Royal Host Real Estate Investment Trust
TSX : RYL.DB.A
TSX : RYL.UN
TSX : RYL.DB.B
TSX : RYL.DB.C

Royal Host Real Estate Investment Trust

May 07, 2007 23:58 ET

Royal Host REIT Reports First Quarter Results and Appointment of New Chief Financial Officer

CALGARY, ALBERTA--(CCNMatthews - May 7, 2007) - Royal Host Real Estate Investment Trust ("Royal Host" or the "Trust") (TSX:RYL.UN) (TSX:RYL.DB.A) (TSX:RYL.DB.B) (TSX:RYL.DB.C) today announced financial results for the three months ended March 31, 2007.

Royal Host's continuing operations delivered consistent results in the first quarter of 2007, comparable to the outstanding results realized in the first quarter of 2006. In addition, a number of significant and strategic milestones were achieved, most notably repayment of the 9.25% Convertible Debenture and completion of the sale of the non-core US Management business.

During the quarter the Trust announced its fifth consecutive increase in monthly unitholder distributions to $0.055 per unit. This annualized rate of distribution represents a 32% increase over 2006 levels.

Mr. Mike Jackson, President and Chief Operating Officer of Royal Host, stated, "The achievements of this quarter are a direct reflection of our belief in the fundamentals of a strong financial position, well maintained product and a focus on core business activities. This solid platform in conjunction with a positive industry outlook bodes well for continued growth in unitholder value."

The Board is pleased to announce the appointment of Brad Cann as Vice President and Chief Financial Officer effective June 1, 2007. Brad will be replacing Wayne King, who announced that he would be leaving Royal Host on May 31, 2007 to pursue other opportunities. George Armoyan, speaking on behalf of the Board of Trustees, added "We are delighted to be able to fill this important position with an internal candidate. Brad has served as the Corporate Controller for Royal Host over the last three years and has shown he is the right person to lead our financial team going forward. We thank Wayne for his contribution and wish him all the best in his future endeavours."

A conference call will be held on Tuesday, May 8, 2007 at 1:30 p.m. Eastern Time. Investors and analysts are invited to access the call by dialing 1-877-888-4210 or 1-416-695-9712. You will be required to identify yourself and indicate if you represent an organization or you are a private investor. A recording of this call will be made available beginning May 8 through May 22, 2007. To access this recording please dial 1-888-509-0081 or 1-416-695-5275 and provide the playback password 642717.

Royal Host's core businesses are hotel ownership, management and franchising. Royal Host owns 37 hotels, comprising 4,500 rooms, manages additional properties for third parties, and franchises over 100 locations (including 15 owned by Royal Host) under the Travelodge® and Thriftlodge® banners.

Royal Host is committed to creating stable and repeatable earnings through high quality assets, efficient operations, and exceptional people. Through strategic management and growth of its assets, and ongoing training, communication and teamwork, it is committed to achieving ongoing improvements to its bottom line results. Royal Host Units and Convertible Debentures are traded on the Toronto Stock Exchange under the trading symbols "RYL.UN", "RYL.DB.A", "RYL.DB.B" and "RYL.DB.C", respectively. This press release contains certain forward-looking statements relating, but not limited to, Royal Host's operations, anticipated financial performance, business prospects, and strategies. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan", or similar words suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by such forward-looking statements. Such factors include, but are not limited to economic, competitive, and lodging industry conditions. Royal Host disclaims any responsibility to update any such forward-looking statements except as required by law.

ROYAL HOST REAL ESTATE INVESTMENT TRUST

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE MONTHS ENDED MARCH 31, 2007

The following Management's Discussion and Analysis of Operations and Financial Condition ("MD&A") dated May 7, 2007 is the responsibility of Management. The Board of Trustees carries out its responsibility for review of this MD&A principally through its Audit Committee.

This MD&A should be read in conjunction with the unaudited interim Consolidated Financial Statements and notes of Royal Host Real Estate Investment Trust ("Royal Host" or the "Trust") for the three months ended March 31, 2007 and the annual consolidated financial statements and accompanying MD&A for the year ended December 31, 2006. The unaudited interim Consolidated Financial Statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP").

