January 2003 - Looking back on 2002, the Canadian economy showed resilience and a slow but steady recovery from 2001that was stronger than our U.S. neighbours. Gross Domestic Product (GDP) is forecast to increase by 3.3% in 2002 and a further 3.8% in 2003, compared to expected GDP growth in the United States of only 2.4% and 3.2% in 2002 and 2003, respectively. The Canadian economy also saw approximately 56,000 new jobs in 2002 in contrast to the U.S., which lost about 181,000.  More specific to the hotel industry, Canadian RevPAR showed solid increases, by some 5% in 2002, which is in sharp contrast to the decline of almost 3% forecast in the United States.

Total transaction volume reached an estimated $540 million with the completion of 48 hotel sales over $1 million. This was a decline of almost 18% from the prior year when $656 million in transactions were completed. Most of the activity occurred in the second and third quarters, accounting for 36% and 32% of the annual total, respectively.  Although strategic hotel acquisitions 1 represented about 66% of total volume, they accounted for only 13% of trades completed. When strategic trades are excluded, transaction volume declined by 33% between 2001 and 2002, from $276 million to $185 million.

Although strategic trades accounted for the majority of transaction volume in 2002, they did not represent the typical hotel transaction.  Approximately 63% of the trades in 2002 involved properties of less than 100 rooms with transaction prices under $5 million. Additionally, 60% of trades completed were at a price per room of between $30,000 and $69,000, with 8% falling below this range, 15% between $70,000 and $99,000, and 17% at $100,000 or more. Capitalization rates generally remained between 12% and 15% for the more traditional hotel transaction, with almost 40% of trades reporting capitalization rates within this range. It is important to note, however, that strategic hotels generally traded at capitalization rates well below this range.

The following provides a brief review of transaction activity on a regional basis.

Western Canada (British Columbia, Alberta, Saskatchewan and Manitoba)

British Columbia and Alberta were the only provinces in Western Canada to see any transaction activity in 2002; however, with three of Canada�s top four transactions, this Region accounted for approximately 64% of total transaction volume and represented a 33% increase over 2001 when all Western Canadian provinces reported activity.

Within Western Canada, British Columbia represented about 66% of the transaction volume reported in 2002, compared to 34% in Alberta. Other trends in Western Canada included:

• There were 19 properties sold, with the average hotel size being 125 rooms; however, 42% of the hotels sold had only 40 to 60 rooms.

• Approximately 47% of hotels sold were branded properties.

• Capitalization rates ranged from 6.5% for the Oasis Entertainment Hotel in Belvedere, Alberta to 17.4% for the Crestwood Hotel in Hinton, Alberta. From transactions where capitalization rates were available, 36% were in the 12% to 15% range. Due to their strategic nature, the Sheraton Suites Calgary Eau Claire, Calgary, Alberta and the Harrison Hot Springs Resort & Spa, Harrison Hot Springs, British Columbia reported capitalization rates well below this range, at 11.2% and 9.5%, respectively.

• The average price per room of non-strategic hotel trades in Western Canada was approximately $65,000.

Transaction volume in Central Canada represented approximately 30% of total transaction volume in 2002, a 58% decline over 2001. Of this activity, about 57% of the volume occurred in Ontario and 43% took place in Quebec. Highlights include:

• There were 22 hotels sold in Ontario, compared to only 5 in Quebec.

• Approximately 52% of hotels sold were branded properties.

• The average size of hotel sold in Ontario was 80 rooms as compared to Quebec at 227 rooms.

• Despite a greater proportion of smaller hotels (under 100 rooms) selling in Ontario, only 55% of hotels sold had a price per room $50,000 or less, compared to Quebec at 80% of the transactions reported.

• Capitalization rates generally fell in the 11% to 13% range, representing 53% of reporting hotels.

With only two trades in 2002, Eastern Canada represented 5% of the country�s transaction volume. Canmac Hotels Corporation acquired the 96-room Howard Johnson Hotel in Saint John, New Brunswick in September for $3 million ($31,300 per room), reflecting a capitalization rate of 14.5%. The second trade, the sale of the 285-room Delta St. John�s Hotel & Conference Centre in St. John�s, Newfoundland, represented the fifth highest price paid for a hotel in Canada in 2002. Fortis Properties acquired the hotel in December for $25.9 million ($90,900 per room), which represented a capitalization rate of 11.0%.

THE STOCK MARKET WATCH
Canada

As of December 31, 2002 four public companies traded within 10% of their 52-week high. Ten of the thirty hospitality stocks noted in the table below showed a narrowing between their December 31, 2002 close price and their 52-week high compared to third quarter results, with AFM Hospitality Corporation (AFM) showing the greatest improvement, tightening the gap from -45.38% in Q3 to -4.55% in Q4. Hospitality Properties Trust (HPT) ended the fourth quarter closest to its 52-week high, closing at only 4.22% below $35.20.