Charting Safe Passage

Transcription

1 Charting Safe Passage through uncertain waters 2009 ANNUAL REPORT Holloway Lodging REIT Annual Repor t

2 Corporate Profile Holloway Lodging Real Estate Investment Trust 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 21 wholly-owned hotels (2,320 rooms) and another eight hotels (629 rooms) in which Holloway has a beneficial, minority ownership interest. Our hotels are located in Alberta, British Columbia, New Brunswick, Newfoundland and Labrador, Northwest Territories, Nova Scotia, Ontario, Quebec, and South Carolina. Holloway s competitive advantages fueling our growth include a dedicated REIT management team; a property management agreement with one of Canada s leading hotel management firms, Pacrim Hospitality Services Inc.; access to electronic marketing and reservation expertise through Intergy, an e-marketing and reservation company; and extensive alliances with hotel franchisors, national real estate firms and large financial institutions. Holloway s units and convertible debentures trade on the TSX under the symbols HLR.UN, HLR.DB and HLR.DB.A. Our Mission To strategically grow to become one of North America s top-performing lodging REITs. We will continuously seek to improve our operating results by focusing on dominating the market segments in which we operate and maximizing product quality through a prudent capital reinvestment program. We will continue to strengthen our relationships with our key strategic business partners, unitholders, guests, and employees. Contents Highlights Message from the CEO Hotel Awards Management s Discussion & Analysis Consolidated Financial Statements Board of Trustees Senior Officers Corporate Information Holloway Lodging REIT Annual Repor t

3 2009 Highlights For the years ended December Key operating statistics for the period of ownership Revenue per available room (RevPAR) $ $ Average daily rate (ADR) $ $ Occupancy 55.85% 65.14% Guest Room Distribution BY LOCATION Operating Results (in millions, except per unit amounts) Hotel revenues $ $ Hotel EBITDA $ 20.3 $ 31.3 Distributable income $ 0.4 $ 12.3 Basic and diluted distributable income per unit $ $ Distributions declared per unit $ $ Alberta...61% British Columbia...14% Nova Scotia...11% New Brunswick...6% South Carolina...5% Northwest Territiories...3% Market penetration This table illustrates Holloway s 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 a property has achieved more than its fair share of the business in a particular market. 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Super 8 Slave Lake % 2. Super 8 Fort St. John % 3. Super 8 Drayton Valley % 4. Holiday Inn Express Kamloops % 5. Super 8 Truro % 6. Holiday Inn Grande Prairie % 7. Best Western Grande Prairie % 8. Holiday Inn Express Myrtle Beach % 9. Holiday Inn Express Halifax % 10. Pomeroy Inn Grande Prairie % 11. Radisson Fort McMurray % 12. Super 8 Yellowknife % 13. Super 8 Whitecourt % 14. Radisson Halifax % 15. Holiday Inn Express Moncton % 16. Super 8 Three Hills % 17. Super 8 Grande Prairie % 18. Five Calgary % 19. Northwest Inn % BY BRAND Super % Holiday Inn Express...18% Radisson...10% Holiday Inn...5% Best Western...5% Pomeroy Inn & Suites...5% Independent...10% Market Penetration by Region* 120% 118% 116% 114% 112% 110% 108% 106% 104% 102% 100% 2009 West 2008 Atlantic * Same Store Holloway Lodging REIT Annual Repor t

4 Message from the CEO 2009 was a challenging year for the economy and in particular the hospitality industry, both in Canada and around the world. Holloway was not immune to these challenges. In July, we were forced to suspend distributions to our unitholders. This decision was a difficult one and came only after a comprehensive analysis of the economic situation facing us. Suspending distributions was a clear indication of the severity of the economic decline and the only possible means of preserving capital and protecting unitholders interests in the long term. During the year, the REIT sold the Wingate by Wyndham Calgary. This was a strategic move and advantageous to the REIT as it allowed us to realize a gain of $1.2m and net cash proceeds of $8.5m. The sale was in keeping with our current business strategy of realizing on opportunistic deals while continuing to focus resources on managing our portfolio aggressively to maximize performance. Industry predictions for 2010 indicate both the global and Canadian economy will move toward recovery but at a slow pace. It is not surprising that the hotel industry has suffered more than many sectors, with both leisure and business travel being largely a discretionary activity. However, Holloway Lodging REIT is on a solid footing compared to many others in our industry. We are well-equipped to face the We are well-equipped to face the challenges ahead and move cautiously and strategically toward a more prosperous future. W. Glenn Squires, Chief Executive Officer Holloway Lodging REIT Annual Repor t

5 challenges ahead and move cautiously and strategically toward a more prosperous future. maturities, will position Holloway Lodging REIT favourably as we move into 2010 and beyond. In 2010, we will continue to focus on our current business strategy but will watch closely for signs of change and will look to capitalize on accretive opportunities that may arise. Continuing to reduce operating expenses, increasing productivity, moving market share from our competitors, and finding ways to strengthen our balance sheet will be our focus. As Canada moves further out of the recession and growth in the economy continues, the benefits of our market share gains, operating cost reductions and having a relatively young and well maintained hotel portfolio, with no near-term debt Holloway Lodging REIT s ability to weather these hard times is due, in large part, to the quality of our management and staff. As CEO, I am fortunate to work with a dedicated and skilled team. My thanks go out to each employee. In closing, I want to thank our investors, trustees and guests for standing by us during these difficult times. As we move ahead together, we will keep Holloway Lodging REIT s core values at the forefront: protecting unitholders investments, increasing returns while providing an exemplary experience for our guests. Sincerely, Glenn Squires Chief Executive Officer In 2010, we will watch closely for signs of change and will look to capitalize on accretive opportunities that may arise. Holloway Lodging REIT Annual Repor t

6 Hotel Awards Canada Alberta 5 Calgary Downtown Suites Alberta Hotel & Lodging Association Employer of Choice (2008, 2009) - given to those employers demonstrating and committing to sound human resource practices in the areas of organizational effectiveness, organizational learning, development and training, staffing, total compensation, employee relations, workplace health & safety and HR information management Best Western 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 Holiday Inn Hotel & Suites Grande Prairie InterContinental Hotels Group Quality Excellence Award (2007)- based on guest satisfaction Alberta Hotel & Lodging Association Housekeeping Award (2007, 2008) - based on annual inspections Pomeroy Inn & Suites Grande Prairie Alberta Hotel & Lodging Association Housekeeping Award (2006, 2008) - based on guest satisfaction Radisson Hotel & Suites Fort McMurray Radisson Hotels Worldwide Carlson Hotels Aspire Award (2008) - greatest percentage increase in year over year RevPAR growth Alberta Hotel & Lodging Association Housekeeping Award (2007, 2009) - based on annual inspections Super 8 Drayton Valley 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) - based on annual inspections Drayton Valley & District Chamber of Commerce Business of the Year Award (2005, 2006) - based on annual inspections & community involvement Super 8 Grande Prairie Wyndham International Pride of Super 8 Designation - continuously exceeding the chain s standards VIP Challenge Award (2001, 2002, 2003) - motels with rooms with the highest VIP program enrollment Alberta Hotel & Lodging Association Housekeeping Award (2001, 2002, 2003, 2004, 2005) - based on annual inspections Holloway Lodging REIT Annual Repor t

7 Super 8 High Level Super 8 Three Hills British Columbia Holiday Inn Express Kamloops New Brunswick Holiday Inn Express Hotel & Suites Moncton Wyndham International Clean & Friendly Award (2002, 2003) - no customer complaints for a 1 year period Alberta Hotel & Lodging Association Housekeeping Award (2007) - based on annual inspections Wyndham International Quality Excellence Award based on customer satisfaction Alberta Hotel and Lodging Association Housekeeping Award (1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2009) based on annual inspection 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 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 HR development Holloway Lodging REIT Annual Repor t

8 Northwest Territories Super 8 Yellowknife Nova Scotia Holiday Inn Express Halifax Radisson Suite Hotel Halifax Super 8 Truro Wyndham International Pride of Super 8 Designation - continuously exceeding the chain s standards 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, 2008, 2009) - 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 Yes I Can Award (2008, 2009) - based on guest satisfaction Tourism Industry Association of Nova Scotia (TIANS) Commitment to Excellence Award (2003, 2004, 2005, 2006, 2007, 2008) - 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 Holloway Lodging REIT Annual Repor t

9 Management s Discussion and Analysis For the three months and year ended December 31, 2009 H o l l o way L o d g i n g R E I T A n n u a l R e p o r t

10 Introduction The following management s discussion and analysis ( MD&A ) is a discussion of the results of operations and financial condition of Holloway Lodging Real Estate Investment Trust ( Holloway or the REIT ) for the three months and year ended December 31, 2009 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 forwardlooking 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. Holloway Lodging REIT Annual Repor t

11 Overview The year 2009 was challenging for many sectors of the economy and these difficult times had a significant impact on the hospitality industry. According to data compiled by PKF Consulting Inc. ( PKF ), on a national basis, hotel room demand declined by 6% and average daily rates fell by 5%. To provide some context to this data, the two prior economic shocks of the last ten years, namely the events of 9/11 and the outbreak of SARS resulted in declines in demand of 4.3% and 3.7%, respectively. Within specific regions of Canada, the level of volatility in demand was much more pronounced. The region experiencing the largest year over year decline was rural Alberta. It is in this area that close to 50% of the REIT s room supply is located, and therefore the REIT experienced significant demand declines in the western region versus the prior year. The primary cause of the decline was the downturn in oil and gas exploration and associated activities. The REIT s hotels in the Atlantic region weathered the recession much better as the sources of business for these hotels are of a much more diversified nature and Atlantic Canada is less prone to volatile economic swings. Despite these challenges, the REIT has made gains in market share growth and cost containment across its portfolio. Many of our hotels increased their market share versus the prior year. The REIT has also made progress on managing costs in every area of the operation including wages, operating expenses as well as in each area of overhead expenses. The REIT also completed the sale of the Wingate by Wyndham in Calgary, recognizing a gain of $1.5 million and cash proceeds after mortgage repayment and closing costs of $8.5 million. In addition, subsequent to year-end, the REIT refinanced all mortgages maturing in 2010 on more favourable terms. As Canada moves further out of the recession and demand growth in the economy continues, the benefits of our market share gains, operating cost reductions, a relatively young and well maintained hotel portfolio and no near-term debt maturities will position the REIT favourably as we move into 2010 and beyond. 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 74,427 93,495 69,751 Total revenues (hotel and REIT interest income) 75,166 96,297 72,192 Net income (loss) and comprehensive income (loss) (20,337) (5,080) 1,520 Basic and diluted income (loss) per unit (0.52) (0.13) 0.05 Basic and diluted FFO per unit Basic and diluted distributable income per unit Distributions declared per unit Total assets 358, , ,216 Total indebtedness (mortgages and loans payable, obligations under capital leases, convertible debentures and promissory notes) 223, , ,114 Unitholders equity 125, , ,806 Number of rooms* 2,320 2,423 2,423 Occupancy* 55.45% 65.14% 66.02% ADR* $ $ $ RevPAR* $73.02 $ $90.96 *Excludes discontinued operations. Holloway Lodging REIT Annual Repor t

12 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 a Declaration of Trust on March 28, was the initial year of active operations for the REIT. As at December 31, 2009, the REIT owned 21 hotel properties with 2,320 guest rooms and suites and has equity ownership interests, ranging from 2.52% to 19.06% in eight other hotels. The hotels in which the REIT has an equity ownership interest represent an additional 629 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. The 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. Holloway Lodging REIT Annual Repor t