FORWARD-LOOKING STATEMENTS

Certain statements in this MD&A, including those in the Outlook section, relate to periods commencing after March 31, 2007 and contain estimates or assumptions about the outcome of future events. These forward-looking statements are subject to risks, uncertainties, and other factors that could result in the outcome of these events being materially different from those anticipated in this MD&A. These factors include, but are not limited to: general economic conditions, levels of travel in Royal Host's key market areas, political conditions and events, competitive pressures, changes in government policy or regulations and other risk factors including risks and uncertainties described below. Royal Host does not undertake to update such forward-looking statements should its estimates or assumptions change, except as required by law. Additional information relating to Royal Host and the risks to which its business is subject is contained in its Annual Information Form, which is available at www.sedar.com.

OVERVIEW

Royal Host's core businesses are hotel ownership, management and franchising. As at March 31, 2007, Royal Host owned 37 hotels (comprising approximately 4,500 rooms), managed additional properties for third parties, and franchised over 100 locations (including 15 owned by the Trust) under the Travelodge and Thriftlodge banners.

HIGHLIGHTS

Royal Host delivered consistent results from continuing operations in the first quarter of 2007, comparable to the outstanding results realized in the first quarter of 2006. Overall results were improved over 2006, and with the inclusion of income from discontinued operations, basic per unit net income of $0.10 (2006 - $0.08 loss) was achieved. During the three months ended March 31, 2007, Royal Host continued to improve its strong financial position and increase unitholder value. Other highlights include:


- Increased monthly distributions in February 2007 to $0.055 per unit ($0.66 per annum), representing the fifth increase since 2005.

- Repaid the 9.25% Convertible Debenture of $38.0 million which matured on March 1, 2007, further reducing its overall cost of capital.

- Continued to be active under its Normal Course Issuer Bids, repurchasing 0.3 million Trust Units with an aggregate cost of $2.0 million ($7.00 per unit) and $0.3 million of 7.90% Convertible Debentures

- Sold its ancillary US hotel management business for a gain of approximately $4.2 million.

- Increased Cash Available for Distribution by 100% to $0.04 per unit (2006 - $0.02 per unit).

- Maintained a strong balance sheet, with cash and marketable securities of $59.7 million at March 31, 2007

- Generated a total unitholder return in the quarter of 9.4%.



SELECTED FINANCIAL INFORMATION

Three months ended
March 31
($000's, except as otherwise noted) 2007 2006 Change
(%)
----------------------------------------------------------------------------
Hospitality Revenue (continuing operations)
Rooms 22,437 22,557 (0.1)
Food and Beverage 5,835 5,769 1.1
Franchising and Management 787 417 88.7
Other 2,658 2,427 9.5
---------------------
Total 31,717 31,170 1.8

Hospitality Expenses 24,530 24,063 1.9
---------------------

Hospitality Gross Margin 7,187 7,107 1.1
---------------------

Hospitality Gross Margin % 22.7 22.8
---------------------

Loss From Continuing Operations (1,782) (2,220)
Income From Discontinued Operations 4,125 194
---------------------

Net Income (Loss) 2,343 (2,026)
---------------------
---------------------

Basic Per Unit Net Earnings ($)
From Continuing Operations (0.07) (0.09)
From Discontinued Operations 0.17 0.01
---------------------
0.10 (0.08)
---------------------
---------------------

Cash Available For Distribution 963 574 67.8
---------------------
---------------------

Distributions Declared on Trust Units 4,141 2,842 45.7
---------------------
---------------------

Basic Per Unit Cash Available For
Distribution ($) 0.04 0.02 100.0
---------------------
---------------------

Per Unit Distributions Declared ($) 0.165 0.11 50.0
---------------------
---------------------

Weighted Average Number of Trust Units
Outstanding (000's) 24,858 25,949 (4.2)
---------------------
---------------------

Number of Trust Units Outstanding (as at
March 31) (000's) 25,521 24,501 4.2
---------------------
---------------------

Closing Trust Unit Trading Price as at
March 31 ($) 7.00 6.40 9.4
---------------------
---------------------


NON-GAAP FINANCIAL MEASURES

This MD&A includes certain non-GAAP financial measures (measures that are not calculated or presented in accordance with GAAP). These measures are not recognized under GAAP and Royal Host's method of calculation may not be comparable to measures presented by other entities. These measures should not be used as an alternative to net earnings determined in accordance with GAAP when assessing Royal Host's financial performance. However, the Trust believes these measures are useful in supplementing the reader's understanding of the Trust's performance.

