method. Under this method, compensation expense is measured at fair value at the grant date using the Black-Scholes option pricing model and is recognized over the vesting period. Option pricing models require the input of highly subjective assumptions including the expected volatility. Changes in the assumptions can materially affect the fair value estimate, and therefore, the existing models do not necessarily provide a reliable measure of the fair value of the REIT s unit options. The REIT recognizes all other unit-based payments to employees or trustees, including the issuance of units as compensation, at the fair market value of the units on the date of issuance Annual Report 56

57 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 2 Significant accounting policies (continued) p) Financial instruments i) Financial instruments recognition and measurement Section 3855 establishes standards for recognizing and measuring financial assets, financial liabilities and non-financial derivatives. All financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities. The REIT has implemented the following classifications: - Cash and cash equivalents are classified as Financial Assets Held-for-Trading. These financial assets are marked-to-market through net income at each period end. - Accounts receivable and loans receivable from related parties are classified as Loans and Receivables. After their initial fair value measurement, they are measured at amortized cost including transaction costs using the effective interest method. - Accounts payable capital leases, convertible debentures, mortgages and loans payable and promissory notes payable are classified as Other Financial Liabilities. After their initial fair value measurement, they are measured at amortized cost net of transaction costs using the effective interest method. ii) Comprehensive income Under Section 1530, comprehensive income is comprised of net earnings and other comprehensive income ( OCI ) which generally would include unrealized gains and losses on financial assets classified as available-for-sale, unrealized foreign currency translation adjustments, net of hedging, arising from self-sustaining foreign operations and changes in the fair value of the effective portion of cash flow hedging instruments. The REIT has no OCI, and therefore, accumulated OCI is not presented as a category of unitholders equity. q) Management estimates The presentation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates are required in the determination of future cash flows and probabilities in assessing the recoverability of hotel properties and other long-term assets, the valuation of loans receivable, the determination of useful lives for depreciation and amortization purposes, the fair value of financial instruments for disclosure purposes, the value of conversion options in convertible debentures, the value of unit options and the determination of future income tax assets and liabilities. Actual results could differ from these estimates Annual Report 57

58 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 2 Significant accounting policies (continued) r) Foreign currency translation Monetary assets and liabilities of integrated foreign operations are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Other non-monetary assets and non-monetary liabilities are translated at rates of exchange in effect when the assets were acquired or liabilities incurred. Revenues and expenses are translated at the average monthly rates of exchange during the year and depreciation and amortization is translated at rates of exchange consistent with the assets to which they relate. Gains or losses on translation of integrated foreign operations are recognized in income. Future changes to Canadian GAAP The REIT will cease to prepare its consolidated financial statements in accordance with Canadian GAAP as set out in Part V of the CICA Handbook Accounting ( Canadian GAAP ) for the year beginning on January 1, 2011 when it will start to apply International Financial Reporting Standards as published by the International Accounting Standards Board as set out in Part 1 of the CICA Handbook Accounting as its primary basis of accounting. Consequently, future accounting changes to Canadian GAAP that are effective for periods beginning on or after January 1, 2011 are not discussed in these financial statements as they will not be applied by the REIT. 3 Loans receivable from related parties The REIT has a $6,239 (December 31, $6,350) loan receivable from Pacrim Hospitality Services Inc., a company in which a member of management and trustee has a significant ownership interest. The loan is unsecured, is due on February 1, 2018, is repayable at any time without penalty and bears interest at the lesser of 13% and the trailing three-month yield plus 1% on Holloway s units. As the yield on Holloway s units declined to 0% with the suspension of distributions, the interest rate is currently 1%. During the second quarter of 2010, the loan was reduced by $111 representing the unpaid remuneration for services rendered by Pacrim Hospitality Services Inc. to the Windsor Super 8 hotel and was applied against the principal balance of the loan when the hotel was acquired. The REIT has a $159 loan receivable due December 31, 2011 from Winport Developments Inc., a company in which a member of management and trustee has a significant ownership interest. The loan is secured by 55,555 units of the REIT and a guarantee by Canada Inc., a company in which a member of management and trustee has a significant ownership interest, is repayable at any time without penalty and bears interest at 11% per annum Annual Report 58

