CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS March 31, December 31, Assets Current assets Cash $ 48,243 $ 11,370 Marketable securities 404 404 Trade and other receivables 7,420 6,086 Deposits and prepaids 2,256 2,537 Inventories 1,256 1,306 Net investment in lease 268 245 59,847 21,948 Non-current assets Property and equipment (Note 4) 431,439 432,337 Investment property (Note 5) 9,772 9,850 Investment in hotel properties 10,660 10,498 Net investment in lease 2,981 3,063 Other assets 1,768 1,618 Intangible assets (Note 6) 1,108 1,282 Goodwill 1,608 1,608 459,336 460,256 Liabilities and Shareholders' Equity $ 519,183 $ 482,204 Current liabilities Accounts payable and other liabilities $ 20,561 $ 18,173 Debt (Note 8) 267,895 262,071 288,456 280,244 Non-current liabilities Debt (Note 8) 227,360 193,780 Deferred income tax (Note 7) 2,431 2,311 229,791 196,091 Total liabilities 518,247 476,335 Shareholders equity 936 5,869 Approved by the Directors "Chris Cahill" "Brent McLean" $ 519,183 $ 482,204 (unaudited) 1
CONDENSED CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS March 31 Revenue Room revenue $ 26,040 $ 25,382 Other hotel revenue (Note 9) 11,171 10,857 37,211 36,239 Expenses Hotel operating costs 29,664 28,840 Hotel operating income 7,547 7,399 Interest expense (Note 10) 7,155 7,285 Other expense (income) (Note 11) 57 (118) Share based compensation 35 35 General and administrative expenses 718 727 Depreciation (Note 4 and 5) 4,158 5,014 Amortization of intangible assets (Note 6) 174 190 Net loss before equity income and income taxes (4,750) (5,734) Equity income on investment in hotel properties 162 131 Net loss before income taxes (4,588) (5,603) Deferred income tax recovery (expense) (Note 7) (120) 35 Net loss and comprehensive loss $ (4,708) $ (5,568) Net loss per common share (Note 12) Basic and diluted $ (0.19) $ (0.22) (unaudited) 2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY March 31 Share capital (Note 13) Balance, beginning of period $ 295,412 $ 295,412 Repurchase of common shares under normal course issuer bid (1,165) - Balance, end of period 294,247 295,412 Equity component of convertible financial instruments Balance, beginning of period 4,498 7,862 Convertible debentures retired - (875) Balance, end of period 4,498 6,987 Contributed surplus Balance, beginning of period 1,182 1,049 Value of deferred shares granted 35 35 Balance, end of period 1,217 1,084 Cumulative loss Balance, beginning of period (199,942) (182,393) Net loss (4,708) (5,568) Repurchase of common shares under normal course issuer bid 905 - Convertible debentures retired - 875 Balance, end of period (203,745) (187,086) Cumulative dividends to shareholders Balance, beginning and end of period (95,281) (95,281) Shareholders' equity $ 936 $ 21,116 (unaudited) 3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS March 31 Operating activities Net loss $ (4,708) $ (5,568) Items not affecting cash Depreciation 4,158 5,014 Amortization of intangible assets 174 190 Amortization of tenant inducements 11 5 Amortization of transaction costs 232 278 Accretion - convertible debentures 382 510 Deferred income taxes 120 (35) Share based compensation 35 35 Equity income on investment in hotel properties (162) (131) 242 298 Working capital adjustments (Note 15) 1,385 (4,239) Cash provided by (used in) operating activities 1,627 (3,941) Investing activities Capital expenditures (3,182) (971) Receipt of net investment in lease 59 56 Change in other assets (161) (105) Cash used in investing activities (3,284) (1,020) Financing activities Proceeds of mortgage debt 2,060 - Lump sum principal payments on mortgage loans (276) (10,713) Regular repayment of principal on mortgage loans (3,494) (3,905) Expenditures on transaction costs - (113) Revolving loan advances 40,500 - Common share repurchases (260) - Convertible debenture redemption - (22,773) Cash provided by (used in) financing activities 38,530 (37,504) Net increase (decrease) in cash during the period 36,873 (42,465) Cash, beginning of period 11,370 67,922 Cash, end of period $ 48,243 $ 25,457 (unaudited) 4