This MD&A includes the following non-GAAP financial measures: Revenue per Available Room ("RevPAR"), Average Daily Rate ("ADR"), Occupancy, Cash Available for Distribution (and Basic and Diluted Per Unit Cash Available for Distribution), Funds From Operations and Adjusted Funds From Operations.

Key Performance Drivers and Measures

The hospitality industry and hotel real estate investment trusts commonly use three non-GAAP financial measures as key indicators of financial performance:

- RevPAR, which combines information about both pricing levels and occupancy. This measure of efficiency is based on all available rooms regardless of whether they are occupied or not. RevPAR is calculated by dividing the number of rooms available in a given period into the room revenue in the same period;

- Occupancy, which measures the level of hotel room utilization and is calculated by dividing the number of rooms rented in a given time period by the number of rooms available in the same period; and

- ADR, which measures the average room price for all guest rooms and is calculated by dividing total room revenue by the number of rooms rented.

Cash Available for Distribution, Funds from Operations and Adjusted Funds from Operations

Cash Available for Distribution, Funds from Operations and Adjusted Funds from Operations are non-GAAP financial measures commonly used by hotel real estate investment trusts. As a "non-GAAP" measure, no standards exist for the calculation of Cash Available for Distribution and reporting practices vary widely.

The policies of the Canadian Securities Administrators and the draft guidance issued by the Canadian Institute of Chartered Accountants consider distributable cash (Cash Available for Distribution) a cash flow measure and, as such, require that it be reconciled to Cash Flows from Operating Activities. The Trust has conformed to this guidance and presented this calculation in this manner.

The Trust calculates Funds from Operations and Adjusted Funds from Operations, as defined by the Real Property Association of Canada.



Room Statistics - Total

Three months ended March 31
2007 2006 Change
CONTINUING OPERATIONS (4,422 rooms) (%)
----------------------------------------------------------------------------
RevPAR $ 56.15 $ 56.08 0.1
Occupancy 58.5% 61.3% (4.6)
ADR $ 95.99 $ 91.41 5.0


The first quarter of 2007 saw RevPAR from continuing operations improve modestly to $56.15, compared to a very strong $56.08 realized for the first quarter of 2006. The increase resulted from a $4.58, or 5.0%, increase in ADR. This was offset by a 4.6% decrease in Occupancy, which was attributable to a number of properties in the Ontario and Western regions, as detailed below.



Room Statistics - By Region (Continuing Operations)

Three months ended March 31
2007 2006 Change
ONTARIO (59.6% of rooms revenue / 2,489 rooms) (%)
----------------------------------------------------------------------------
RevPAR $ 59.01 $ 60.01 (1.7)
Occupancy 59.1% 61.6% (4.1)
ADR $ 99.83 $ 97.42 2.5


In Ontario the modest increase in ADR was more than offset by a decrease in Occupancy, resulting in lower RevPAR compared to the first quarter of 2006. While the region benefited from increased ADR, Occupancy decreases occurred at the Holiday Inn Oakville, Holiday Inn Trenton and the Travelodge Toronto Airport, due in part to a downturn in the automotive industry and reduced travel resulting from new passport legislation. The Travelodge Ottawa West and the Chimo Hotel in Ottawa produced very strong results, as did the Travelodge Timmins and Super 8 Timmins.