59 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 4 Acquisition of hotel property During the second quarter of 2010, the REIT acquired the Super 8 hotel in Windsor, Nova Scotia. As Holloway had provided a $1.9 million mezzanine loan to the hotel which was in default, the owners Winport Developments Limited Partnership, a related party, relinquished ownership to Holloway pursuant to a quit claim. Holloway assumed all the assets and liabilities of the hotel effective June 1, The excess of liabilities assumed over assets acquired of $47 was recorded as a loss on acquisition of hotel property. The acquisition has been accounted for under the purchase method and accordingly, the results of the operations of the hotel since the date of acquisition have been included in the consolidated statement of income. The following table details the acquisition and how it was financed: Location: Windsor, Nova Scotia Date of Acquisition: June 1, 2010 Assets acquired $ Land 300 Building 2,400 Furniture, fixtures, equipment and other 340 Signage 10 Franchise fees 14 Other working capital and short-term liabilities assumed (277) Financed by Assumed mortgage 2,834 Excess of liabilities over assets acquired (47) 2,787 2,787 5 Investments in hotel properties On December 22, 2008, the REIT acquired beneficial equity ownership interests in a number of hotels located in Canada and an assignment of $680 in cash proceeds from Winport Developments Limited Partnership, a related party, at the exchange amount of $3,552. The equity ownership percentages range from 2.52% to 19.06%. The investments are accounted for using the cost method. As part of the transaction, Winport Developments Limited Partnership assigned its right to receive $680 in proceeds from the sale of Winport Developments Limited Partnership s equity ownership interest in RegWin Hotel Partnership to the REIT. The $680 was received on December 23, The cost of the investments has been reduced by $183, representing the discount on one of the promissory notes used to finance the purchase of these investments (note 11). During the year ended December 31, 2010, the REIT recorded a provision for impairment of $423 against its investment in the Super 8 in Toronto, ON, which represents the total cost of this investment. During the year ended December 31, 2009 the REIT recorded a provision for impairment of $549 against its investment in the Super 8 in Langley, BC, which represents the total cost of this investment. In addition, the REIT wrote off its investment of $462 in the Super 8 in Midland, ON, as it relinquished its ownership interest in this hotel Annual Report 59

60 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 6 Property and equipment 2010 accumulated Accumulated Cost impairment amortization Net $ $ $ $ Land 29,535 2,582 26,953 Land lease Buildings 296,986 3,901 27, ,691 Renovations in progress Furniture, fixtures and equipment and other 32, ,747 16,745 Paving 3, ,205 2,095 Landscaping Signage 1, Computer equipment and websites 2,005 1, Vehicles Tenant inducements ,993 6,768 46, , accumulated Cost amortization Net $ $ $ Land 29,217 29,217 Land lease Buildings 294,179 20, ,177 Renovations in progress Furniture, fixtures and equipment and other 29,403 11,450 17,953 Paving 3, ,440 Landscaping Signage 1, Computer equipment and websites 1,799 1, Vehicles Tenant inducements Amortization expense for the year ended December 31, 2010 was $12,805 ( $12,759). 360,802 34, ,465 As at December 31, 2010, the REIT held assets under capital leases with a cost of $1,784 ( $1,798) and accumulated amortization of $1,109 ( $853). All of the hotel properties have been pledged as security for first mortgages (note 10) or lines of credit (note 8). During the year ended December 31, 2010, the REIT recorded an impairment loss on a hotel property of $6,768 as a result of an annual impairment test of all of its long lived assets. Management determined the carrying value of the Northwest Inn in Slave Lake, AB exceeded its fair value at December 2010 as the carrying value exceeded the sum of the undiscounted cash flows expected to result from its use and eventual disposition. The amount of the impairment loss is the amount by which the carrying value exceeds the discounted cash flows of the hotel. This non-cash loss is included in earnings as a provision for impairment on hotel property Annual Report 60

61 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 7 Other assets 2010 accumulated Cost amortization Net $ $ $ Agreements Franchise fees , accumulated Cost amortization Net $ $ $ Agreements Franchise fees , Line of credit The REIT has two available lines of credit for $5.0 million and $0.5 million. As at December 31, 2010, the REIT had drawn $2.5 million of the $5.0 million line of credit. This line of credit bears interest at prime plus 2.5%, is payable on demand and is secured by a demand collateral mortgage and charge on the Holiday Inn Express in Kamloops, BC Annual Report 61

62 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 9 Obligations under capital leases The REIT assumed various capital lease obligations to acquire computer equipment, signage, furniture and hotel equipment $ $ Present value of future minimum lease payments Less: Current portion Estimated future repayments over the next five years are as follows: $ Year ending December 31, Thereafter Future minimum lease payments 242 Less: Amounts representing interest at a weighted average rate of 10.52% 20 Present value of future minimum lease payments Mortgages and loans payable $ $ Mortgages payable, bearing interest at a weighted average rate of 6.75% ( %) and maturing on various dates from June, 2011 to July, Individual first charges on most of the hotel properties have been pledged as security for individual mortgages 153, ,446 Other , ,485 Less: Deferred financing fees 1,041 1,002 Less: Current portion 41,034 4, , , Annual Report 62