1 Nature and description of Company Temple Hotels Inc. ("Temple" or the "Company") owns and operates hotel property investments in Canada. The head office for the Company is located at 55 City Centre Drive, Suite 1000, Mississauga, Ontario, L5B 1M3. Temple is listed on the Toronto Stock Exchange ("TSX"). The following schedule reflects securities of Temple, which trade on the TSX and the related trading symbol: Common shares Series E Convertible Debentures Series F Convertible Debentures TPH TPH.DB.E TPH.DB.F 2 Statement of compliance and significant accounting policies These condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") IAS 34, "Interim Financial Reporting", as issued by the International Accounting Standards Board ("IASB") and thus do not contain all the disclosures applicable to the annual audited consolidated financial statements. These condensed consolidated financial statements use the same accounting policies and methods of their application as the most recent annual audited consolidated financial statements, except for the adoption of current accounting policies noted below, and should be read in conjunction with the most recent annual audited consolidated financial statements. The condensed consolidated financial statements were approved and authorized for issue by the Board of Directors on May 7, 2018. Seasonality Temple's financial results for any individual quarter are not necessarily indicative of results to be expected for the full year. Revenues from hotel operations tend to fluctuate throughout the year, based on changes in seasonal demands. Current changes to significant accounting policies (i) IFRS 15 - Revenue from Contracts with Customers ("IFRS 15") In May 2014, the IASB issued IFRS 15, a single comprehensive model to account for revenue arising from contracts with customers. The objective of IFRS 15 is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. The core principle of the standard is that an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects consideration to which the entity expects to be entitled in exchange for those goods and services. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018. The Company adopted the standard on January 1, 2018 and applied the requirements of the standard retrospectively. The Company assessed the impact of IFRS 15 and upon a review of the Company s revenue streams determined the pattern of revenue recognition will remain unchanged upon adoption of the standard. The impact was limited to additional note disclosure on the disaggregation of some the Company s revenue streams (Note 9). (unaudited) 5
(ii) IFRS 9 - Financial Instruments ("IFRS 9") The final version of IFRS 9 was issued by the IASB in July 2014 and will replace IAS 39, "Financial Instruments: Recognition and Measurement" ("IAS 39"). IFRS 9 addresses the classification and measurement of all financial assets and liabilities within the scope of the current IAS 39 and a new expected loss impairment model that will require more timely recognition of expected credit losses and a substantially reformed model for hedge accounting. Also included are the requirements to measure debt-based financial assets at either amortized cost or fair value through profit or loss ("FVTPL") and to measure equity-based financial assets either as held-for-trading or as fair value through other comprehensive income ("FVTOCI"). No amounts are reclassified out of other comprehensive income if the FVTOCI option is elected. Additionally, embedded derivatives in financial assets would no longer be bifurcated and accounted for separately under IFRS 9. The standard has a mandatory effective date for annual periods beginning on or after January 1, 2018. The Company adopted the standard on January 1, 2018 and applied the requirements of the standard retrospectively with no restatement of comparative periods. Classification and Measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. Financial assets must be classified and measured based on three categories: amortized cost, FVTOCI and FVTPL. Financial liabilities are classified and measured based on two categories: amortized cost and FVTPL. The adoption of the new classification requirements under IFRS 9 did not result in changes in the measurement or the carrying amount of financial assets and liabilities. The following table summarizes the impact of the adoption of IFRS 9 on the classification of the Company s financial assets and liabilities: Financial Statement Item Classification under IAS 39 Classification under IFRS 9 Cash Loans and receivables Amortized cost Marketable securities FVTPL FVTPL