Three months ended March 31
2007 2006 Change
WESTERN (34.4% of rooms revenue / 1,657 rooms) (%)
----------------------------------------------------------------------------
RevPAR $ 52.47 $ 51.34 2.2
Occupancy 56.3% 60.4% (6.8)
ADR $ 93.25 $ 85.01 9.7


The Grand Okanagan Lakefront Resort and Conference Centre in Kelowna, the Holiday Inn (The Palace) in Edmonton and the Best Western Village Park Inn in Calgary produced record results, and the Trust's Country Inns & Suites in Winnipeg and Regina each had very strong performance. However, the Travelodge Fort Nelson, the Yellowknife Inn and the Travelodge Medicine Hat produced weaker rooms revenue as a direct result of lower Occupancy.



Three months ended March 31
2007 2006 Change
ATLANTIC (5.9% of rooms revenue / 276 rooms) (%)
----------------------------------------------------------------------------
RevPAR $ 52.51 $ 49.86 5.3
Occupancy 61.3% 60.5% 1.3
ADR $ 85.72 $ 82.46 4.0


The Atlantic region had a very solid quarter and, in particular, the Country Inns & Suites in New Glasgow and Dartmouth produced notable increases in both Occupancy and ADR.



Cash Available for Distribution

Three months ended March 31
2007 2006 Change
($000's, except as otherwise noted) (%)
----------------------------------------------------------------------------
Cash Flows from Operating Activities 1,811 (3,049)
Changes in Non-Cash Working Capital 1.783 1,636
Changes in Investment in PRC (1,500) 3,140
Changes in Minority Interest - (20)
---------------------
Cash Flows from Total Operations 2,094 1,707 22.7

Provision for Capital Replacement (1,131) (1,133)
---------------------

Cash Available for Distribution 963 574 67.8
---------------------
---------------------

Distributions Declared 4,141 2,842 45.7
---------------------
---------------------

Basic Per Unit Cash Available For
Distribution ($) 0.04 0.02 100.0
---------------------
---------------------

Diluted Per Unit Cash Available For
Distribution ($) 0.04 0.02 100.0
---------------------
---------------------

Per Unit Distributions Declared ($) 0.165 0.11 50.0
---------------------
---------------------


Cash Available for Distribution is calculated by deducting a provision for capital replacement from cash flows from total operations. The Trust designates a portion of its capital expenditure budget for capital replacement to be funded from cash flows from operating activities. This provision is calculated as 4.0% of rooms and food and beverage revenue, or $1.1 million (2006 - $1.1 million). Cash Available for Distribution for the three months ended March 31, 2007 increased to $1.0 million, or $0.04 per unit (2006 - $0.6 million, or $0.02 per unit).

The Trust's revenue and profitability are typically higher in the second and third quarters, as compared to the first and fourth quarters. Therefore, cash flows from operating activities are not generated evenly throughout the year. Royal Host's Board of Trustees determines monthly distributions to Unitholders based on, among other considerations, annual performance, projected cash flows, capital commitments and working capital requirements. The objective is to set the distributions at a level that will be sustainable over a longer period. Accordingly, cash distributions will not equal cash available for distribution in any one quarter.

During the three months ended March 31, 2007, the Trust declared distributions on Trust Units of $4.1 million, an increase of 45.7% (2006 - $2.8 million). Royal Host pays monthly cash distributions to Unitholders of record on or about the 15th day of each month. Distributions are payable on or about the last business day of the month.

The Trust increased monthly distributions to $0.055 per unit, or $0.66 per unit annually, effective for the February 2007 distribution.

Royal Host made various cash outlays in addition to distributions. The Trust deployed $32.5 million in cash in connection with the maturity of its 9.25% convertible debenture in March 2007, and made total debt principal repayments of $0.8 million. In addition, the Trust spent $3.1 million on capital investment, which it funded from cash from operations and restricted cash. It also spent $3.0 million repurchasing Trust Units and $0.3 million repurchasing Convertible Debentures pursuant to its Normal Course Issuer Bids ("NCIBs"), which it funded from cash on hand.