63 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 10 Mortgages and loans payable (continued) Estimated future repayments over the next five years are as follows: $ Year ending December 31, , , , , ,948 Thereafter 82, Promissory notes payable On December 22, 2008, the REIT issued two promissory notes for $3,000 and $552, respectively, payable to Winport Developments Limited Partnership to finance the acquisition of the investments in hotel properties. The notes were assigned by Winport Developments Limited Partnership to its partners/owners. The partners include various Dynamic mutual funds, a Gluskin Sheff mutual fund, Canadian Mortgage Capital Corporation, Holloway Investments Inc., a related party and SLC Development Corporation, a related party. The $3,000 promissory note bears interest at 6% per year until December 22, 2011 and 12% per year, thereafter. The $552 note does not bear interest and therefore has been discounted by $183, representing the net present value of the implicit interest. The discount is being accreted to interest expense over five years, the expected term of the promissory notes. The principal of the notes are repayable on the sale of Holloway s ownership interests or the sale of the underlying properties. During the year ended December 31, 2010, Holloway repaid $239 on the promissory notes as a result of the sale of its interest in two hotels. The notes mature on December 22, 2011 at which time the REIT can pay all or a portion of the notes in cash or, by the issuance of units, or extend the term of either or both of the notes at its sole discretion. As the REIT can extend the term of the notes, they are presented as a long-term liability Annual Report 63

64 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 12 Convertible debentures On August 1, 2006, the REIT issued $20,238 in convertible, redeemable debentures. The debentures bear interest at 8%, payable semi-annually on February 1st and August 1st and mature on August 1, The convertible debentures can be converted into units of the REIT at $5.40 per unit at any time commencing two years and one day from the issuance date and ending on the date that is 15 days prior to the maturity date. On June 21, 2007, the REIT issued $45,000 in convertible, redeemable debentures. The debentures bear interest at 6.5%, payable semi-annually on June 30th and December 31st and mature on June 30, The convertible debentures can be converted into units of the REIT at $6.15 per unit at any time commencing two years and one day from the issuance date and ending on the date that is 15 days prior to the maturity date. On July 18, 2007, the REIT issued an additional $6,844 in convertible, redeemable debentures with the same terms as the June 21, 2007 debentures, pursuant to the underwriters exercising their over-allotment option. Subject to various conditions and time frames, the REIT can redeem the debentures. In the event the REIT gives notice of redemption, the debentures holders have 30 days to elect to convert their debentures into units. The REIT has the option to repay the principal amount of the 6.5% debentures, in whole or in part, at maturity, by issuing the number of units calculated by dividing the aggregate principal amount by 95% of the current market price of the units on the maturity date. This alternative does not exist with the 8% debentures. The convertible debentures have been valued at their estimated fair value at the time of issuance, according to the terms and conditions in place at the time. The difference between the gross proceeds and the estimated fair value of the debt of $5,300 on the August 1, % debentures, $4,150 on the June 21, % debentures and $644 on the July 18, % debentures represents the value of the conversion feature of the debentures and accordingly, has been recorded as a component of equity. The difference between the recorded value of the debt component of the debentures and their face value has been accounted for as a discount on the issuance of the debt and is being accreted to interest expense, using the effective interest rate method, over the respective terms of the debentures. The debt component of the convertible debentures is recorded as a liability. The accretion of the discount on the issuance of the debentures increases the debt component to their face value over the term of the debentures. The REIT has a signed term sheet to finance the repayment of the debentures that mature on August 1, $ $ Debt component 61,988 61,988 Accretion of convertible debentures 7,515 5,295 Deferred financing fees (768) (1,348) Current portion (19,138) 49,597 65, Annual Report 64

65 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 13 Unitholders equity The REIT is authorized to issue an unlimited number of units ( REIT units ) for the consideration of, and on the terms and conditions determined by, its Declaration of Trust. Each REIT unit is transferable and represents an equal undivided beneficial interest in any distribution from the REIT. All REIT units are of the same class and have equal rights and privileges. Class B Limited Partnership units The Class B Limited Partnership units ( exchangeable LP units ) are exchangeable for units of the REIT on a one-for-one basis pursuant to an exchange agreement. Special voting units are also issued to the Class B LP holders such that the exchangeable LP units hold the economic and voting equivalent of the REIT units. Issued and outstanding units The following presents the number of units issued and outstanding, and the related ascribed values, for the years ended December 31, 2010 and 2009: Number of units issued and outstanding ascribed value $ REIT Class B REIT Class B Units LP Units Total Units LP Units Total Balance, December 31, ,801, ,500 39,135, , ,755 Balance, December 31, ,801, ,500 39,135, , ,755 Exchange of Class B LP units for REIT units 230,000 (230,000) 460 (460) Balance, December 31, ,031, ,500 39,135, , , Annual Report 65