Trade and other receivables Loans and receivables Amortized cost Deposits Loans and receivables Amortized cost Other assets Loans and receivables Amortized cost Accounts payable and other liabilities Other financial liabilities Amortized cost Mortgage loans Other financial liabilities Amortized cost Line of credit Other financial liabilities Amortized cost Revolving loan Other financial liabilities Amortized cost Convertible debentures Other financial liabilities Amortized cost Interest rate swap liability FVTPL FVTPL Impairment - Expected Credit Loss Model IFRS 9 replaced the incurred loss model in IAS 39 with a forward-looking expected credit loss ("ECL") model. The ECL model requires a more timely recognition of expected credit losses using judgement determined on a probability-weighting basis. The new impairment model is applied, at each balance sheet date, to financial asset measured at amortized cost or those measured at FVTOCI, except for investment in equity instruments. The adoption of the ECL model did not have a material impact on the Company s consolidated financial statements. (unaudited) 6
General Hedge Accounting Model IFRS 9 requires the Company to ensure that hedge accounting relationships are aligned with the Company s risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The Company does not currently have any hedging activities and the adoption did not have an impact on the Company s consolidated financial statements. (ii) IAS 40 Investment Property ("IAS 40") During December 2016, the IASB issued an amendment to IAS 40, clarifying certain existing IAS 40 requirements. The amendment requires that an asset be transferred to or from investment property when, and only when, there is a change in use. A change in use occurs when the property meets or ceases to meet the definition of investment property and there is evidence of the change in use. In isolation, a change in management s intentions for the use of a property does not provide evidence of a change in use. This amendment is effective for annual periods beginning on or after January 1, 2018. The amendment did not have a material impact on the Company s consolidated financial statements. Future changes to significant accounting policies IFRS 16 Leases ("IFRS 16") IFRS 16 replaces IAS 17 - Leases and requires lessees to account for leases on balance sheet by recognizing a right of use asset and a lease liability. The standard is effective for annual periods beginning on or after January 1, 2019, with earlier adoption permitted so long as IFRS 15 has been adopted. The Company is currently assessing the impact of IFRS 16 on its consolidated financial statements. 3 Significant accounting judgments, estimates and assumptions The preparation of Temple's financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected. Management bases their judgments, estimates and assumptions on factors they believe to be reasonable in the circumstances, but which may be inherently uncertain and unpredictable. In the process of applying Temple's accounting policies, management has applied the same methodologies in making significant accounting judgments, estimates and assumptions as disclosed in the Company's annual audited consolidated financial statements for the year ended December 31, 2017. (unaudited) 7
4 Property and equipment March 31, 2018 Cost Accumulated Impairment Provision Accumulated Depreciation Net Book Value Land $ 77,246 $ (22,569) $ - $ 54,677 Buildings 562,832 (135,578) (92,431) 334,823 Furniture and equipment 81,299 (7,811) (44,014) 29,474 Paving 28,104 (3,491) (13,683) 10,930 Signage 1,487 (209) (663) 615 Computer equipment 3,398 (265) (2,213) 920 Vehicles 278 (15) (263) - $ 754,644 $ (169,938) $ (153,267) $ 431,439 December 31, 2017 Cost Accumulated Impairment Provision Accumulated Depreciation Net Book Value Land $ 77,246 $ (22,569) $ - $ 54,677 Buildings 561,819 (135,578) (89,911) 336,330 Furniture and equipment 79,254 (7,811) (43,068) 28,375 Paving 28,104 (3,491) (13,261) 11,352 Signage 1,487 (209) (618) 660 Computer equipment 3,274 (265) (2,089) 920 Vehicles 278 (15) (240) 23 $ 751,462 $ (169,938) $ (149,187) $ 432,337 Transactions in property and equipment for the three months ended March 31, 2018 are summarized as follows: March 31, 2018 Opening Net Book Value Additions Depreciation for the Period Closing Net Book Value Land $ 54,677 $ - $ - $ 54,677 Buildings 336,330 1,013 (2,520) 334,823 Furniture and equipment 28,375 2,045 (946) 29,474 Paving 11,352 - (422) 10,930 Signage 660 - (45) 615 Computer equipment 920 124 (124) 920 Vehicles 23 - (23) - $ 432,337 $ 3,182 $ (4,080) $ 431,439 (unaudited) 8