13 Portfolio of Hotels 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-one hotels wholly owned by Holloway as at December 31, Approximately 61% of Holloway s rooms and suites are located in Alberta. Property Location No. of Rooms Alberta Super 8 Drayton Valley 60 5 Calgary Downtown Suites & Spa Hotel Calgary 302 Radisson Hotel and Suites Fort McMurray 134 Super 8 Three Hills 82 Super 8 Slave Lake 58 Super 8 Whitecourt 59 Super 8 High Level 81 Super 8 Grande Prairie 149 Holiday Inn Grande Prairie 146 Best Western Grande Prairie 100 Pomeroy Inn and Suites Grande Prairie 152 Northwest Inn Slave Lake 99 Total Rooms 1,422 British Columbia Super 8 Fort St. John 93 Super 8 Fort Nelson 142 Holiday Inn Express Kamloops 80 Total Rooms 315 New Brunswick Holiday Inn Express and Suites Moncton 151 Total Rooms 151 Northwest Territories Super 8 Yellowknife 66 Total Rooms 66 Nova Scotia Super 8 Truro 50 Radisson Suite Hotel Halifax 104 Holiday Inn Express Halifax 98 Total Rooms 252 South Carolina USA Holiday Inn Express Myrtle Beach 114 Total Rooms 114 Total 2,320 Holloway Lodging REIT Annual Repor t

14 The table below provides details on the eight 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% 92 Quebec Super 8 Ste-Foy 15.00% 79 Super 8 Trois-Rivieres 15.00% 78 Total 629 Holloway Lodging REIT Annual Repor t

15 Operating Results The following table provides a summary of the operating results for the three months and years ended December 31, 2009 and (in $000 s except number of Three months ended Three months ended Year ended Year ended units and per unit results) December 31, 2009 December 31, 2008 December 31, 2009 December 31, 2008 Hotel revenues 15,939 20,489 71,985 89,332 Hotel expenses 12,508 14,707 52,673 59,701 Hotel operating income 3,431 5,782 19,312 29,631 Other expenses 15,637 11,422 44,300 35,123 Provision for (recovery of) future income taxes (413) (712) (3,056) 65 Net income (loss) from continuing operations for the period basic and diluted (11,793) (4,928) (21,932) (5,557) Income from discontinued operations 1, , Net income (loss) and comprehensive loss for the period (10,432) (4,903) (20,337) (5,080) Weighted average basic units outstanding 39,135,216 39,136,183 39,135,216 39,132,025 Weighted average diluted units outstanding 39,135,216 39,136,183 39,135,216 39,132,025 Basic income (loss) per unit (0.27) (0.13) (0.52) (0.13) Diluted income (loss) per unit (0.27) (0.13) (0.52) (0.13) Reconciliation to funds from operations (FFO) Add/(deduct): Depreciation and amortization on real property 3,190 3,302 13,045 13,032 Gain on sale of hotel property (1,474) (1,474) Provision for impairment of mezzanine loans and advances 6,359 3,000 11,059 3,000 Write-off and provision for impairment of investments in hotel properties 1,011 1,011 Provision for (recovery of) future income taxes, continuing operations (413) (482) (3,056) 65 Provision for future income taxes, discontinued operations 89 (211) Funds from operations basic and diluted (1,670) ,243 Basic FFO per unit (0.04) Diluted FFO per unit (0.04) Reconciliation to distributable income Add/(deduct): Depreciation and amortization trust and other assets Accretion of mortgages, convertible debentures and deferred financing fees ,528 2,170 Unit-based compensation Unrealized foreign exchange loss (gain) (86) 691 (737) 1,020 FF&E reserve (480) (641) (2,233) (2,805) Distributable income basic and diluted (1,500) 1, ,340 Basic distributable income per unit (0.04) Diluted distributable income per unit (0.04) Distributions declared Reconciliation of cash flow from operating activities to distributable INCOME Cash flow from operating activities (2,857) 2, ,332 Changes in non-cash working capital balances 1,837 (675) 2,244 (1,187) FF&E reserve (480) (641) (2,233) (2,805) Distributable income (1,500) 1, ,340 Holloway Lodging REIT Annual Repor t

16 Q4 Operating Results The results of operations for the three months ended December 31, 2009 and 2008 represent the continuing operations of twentyone hotels for the full quarter. Revenues Three months ended Three months ended (in $000 s) December 31, 2009 December 31, 2008 Variance Room revenue 13,247 17,222 (3,975) Other revenue 2,692 3,267 (575) Total 15,939 20,489 (4,550) Room Revenue Key Performance Measures Three months ended Three months ended December 31, 2009 December 31, 2008 RevPAR Region Occupancy ADR RevPAR Occupancy ADR RevPAR Change Atlantic Canada ($Cdn) 57.48% $ $ % $ $67.72 (7.9%) Western Canada ($Cdn) 48.39% $ $ % $ $86.47 (25.5%) United States ($US) 35.29% $63.83 $ % $78.09 $28.81 (21.8%) Weighted Average Total ($Cdn) 49.32% $ $ % $ $80.69 (23.1%) The Atlantic Canada RevPAR has decreased 7.9% for the three months ended December 31, 2009 compared to the three months ended December 31, In Moncton, there has been an erosion of business due to the increased market penetration from a relatively new market entrant. In Truro, one competitor representing half of the available rooms in the market had a significant ramp up in the fourth quarter compared to last year when they were undergoing renovations. In downtown Halifax, the trend continued among the competitive set of attempting to sustain occupancy via rate discounts. The result was that occupancy and rate were down across the market in equal measure compared to the prior year. The Radisson Halifax, however, achieved healthy RevPAR and market share growth despite these market challenges. In suburban Halifax, the Holiday Inn Express performed relatively well in a down market and increased its market share. Three of the four REIT hotels in Atlantic Canada exceeded their fair market share in the fourth quarter. The Western Canada RevPAR decreased 25.5%. The downturn in the oil and gas sector continued and the associated industry service and supply companies scaled back their accommodation requirements proportionately. According to statistics compiled by the Canadian Association of Oilwell Drilling Contractors, the average number of active oil rigs in the fourth quarter was down by 30% compared to the prior year. Holloway Lodging REIT Annual Repor t

17 The largest hotel occupancy declines were in Whitecourt, Three Hills, Slave Lake, Fort McMurray and Drayton Valley. Compression on rates followed across these markets but to a lesser extent in Fort McMurray than in the other locations. In Whitecourt, a new competitor entered the market in the quarter. Despite this difficult environment, the REIT s hotels in the Western region largely maintained levels of market share and most achieved well in excess of fair market share. In Grande Prairie, the occupancy decline in the quarter also translated into lower rates as clients negotiated rate discounts in a market with constricted demand. However, three of the REIT s four hotels in Grande Prairie achieved growth in market share in the fourth quarter versus the prior year. The RevPAR for the Holiday Inn Express in Myrtle Beach, South Carolina decreased 21.8% due to the drop in average rate as clientele are exceedingly price conscious due to the prevailing economic conditions, the availability of online discounts and the willingness of the competitive set to negotiate rate concessions. Other Revenue Lower food and beverage revenue in Grande Prairie and Calgary accounted for the majority of the decline in other revenue. There were lower ancillary revenues at several hotels, due to lower occupancy levels as well as a decline in parking revenue in Calgary. Expenses Three months ended Three months ended (in $000 s) December 31, 2009 December 31, 2008 Variance Operating expenses 11,076 12,894 (1,818) Property taxes and insurance 1,103 1,241 (138) Management fees (243) Total 12,508 14,707 (2,199) 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 decreased $1.8 million when comparing the three months ended December 31, 2009 to the same period in Substantial savings were achieved as a result of lower wage costs due to the lower occupancy along with cost containment in operating expenses such as guest consumables as well as from efficiencies realized in maintenance, administrative and marketing departments. Utility costs were also lower as a function of the lower occupancy. Property Taxes and Insurance Property taxes and insurance expenses have declined $0.1 million for the three months ended December 31, 2009 compared to the fourth quarter of Insurance rates were negotiated down and several properties experienced lower property tax assessments. Management Fees Management fees are based on the hotel revenues which have declined from the prior year. Holloway Lodging REIT Annual Repor t

18 Hotel Operating Income The following table provides the REIT s hotel margins for its portfolio for the three months ended December 31, 2009 and (in $000 s except percentages, number of rooms Three months ended Three months ended available and HOI per available room) December 31, 2009 December 31, 2008 Variance Hotel revenues 15,939 20,489 (4,550) Hotel operating expenses 11,076 12,894 (1,818) Hotel gross margin 4,863 7,595 (2,732) Percentage 30.5% 37.1% (6.6%) Hotel overhead expenses (1) 1,432 1,813 (381) Hotel operating income (HOI) 3,431 5,782 (2,351) Hotel operating income margin 21.5% 28.2% (6.7%) Number of rooms available 213, ,440 HOI per available room (11.02) 1. Hotel overhead expenses include property taxes, insurance and management fees. Hotel operating income per available room decreased by $11.02 to $16.07 from $27.09 for the three months ended December 31, 2009 and 2008, respectively. The hotel operating income margin decreased to 21.5% from 28.2%. The decrease is attributable to the substantial revenue decline, much of which occurred in ADR, and as such has a greater impact on operating margins. While considerable cost savings have been achieved in wages and in all operating and overhead departments as outlined in the Hotel Expenses section above, the magnitude of these savings did not proportionally offset the revenue declines. Other Income and Expenses Three months ended Three months ended (in $000 s) December 31, 2009 December 31, 2008 Variance Interest on mortgages and other debt and accretion of deferred financing fees 2,725 2,823 (98) Convertible debentures interest and accretion 1,920 1, Corporate and administrative (16) Interest income (79) (706) 627 Unrealized foreign exchange loss (gain) (86) 690 (776) Depreciation and amortization 3,243 3, Provision for impairment of mezzanine loans and advances 6,359 3,000 3,359 Write-off and provision for impairment of investments in hotel properties 1,011 1,011 Total 15,637 11,422 4,215 Interest on Mortgages and Other Debt and Accretion of Deferred Financing Fees Interest on mortgages and other debt and accretion of deferred financing fees has decreased $0.1 million to $2.7 million for the three months ended December 31, 2009 compared to the three months ended December 31, 2008 due to the decline in the mortgage principal outstanding. Holloway Lodging REIT Annual Repor t

19 Convertible Debentures Interest and Accretion The total debenture interest expense and the non-cash accretion of the discount on the debentures has increased $0.1 million to $1.9 million for the fourth quarter of 2009 compared to $1.8 million for the fourth quarter of 2008 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 were $0.5 million for the three months ended December 31, 2009 and $0.6 million for the three months ended December 31, 2008 as a result of declines in wages, legal fees and expenses related to non-acquired properties. The REIT has ongoing cost-control measures in place across all of areas of corporate expenses. Interest Income During the three months ended December 31, 2009 and 2008, the REIT generated interest income of $0.1 million and $0.7 million respectively from loans receivable and the investment of cash balances. There was lower interest revenue from the loan to Pacrim Hospitality Services Inc. as the interest rate on that loan declined. The interest rate charged is described in the RELATED PARTY AGREEMENTS section of this report. In addition, the REIT is recording an allowance against all of the interest income from the mezzanine loans as the loans are considered impaired and collectability is uncertain. 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 dollar. Depreciation and Amortization Depreciation and amortization has increased marginally for the three months ended December 31, 2009 compared to the fourth quarter of The increase in depreciation represents depreciation on capital additions made to the properties. Provision for Impairment of Mezzanine Loans and Advances The REIT believes that the loans to Winport Developments Limited Partnership and Pacrim North York Limited Partnership are impaired. The loans are in default and the REIT issued a demand notice for payment earlier in the year. On August 6, 2009, a court-appointed receiver on behalf of the first mortgagor for the property was named, with a mandate to sell the property and maximize the return to the debt-holders. The REIT s loans and advances have been written down to zero as the REIT does not expect to realize on its security. The REIT believes that the mezzanine loan and advances to Windsor 8 Motel Limited are impaired. The loan is currently in default. The REIT is progressing with a quit claim to obtain title of the property in As the appraised value of the property is approximately equal to the first mortgage debt on the property, the REIT s mezzanine loan and advances have been written down to zero. Holloway recorded a total provision for impairment of $6.4 million on its mezzanine loans and advances during the three months ended December 31, Holloway Lodging REIT Annual Repor t