66 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 13 Unitholders equity (continued) Option activity for the years ended December 31, 2010 and 2009 was as follows: Weighted Weighted average average exercise price exercise price Number $ Number $ Outstanding, beginning of year 1,302, ,302, Forfeited (328,415) Outstanding, end of year 973, ,302, The following table summarizes information about options outstanding and exercisable at December 31, 2010: Weighted Weighted average average exercise price remaining Weighted average exercise price per unit Number per unit contractual Number $ outstanding $ life (years) exercisable , , , , , , , ,841 Weighted average number of units The basic and diluted weighted average number of units outstanding was as follows: (units) (units) Basic 39,135,216 39,135,216 Diluted 39,135,216 39,135, Annual Report 66

67 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 14 Supplemental cash flow information Changes (credits) to income not involving cash: $ $ Unit-based compensation Depreciation and amortization 12,986 12,969 Accretion on convertible debentures, mortgages and deferred financing fees 3,093 2,578 Loss on acquisition or disposal 193 Provision for impairment of investments in hotel properties 423 1,011 Provision for impairment of mezzanine loans and advances 11,059 Provision for impairment of hotel property 6,768 Unrealized foreign exchange gain (242) (737) Recovery of future income taxes (2,516) (3,056) 20,720 23,888 Net change in non-cash working capital balances related to operations: $ $ Accounts receivable (525) 882 Inventories Prepaid expenses and deposits 1,871 (2,271) Accounts payable and accrued liabilities 623 (1,351) 1,988 (2,719) Cash and cash equivalents are comprised of the following: $ $ Cash on hand and balances with banks 830 3, $ $ Interest paid 15,746 16, Annual Report 67

68 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 15 Discontinued operations On October 5, 2009, the REIT sold the Wingate by Wyndham in Calgary, AB (the Wingate ) for total proceeds of $16,500. The REIT recognized a gain on the sale of $1,474. Accordingly, the operations of the Wingate have been included in discontinued operations on the consolidated statement of operations and comprehensive loss and are reflected as assets and liabilities of discontinued operations of the consolidated balance sheet. Discontinued operations for the years ended December 31, 2010 and 2009 are as follows: Years ended December 31, December 31, $ $ Hotel revenues 2,442 Hotel expenses 1,474 Hotel operating income 968 Interest on mortgages and other debt and accretion of deferred financing fees 273 Depreciation and amortization 320 Gain on sale of property (1,474) (881) Income before income taxes 1,849 Provision for future income taxes 254 Income from discontinued operations 1, Annual Report 68