5 Investment property Investment property comprises the Cortona Residence located in Fort McMurray, Alberta, and is held to earn rental income and capital appreciation. A key characteristic of an investment property is that it generates cash flows which are largely independent of the active business process of the Company s hotel operations. The Cortona Residence is fully leased until April 30, 2018. March 31, 2018 Cost Accumulated Impairment Provision Accumulated Depreciation Net Book Value Land $ 2,301 $ (1,275) $ - $ 1,026 Buildings 19,840 (10,437) (1,448) 7,955 Furniture and equipment 471 (207) (142) 122 Paving 2,577 (1,132) (776) 669 $ 25,189 $ (13,051) $ (2,366) $ 9,772 December 31, 2017 Cost Accumulated Impairment Provision Accumulated Depreciation Net Book Value Land $ 2,301 $ (1,275) $ - $ 1,026 Buildings 19,840 (10,437) (1,393) 8,010 Furniture and equipment 471 (207) (138) 126 Paving 2,577 (1,132) (757) 688 $ 25,189 $ (13,051) $ (2,288) $ 9,850 Transactions in investment property for the three months ended March 31, 2018 are summarized as follows: March 31, 2018 Opening Net Book Value Depreciation for the Period Closing Net Book Value Land $ 1,026 $ - $ 1,026 Buildings 8,010 (55) 7,955 Furniture and equipment 126 (4) 122 Paving 688 (19) 669 $ 9,850 $ (78) $ 9,772 (unaudited) 9
The following chart reflects the revenue, expenses and net income and comprehensive income of the investment property for the three months ended March 31, 2018 and 2017. March 31 Revenue $ 556 $ 556 Operating costs 5 3 Operating income 551 553 Interest expense 334 178 Depreciation 78 109 Amortization of intangible assets 72 72 Net income and comprehensive income $ 67 $ 194 6 Intangible assets Transactions in intangible assets for the three months ended March 31, 2018 are summarized as follows: Opening Net Amortization Closing Net Book Value for the Period Book Value Franchise fees $ 407 $ (14) $ 393 Lease intangibles 875 (160) 715 $ 1,282 $ (174) $ 1,108 7 Income tax The deferred income tax liabilities of Temple and its wholly owned subsidiary corporations consists of the following: The Company Discretionary capital cost allowance claims can be reduced in future periods to increase future taxable income and utilize unused tax losses. As at March 31, 2018, the Company has deductible temporary differences of $197,524 (December 31, 2017 - $193,265) for which no deferred tax asset has been recognized, as it is not probable that the deferred tax asset will be realized, of which $13,296 (December 31, 2017 - $13,888) have no expiration and $184,228 (December 31, 2017 - $179,377) relates to unused tax losses that expire beginning in 2023. 9551301 Canada Ltd. March 31, December 31, Deferred income tax liability (assets) of the 9551301 Canada Ltd. relating to the temporary differences between accounting and tax values of: Property and equipment $ 2,440 $ 2,321 Debt issue costs (9) (10) Deferred income tax liability $ 2,431 $ 2,311 (unaudited) 10
8 Debt March 31, December 31, Secured debt Mortgage loans (a) $ 366,861 $ 368,571 Revolving loan (c) 19,000 13,500 Total secured debt 385,861 382,071 Unsecured debt Convertible debentures (b) 75,524 75,142 Revolving loan (c) 35,000 - Total unsecured debt 110,524 75,142 Unamortized transaction costs Mortgage loans (853) (957) Convertible debentures (b) (277) (405) Total unamortized transaction costs (1,130) (1,362) Total debt 495,255 455,851 Less current portion Mortgage loans 212,871 212,914 Revolving loan 19,000 13,500 Convertible debentures 36,544 36,321 Transaction costs (520) (664) Total current debt 267,895 262,071 Total non-current debt $ 227,360 $ 193,780 Principal payments and principal maturities at face value as at March 31, 2018, are as follows: Mortgage Loans Convertible Principal Principal Debentures Payments Maturities (at face value) Total 2018 (remainder of year) $ 4,945 $ 206,451 $ 36,564 $ 247,960 2019 5,184 62,635 2,038 69,857 2020 3,611 7,996 38,722 50,329 2021 3,236 - - 3,236 2022 2,563 42,550-45,113 Thereafter 14,987 12,703-27,690 $ 34,526 $ 332,335 $ 77,324 $ 444,185 (unaudited) 11