20 Write-off and Provision for Impairment of Investments in Hotel Properties The REIT recorded a provision for impairment of $0.5 million during the three months ended December 31, 2009 against its investment in the Super 8 Langley, BC which represents the total cost of this investment. This provision was taken as the performance of this hotel no longer supports the carrying value of the investment. In addition, the REIT wrote off its investment of $0.5 million in the Super 8 in Midland, ON, as it has relinquished its ownership interest in this hotel. Income from Discontinued Operations The REIT s income from discontinued operations during the fourth quarter of 2009 was $1.5 million, which represents the gain on the sale of the Wingate by Wyndham hotel in Calgary, AB. On October 5, 2009, the REIT sold this property to an arm s length purchaser for $16.5 million. After repayment of the mortgage and closing costs on the property, net cash proceeds were $8.5 million. Funds from Operations ( FFO ) FFO for the three months ended December 31, 2009 was ($1.7) million [($0.04) basic and diluted FFO per unit] compared to $0.7 million ($0.02 basic and diluted FFO per unit) for the same period in 2008, primarily due to the decline in hotel revenues. Distributable Income Distributable income was ($1.5) million [($0.04) basic and diluted distributable income per unit] for the three months ended December 31, 2009 compared to $1.4 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, 2009 and 2008, respectively. Three months ended Three months ended (in $000 s) December 31, 2009 December 31, 2008 Net Cash Provided by Operating Activities (2,857) 2,708 Capital expenditures including acquisitions and other assets (486) (423) Standardized Distributable Cash (3,343) 2,285 Reconciliation to Distributable Income: Standardized Distributable Cash (3,343) 2,285 Capital expenditures in excess of (less than) FF&E reserve 6 (218) Changes in non-cash working capital balances 1,837 (675) Distributable Income (1,500) 1,392 Cash Flow for the Three Months Ended December 31, 2009 and 2008 During the three months ended December 31, 2009, the REIT s 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. For the comparative period in 2008, cash and cash equivalents decreased by $2.9 million from $7.9 million to $5.0 million primarily due to distributions to unitholders exceeding distributable income by $2.8 million for that period. Holloway Lodging REIT Annual Repor t

21 Three months ended Three months ended (in $000 s) December 31, 2009 December 31, 2008 Operating activities Net income (loss) and comprehensive income (loss) from continuing operations for the periods (11,793) (4,946) Charges (credits) to income not involving cash Unit-based compensation 15 9 Depreciation and amortization 3,243 3,231 Accretion of mortgages and convertible debentures Unrealized foreign exchange loss (gain) (86) 690 Provision for (recovery of) future income taxes (413) (693) Provision for impairment of mezzanine loans and advances 6,359 3,000 Write-off and provision for impairment of investments in hotel properties 1,011 (995) 1,858 Net change in non-cash working capital balances related to operations (1,977) 677 Cash flow from discontinued operations Cash flow from (used in) operating activities (2,857) 2,708 Investing activities Decrease (increase) in restricted cash 10 (77) Increase in capital reserves, continuing operations (169) (515) Decrease (increase) in capital reserve, discontinued operations (585) 18 Proceeds from sale of property, discontinued operations 15,636 Increase in mezzanine loans and advances receivable (30) Additions to property and equipment, continuing operations (486) (393) Additions to property and equipment, discontinued operations (30) Investment in hotel properties 680 Cash flow from (used in) investing activities 14,376 (317) Financing activities Repayment of capital lease obligations (96) (93) Increase in deferred financing fees, continuing operations (29) Repayment of mortgages and loans payable, continuing operations (1,175) (966) Repayment of mortgage payable, discontinued operations (6,912) (73) Units repurchased and cancelled (1) Distributions paid to unitholders (4,207) Cash flow used in financing activities (8,212) (5,340) Net change in cash and cash equivalents during the periods 3,307 (2,949) Cash and cash equivalents, continuing operations beginning of periods 151 7,746 Cash and cash equivalents, discontinued operations beginning of periods ,941 Cash and cash equivalents, continuing operations end of periods 3,756 4,860 Cash and cash equivalents, discontinued operations end of periods ,786 4,992 Holloway Lodging REIT Annual Repor t

22 Operating Activities 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 increased $2.0 million, accounts payable and accrued liabilities decreased $0.6 million, accrued interest on convertible debentures decreased $0.4 million (all uses of cash) which were offset by the reduction in accounts receivable of $1.0 million (source of cash). For the three months ended December 31, 2008, cash flow from operations was $2.7 million. The cash flow before changes in working capital items provided $1.9 million in cash. The changes in working capital items provided an additional $0.7 million as accounts receivable declined $1.1 million (source of cash) and the accrued interest on the convertible debentures decreased $0.4 million (use of cash). Investing Activities 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 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. For the three months ended December 31, 2008, investing activities utilized $0.3 million. The REIT s capital reserves for replacement increased $0.5 million and additions to property and equipment totalled $0.4 million. As part of the acquisition of equity ownership interests in nine hotels, the REIT received $0.7 million in cash. Financing Activities 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 three months ended December 31, For the three months ended December 31, 2008, financing activities utilized $5.3 million. The REIT made principal repayments on its mortgage debt and loans payable of $1.0 million. Distributions to unitholders utilized $4.2 million in cash during the fourth quarter of Holloway Lodging REIT Annual Repor t

23 Full Year Operating Results The following discussion for the years ended December 31, 2009 and 2008 represents the continuing operations of the twenty-one hotels owned by the REIT. It does not include the discontinued operations of the Wingate by Wyndham Calgary. Revenues Year ended Year ended (in $000 s) December 31, 2009 December 31, 2008 Variance Room revenue 61,837 77,063 (15,226) Other revenue 10,148 12,269 (2,121) Total 71,985 89,332 (17,347) Room Revenue Key Performance Measures Year ended Year ended RevPAR December 31, 2009 December 31, 2008 Change Region Occupancy ADR RevPAR Occupancy ADR RevPAR Atlantic Canada ($Cdn) 67.32% $ $ % $ $87.69 (8.6%) Western Canada ($Cdn) 52.93% $ $ % $ $93.99 (22.4%) United States ($US) 53.48% $81.26 $ % $93.81 $52.63 (17.4%) Weighted Average Total ($Cdn) 55.45% $ $ % $ $90.98 (19.7%) The Atlantic Canada RevPAR has decreased by 8.6% for the year ended December 31, 2009 compared to the year ended December 31, 2008 due to reduced occupancy at three of the four properties in the Atlantic region and a decline in rates primarily in the Halifax market. Two of the four REIT hotels in the Atlantic region increased their market share versus the competitive set from the previous year and three of the four rank first in market share. Western Canada RevPAR decreased 22.4%. Within the Western region, the combination of sharply lower demand, room supply increases in many markets and the resulting downward pressure on rates produced substantial declines in RevPAR for the year. The largest occupancy declines were in Fort McMurray, Drayton Valley, Slave Lake, Fort St. John and Whitecourt. The decline in gas and oil activity has a major effect on many of our Alberta and northern British Columbia hotels as demand is largely reliant on this business. A substantial increase in available room supply has also been a major factor in Grande Prairie, Slave Lake, Drayton Valley and Fort St. John. However, many of the REIT s hotels in the Western region have posted solid growth in market share year over year. RevPAR at the Holiday Inn Express in Myrtle Beach, South Carolina decreased 17.4% due to the drop in average rate due to lower leisure and group activity on account of the prevailing economic conditions in the United States. Despite this, the hotel has achieved healthy growth in market share and it well exceeds fair market share. Holloway Lodging REIT Annual Repor t

24 Other Revenue Lower other revenue is primarily attributable to lower food and beverage revenue in Grande Prairie, Slave Lake and Calgary. Also, the prior year included $0.1 million in food and beverage revenue from a restaurant operation which was leased out in February, There were lower ancillary revenues at the Radisson in Fort McMurray and several other hotels due to lower occupancy levels along with lower parking revenue in Calgary. Expenses Year ended Year ended (in $000 s) December 31, 2009 December 31, 2008 Variance Operating expenses 46,236 52,544 (6,308) Property taxes and insurance 4,627 4,842 (215) Management fees 1,810 2,315 (505) Total 52,673 59,701 (7,028) 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. The expenses have decreased $6.3 million when comparing the year ended December 31, 2009 to the same period in The hotels are economizing with staff scheduling and cutting operating expenses as a result of the lower business levels. Savings were achieved throughout all operating and overhead departments, with wages representing the largest savings area. Operating supplies expenses were down, as were fees calculated as a percent of revenue, maintenance expenses and utilities. Property Taxes and Insurance Property taxes and insurance expenses have decreased to $4.6 million from $4.8 million for the year ended December 31, 2009 and 2008, respectively due to lower assessments in several Western region hotels. Management Fees Management fees are based on a percent of hotel revenues which have declined from the prior year. In addition, the management fees for January, 2008 for 10 hotels in Alberta and British Columbia were subject to a higher fee under another management agreement which was terminated at the end of January, Hotel Operating Income The following table provides the REIT s hotel margins for its portfolio for the years ended December 31, 2009 and (in $000 s except percentages, number of rooms Year ended Year ended available and HOI per available room) December 31, 2009 December 31, 2008 Variance Hotel revenues 71,985 89,332 (17,347) Hotel operating expenses 46,236 52,544 (6,308) Hotel gross margin 25,749 36,788 (11,039) Percentage 35.8% 41.2% (5.4%) Hotel overhead expenses (1) 6,437 7,157 (720) Hotel operating income (HOI) 19,312 29,631 (10,319) Hotel operating income margin 26.8% 33.2% (6.4%) Number of rooms available 846, ,100 (300) HOI per available room (12.17) (1) Hotel overhead expenses include property taxes, insurance and management fees. Holloway Lodging REIT Annual Repor t

25 Hotel operating income per available room decreased by $12.17 to $22.81 from $34.98 for the year ended December 31, 2009 and 2008, respectively. The hotel operating income margin decreased to 35.8% from 41.2%. The decrease is primarily attributable to the substantial revenue decline and in particular, the decrease in ADR. While cost savings have been achieved across all operating departments as outlined in the Hotel Expenses section above, the magnitude of these savings did not proportionally offset the revenue declines. Other Income and Expenses Year ended Year ended (in $000 s) December 31, 2009 December 31, 2008 Variance Interest on mortgages and other debt 10,997 11,107 (110) Interest on convertible debentures 4,989 5,022 (33) Accretion on convertible debentures, mortgages and deferred financing fees 2,578 2, Corporate and administrative 2,173 2,844 (671) Interest income (739) (2,802) 2,063 Unrealized foreign exchange loss (gain) (737) 1,020 (1,757) Depreciation and amortization 12,969 12, Provision for impairment of mezzanine loans and advances 11,059 3,000 8,059 Write-off and provision for impairment of investments in hotel properties 1,011 1,011 Total 44,300 35,123 9,177 Interest on Mortgages and Other Debt Interest on mortgages and other debt has decreased marginally when comparing the year ended December 31, 2009 to the year ended December 31, This is due to a decrease in mortgage interest expense as principal balances are paid down, offset by a $0.2 million increase in interest expense on the promissory notes issued in December, Convertible Debentures Interest The total debenture interest expense for the years ended December 31, 2009 and 2008 has remained constant at $5.0 million. Accretion on Mortgages, Convertible Debentures and Deferred Financing Fees The accretion on mortgages, convertible debentures and deferred financing fees has increased $0.4 million to $2.6 million from $2.2 million for the years ended December 31, 2009 and 2008, respectively. The increase relates primarily to the increase in the non-cash accretion on the convertible debentures which increases over the term to the maturity dates of the debentures. Corporate and Administrative Corporate and administrative expenses were $2.2 million for the year ended December 31, 2009 and $2.8 million for the year ended December 31, This decrease is due in part to a $0.4 million decrease in unit-based compensation. In addition, there were two additional corporate employees during the first half of 2008 whose positions were eliminated during 2008, resulting in quarterly savings of $60,000. The REIT eliminated another corporate position and out-sourced another position during the third quarter of 2009 resulting in additional on-going savings. In addition, all other corporate expenses are strictly controlled. Holloway Lodging REIT Annual Repor t