69 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 16 Agreements Hotel Management Agreement Pacrim Hospitality Services Inc. On June 7, 2006, Holloway Lodging REIT entered into a long-term management agreement with Pacrim Hospitality Services Inc. ( PHSI ), a related party, to manage the hotels purchased by the REIT, with an initial term of ten years and an automatic renewal for successive five year terms commencing on the last day of the initial term. PHSI is entitled to a base management fee of 3% of gross hotel revenues, an incentive fee, a purchasing fee of 4% of the cost of exceptional operating supplies and furniture, fixtures and equipment, a construction fee of 3% of the cost of construction materials, labour and equipment in connection with any construction or capital expenditures and an accounting fee ranging from $23 to $34 per year per hotel depending on the size of the hotel when accounting services are provided by PHSI. In addition, Intergy, a division of PHSI, provides central reservation services for the REIT s hotels. A commission of 10% is paid on reservations made through Intergy. On November 24, 2006, the parties entered into an amending agreement such that the initial term with respect to each hotel shall commence on the date on which the REIT acquires the hotel for a term of ten years and automatic renewals for successive five-year terms. On June 22, 2007, the REIT entered into a management agreement with Pomeroy Hospitality Ltd. ( Pomeroy ) to manage ten hotels purchased by the REIT, with a term of five years. On February 1, 2008, PHSI acquired management of ten of the REIT s hotel properties located in northern Alberta and British Columbia from Pomeroy. The REIT acquired the hotels (the Pomeroy Hotels ) from affiliates of Pomeroy in June, Under the terms of an agreement among the REIT, PHSI and Pomeroy, Pomeroy assigned its interest in the hotel management agreement between Pomeroy and the REIT to PHSI on February 1, 2008 in return for a $6,350 one-time payment from PHSI. At the same time, the existing hotel management agreement between the REIT and PHSI was amended to include the Pomeroy Hotels. Among other things, the amended hotel management agreement between the REIT and PHSI provides that PHSI receive reimbursable expenses plus a base management fee for the Pomeroy Hotels that is significantly lower than the base management fee payable under the previous hotel management agreement with Pomeroy until the REIT generates distributable income that exceeds certain targets. In order to facilitate the assignment, the REIT loaned PHSI the funds paid to Pomeroy in consideration of the assignment (note 3). Upon certain change of control events, as set out in the Hotel Management Agreement, PHSI is entitled to terminate the entire Hotel Management Agreement upon 60 days prior written notice to Holloway Lodging Limited Partnership and the REIT and to receive a lump sum payment of $1.5 million in connection with such termination, without detracting from any other remedies available to it under the terms of the Hotel Management Agreement. In addition, PHSI shall be entitled to receive a one-time fee in the amount of the aggregate outstanding principal and accrued and unpaid interest on the loan as of the termination date of the Hotel Management Agreement. Such fee shall be withheld by Holloway Lodging Limited Partnership and used directly to repay the loan in full Annual Report 69

70 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 16 Agreements (continued) Hotel Management Agreement (continued) Pacrim Hospitality Services Inc. (continued) On July 7, 2010, pursuant to the acquisition of the Super 8 hotel in Windsor, Nova Scotia (note 4), PHSI agreed to defer its management and accounting fees until June 30th of each calendar year. PHSI is entitled to receive a payment calculated as 3/5 th of 50% of the hotel s free cash flow for the prior twelve months (thirteen months for ). Free cash flow is defined as net operating income less first mortgage debt service and 3% of total revenues for reserve for replacement. The payment is due on or before July 25th of each year. Any unpaid balance of the fees will be applied against the principal balance of the loan receivable from PHSI (note 3). The terms of the agreement will be revisited annually before June 30th for the foregoing twelve months. Non-competition, Right of First Opportunity and Participation Agreement On June 22, 2007, Holloway Lodging REIT entered into a non-competition, right of first opportunity and participation agreement with Pomeroy Gold Ltd. The agreement has a five year term and provides for (a) limitations on the development of hotels within a defined area without the consent of each party to the agreement; (b) the right of first opportunity for Holloway to purchase certain hotels; and (c) the right for Holloway to invest in certain Pomeroy developments. 17 Commitments and contingencies Lease revenue The REIT is committed to lease space in some of its hotels to outside parties. The minimum annual revenue from future rentals is expected to be as follows: $ Year ending December 31, Annual Report 70

71 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 17 Commitments and contingencies (continued) Franchise agreements The following fees are payable under the terms of the various franchise agreements covering certain of the hotel properties: As a % of gross room revenue To Super 8 Motels, Inc. Royalty fee 5% Marketing assessment 3% To Holiday Hospitality Franchising Inc. Group Royalty fee 5% - 6% Marketing assessment 1.5% - 2% Reservation assessment 1% To Radisson Hotels International, Inc. Royalty fee 4% - 5% Marketing assessment 2% Reservation assessment 2% To Pomeroy Inn & Suites Inc. Royalty fee 5% Marketing assessment 3% To Best Western International, Inc. Annual dues $54 Operating leases The REIT has various equipment operating leases at several properties. Land lease The REIT has a long-term ground lease on the 5 Calgary Downtown Suites and Spa Hotel ( 5 Calgary ). The ground lease expires on June 24, The amount of the annual ground lease payment varies with gross revenues and expenses. The minimum ground lease payments are $10 per month until June 24, For the two periods beginning June 24, 2015 and June 24, 2040, the minimum annual ground lease payment will be adjusted based on the fair market value of the related land, free and unencumbered on those dates. The REIT is required to pay an annual ground lease participation fee related to the ground lease for 5 Calgary, which is equal to 25% of 5 Calgary s annual gross revenue reduced by property tax expense, the minimum ground lease payments for the year and an allowable deduction of 20% of gross revenues. The total ground lease expense, including the minimum ground lease payments and the ground lease participation fee, recorded for 2010 and 2009 was $1,887 and $1,852, respectively Annual Report 71