(a) Mortgage loans March 31, December 31, First mortgage loans $ 350,861 $ 352,571 Second mortgage loans 16,000 16,000 Total $ 366,861 $ 368,571 Weighted average interest rate fixed rate First mortgage loans of $249,540 (2017 $252,380) 4.82% 5.02% Second mortgage loans of $16,000 (2017 $16,000) 5.00% 5.00% Weighted average interest rate fixed rate 4.83% 5.02% Weighted average interest rate variable rate First mortgage loans of $101,321 (2017 $100,191) 6.32% 6.16% As a condition of certain mortgage loans, the Company is required to maintain annual debt service coverage ratios and/or debt to equity ratios and/or debt to appraised value ratios; arrange for capital expenditures in accordance with predetermined limits; and maintain ongoing liquidity ratios. At March 31, 2018, the Company is not in compliance with seven debt service covenants affecting the seven mortgage loans as follows: As of March 31, 2018, the Company was not in compliance with a 1.4 to 1.0 debt service coverage requirement in regard to four mortgage loans with an aggregate principal balance of $71,702 on four properties. The lender has been notified of the breach and management is in discussion with the lender to resolve the matter. As of March 31, 2018, the Company was not in compliance with a 1.2 to 1.0 debt service coverage requirement in regard to two mortgage loans as well as one property in breach due to a cross-collateral provision, having an aggregate principal balance of $36,267 on the three properties. The lender has been notified of the breach and management is in discussion with the lender to resolve the matter. None of the lenders have demanded payment of the mortgage loans. However, IFRS requires that the loan balance of mortgage loans in breach of debt covenants be included in the current portion of debt. All mortgage loans in breach of debt covenants have contractual maturities due within twelve months of March 31, 2018. At December 31, 2017, the Company was not in compliance with seven debt service covenants affecting seven mortgage loans, amounting to $109,339. All mortgage loans in breach of debt covenants had contractual maturities due within twelve months of December 31, 2017. As of December 31, 2017, the Company was not in compliance with a corporate 1.1 to 1.0 working capital ratio requirement affecting three mortgage loans scheduled to mature in June 2018, with an aggregate principal balance of $37,106. The Company received a waiver from the lender subsequent to December 31, 2017. (unaudited) 12
(b) Convertible debentures March 31, 2018 Due Date Debt Equity Series E Sept. 30, 2020 41,105 2,137 Series F Mar. 31, 2018 (1) 34,419 2,528 75,524 4,665 Transaction costs (277) (167) $ 75,247 $ 4,498 December 31, 2017 Due Date Debt Equity Series E Sept. 30, 2020 40,935 2,137 Series F Mar. 31, 2018 (1) 34,207 2,528 75,142 4,665 Transaction costs (405) (167) $ 74,737 $ 4,498 (1) The Series F convertible debentures had a March 31, 2018 due date. Since March 31, 2018 fell on a weekend, the Company repaid the Series F convertible debentures on April 2, 2018, the first business day after March 31, 2018. The following chart reflects the face amount, interest rate (payable semi-annually) and conversion price that the debentures are converted to common shares at any time at the option of the holder of the debentures: March 31, 2018 Rate Conversion Price Face Amount Series E 7.25% 9.75 42,905 Series F 7.00% 39.12 34,419 $ 77,324 On March 15, 2017, Temple initiated a normal course issuer bid ("NCIB") for the purchase of debentures. This NCIB represents 10% of the public float of each of the Series E and Series F debentures as at February 28, 2017 and expired on March 14, 2018. On March 15, 2018, Temple renewed its NCIB for the purchase of debentures. This NCIB represents 10% of the public float for the Series E debentures and expires on March 14, 2019. As of May 7, 2018, no debentures have been purchased under the NCIB. On September 28, 2017, holders of the Series E convertible redeemable unsecured debentures approved the following amendments to the Series E debentures, effective October 2, 2017: i) Decreasing the conversion price from $40.08 to $9.75 per common share of Temple; ii) Extending the maturity date from September 30, 2017 to September 30, 2020; iii) Permitting Temple to redeem the Series E debentures, in whole or in part, at any time up to September 30, 2020, at a price equal to the principal amount thereof plus accrued and unpaid interest to, but excluding the date of the redemption; and iv) Permitting Temple to complete the Initial Partial Redemption (as defined below) without further notice or communication to holders of Series E debentures and to complete the Additional Partial Redemptions (as defined below). (unaudited) 13