26 Interest Income During the years ended December 31, 2009 and 2008, the REIT generated interest income of $0.7 million and $2.8 million, respectively from loans receivable and the investment of cash balances. There was lower interest revenue from the loan to Pacrim Hospitality Services Inc. as the interest rate on that loan declined at the beginning of the fourth quarter of In addition, the REIT is recording an allowance against all of the interest income from the mezzanine loans as the loans are considered impaired and collectability is uncertain. 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 by $0.2 million to $13.0 million from $12.8 million for the years ended December 31, 2009 and 2008, respectively. The increase in depreciation represents depreciation on capital additions made to the properties. Provision for Impairment of Mezzanine Loans and Advances The REIT believes the loans to Winport Developments Limited Partnership and Pacrim North York Limited Partnership are impaired. The loans are in default and the REIT issued a demand notice for payment earlier in the year. On August 6, 2009, a court-appointed receiver on behalf of the first mortgagor for the property was named, with a mandate to sell the property and maximize the return to the debt-holders. The REIT s loans and advances have been written down to zero as the REIT does not expect to realize on its security. The REIT believes that the mezzanine loan and advances to Windsor 8 Motel Limited are impaired. The loan is currently in default. The REIT is progressing with a quit claim to obtain title of the property in As the appraised value of the property is approximately equal to the first mortgage debt on the property, the REIT s mezzanine loan and advances have been written down to zero. Holloway recorded a total provision for impairment of $11.1 million on its mezzanine loans and advances for the year ended December 31, Write-off and Provision for Impairment of Investments in Hotel Properties The REIT recorded a provision for impairment of $0.5 million during the year ended December 31, 2009 against its investment in the Super 8 in Langley, BC which represents the total cost of this investment. This provision was taken as the performance of this hotel no longer supports the carrying value of the investment. In addition, the REIT wrote off its investment of $0.5 million in the Super 8 in Midland, ON, as it has relinquished its ownership interest in this hotel. Income from Discontinued Operations The income from discontinued operations represents the income from the Wingate by Wyndham hotel in Calgary, AB which was sold during the year. The income from discontinued operations of $1.6 million for the year ended December 31, 2009 includes the seven months of operations up to July 31, 2009 plus the $1.5 million gain on the sale of the property. The operating income accrued to the purchaser after July 31, The income from discontinued operations for the year ended December 31, 2008 was $0.5 million. Holloway Lodging REIT Annual Repor t

27 Funds from Operations ( FFO ) FFO for the year ended December 31, 2009 was $0.5 million ($0.01 basic and diluted FFO per unit) compared to $11.2 million ($0.29 basic and diluted FFO per unit) for The savings in expenses cannot fully compensate for the decline in revenues in 2009 compared to Distributable Income The REIT generated $0.4 million in distributable income ($0.01 basic and diluted distributable income per unit) for the year ended December 31, 2009 compared to $12.3 million ($0.32 basic and diluted distributable income per unit) for A distribution of $ per unit per month was declared for January to June, Distributions declared and paid totalled $4.1 million for the year ended December 31, Distributions were suspended on July 21, The REIT s 2009 distributions exceeded its distributable income. Excess, un-deployed cash was used to fund the distribution shortfall. 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 years ended December 31, 2009 and 2008, respectively. Year ended Year ended (in $000 s) December 31, 2009 December 31, 2008 Net Cash Provided by Operating Activities ,332 Capital expenditures including acquisitions and other assets (1,545) (2,080) Standardized Distributable Cash (1,188) 14,252 Reconciliation to Distributable Income: Standardized Distributable Cash (1,188) 14,252 Capital expenditures in excess of (less than) FF&E reserve (688) (725) Changes in non-cash working capital balances 2,244 (1,187) Distributable Income ,340 Holloway Lodging REIT Annual Repor t

28 Cash Flow for the Years Ended December 31, 2009 and 2008 During the year ended December 31, 2009 the REIT s cash and cash equivalents decreased by $1.2 million from $5.0 million to $3.8 million, primarily as a result of the sale of the Wingate by Wyndham in Calgary resulting in net cash proceeds of $8.5 million offset by the distributions to unitholders of $4.8 million and principal repayments of $4.6 million. For the comparative period in 2008, cash and cash equivalents decreased by $17.9 million from $22.9 million to $5.0 million. Operating Activities 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 (uses of cash) while accounts receivable decreased $0.9 million (source of cash). The cash flow from discontinued operations provided $1.1 million in cash. For the year ended December 31, 2008, cash flow from operations was $16.3 million. The cash flow before changes in working capital items provided $13.9 million in cash. Changes in working capital items provided $1.0 million as the decrease in inventories and prepaid expenses and deposits and the increase in accounts payable and accrued liabilities were higher than the increase in accounts receivable. The cash flow from discontinued operations provided $1.3 million in cash. Investing Activities 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 $1.3 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 has 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 $1.4 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. For the year ended December 31, 2008, investing activities utilized $9.4 million primarily due to the $6.4 million loan to Pacrim Hospitality Services Inc. ( PHSI ) as described in the RELATED PARTY AGREEMENTS section and a $1.25 million mezzanine loan to The Yorkland Hotel. In addition, capital reserves for replacement increased $2.1 million and additions to property and equipment of $2.0 million were made at the Radisson Hotel and Suites in Fort McMurray, AB, the Radisson Suite Hotel in Halifax, NS and a number of smaller additions at a number of hotels. The decrease in restricted cash of $1.7 million resulted from the release of cash held in escrow as renovations were completed at the Pomeroy Inn and Suites in Grande Prairie, AB. Financing Activities Financing activities utilized $15.8 million during the year ended December 31, The REIT obtained an additional $1.2 million before 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 by Wyndham before the sale and the repayment on closing utilized $7.1 million in cash. Financing activities utilized $24.8 million during the year ended December 31, The REIT made principal payments on its mortgages and other loans of $3.8 million. Distributions paid to unitholders totalled $20.1 million during the year ended December 31, Holloway Lodging REIT Annual Repor t

29 Balance Sheet The following table outlines the significant changes in the consolidated balance sheet from December 31, 2008 to December 31, As at As at December 31, December 31, Increase (in $000 s) (Decrease) Explanation Assets Cash and cash equivalents 3,756 4,992 (1,236) See the Cash flow for the Years Ended December 31, 2009 and 2008 in the previous section. Capital reserve 912 1,553 (641) The decrease in the internally-controlled capital reserves relates to capital improvements made at the 5 in Calgary, the Super 8 in Yellowknife and the Radisson Hotel in Fort McMurray. In addition, the capital reserve of $0.1 million for the Wingate by Wyndham has been excluded in the balance at December 31, 2009 but included in the December 31, 2008 balance. Accounts receivable 2,438 3,376 (938) The decrease is primarily due to a decrease in the charge accounts for hotel customers. Prepaid expenses and deposits 4,479 2,239 2,240 The increase is primarily due to a $1.9 million deposit at the end of the year paid to the receiver for the potential acquisition for The Yorkland Hotel. Subsequent to December 31, 2009, the acquisition was terminated and the deposit refunded. Current portion of mezzanine 3,000 (3,000) The $3.0 million mezzanine loan to RegWin Hotel Ltd. loans receivable was repaid on February 5, Assets of discontinued operations The assets of discontinued operations represent the remaining cash and funds held in escrow for improvements to be made at the property. Capital reserve restricted 4,691 2,975 1,716 The increase is related to the capital reserve contributions being held by the mortgage lenders. Mezzanine loans and advances receivable 10,174 (10,174) The decrease is a result of the provisions for impairment recorded during Investments in hotel properties 1,961 2,688 (727) The decrease is related to additional funds for the hotels in which the REIT owns equity ownership interests, net of the write-off and provision for impairment of $1.0 million. Property and equipment 326, ,035 (25,570) The decrease is the net of additions of $1.4 million and the depreciation for the year of $12.7 million and the sale of the Wingate by Wyndham property and equipment which had a net book value of $14.4 million. Future income taxes 4,566 1,764 2,802 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. (continued on top of next page) Holloway Lodging REIT Annual Repor t

30 (Balance Sheet, continued from last page) As at As at December 31, December 31, Increase (in $000 s) (Decrease) Explanation Liabilities and Unitholders Equity Accounts payable and accrued liabilities 7,856 9,419 (1,563) The decrease is a result of lower accounts payable and accruals due to lower business levels. Current portion of mortgages and 4,695 5,155 (460) The balance at December 31, 2008 included the current loans payable portion of the mortgage on the Wingate by Wyndham. Liabilities of discontinued operations The liabilities of discontinued operations represent a small amount of remaining payables and the $0.6 million relating to the improvements to be made at the property. Mortgages and loans payable 148, ,666 (10,878) The balance of mortgages and loans payable has decreased due to the ongoing principal payments. In addition, the mortgage on the Wingate by Wyndham was included in the December 31, 2008 balance. Convertible debentures 65,935 63,458 2,477 The increase is due to the accretion on the convertible debentures which increases the liability so that they will reflect their face value at the maturity date. Unitholders equity 125, ,094 (24,382) The decrease is comprised of the distributions of $4.1 million and the loss of $20.3 million for the year ended December 31, Quarterly Results The following table provides a summary of the quarterly operating results: Q q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 (in $000 s except per unit results) Total revenues 16,018 19,977 18,007 18,722 21,195 25,202 23,123 22,614 Hotel revenues 15,939 19,800 17,782 18,464 20,489 24,509 22,427 21,905 Hotel expenses 12,508 13,588 12,897 13,680 14,707 15,382 14,963 14,649 Hotel operating income 3,431 6,212 4,885 4,784 5,782 9,127 7,464 7,256 Other (income) expenses 15,637 7,842 12,434 8,387 11,422 7,918 7,763 8,019 Future income tax expense (recovery) (413) (412) (1,131) (1,100) (711) Net income (loss) for the period from continuing operations (11,793) (1,218) (6,418) (2,503) (4,929) 568 (398) (795) Income from discontinued operations 1, Net income (loss) for the period (10,432) (1,139) (6,286) (2,480) (4,904) 781 (178) (781) Per Unit Results: Basic and diluted earnings per unit 0.02 Basic and diluted loss per unit (0.27) (0.03) (0.16) (0.06) (0.13) (0.01) (0.02) Basic and diluted FFO per unit (0.04) (0.01) Basic and diluted distributable income per unit (0.04) Occupancy 49.32% 61.95% 54.82% 55.72% 58.55% 71.98% 65.22% 64.35% ADR $ $ $ $ $ $ $ $ RevPAR $62.06 $81.69 $72.63 $75.77 $80.69 $ $91.69 $90.18 Holloway Lodging REIT Annual Repor t

31 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, optimizing the cost of capital, funds its business and growth strategies and builds long-term unitholder value. In managing its capital structure, the REIT monitors performance throughout the year to ensure 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 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 mortgages and loans payable, obligations under capital leases, promissory notes and the face value of the convertible debentures (Debt) divided by total assets plus accumulated depreciation and amortization (GBV). The REIT s Declaration of Trust states that Holloway s debt to GBV should not exceed 60%. The REIT is in compliance with or has obtained waivers for all of its financial covenants. As at As at Capital Management (in $000 s except ratios) December 31, 2009 December 31, 2008 Capital structure Obligations under capital leases Mortgages and loans payable 153, ,821 Convertible debentures 65,935 63,458 Promissory notes 3,405 3,368 Total debt 223, ,513 Unitholders equity 125, ,094 Total capital 349, ,607 Ratios Total debt 223, ,513 Adjustment of convertible debentures to face value 6,147 8,624 Adjustment of promissory notes to face value Debt 229, ,320 Gross book value 393, ,447 Debt to GBV ratio 58.4% 57.9% Twelve months Twelve months trailing from trailing from December 31, 2009 December 31, 2008 Earnings base 18,909 32,020 Debt service 21,520 21,093 Debt service coverage ratio Holloway Lodging REIT Annual Repor t