72 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 17 Commitments and contingencies (continued) The minimum annual lease payments over the next five years are as follows: Operating Land leases lease Total $ $ $ Year ending December 31, Contingencies In the course of the REIT s ordinary activities, the REIT is involved in administrative proceedings, litigations and claims. The REIT believes that either there are valid defences to any actions or that the outcome will not have a material impact on the REIT s consolidated financial position or results of operations. 18 Related party transactions The information below details the related party transactions not previously disclosed in these financial statements, including amounts received or receivable, paid or payable and year-end balances $ $ Pacrim Hospitality Services Inc. (PHSI), a company in which a member of management and trustee has a significant ownership interest Hotel management, accounting and related fees 2,462 2,523 Head office rent and office operating expenses Reimbursable expenses related to hotels managed under reduced fee Reservation services commissions paid to Intergy, a division of PHSI Interest income on loan receivable Capital purchasing fees and project management fees capitalized to property and equipment Distributions paid or payable on Class B limited partnership units 6 Included in accounts payable and accrued liabilities Winport Developments Inc., a company in which a member of management and trustee has a significant ownership interest Interest income on loan Included in accounts receivable 22 Superior Lodging Corp., a company in which a trustee is a member of management and has an ownership interest Royalty fees Annual Report 72

73 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 19 Capital management The REIT defines capital as the aggregate of unitholders equity and interest-bearing debt. The objectives of the REIT s capital management program are to maintain a level of capital that complies with the investment and debt restrictions according to the REIT s Declaration of Trust, complies with existing debt covenants, optimizes the cost of capital, funds its business strategies and builds long-term unitholder value. In managing its capital structure, the REIT monitors performance throughout the year to ensure anticipated working capital requirements and capital expenditures are funded from operations, available cash on deposit and, where applicable, bank borrowings. The REIT will make adjustments to its capital structure to meet the objectives of the broader corporate strategy or in response to changes in economic conditions and risk. In order to maintain or adjust the capital structure, the REIT may issue debt and/or issue or redeem units. The REIT monitors capital using the following financial metrics, including (but not limited to): a Debt Service coverage ratio defined as earnings before interest, income taxes, depreciation, amortization, non-cash accretion of deferred financing fees and unit-based compensation (Earnings base) to mortgages, loans, promissory notes and capital lease interest and principal payments (Debt Service); and a Debt to Gross Book Value ( Debt to GBV ) ratio defined as mortgages and loans payable, obligations under capital leases, the face value of promissory notes and the face value of convertible debentures ( Debt ) divided by total assets plus accumulated depreciation and amortization ( GBV ). The REIT s Declaration of Trust states that the REIT s debt to GBV ratio should not exceed 60% Annual Report 73

74 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 19 Capital management (continued) $ $ Capital structure Line of credit 2,519 Obligations under capital leases Mortgages and loans payable 152, ,483 Convertible debentures 68,735 65,935 Promissory notes 3,203 3,405 Total debt 227, ,330 Unitholders equity 105, ,712 Total capital 333, ,042 Ratios Total debt 227, ,330 Adjustment of convertible debentures to face value 3,347 6,147 Adjustment of promissory notes to face value Debt 230, ,623 Gross book value 396, ,025 Debt to GBV 58.2% 58.4% $ $ Earnings base 16,612 18,909 Debt service 20,994 21,520 Debt service ratio The REIT is also subject to financial covenants on its mortgages and loans payable, which are measured on an annual basis and include customary terms and conditions for borrowings of this nature. These include the Debt Service ratio presented above. The REIT is in compliance with, or has obtained waivers for all of its financial covenants except one. One lender has not provided a waiver however, as a result of discussions with this lender, management believes the loans will not be called prior to maturity. The two mortgages with this lender, on hotels in Fort McMurray and Drayton Valley, are included in current liabilities and mature in October 2011 and January Annual Report 74

75 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 20 Financial instruments i) Fair value of financial instruments The REIT s financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, capital reserves, loans receivable from related parties, line of credit, accounts payable and accrued liabilities, accrued interest on convertible debentures, obligations under capital leases, mortgages and loans payable, promissory notes payable and convertible debentures. The REIT s cash and cash equivalents, restricted cash, accounts receivable, capital reserves, line of credit, accounts payable and accrued liabilities and accrued interest on convertible debentures are carried at amortized cost, which approximates fair value due to the immediate or short-term maturities of these financial instruments. The fair value of the REIT s obligations under capital leases and mortgages and loans payable is based on discounted future cash flows using discount rates that reflect current market conditions for instruments with similar terms and risks. The fair values do not necessarily represent amounts the REIT might pay in actual market transactions. The fair value of the convertible debentures is the trading value at December 31, 2010 and 2009, respectively Carrying value Fair value Carrying value Fair value $ $ $ Held for trading (cash, restricted cash and capital reserves) 7,742 7,742 9,919 9,919 Loans and receivables (accounts receivable) 2,962 2,962 2,438 2,438 Other financial liabilities (accounts payable and accrued liabilities, and accrued interest on convertible debentures) 9,270 9,270 8,531 8,531 Line of credit 2,519 2,519 Obligations under capital leases Mortgages and loans payable 152, , , ,929 Convertible debentures 78,331 50,775 75,531 44, Annual Report 75