Funds From Operations and Adjusted Funds From Operations

Three months ended March 31
2007 2006 Change
($000's, except as otherwise noted) (%)
----------------------------------------------------------------------------
Cash Flows provided by Total Operations 2,094 1,707 22.7

Debt issuance costs (582) (399)
---------------------

Funds From Operations 1,512 1,308 15.6

Provision for Capital Replacement (1,131) (1,133)
---------------------

Adjusted Funds From Operations 381 175 117.7
---------------------
---------------------


During the three months ended March 31, 2007, the Trust generated Funds from Operations of $1.5 million, or $0.06 per unit (2006 - $1.3 million, or $0.05 per unit). Funds from Operations reflects the adjustment for the deduction of accretion of convertible debentures and mortgages, which was $0.6 million in 2007 (2006 - $0.4 million). Debt issuance costs are accreted over the term of the related debt. Adjusted Funds from Operations is calculated by deducting the Trust's provision for capital replacement from Funds from Operations. In 2007, Adjusted Funds from Operations was $0.4 million, or $0.02 per unit (2006 - $0.2 million, or $0.01 per unit).

SEASONALITY

The hospitality industry business is seasonal in nature. The Trust's revenue and profitability are typically higher in the second and third quarters, as compared to the first and fourth quarters.



THREE MONTHS ENDED MARCH 31, 2007 (Continuing Operations)

For the three months ended March 31 2007 2006 Change Change(%)
($000's, except as otherwise noted)
----------------------------------------------------------------------------

Hospitality Revenue 31,717 31,170 547 1.8

Hospitality Expenses 24,530 24,063 467 1.9
--------------------------

Hospitality Gross Margin 7,187 7,107 80 1.1

Royal Private Residence Club - - -
--------------------------

Gross Margin 7,187 7,107 80 1.1

Other Expenses 8,969 9,327 (358) (3.8)
--------------------------

Loss from Continuing Operations (1,782) (2,220) 438
--------------------------
--------------------------


Hospitality Revenue

Hospitality revenue from continuing operations for the three months ended
March 31, 2007 increased by $0.5 million to $31.7 million (2006 - $31.2
million).


Three months ended March 31 2007 2006 Change Change(%)
($000's, except as otherwise noted)
----------------------------------------------------------------------------

Revenue (continuing operations)
Rooms 22,437 22,557 (120) (0.5)
Food and Beverage 5,835 5,769 66 1.1
Franchising and Management 787 417 370 88.7
Other 2,658 2,427 231 9.5
--------------------------
31,717 31,170 547 1.8
--------------------------
--------------------------


Rooms revenue decreased marginally by $0.1 million, or 0.5%, to $22.4 million (2006 - $22.5 million). The Grand Okanagan Resort and Conference Centre, the Travelodge Ottawa West, the Chimo Hotel, the Holiday Inn (The Palace) and the Best Western Village Park Inn produced particularly strong results, offset by lower rooms revenue at six of the Trust's hotels as described above.

Food and beverage revenue was consistent at $5.8 million.

Franchising and management revenue increased $0.4 million to $0.8 million (2006 - $0.4 million). Travelodge franchise fees increased relative to 2006 due primarily to the receipt of termination fees.

Other revenue increased $0.3 million to $2.7 million (2006 - $2.4 million), and includes revenue from telephone, retail sales, tenant lease, parking, and other minor operated departments.



Hospitality Expenses

Three months ended March 31 2007 2006 Change Change(%)
($000's, except as otherwise noted)
----------------------------------------------------------------------------

Hospitality Expenses 24,530 24,063 467 1.9


Total hospitality expenses increased $0.5 million, or 1.9%, to $24.5 million (2006 - $24.1 million). Operating expenses were steady as a percentage of revenue at 77.3% (2006 - 77.2%). The largest component of hospitality expenses is wages, which decreased overall as a percentage of hospitality revenue. In the first quarter of 2007, the Trust incurred a $0.2 million personnel restructuring cost. Utility costs were unchanged from 2006, despite the receipt of a utility credit of $0.1 million in the first quarter of 2006.