32 The total debt (including obligations under capital leases, mortgages and loans payable and promissory notes) to gross book value ( GBV ) was 40.1% at December 31, 2009 (December 31, %) and the total debt plus the face value of convertible debentures to GBV was 58.4% at December 31, 2009 (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. Mortgages Payable As at December 31, 2009, the REIT had total mortgage debt outstanding of $153.4 million, excluding deferred financing fees of $1.0 million which have been netted against mortgages payable in the financial statements compared to $164.7 million outstanding at December 31, The interest rates on the mortgages payable range from 5.88% to 9.06% per annum, with a weighted average interest rate of 6.82% 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 April, 2010 to July, The weighted average maturity is 5.4 years. The principal amount of mortgage debt maturing on April 1, 2010 is $8.9 million. Subsequent to December 31, 2009, the REIT refinanced these two mortgages at an interest rate of 6.6% for a five year term. Convertible Debentures Payable As at December 31, 2009 and 2008, 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% and the weighted average maturity is 2.2 years. Promissory Notes Payable Pursuant to the purchase of equity ownership interests in nine hotel properties on December 22, 2008, the REIT issued two promissory notes for $3.0 million and $551,613, respectively to Winport Developments Limited Partnership. The $3.0 million promissory note bears interest at 6.0% per annum until December 22, 2011 and 12.0% per annum, thereafter. The $551,613 promissory note does not bear interest and was discounted by $183,279 at the date of issuance, 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 promissory notes is repayable on the sale of Holloway s ownership interests or the sale of the underlying hotel properties. Financial Commitments The following chart summarizes the REIT s future financial commitments as at December 31, (in $000s) Thereafter Mortgages payable principal 4,953 30,360 19,187 3,315 3,543 93,127 Mortgages payable interest 10,426 9,976 7,204 6,686 6,457 17,661 Obligations under capital leases Vehicle loans principal 35 4 Vehicle loans interest 1 Convertible debentures principal 20,238 51,844 Convertible debentures interest 4,989 4,989 1,685 Land lease ,091 Operating leases Promissory notes principal 3,551 Promissory notes interest Total 21,069 66,038 80,504 14,045 10, ,879 Holloway Lodging REIT Annual Repor t

33 Liquidity and Working Capital Liquidity refers to the REIT s having or generating sufficient cash to meet the ongoing operational commitments, as well as to maintain compliance with liquidity covenants on financing contracts and its capital management requirements and objectives. At December 31, 2009, the REIT had a working capital deficit of approximately $1.0 million. Cash from operations will fluctuate due to the seasonality in the hospitality industry. At December 31, 2009, the REIT had not drawn on its available operating lines of credit which totalled $5.5 million. With the Debt to GBV ratio at 58.4% at December 31, 2009, the REIT could incur additional indebtedness of approximately $15 million and not exceed the 60% Debt to GBV ratio limit. This calculation assumes the additional indebtedness results in a corresponding increase in the assets of the REIT. The REIT suspended distributions to unitholders on July 21, 2009 which was effective for the July distributions which would have been payable to unitholders on August 14, The REIT has refinanced the two mortgages that were to mature in April, 2010 and has no other debt maturing in Based on the overall cash and resources, generation capacity and overall financial position, while there can be no assurance, management believes the REIT will be able to continue to meet its financial obligations as they come due. 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, 2009 December 31, 2008 Units outstanding 39,135,216 39,135,216 Options outstanding (exercisable) 1,139, ,418 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 52,452,750 52,280,331 Normal Course Issuer Bid On December 22, 2008, Holloway initiated a Normal Course Issuer Bid ( NCIB ) to repurchase over the next 12 months which commenced on December 24, 2008 and expired on December 23, 2009, up to 1,880,233 of its issued and outstanding trust units, such amount representing 10% of the REIT s public float as of December 18, During the three months and year ended December 31, 2009, the REIT did not purchase units under this NCIB. Under a prior NCIB which was initiated on December 11, 2007 and expired on December 10, 2008, Holloway could repurchase a maximum of 1,000,000 of its issued and outstanding trust units. During the three months ended December 31, 2008, the REIT purchased 1,000 units under this NCIB at an average cost of $0.82. For year ended December 31, 2008, the REIT purchased 63,100 units under this NCIB at an average cost of $3.43. 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, Holloway Lodging REIT Annual Repor t

34 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. 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; 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. Holloway Lodging REIT Annual Repor t

35 Readers should refer to the table OPERATING RESULTS for the three months and years ended December 31, 2009 and 2008 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. 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 $23,000 to $33,500 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 fiveyear 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 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. Holloway Lodging REIT Annual Repor t

36 In order to facilitate the assignment, the REIT loaned PHSI the funds that were 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 13% per annum during the first six months of the term and 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 has 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 LP 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 LP and used directly to repay the loan in full. Development Agreement On June 7, 2006, the REIT entered into a long-term development agreement with Winport Developments Inc. ( Winport ), a related party, to provide mezzanine financing to Winport and to have the option to purchase properties developed by Winport. The agreement has an initial term of ten years with an automatic renewal for five-year terms thereafter. On October 6, 2006, the development agreement was assigned to Winport Developments Limited Partnership, a related party. On May 15, 2007, Winport Developments Inc. was re-instated as an approved developer and recipient of mezzanine loans. The development agreements were terminated effective March 9, Legal Proceedings On February 20, 2009, the solicitors of the REIT issued a demand letter, on behalf of the REIT, to Winport Developments Limited Partnership, Pacrim North York Limited Partnership and Ontario Inc. for payment of approximately $11.5 million, representing the principal and interest owed on the mezzanine loans receivable and legal fees at that time. The mezzanine loans are in default and the borrower had until March 2, 2009 to make payment to the REIT. Payment was not received. On August 6, 2009, a court-appointed receiver, on behalf of the first mortgagor, for the property was named, with a mandate to sell the property and maximize the return to the debt-holders. The REIT s loans have been written down to zero as the REIT does not expect to realize on its security. Significant Accounting Policies 2009 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. Commencing with the first quarter of 2009, the REIT adopted two new accounting standards issued by the Accounting Standards Board of the CICA as follows: (i) Section 3064 Goodwill and Intangible Assets; and (ii) Section 1000 Financial Statement Concepts was also amended to provide consistency with Section The new standards on goodwill and intangible assets establish new standards for the recognition, measurement, presentation and disclosure of these items. The REIT does not have any recorded goodwill. There has been no impact on how the REIT accounts for its intangible assets. Note 2 to the audited consolidated financial statements for the year ended December 31, 2009 explain the impact of these changes in accounting policies. Holloway Lodging REIT Annual Repor t

37 Future Changes to Canadian GAAP Business Combinations, Consolidated Financial Statements and Non-Controlling Interests The CICA has issued new accounting standards, Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements and Section 1602 Non-controlling Interests which establish new standards for consolidated financial statements and business combinations. The definition of a business is expanded and described as an integrated set of activities and assets that are capable of being managed to provide a return to investors or economic benefits to owners, members or participants. Net assets, non-controlling interests and goodwill acquired in a business combination will be recorded at fair value. Non-controlling interests will be reported as a component of equity. In addition, acquisition costs will be expensed when incurred. The new and amended standards will be effective for the REIT s 2011 fiscal year. The objective of these new Sections is to harmonize Canadian GAAP with International Financial Reporting Standards. When these standards are adopted by the REIT, acquisition costs will be expensed through the income statement. Other impacts of these standards are still being assessed. International Financial Reporting Standards 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 REIT has a preliminary assessment of the key differences between Canadian GAAP as currently applied by Holloway and IFRS. The assessment also includes a summary of the key decisions that will need to be made and a summary of the key IFRS disclosure requirements. Work is progressing on the detailed analysis of the individual standards, the impact on the REIT s financial statements and the decisions to be made where alternatives exist. The REIT has identified the significant differences between IFRS and Canadian GAAP in relation to the REIT s primary financial statement items. 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. 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 its property, plant and equipment at fair value on transition to IFRS. The fair value will be the new cost or deemed cost. 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 the useful life. When the recoverable amount is higher than the carrying amount, previously recognized impairment losses are reversed. Impairment losses can not be reversed under GAAP. Under GAAP, the undiscounted cash flows from the use of the asset and its eventual disposition are used to measure impairment. As discounted cash flows are used under IFRS, entities may have more impairments. Holloway Lodging REIT Annual Repor t

38 Business Combinations The CICA has issued a new accounting standard, Section 1582 Business Combinations which will be effective for the REIT s 2011 fiscal year, the year of transition to IFRS. The objective of the new standard is to harmonize GAAP with IFRS. The definition of a business is expanded. Under IFRS costs related to an acquisition must be expensed whereas under 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. 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 May 12, 2009 to eliminate the mandatory distribution. Thus, the REIT s units will be presented as equity under IFRS. The REIT is continuing to assess the alternatives and implications of the transition to IFRS and has not made conclusions on the selection of accounting policies and the exceptions and exemptions available under IFRS 1. Critical Accounting Estimates Note 3 to the audited consolidated financial statements for the year ended December 31, 2009 provide 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. No impairments on hotel properties were recorded in the REIT s financial statements for the year ended December 31, Holloway Lodging REIT Annual Repor t

39 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. As previously described in this MD&A, the REIT believes its mezzanine loans and advances are impaired and the carrying values have been written down to zero. The REIT recorded a provision for impairment of $11.1 million during the year ended December 31, 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 eight hotel partnerships or co-tenancies ranging from 2.52% to 19.06%. The investments are accounted for using the cost method. The REIT has recorded a provision for impairment of $0.5 million against its investment in the Super 8 in Langley, BC, 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. 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. Holloway Lodging REIT Annual Repor t

40 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 2009, 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, 2009, 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 2009, 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, 2009, 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. The REIT s 2009 distributions were 100% return of capital. Holloway Lodging REIT Annual Repor t

41 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 produced 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 travelling 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 to the hotels in the 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 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 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 the sector could result in a decline in revenue for the REIT. Holloway Lodging REIT Annual Repor t

42 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. 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 arrangements contain covenants that could restrict its ability to operate its business. If the REIT fails to comply with the restrictions in its financing arrangements, its lenders may be able to accelerate payment of the related debt. In connection with its financing arrangements, 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. PHSI will continue to own, acquire and manage 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 to 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 Holloway Lodging REIT Annual Repor t

43 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 to 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. 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 General Economic Environment As with any commercial enterprise, the REIT is subject to risks associated with the 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 of the general economic conditions may adversely affect business levels of the REIT. 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 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 30, 2009 which is available at Holloway Lodging REIT Annual Repor t