76 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 20 Financial instruments (continued) i) Fair value of financial instruments (continued) Fair value hierarchy Financial instruments recorded at fair value on the balance sheet are classified using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: Level 1: valuation based on quoted prices observed in active markets for identical assets or liabilities. Level 2: valuation techniques based on inputs that are quoted prices of similar instruments in active markets; quoted prices used in a valuation model that are observable for that instrument; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3: valuation techniques with significant unobservable market inputs. A financial instrument is classified to the lowest level of the hierarchy for which a significant input has been considered in measuring fair value. The following table presents the financial instruments recorded at the fair value in the consolidated balance sheets, classified using the fair value hierarchy described above: Level 1 Level 2 Level 3 Level 1 Level 2 Level 3 $ $ $ $ $ $ Financial assets Cash and cash equivalents 830 3,756 Capital reserves 6,361 5,603 Restricted cash ii) Risk management The REIT, through its financial assets and liabilities, has exposure to the following risks from its use of financial instruments: interest rate risk, credit risk, liquidity risk and currency risk. Senior management is responsible for setting acceptable levels of risk and reviewing risk management activities as necessary. a) Interest rate risk The REIT is exposed to interest rate risk on its lending and borrowing activities. It manages its exposure to interest rate risk by using primarily fixed rate debt so cash flow is not impacted significantly by a change in interest rates. The REIT had $8,905 maturing on April 1, 2010, which it re-financed on March 1, 2010 at a 6.6% interest rate. The weighted average interest rate on its mortgages payable is 6.75% (December 31, %) with a weighted average maturity of 4.7 years (December 31, years) Annual Report 76

77 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 20 Financial instruments (continued) a) Interest rate risk (continued) The convertible debentures have a weighted average interest rate of 6.9% (December 31, %) and a weighted average maturity of 1.2 years (December 31, years). At December 31, 2010, the REIT had no long-term debt at floating rates. The REIT s lines of credit are at floating rates. For the year ended December 31, 2010, a 1% change in interest rates would change the net loss by $3 (December 31, $nil). b) Credit risk In accordance with its investment policy, the REIT invests excess cash in Government of Canada treasury bills, short-term Canadian and provincial government debt, bankers acceptance notes and term deposits of Schedule 1 Banks. The credit risk on cash and cash equivalents is limited because the counter-parties are governments and banks with high credit-ratings assigned by international credit-rating agencies. The amount of accounts receivable disclosed in the balance sheet of $2,962 is net of allowance for bad debts, estimated by management based on prior experience and their assessment of the current economic environment. Historically, there have been no significant material collection issues and the REIT does not believe it is subject to any significant concentration of credit risk. The REIT assesses the credit worthiness of customers requesting credit and listings of accounts receivable are reviewed by management and discussed with operations personnel on a monthly basis. The following table sets forth details of accounts receivable and related allowance for doubtful accounts: $ $ Accounts receivable under 30 days aged 1,867 1,503 Accounts receivable over 30 days aged 1,178 1,065 Less: Allowance for doubtful accounts (83) (130) 2,962 2,438 The REIT is exposed to credit risk on its loans receivable from related parties (note 4). Management reviews the results and cash flows of these entities on a monthly basis Annual Report 77