On October 2, 2017, Temple redeemed $2,259 of the principal amount of the Series E debentures outstanding, which represents approximately 5% of the issued and outstanding Series E debentures (the "Initial Partial Redemption"). Temple has also committed to redeem an additional 5% of the currently issued and outstanding principal amount of Series E debentures on each of September 30, 2018 and September 30, 2019 (the "Additional Partial Redemptions"). Each of the Initial Partial Redemption and the Additional Partial Redemptions will be for a cash payment equal to the principal amount of such redemption plus accrued and unpaid interest to, but excluding the date of redemption. The convertible debentures were allocated to debt and equity components based on the net present value of future principal and interest payments with an estimated cost of borrowing of 9.25%. (c) Revolving loan commitment Credit Facility A On June 30, 2016, Temple entered into a revolving loan agreement with Morguard Corporation ("Morguard"), a related party, secured by a first mortgage charge against a specific hotel property and bears interest at prime plus 2.0%. The credit facility allows for a maximum of $6,000 to be borrowed. On November 9, 2017, the credit facility was increased to $13,500 for a period of one year. Subsequently, the credit facility was increased to $50,000. As at March 31, 2018, the maximum allowable amount to be borrowed under the credit facility is $50,000 (December 31, 2017 $13,500). As of March 31, 2018, the amount drawn on the credit facility was $19,000 (December 31, 2017 $13,500). For the three months ended March 31, 2018, Temple incurred interest on the credit facility of $191 (2017 $nil). Credit Facility B On February 23, 2018, Temple entered into a credit facility with Morguard in the amount of $35,000. The credit facility has a term of three years, is unsecured, and bears interest at the rate of 6.5% per annum. As of March 31, 2018, the amount drawn on the credit facility was $35,000. For the three months ended March 31, 2018, Temple incurred interest on the credit facility of $19. 9 Other hotel revenue Other hotel revenue includes food and beverage revenue and ancillary revenue (such as spa revenue, video lottery terminal revenue, rental revenue, gift shop revenue and other miscellaneous revenue). For the three months ended March 31, 2018, other hotel revenue comprises food and beverage of $7,855 (2017 - $7,370) and ancillary revenue of $3,316 (2017 - $3,487). (unaudited) 14
10 Interest expense Interest expense is comprised of the following: March 31 Mortgage loans interest $ 4,952 $ 4,419 Amortization of transaction costs - mortgages 104 175 Revolving loan and other interest 221 10 Amortization of deferred finance costs - line of credit and revolving loan - 11 Interest on convertible debentures 1,368 2,068 Accretion - convertible debentures 382 510 Amortization of transaction costs - convertible debentures 128 92 $ 7,155 $ 7,285 11 Other expense (income) Interest and other income is comprised of the following: March 31 Interest and other revenue $ (71) $ (54) Finance lease interest revenue (60) (64) Insurance proceeds, net - property damage (Note 18) 188 - $ 57 $ (118) 12 Per common share calculations Net loss per common share calculations are based on the following: March 31 Net loss basic and diluted $ (4,708) $ (5,568) Weighted average number of shares basic and diluted 25,346,160 25,338,131 Net loss per common share $ (0.19) $ (0.22) (unaudited) 15