44 Outlook According to the Bank of Canada, the global economic recovery is underway. Although excess supply still remains in Canada, the Canadian economy is expected to return to full capacity and inflation is expected to return to the 2% target in the third quarter of After contracting by a forecast 2.5% in 2009, the Canadian economy is projected to grow by 2.9 % in 2010 and 3.5% in Unemployment is expected to remain high in The Bank of Canada policy rate is expected to hold at very low levels until mid- 2010, which should help with the confidence level of business and consumers that the recovery that is forecast is a durable one. A key to the improvements forecast for 2010 will be for demand to shift and build back again from households and businesses, as opposed to public stimulus. As policy stimulus begins to fade, a key factor determining the pace and sustainability of Canada s recovery will be how investment and hiring decisions of businesses in all sectors evolve. The hospitality industry is heavily influenced by local economic market conditions, the segment orientation of specific properties and demand generators that are tied largely to employment. There is a tendency to track movement in GDP, and a positive turn in this key metric is important to prospects for improvement in hospitality industry results. According to the Conference Board of Canada, all provinces are expected to post positive growth in 2010, lead by British Columbia due to the Olympic Games impact and Ontario. Ontario has not outpaced the national average for GDP growth in nearly a decade. Alberta s energy sector is set to bounce back and gather strength, fuelling Alberta to 2010 GDP growth of 2.5%. The Conference Board further expects Alberta to gain momentum moving forward, achieving GDP growth in 2011 of over 4%. Nova Scotia and New Brunswick are expected to post economic growth of slightly less than 2% in 2010, in part a result of being among areas of the county least impacted by the recession. As we move forward into this stage, Holloway Lodging hotels remain focused on extending and expanding their distribution channel reach and efficiency through both direct and electronic means, inclusive of relationship marketing, social marketing, value added rate programs and package initiatives. Market and segment specific initiatives continue to be developed and promoted to extend the reach and appeal of each hotel as broadly as possible, to ensure greater capture of demand across business segments which demonstrate strength of demand. Aggressive direct sales efforts and leveraging of hotel brand relationships will continue to be fundamental to building on our success in an improving economic environment. Multi-property initiatives and guest benefits for volume use of multiple hotels are offered to increase market share and build loyalty from regular guests in each market. Strengthening of the Holloway Lodging overall balance sheet is a clear focus using all appropriate means available to the REIT to do so. Holloway Lodging REIT Annual Repor t

45 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 30, 2009 which is available at The REIT does not intend to update or revise any such forward-looking information should its assumptions and estimates change. Holloway Lodging REIT Annual Repor t

46 Consolidated Financial Statements December 31, 2009 and 2008 Holloway H o l l o way Lodging L o d g i n g REIT R E I T A nannual n u a l R erepor p o r t t

47 Management s Responsibility for Financial Reporting March 9, 2010 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 accounting principles generally accepted in Canada 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 financial statements to the Board of Trustees for approval. W. Glenn Squires Tracy Sherren Chief Executive Officer Chief Financial Officer Holloway Lodging REIT Annual Repor t

48 Auditors Report March 9, 2010 To the Trustees of Holloway Lodging Real Estate Investment Trust We have audited the consolidated balance sheets of Holloway Lodging Real Estate Investment Trust ( Holloway Lodging REIT or the REIT ) as at December 31, 2009 and 2008 and the consolidated statements of unitholders equity, operations and comprehensive loss and cash flows for the years ended December 31, 2009 and These consolidated financial statements are the responsibility of the REIT s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the REIT as at December 31, 2009 and 2008 and the results of its operations and its cash flows for the years ended December 31, 2009 and 2008 in accordance with Canadian generally accepted accounting principles. Chartered Accountants Holloway Lodging REIT Annual Repor t

49 Consolidated Balance Sheet As at December 31, 2009 and 2008 (in thousands of dollars) Assets Current assets Cash and cash equivalents (note 14) $ 3,756 $ 4,992 Capital reserve 912 1,553 Restricted cash Accounts receivable 2,438 3,376 Inventories Prepaid expenses and deposits 4,479 2,239 Current portion of mezzanine loans receivable (note 5) 3,000 Assets of discontinued operations (note 15) ,142 16,117 Capital reserve restricted 4,691 2,975 Loans receivable from related parties (note 4) 6,509 6,509 Mezzanine loans and advances receivable (note 5) 10,174 Investments in hotel properties (note 6) 1,961 2,688 Property and equipment (note 7) 326, ,035 Other assets (note 8) 877 1,124 Future income taxes (note 21) 4,566 1,764 $ 358,211 $ 393,386 Liabilities Current liabilities Accounts payable and accrued liabilities $ 7,856 $ 9,419 Distributions payable 685 Accrued interest on convertible debentures Current portion of obligations under capital leases (note 9) Current portion of mortgages and loans payable (note 10) 4,953 5,155 Liabilities of discontinued operations (note 15) ,407 16,272 Obligations under capital leases (note 9) Mortgages and loans payable (note 10) 148, ,666 Promissory notes payable (note 11) 3,405 3,368 Convertible debentures (note 12) 65,935 63, , ,292 Unitholders Equity 125, ,094 $ 358,211 $ 393,386 Commitments (note 17) Approved by the Trustees Trustee Trustee Holloway Lodging REIT Annual Repor t

50 Consolidated Statements of Unitholders Equity As at December 31, 2009 and 2008 Equity Class B component of Accumulated Units LP units Contributed convertible income Accumulated (in thousands of dollars) (note 13) (note 13) surplus debentures (losses) distributions Total Balance, December 31, 2007 $ 180, , (17,806) $ 173,805 Unit-based compensation related to options Exercise of options 84 (58) 26 Units repurchased and cancelled (293) 76 (217) Issuance costs (2) (2) Units issued to trustees (note 14) Net loss (5,080) (5,080) Distributions (18,978) (18,978) 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, 2009 $ 180, ,359 9,596 (25,105) (40,893) $ 125,712 Holloway Lodging REIT Annual Repor t

51 Consolidated Statements of Operations and Comprehensive Loss For the years ended December 31, 2009 and 2008 (in thousands of dollars) Hotel revenues Rooms $ 61,837 $ 77,063 Other 10,148 12,269 71,985 89,332 Hotel expenses Operating expenses 46,236 52,544 Property taxes and insurance 4,627 4,842 Management fees 1,810 2,315 52,673 59,701 Hotel operating income 19,312 29,631 Other (income) expenses Interest on mortgages and other debt 10,997 11,107 Interest on convertible debentures 4,989 5,022 Accretion on convertible debentures, mortgages and deferred financing fees 2,578 2,162 Corporate and administrative 2,173 2,844 Interest income (739) (2,802) Unrealized foreign exchange loss (gain) (737) 1,020 Depreciation and amortization 12,969 12,770 Provision for impairment of mezzanine loans and advances 11,059 3,000 Provision for impairment of investments in hotel properties 1,011 44,300 35,123 Loss before income taxes from continuing operations (24,988) (5,492) Provision for (recovery of) future income taxes (note 21) (3,056) 65 Loss from continuing operations (21,932) (5,557) Income from discontinued operations (note 15) 1, Net loss and comprehensive loss for the years $ (20,337) $ (5,080) Loss per unit (note 13) Basic $ (0.52) $ (0.13) Diluted $ (0.52) $ (0.13) Holloway Lodging REIT Annual Repor t

52 Consolidated Statements of Cash Flows For the years ended December 31, 2009 and 2008 (in thousands of dollars) Cash provided by (used in) Operating activities Net loss and comprehensive loss from continuing operations for the years $ (21,932) $ (5,557) Charges (credits) to income not involving cash Unit-based compensation Depreciation and amortization 12,969 12,770 Accretion of mortgages and convertible debentures 2,578 2,162 Unrealized foreign exchange loss (gain) (737) 1,020 Provision for impairment of mezzanine loans and advances 11,059 3,000 Provision for impairment of investments in hotel properties 1,011 Provision for (recovery of) future income taxes (3,056) 65 1,956 13,931 Net change in non-cash working capital balances related to operations (note 14) (2,719) 1,055 Cash flow from discontinued operations 1,120 1,346 Cash flow from operating activities ,332 Investing activities Decrease (increase) in restricted cash 93 1,669 Increase in capital reserves, continuing operations (1,260) (2,067) Issuance of loan to a related party (6,350) Issuance of mezzanine loans and advances (885) (1,250) Proceeds from repayment of mezzanine loan 3,000 Investments in hotel properties (283) 680 Additions to property and equipment, continuing operations (1,422) (1,951) Increase in other assets, continuing operations (34) Increase in other assets, discontinued operations (5) Additions to property and equipment, discontinued operations (123) (89) Decrease (increase) in capital reserve, discontinued operations 99 (51) Proceeds from sale of property, discontinued operations 15,636 Increase in capital reserve, discontinued operations (585) Cash flow from (used in) investing activities 14,270 (9,448) Financing activities Repayment of capital lease obligations (350) (403) Proceeds from mortgages and loans, net of financing fees, continuing operations 1,040 (48) Repayment of mortgages and loans payable, continuing operations (4,589) (3,806) Issuance costs (2) Units repurchased and cancelled (216) Exercise of options 27 Distributions paid to unitholders (4,794) (20,055) Repayment of mortgages and capital leases, discontinued operations (7,140) (283) Cash flow used in financing activities (15,833) (24,786) Net change in cash and cash equivalents during the years $ (1,206) $ (17,902) Cash and cash equivalents, continuing operations Beginning of periods $ 4,860 $ 22,755 Cash and cash equivalents, discontinued operations Beginning of periods ,992 22,894 Cash and cash equivalents, continuing operations End of periods $ 3,756 $ 4,860 Cash and cash equivalents, discontinued operations End of periods $ 3,786 $ 4,992 Supplemental cash flow information (note 14) Holloway Lodging REIT Annual Repor t

53 (all dollar amounts are in thousands, except per unit amounts) Notes to the Consolidated Statements For the years ended December 31, 2009 and Basis of presentation and nature of operations Holloway Lodging Real Estate Investment Trust ( 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 operations in order to resume distributions to unitholders at the appropriate time. As at December 31, 2009, the REIT owned 20 hotels in Canada and 1 hotel in the United States with 2,320 guest rooms and suites and held minority ownership interests in eight other hotels. 2. Changes in accounting policies In the first quarter of 2009, the REIT adopted the following new Handbook Sections issued by the Canadian Institute of Chartered Accountants ( CICA ). Goodwill and intangible assets Section 3064, Goodwill and Intangible Assets, establishes new standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. Section 1000, Financial Statement Concepts, was also amended to provide consistency with Section These new standards have no impact on the REIT s 2009 financial statements. Financial instruments In June 2009, the Canadian Accounting Standards Board ( AcSB ) issued amendments to Section 3862, Financial Instruments Disclosures, to require enhanced disclosures about the relative reliability of the data, or inputs, that an entity uses in measuring the fair values of its financial instruments. The new requirements are effective for annual financial statements for fiscal years ending after September 30, The additional disclosures are included in note 20. Credit risk and fair value of financial assets and financial liabilities On January 20, 2009, the Emerging Issues Committee ( EIC ) of the AcSB issued EIC Abstract 173, Credit Risk and Fair Value of Financial Assets and Liabilities, which establishes guidance requiring an entity to consider its own credit risk as well as the credit risk of the counterparty in determining the fair value of financial assets and financial liabilities, including derivative instruments. This interpretation must be applied retrospectively without restatement of prior years. The adoption of this interpretation did not have a significant impact on the REIT s 2009 financial statements. 3. 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. Holloway Lodging REIT Annual Repor t

54 (all dollar amounts are in thousands, except per unit amounts) 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 eight 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. 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 its 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 Term of the lease Buildings 40 years Furniture, fixtures and equipment 7 years Paving 10 years Signage 10 years Landscaping 5 years Computer equipment 3 years Vehicles 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 that 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 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. Holloway Lodging REIT Annual Repor t

55 (all dollar amounts are in thousands, except per unit amounts) i) Other assets Other assets consist of franchise fees and agreements. 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 16) is amortized on a straight-line basis over the five-year term of the agreement. 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 that includes the date of enactment or substantive enactment. 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. 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. Holloway Lodging REIT Annual Repor t

56 (all dollar amounts are in thousands, except per unit amounts) 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. 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-tomarket through net income at each period end. Accounts receivable, loans receivable from related parties and mezzanine loans receivable 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 mezzanine loans and advances 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. Holloway Lodging REIT Annual Repor t