78 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 20 Financial instruments (continued) c) Currency risk The REIT earns revenue and incurs expenses in U.S. and Canadian currency, and as such, is subject to fluctuations as a result of foreign exchange rate variation. The REIT manages its exposure to currency risk by billing for its services in the U.S. in the underlying currency related to the expenditure. As this natural hedging effectively matches the revenue and expenses, the REIT s management considers there to be little currency risk. However, a $0.01 change in the US dollar exchange rate will change the unrealized foreign exchange gain or loss by $43 (December 31, $44). d) Liquidity risk The REIT s objective is to have sufficient liquidity to meet liabilities when due, as well as to maintain compliance with liquidity covenants on financing agreements and its capital management requirements and objectives. On July 21, 2009, the REIT suspended distributions in order to conserve cash and satisfy its operating obligations, including principal repayments on its mortgages and loans payable and obligations under capital leases. On March 1, 2010, the REIT re-financed two mortgages, totalling $8,905, that were scheduled to mature on April 1, The REIT has $25,377 in mortgages that mature in The REIT expects to refinance its maturing mortgages at similar or better terms with existing or other lenders. The REIT has $20,238 in convertible debentures that mature on August 1, The REIT has a signed term sheet to finance the repayment of the debentures. The Board and management continue to explore other alternatives to raise funds to repay the debenture holders which may include other debt financing, the sale of certain properties, or some combination thereof. The REIT monitors and forecasts its cash balances and cash flows generated from operations to meet its required obligations. At December 31, 2010, the REIT had drawn $2,519 (December 31, $nil) from its available lines of credit of $5,500. Based on overall cash generation capability and overall financial position, while there can be no assurance, management believes the REIT will be able to meet all financial obligations as they become due Annual Report 78

79 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 21 Income taxes The following table reconciles the expected income taxes payable (recoverable) at the statutory income tax rate to the amounts recognized in the consolidated statements of income and comprehensive income for the years ended December 31, 2010 and 2009: $ $ Income before income taxes, including discontinued operations (22,423) (23,139) Income tax rate 34.0% 35.0% (7,624) (8,099) Non-deductible stock option expense 5 22 Non-deductible foreign exchange losses (41) (386) Non-deductible unrealized impairments 511 2,132 Accretion of discount on convertible debentures Impact of rate change, timing of reversals Other permanent differences Non-taxable portion of capital gain (16) (148) Valuation allowance 3,120 2,217 (2,516) (2,802) The tax effects of temporary differences that give rise to significant portions of the future income tax assets and future income tax liabilities at December 31, 2010 and 2009 that are expected to reverse in the future are presented below: $ $ Future income tax assets Unit issuance costs, financing fees and related 305 1,134 Tax losses carried forward 9,982 6,749 Property and equipment differences in net book value and undepreciated capital cost 2,190 Other Valuation allowance - losses 12,674 8,027 Future income tax liabilities Property and equipment differences in net book value and undepreciated capital cost 1,009 Other ,081 12,582 6,946 Less: Valuation allowance (5,500) (2,380) Net future income tax asset 7,082 4, Annual Report 79

80 Notes to Consolidated Financial Statements For the years ended December 31, 2010 and 2009 (all dollar amounts are in thousands, except per unit amounts) 21 Income taxes (continued) $ $ Recovery of future income taxes is comprised of: Future income taxes related to the changes in the taxation rate (712) (582) Future income taxes related to income and permanent differences (1,861) (2,754) Non-taxable foreign exchange translation loss (2,516) (2,802) 22 Seasonality Revenues from hotel operations tend to fluctuate throughout the year, with greater demand in the second and third quarters of the calendar year, due to higher leisure travel in the summer months. The first quarter revenues are usually the lowest, as leisure travel is lower during the winter. Certain of the REIT s hotels in Alberta and British Columbia generate higher revenues in the first quarter from oil and gas drilling activities. 23 Segmented information In measuring performance, the REIT does not distinguish or group its operations on a geographic or any other basis and, accordingly, results have been aggregated into a single reportable segment. Geographical information $ $ Revenues Canada 71,523 69,905 United States 1,928 2,080 73,451 71,985 Property and equipment Canada 304, ,316 United States 8,772 8, , , Annual Report 80

81 Senior Officers W. Glenn Squires Chief Executive Officer Tracy C. Sherren Chief Financial Officer & Corporate Secretary Corporate Information Corporate Office 30 Damascus Road, Suite 201 Bedford, Nova Scotia B4A 0C1 Investor Relations Toll Free: Fax: Website: Stock Exchange Listing The Toronto Stock Exchange Units: HLR.UN Convertible Debentures: HLR.DB and HLR.DB.A Units Outstanding 39,135,216 (including exchangeable Class B units) Annual General Meeting June 6, 2011 at 2:00 pm Radisson Suite Hotel 1649 Hollis Street, Halifax, Nova Scotia Transfer Agent and Registrar CIBC Mellon Trust Company 1660 Hollis Street, 4th Floor Halifax, Nova Scotia B3J 1V7 Auditors PricewaterhouseCoopers LLP Chartered Accountants 1601 Lower Water Street, Suite 400 Halifax, Nova Scotia B3J 3P Annual Report 81