Convertible debentures Series E and F were not included in the diluted net loss per common share calculation for the three months ended March 31, 2018, as the effect would have been anti-dilutive. Conversion Number of Price Common Shares Convertible debentures Series E 9.75 4,400,512 Series F 39.12 879,831 Total 5,280,343 13 Common shares On June 22, 2017, the common shares were consolidated on the basis of one (1) post-consolidation common share for six (6) pre-consolidation common shares. The number of common shares issued, exercised and converted, are as follows: March 31, 2018 Share Capital Amount Year Ended December 31, 2017 Share Capital Amount Outstanding, beginning of period 25,269,913 $ 295,412 25,269,913 $ 295,412 Common share repurchases (99,684) (1,165) - - Outstanding, end of period 25,170,229 $ 294,247 25,269,913 $ 295,412 On March 15, 2017, the Company initiated a normal course issuer bid for the purchase of up to 1,263,497 common shares for a twelve month period, representing 5% of the issued and outstanding common shares, expiring on March 14, 2018. During the three months ended March 31, 2018, 99,684 common shares were purchased for cash consideration of $260 at a weighted average price of $2.60 per common share. On March 15, 2018, the Company renewed its normal course issuer bid for the purchase of up to 1,263,495 common shares for a twelve month period, representing 5% of the issued and outstanding common shares, expiring on March 14, 2019. As of March 31, 2018, no shares were purchased under this bid. 14 Deferred common share plan March 31 Outstanding and vested, beginning of period 98,105 66,840 Granted during period 11,996 7,043 Outstanding and vested, end of period 110,101 73,883 Share based compensation expense of $35 for the three months ended March 31, 2018 (2017 - $35) relating to deferred common shares granted was recorded to expense the fair value of share based compensation. (unaudited) 16
15 Supplementary cash flow information March 31 Change in: Trade and other receivables $ (1,334) $ (2,329) Deposits and prepaids 281 378 Inventories 50 33 Accounts payable and other liabilities 2,388 (2,321) $ 1,385 $ (4,239) Interest received operating activities $ 86 $ 118 Interest paid operating activities $ 5,154 $ 9,689 16 Related party transactions In addition to the related party transactions disclosed in Note 8(c), related party transactions also include the following: As at March 31, 2018, Morguard owns a 58.3% interest (December 31, 2017 55.9%) in the Company through its ownership of 14,685,907 common shares (December 31, 2017 14,136,012) and has convertible debentures that are convertible to 124,772 common shares (December 31, 2017 124,772 common shares). Morguard is a related party of the Company by virtue of its ownership of common shares and the asset management agreement with the Company. Asset management agreement Pursuant to the terms of the amended and restated Asset Management Agreement dated December 31, 2012, expiring December 31, 2019, Morguard is entitled to receive an asset management fee of 1.5% of the gross revenues of the Company and its subsidiaries on a consolidated basis. The asset management agreement requires Morguard to act as administrator of the Company by providing asset management services, accounting, human resource services, office space and equipment and the necessary clerical and secretarial personnel for the administration of the day-to-day activities of the Company. Key management personnel are provided by Morguard. The Company incurred service fees to Morguard of $558 for the three months ended March 31, 2018 (2017 $543). Construction management agreement The Company has entered into a construction management agreement with the asset manager. The agreement provides for the asset manager to receive a fee equal to 5% of construction costs and requires the asset manager to approve all plans and specifications, manage the tender process, arrange financing and perform construction management services related to the guest room renovations and building upgrades as reflected in approved budgets or acquisition plans. For the three months ended March 31, 2018 and 2017, no service fees were charged for such services. Management compensation Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly and indirectly, and include directors. (unaudited) 17