57 (all dollar amounts are in thousands, except per unit amounts) 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 Business Combinations, Consolidated Financial Statements and Non-Controlling Interests The CICA has issued new accounting standards, Section 1582 Business Combinations, Section 1601 Consolidated Financial Statements and Section 1602, Non-controlling Interests, which establish new standards for consolidated financial statements and business combinations. The definition of a business is expanded and described as an integrated set of activities and assets that are capable of being managed to provide a return to investors or economic benefits to owners, members or participants. Net assets, non-controlling interests and goodwill acquired in a business combination will be recorded at fair value. Non-controlling interests will be reported as a component of equity. In addition, acquisition costs will be expensed when incurred. The new and amended standards will be effective for the REIT s 2011 fiscal year. The objective of these new Sections is to harmonize Canadian GAAP with International Financial Reporting Standards ( IFRS ). When these standards are adopted by the REIT, acquisition costs will be expensed through the income statement. Other impacts of these standards are still being assessed. International Financial Reporting Standards On February 13, 2008, the Canadian Accounting Standards Board ( AcSB ) confirmed the mandatory changeover date to IFRS for all Canadian profit-oriented publicly accountable entities. As such, the REIT will be required to prepare IFRS financial statements for interim and fiscal periods beginning in Work is currently underway to evaluate the impact conversion to IFRS will have on the REIT s financial statements. 4. Loans receivable from related parties The REIT has a $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 thereafter. As the yield on Holloway s units has declined to 0% with the suspension of distributions, the interest rate became 1% on October 1, The REIT has a $159 loan receivable 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 Holloway and a guarantee by Canada Inc., is repayable at any time without penalty and bears interest at 12% per annum. Holloway Lodging REIT Annual Repor t

58 (all dollar amounts are in thousands, except per unit amounts) 5. Mezzanine loans and advances receivable The REIT provides mezzanine loans on hotel projects developed by Winport Developments Inc., Winport Developments Limited Partnership and its partners Winport Developments Limited Partnership, a related party, and Pacrim North York Limited Partnership, principal balance due November 3, 2011, with $8,000 million bearing interest at 12% and $1,500 million bearing interest at 11% 9,500 9,500 Winport Developments Limited Partnership, a related party, and Pacrim North York Limited Partnership, principal balance due January 13, 2009, bearing interest at 12% 1,250 1,250 Accrued interest on loans to Winport Developments Limited Partnership and Pacrim North York Limited Partnership to December 31, Additional advances to Winport Developments Limited Partnership and Pacrim North York Limited Partnership, non-interest bearing with no set terms of repayment and other expenses 852 RegWin Hotel Ltd., principal balance due January 19, 2012, bearing interest at 12%, repaid on February 5, ,000 Windsor 8 Motel Limited, principal balance due January 19, 2012, bearing interest at 12% 1,913 1,913 Additional advances to Windsor 8 Motel Limited, non-interest bearing with no set terms of repayment 40 14,059 16,174 Less: Current portion 3,000 Less: Provision for impairment 14,059 3,000 10,174 The REIT believes that the loans and advances to Winport Developments Limited Partnership and Pacrim North York Limited Partnership are impaired. The loans are in default and the REIT issued a demand notice for payment on February 20, On August 6, 2009, a court-appointed receiver on behalf of the first mortgagee for the property was named, with a mandate to sell the property and maximize the return to the debt-holders. The REIT s loans have been written down to zero as the REIT does not expect to realize on its security. The REIT believes that the loans and advances to Windsor 8 Motel Limited are impaired. The loan is in default. The REIT is progressing with a quit claim to acquire the property in As the appraised value of the property is approximately equal to the first mortgage debt on the property, the REIT s mezzanine loan has been written down to zero. During the year ended December 31, 2009, the REIT recorded an additional provision for impairment of $11,059 ( $3,000). Holloway Lodging REIT Annual Repor t

59 (all dollar amounts are in thousands, except per unit amounts) 6. Investments in hotel properties On December 22, 2008, the REIT acquired beneficial equity ownership interests in nine 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). The REIT has 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 has relinquished its ownership interest in this hotel. 7.Property and equipment 2009 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 ,802 34, , Accumulated Cost amortization Net $ $ $ Land 32,217 32,217 Land lease Buildings 304,905 13, ,622 Renovations in progress Furniture, fixtures and equipment and other 29,941 7,550 22,391 Paving 3, ,975 Landscaping Signage 1, Computer equipment and websites 1, Vehicles Tenant inducements ,758 22, ,035 Holloway Lodging REIT Annual Repor t

60 (all dollar amounts are in thousands, except per unit amounts) Amortization expense for the year ended December 31, 2009 was $12,759 ( $13,086). As at December 31, 2009, the REIT held assets under capital leases with a cost of $1,798 ( $1,813) and accumulated amortization of $853 ( $514). All of the hotel properties have been pledged as security for first mortgages (note 10) or undrawn lines of credit. 8. Other assets 2009 Accumulated Cost amortization Net $ $ $ Agreements Franchise fees , Accumulated Cost amortization Net $ $ $ Agreements Franchise fees Other , , Obligations under capital leases The REIT assumed various capital lease obligations to acquire computer equipment, signs, 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 565 Less: Amounts representing interest at a weighted average rate of 10.33% 58 Present value of future minimum lease payments 507 Holloway Lodging REIT Annual Repor t

61 (all dollar amounts are in thousands, except per unit amounts) 10. Mortgages and loans payable $ $ Mortgages payable, bearing interest at a weighted average rate of 6.82% ( %) and maturing on various dates from April, 2010 to July, Individual first charges on most of the hotel properties have been pledged as security for individual mortgages 154, ,920 Vehicle loans payable, bearing interest at a weighted average rate of 7.66% ( %) and maturing on various dates from April, 2010 to April, , ,019 Less: Deferred finance fees 1,002 1,198 Less: Current portion 4,953 5, , ,666 Estimated future principal repayments over the next five years are as follows: $ Year ending December 31, , , , , ,543 Thereafter 93, 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 (note 6). 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. 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 1 st and August 1 st and mature in five years. 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 30 th and December 31 st and mature in five years. 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. Holloway Lodging REIT Annual Repor t

62 (all dollar amounts are in thousands, except per unit amounts) In the event the REIT gives notice of redemption, the debenture 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. 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 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 $ $ Debt component 61,988 61,988 Accretion of convertible debentures 5,295 3,337 Deferred finance fees (1,348) (1,867) 65,935 63, 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, the 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. 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, 2009 and 2008: Number of units issued and outstanding Ascribed vallue $ REIT Class B LP REIT Class B LP Units Units Total Units Units Total Balance, December 31, ,819, ,500 39,153, , ,898 Exercise of options 26,667 26, Units repurchased and cancelled (63,100) (63,100) (293) (293) Units issued to trustees 18,332 18, Issuance costs (2) (2) Balance, December 31, ,801, ,500 39,135, , ,755 Balance, December 31, ,801, ,500 39,135, , ,755 Holloway Lodging REIT Annual Repor t

63 (all dollar amounts are in thousands, except per unit amounts) 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. Unit options On April 2, 2007, 62,000 REIT unit options were granted to employees of Pacrim Hospitality Services Inc. for services at an exercise price of $4.88 per unit expiring on April 2, These options vest over a three-year period. On March 5, 2008, 473,685 REIT unit options were granted to trustees and employees of the REIT and 16,182 REIT unit options were issued to employees of Pacrim Hospitality Services Inc. for services at an exercise price of $3.69 per unit expiring on March 5, These options vest over a three-year period. The compensation expense for the options issued was determined based on the fair value of the options at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: 2008 Expected option life 5 years Risk-free interest rate 3.75% Dividend yield 10.0% Expected volatility 35% Option activity for the years ended December 31, 2009 and 2008 was as follows: Weighted average Weighted average exercise price exercise price Number $ Number $ Outstanding, beginning of year 1,302, , Granted 489, Exercised (26,667) 1.00 Forfeited (24,610) 4.88 Outstanding, end of year 1,302, ,302, The weighted average grant-date fair value of options granted during 2008 was $0.38 per option. Holloway Lodging REIT Annual Repor t

64 (all dollar amounts are in thousands, except per unit amounts) The following table summarizes information about options outstanding and exercisable at December 31, 2009: Weighted average Weighted average Weighted average exercise price exercise price remaining per unit Number per unit contractual life Number $ Outstanding $ (years) exercisable , , , , , ,838 Weighted average number of units The basic and diluted weighted average number of units outstanding was as follows: 1,302,256 1,139, (units) (units) Basic 39,135,216 39,132,025 Diluted 39,135,216 39,132, Supplemental cash flow information Net change in non-cash working capital balances related to operations: $ $ Accounts receivable 882 (59) Inventories Prepaid expenses and deposits (2,271) 630 Accounts payable and accrued liabilities (1,351) 492 2,719 1,187 Cash and cash equivalents are comprised of the following: $ $ Cash on hand and balances with banks 3,756 4,992 Non-cash transaction During the year ended December 31, 2008, accrued trustee fees of $68 were settled by the issuance of units. Holloway Lodging REIT Annual Repor t

65 (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. After repayment of the mortgage and closing costs, net cash proceeds were $8,596. The operating income from the property after July 31, 2009 accrued to the purchaser. 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, 2009 and 2008 are as follows: December 31, 2009 December 31, 2008 Years ended $ $ Hotel revenues 2,442 4,163 Hotel expenses 1,474 2,477 Hotel operating income 968 1,686 Interest on mortgages and other debt and accretion of deferred financing fees Depreciation and amortization Gain on sale of property (1,474) (881) 983 Income before income taxes 1, Provision for future income taxes Income from discontinued operations 1, 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 commencing January 1, 2007, calculated as tiered percentages of the amount by which the REIT exceeds its budgeted distributable income for the year, 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 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 fiveyear terms. Holloway Lodging REIT Annual Repor t

66 (all dollar amounts are in thousands, except per unit amounts) 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 that were paid to Pomeroy in consideration of the assignment (note 4). 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 LP 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 LP and used directly to repay the loan in full. Development Agreement On June 7, 2006, Holloway Lodging REIT entered into a long-term development agreement with Winport Developments Inc. ( Winport ), a related party, to provide mezzanine financing to Winport and to have the option to purchase properties developed by Winport. The agreement has an initial term of ten years with an automatic renewal for five year terms thereafter. On October 6, 2006, the development agreement was assigned to Winport Developments Limited Partnership, a related party. On May 15, 2007, Winport Developments Inc. was re-instated as an approved developer and recipient of mezzanine loans. The agreements were terminated on March 9, 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 term of five years 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 Lease revenue The REIT is committed to lease areas of certain hotel facilities to outside parties. The minimum annual revenue from future rentals is expected to be as follows: $ For the year ending December 31, Holloway Lodging REIT Annual Repor t

67 (all dollar amounts are in thousands, except per unit amounts) 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 (for Holiday Inns) Royalty fee 5% Marketing assessment 2% - 2.5% 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% Operating leases The REIT has various equipment operating leases at several properties. The REIT also 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 liability 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 liability, recorded for 2009 and 2008 was $1,852 and $2,333, respectively. The minimum annual lease payments over the next five years are as follows: Operating Land leases lease Total $ $ $ Year ending December 31, Holloway Lodging REIT Annual Repor t

68 (all dollar amounts are in thousands, except per unit amounts) 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., a company in which a member of management and trustee has a significant ownership interest Hotel management and related fees 2,523 2,754 Head office rent Reimbursable expenses related to hotels managed under reduced fee 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 28 Intergy, a division of Pacrim Hospitality Services Inc. Reservation services commissions and related costs Included in accounts receivable 144 Included in accounts payable and accrued liabilities Winport Developments Limited Partnership, a limited partnership in which a member of management and trustee and another trustee have ownership interests Interest income on mezzanine loans 1,170 Winport Developments Inc., a company in which a member of management and trustee has a significant ownership interest Renovations and project management fees capitalized to property and equipment 37 Interest income on loan Included in accounts receivable 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. Holloway Lodging REIT Annual Repor t

69 (all dollar amounts are in thousands, except per unit amounts) 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 finance 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, 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 debt to GBV should not exceed 60% $ $ Capital structure Obligations under capital leases Mortgages and loans payable 153, ,821 Convertible debentures 65,935 63,458 Promissory notes 3,405 3,368 Total debt 223, ,513 Unitholders equity 125, ,094 Total capital 349, ,607 Ratios Total debt 223, ,513 Adjustment of convertible debentures to face value 6,147 8,624 Adjustment of promissory notes to face value Debt 229, ,320 Gross book value, continuing operations 393, ,447 Debt to GBV 58.4% 57.9% $ $ Earnings base 18,909 32,020 Debt service 21,520 21,093 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 its financial covenants. For 2008 and 2009, cash distributions to unitholders exceed the REIT s distributable income, as defined in the REIT s Declaration of Trust. On November 13, 2008, the REIT reduced its distributions to $0.21 per unit on an annual basis. On July 21, 2009, the REIT suspended distributions. Holloway Lodging REIT Annual Repor t

70 (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, mezzanine loans and advances receivable, capital reserves, loans receivable from related parties, accounts payable and accrued liabilities, distributions payable, 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, accounts payable and accrued liabilities, distributions payable 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, 2009 and 2008, respectively $ $ Carrying value Fair value Carrying value Fair value Held for trading (cash, restricted cash and capital reserves) 9,919 9,919 10,174 10,174 Loans and receivables (accounts receivable) 2,438 2,438 3,376 3,376 Other financial liabilities (accounts payable and accrued liabilities, distributions payable and accrued interest on convertible debentures) 8,531 8,531 10,779 10,779 Obligations under capital leases Mortgages and loans payable 153, , , ,289 Convertible debentures 75,531 44,254 73,054 43,832 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. Holloway Lodging REIT Annual Repor t

71 (all dollar amounts are in thousands, except per unit amounts) 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 3,756 4,992 Capital reserves 5,603 4,528 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. 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 fixed rate debt so that cashflow 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 6.82% (December 31, %) with a weighted average maturity of 5.4 years (December 31, years). The convertible debentures have a weighted average interest rate of 6.9% (December 31, %) and a weighted average maturity of 2.2 years (December 31, years). At December 31, 2009, the REIT had no long-term debt at floating rates and thus, for the year ended December 31, 2009, a 1% change in interest rates would not change the net loss. The REIT s undrawn lines of credit are at floating rates. 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. Holloway Lodging REIT Annual Repor t

72 (all dollar amounts are in thousands, except per unit amounts) The amount of accounts receivable disclosed in the balance sheet of $2,438 is net of allowances for bad debts, estimated by management based on prior experience and their assessment of the current economic environment. Historically there have been no 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 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 1,503 2,112 Accounts receivable over 30 days aged 1,065 1,349 Less: Allowance for doubtful accounts (130) (85) 2,438 3,376 The REIT is exposed to credit risk on its loans receivable from related parties and mezzanine loans and advances receivable (notes 4 and 5). Management reviews the results and cashflows of these entities on a monthly basis. 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 $44 (December 31, $45). 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 contracts and its capital management requirements and objectives. At December 31, 2009, the REIT had undrawn lines of credit of $5,500. In November 2008, distributions were reduced to $ per unit per month ($0.21 per unit annually) and on July 21, 2009, the REIT suspended distribution in order to conserve cash and satisfy its operating obligations, including principal repayments on its mortgages and loans payable and obligations under capital leases. Subsequent to December 31, 2009, the REIT re-financed the two mortgages totalling $8,906 that were maturing on April 1, The new mortgages bear interest at 6.6% (the interest rate on maturing mortgages was 9.285%) and mature on March 1, The REIT does not have any other mortgages that mature in The REIT monitors and forecasts its cash balances and cash flows generated from operations to meet its requirements. Based on overall cash generation capacity and overall financial position, while there can be no assurance, management believes the REIT will be able to meet financial obligations as they come due. Holloway Lodging REIT Annual Repor t

73 (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, 2009 and 2008: $ $ Income before income taxes, including discontinued operations (23,139) (4,789) Income tax rate 35.0% 32.5% (8,099) (1,557) Non-deductible stock option expense Non-deductible foreign exchange losses (386) 476 Non-deductible unrealized loan impairment 2, Accretion of discount on convertible debentures Impact of rate change 651 Other permanent differences Non-taxable portion of capital gain (148) Valuation allowance for capital losses 2,217 (2,802) 291 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, 2009 and 2008 that are expected to reverse in the future are presented below: $ $ Future income tax assets Unit issuance costs, finance fees and related 705 1,656 Tax losses carried forward 4,585 3,524 Other ,391 5,415 Future income tax liabilities Property and equipment differences in net book value and undepreciated capital cost 775 3,651 Other ,651 Net future income tax asset 4,566 1, $ $ Recovery of future income taxes is comprised of: Future income taxes related to the changes in the taxation rate (582) Future income taxes related to income and permanent differences (2,754) 185 Non-taxable foreign exchange translation loss 534 (476) (2,802) (291) Holloway Lodging REIT Annual Repor t

74 (all dollar amounts are in thousands, except per unit amounts) 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. 23. Segmented information In measuring performance, the REIT does not distinguish or group its operations on a geographical or any other basis and, accordingly, results have been aggregated into a single reportable segment. Geographical information $ $ Revenues Canada 69,905 91,172 United States 2,080 2,323 71,985 93,495 Property and equipment Canada 318, ,812 United States 8,149 8, , , Subsequent event Subsequent to December 31, 2009, the REIT re-financed the mortgages on its Holiday Inn Express Hotel and Radisson Suite Hotel in Halifax, Nova Scotia totalling $10,500. The loans bear interest at 6.6%, were drawn on March 1, 2010 and mature on March 1, The additional funds, after repayment of the principal balance of $8,940 on the maturing mortgages, totalled $1,182 which will be used for capital improvements at the properties. Holloway Lodging REIT Annual Repor t

75 Board of Trustees Walter A. Keyser, Chairman of the Board Walter Keyser s career has focused on capital markets in the areas of commercial real estate and financial services. His corporate finance activities during the 1960 s included the incorporation and financing of Orangeroof Canada Limited, Master Franchisee for Howard Johnson Hotels and Restaurants throughout Canada. Mr. Keyser is currently President of W.A. Keyser & Associates Ltd., incorporated in 1974 to originate and administer NHA and commercial mortgage loans for U.S. and Canadian financial institutions and in recent years to provide financial consulting services to real estate owners and investors. He has served as a director of several TSX listed companies which currently includes Morguard REIT. Mr. Keyser graduated in 1958 from the University of Western Ontario School of Business. W. Glenn Squires, Trustee Glenn Squires is a Trustee and the Chief Executive Officer of the REIT. His 30 years of experience in the hotel industry is comprehensive. Mr. Squires has lead the acquisition, development, renovation and repositioning of more than $750 million worth of hotel properties throughout North America. Mr. Squires also serves as the Chief Executive Officer of Pacrim Hospitality Services Inc. (PHSI). Under his leadership, Pacrim Hospitality Services Inc. (PHSI) received the Tourism Industry Association of Canada s 2009 National Award for Tourism Excellence, Business of the Year Multiple Unit in November The business of the year award recognizes a company that operates a multi-unit business whose significant contribution to the tourism industry is reflected in the energy, commitment to service and vision that is evident in its operations. In 2009, Glenn Squires received the Dennis Brown Memorial Award from Wyndham Worldwide, recognizing achievements in developing a significant number of Super 8 properties across Canada from the ground up. He currently sits as Vice Chair of the International Association of Holiday Inns (IAHI) which is the owners association of InterContinental Hotels Group. James Gourlay, Independent Trustee James Gourlay is President of Saltscapes Publishing Limited. He has spent his entire career in print journalism; 16 years in the newspaper field and 26 years in the magazine business. His company, Saltscapes Publishing Limited, currently publishes the largest group of consumer magazines east of Montreal and the largest privately-published travel magazine in Canada. He and a former business partner launched Progress Magazine, which has since become the pre-eminent business magazine in Atlantic Canada. In recent years, Saltscapes has extended its brand into the consumer show business and currently owns and operates the largest lifestyle and travel show in the region. James B. Howe, Independent Trustee Mr. Howe is President of Bragg Creek Financial Consultants Ltd., a private financial consulting company, a position he has held since In addition to several years practicing as a Chartered Accountant, Mr. Howe has served as Chief Financial Officer of several public companies. He presently serves as a director of Ensign Energy Services Inc., Pason Systems Inc., Bengal Energy Inc., Excelsior Energy Ltd., Wrangler West Energy Corp., and Seaview Energy Inc. Mr. Howe received a B.A. from the Ivey School of Business at the University of Western Ontario and is a member of the Institute of Chartered Accountants of Alberta. Holloway Lodging REIT Annual Repor t

76 Michael L. Jackson, Trustee Mr. Jackson is the President and Chief Operating Officer of the REIT and also serves as President and Chief Operating Officer of Pacrim Hospitality Services Inc. (PHSI). Mr. Jackson has been in the hospitality industry for over 35 years and has held a number of senior executive positions. Prior to joining the REIT and PHSI, he was the President and Chief Operating Officer of Royal Host Real Estate Investment Trust. He has also held the position of President for Choice Hotels Canada, as well as Senior Vice President of Operations for Westmont Hospitality Group (Canada), Unihost Corporation and Commonwealth Hospitality. Mr. Jackson served as Chairman of the Hotel Association of Canada and is currently a member of its Board of Directors as well as participating on numerous other industry-related boards. Marc L. Staniloff, Trustee Mr. Staniloff is Chairman and Chief Executive Officer of Superior Lodging Corp., the master developer for Super 8 and Wingate by Wyndham. Mr. Staniloff has been instrumental in the development of 129 Super 8 s and 3 Wingate by Wyndham s from 1993 to In 1998, he was recognized as Franchisee of the Year by Super 8 Worldwide, Inc. as a result of his leadership in the development of the Super 8 Franchise system in Canada. As well, in 2004 Superior Lodging Corp. was the recipient of the Hotel Company of the Year (Canada) Award. Currently, Mr. Staniloff is a Director and Chair of the audit committee for Xtreme Coil Drilling Corp. (XDC-T) a TSX-listed company. Mr. Staniloff received his Bachelor of Commerce degree from the University of Calgary and is a member of the World Presidents Organization (WPO), the Super 8 Franchisee Advisory Board (FAB) and the President s Advisory Council (PAC) for Wingate by Wyndham. G. Wayne Watson, Indpendent Trustee Wayne Watson has over thirty years experience in finance, taxation and operations management. He recently retired from his position of Vice President Finance of CanJam Trading Limited, a leading saltfish producer and international trading house located in Nova Scotia. Prior to joining CanJam, he was the Vice President and CFO of Fortis Inc., a TSX-listed company with investments in electric utilities, commercial real estate and hotels. From 1988 to 1992, Mr. Watson was the Vice President Finance and CFO for Comstock Canada, an electrical and mechanical contractor with offices across Canada. He was also a partner with Thorne Ernst & Whinney Chartered Accountants, now part of KPMG, where he received his CA designation in Mr. Watson is also a Director and Chair of the Audit Committee of Killam Properties Inc., a TSX-listed company. Audit Compensation & Acquisition & Committee Governance Committee Investment Committee James Gourlay James B. Howe Michael L. Jackson Walter A. Keyser W. Glenn Squires Marc L. Staniloff G. Wayne Watson Holloway Lodging REIT Annual Repor t

77 Senior Officers W. Glenn Squires Chief Executive Officer Michael L. Jackson President and Chief Operating Officer Tracy C. Sherren Chief Financial Officer and 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 38,801,716 Annual General Meeting May 25, 2010 at 4:00 p.m. InterContinental Toronto Centre 225 Front Street West Toronto, Ontario M5V 2X3 Transfer agent and registrar CIBC Mellon 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 3P6 Design: Colour Holloway Lodging REIT Annual Repor t