The executive officers of the Company are employed by Morguard, and the Company does not directly or indirectly pay any compensation to them. Any variability in compensation paid by Morguard to the executive officers of the Company has no impact on the Company s financial obligations, including its obligations under the various Agreements with Morguard and Morguard s affiliates. March 31 Director fees $ 27 $ 28 Deferred shares granted to directors 35 35 $ 62 $ 63 Other Included in accounts payable and other accrued liabilities is $601 (December 31, 2017 - $503) due to Morguard relating to the service fees and revolving loan interest. 17 Segmented financial information The Company owns and operates hotel properties in Canada. Operating segments have been aggregated regionally to segregate properties in Fort McMurray, Alberta (the "Fort McMurray" operating segment); properties in other Alberta locations (the "Other Alberta" operating segment); and other properties (the "Other Canada" operating segment) to reflect the unique revenue and income patterns of each segment. Investments in hotel properties are included in Corporate. The Company has applied judgment by aggregating its operating segments according to the nature of property operations March 31, 2018: Fort Other Other McMurray Alberta Canada Corporate Total Room revenue $ 4,981 $ 4,177 $ 16,882 $ - $ 26,040 Other hotel revenue 277 4,884 6,010-11,171 Hotel operating costs (3,863) (7,702) (18,099) - (29,664) Hotel operating income 1,395 1,359 4,793-7,547 Interest expense (1,456) (962) (2,448) (2,289) (7,155) Other income (expense) (228) 2 163 6 (57) Share based compensation - - - (35) (35) General and administrative expense - - - (718) (718) Depreciation (726) (767) (2,665) - (4,158) Amortization of intangible assets (90) (12) (72) - (174) Equity income on investment in hotel properties - - - 162 162 Income tax expense - - - (120) (120) Net loss $ (1,105) $ (380) $ (229) $ (2,994) $ (4,708) Total assets March 31, 2018 $ 94,321 $ 88,606 $ 286,990 $ 49,266 $ 519,183 Total liabilities March 31, 2018 $ 87,087 $ 90,171 $ 192,179 $ 148,810 $ 518,247 (unaudited) 18
March 31, 2017: Fort Other Other McMurray Alberta Canada Corporate Total Room revenue $ 4,519 $ 4,430 $ 16,433 $ - $ 25,382 Other hotel revenue 361 4,672 5,824-10,857 Hotel operating costs (3,434) (7,787) (17,619) - (28,840) Hotel operating income 1,446 1,315 4,638-7,399 Interest expense (1,191) (1,133) (2,079) (2,882) (7,285) Other income (expense) 2 1 71 44 118 Share based compensation - - - (35) (35) General and administrative expense - - - (727) (727) Depreciation (983) (1,125) (2,906) - (5,014) Amortization of intangible assets (90) (13) (87) - (190) Equity income on investment in hotel properties - - - 131 131 Income tax recovery - - - 35 35 Net loss $ (816) $ (955) $ (363) $ (3,434) $ (5,568) Total assets December 31, 2017 $ 95,373 $ 88,715 $ 286,610 $ 11,506 $ 482,204 Total liabilities December 31, 2017 $ 87,511 $ 89,917 $ 192,473 $ 106,434 $ 476,335 18 Contingencies Legal and other claims In the normal course of operations, the Company may become subject to a variety of legal and other claims. Management and legal counsel evaluate all claims on their apparent merits, and accrue management's best estimate of the estimated costs to satisfy such claims. Although the outcome of existing legal and other claims are not reasonably determinable, management believes that any such outcome will not be material. Insurance recoveries Events in Fort McMurray resulted in an insurance claim under the Company s business interruption policy. Recoveries under this policy are only recognized at the earlier of when proceeds have been received or confirmation has been given by the insurer of the amount of any settlement. During the three months ended March 31, 2018, $188 (2017 - $nil) of recoverable outlays net of insurance proceeds received and/or confirmed by the insurers was recognized in other expense (income) (Note 11). The amount recognized in other expenses (income) during the three months ended March 31, 2018 is comprised of insurance proceeds of $54 (2017 - $nil) net of related recoverable outlays of $242 (2017 - $nil). The Company expects that all amounts required to repair and remediate the hotels will be covered by insurance proceeds. (unaudited) 19
19 Subsequent events Subsequent to March 31, 2018, the Company acquired 147,900 common shares under its normal course issuer bid for cash consideration of $451. Subsequent to March 31, 2018, the Company borrowed $17,000 under its Credit Facility A. On April 2, 2018, the Company fully repaid the 7% Series F convertible debentures in the amount of $34,419. On April 9, 2018, the Company repaid a second mortgage loan in the amount of $16,000, bearing interest at 5% and secured by three hotel properties in Nova Scotia. (unaudited) 20