Hospitality Gross Margin

Three months ended March 31 2007 2006 Change Change(%)
($000's, except as otherwise noted)
----------------------------------------------------------------------------

Hospitality Gross Margin 7,187 7,107 80 1.1


Hospitality gross margin increased $0.1 million, or 1.1%, to $7.2 million in 2007 (2006 - $7.1 million). Gross margin as a percentage of revenue was steady at 22.7% (2006 - 22.8%).

Royal Private Residence Club

As at December 31, 2006, sales of 96.8% of the condominiums were closed. During the three months ended March 31, 2007, sales of 3.0% of the condominiums were closed, bringing cumulative sales to 99.8%. In 2007, the Trust recognized revenue from the sale of condominiums of $1.5 million and cost of sales of $1.5 million. The Trust does not anticipate recording any significant profits in 2007.

Other Expenses

As described herein under "Changes in Accounting Policies", commencing on January 1, 2007, interest on Convertible Debentures, mortgages and capital leases includes accretion of debt issuance costs. Interest on mortgages and capital leases for the three months ended March 31, 2007 increased $0.2 million to $2.9 million due to the recognition of $0.2 million of accretion of debt issuance costs (2006 - $nil) related to its mortgages. Interest on Convertible Debenture increased by $0.7 million as a result of additional Convertible Debentures issued in September 2006 and the recognition of accretion of Convertible Debentures' conversion options of $0.1 million (2006 - $nil) and debt issuance costs of $0.3 million (2006 - $nil).

Interest and investment income increased to $1.0 million (2006 - $0.2 million), a result of higher levels of cash on hand, an increase in overall investment rates and the realization of gains on the sales of marketable securities. The Trust also generated unrealized gains on marketable securities of $0.4 million (2006 - $nil).

Depreciation and amortization was unchanged at $3.8 million. In 2006, depreciation and amortization included $0.4 million of amortization of deferred debt issuance costs related to mortgages and convertible debentures. In 2007, due to the aforementioned change in accounting policy, accretion of debt issuance costs is included in interest on convertible debentures, mortgages and capital leases.

Trust administration decreased by $0.1 million to $0.4 million (2006 - $0.5 million), reflecting management's continued focus on costs.

Net Income (Loss), Other Comprehensive Income and Comprehensive Income (Loss)

The Trust's Loss from continuing operations for the three months ended March 31, 2007 was $1.8 million (2006 -$2.2 million). Income from discontinued operations was $4.1 million (2006 - $0.2 million) and included the Trust's timeshare and US hotel management businesses, in addition to the Sundial Inn, as described further below.

Net income was $2.3 million (2006 - net loss of $2.0 million). The Trust's other comprehensive loss is attributable to unrealized losses on marketable securities classified as available-for-sale. Comprehensive income (loss) for the three months ended March 31, 2007 was $2.3 million (2006 - loss of $2.0 million).

DISCONTINUED OPERATIONS AND PROPERTY HELD FOR SALE

The operations of properties and businesses that were disposed of during the three months ended March 31, 2007 or that are held for sale as at March 31, 2007, have been included in discontinued operations on the consolidated statements of net income (loss) and comprehensive income (loss) and reflected as assets and liabilities of discontinued operations and property held for sale on the consolidated balance sheets beginning in the year they are determined to be discontinued.

Effective January 1, 2007, Royal Host sold its US hotel management business, resulting in a gain on disposition of approximately $4.2 million.

Effective December 31, 2006, Royal Host sold its timeshare business for $1.2 million, resulting in a loss on disposition of $0.3 million.

Discontinued operations also include the 75-room Sundial Inn in Orillia, Ontario, for which Royal Host is seeking a buyer.



Income from Discontinued Operations

Three months ended
March 31
($000's, except as otherwise noted) 2007 2006

----------------------------------------------------------------------------

Revenue 145 1,111
Operating expenses 180 888
-------------------
Gross margin (35) 223
Other expenses 77 29
-------------------
Income (loss) before gain on disposition (112) 194
Gain on disposition 4,237 -
-------------------
Income from discontinued operations 4,125 194
-------------------
-------------------


Revenue from discontinued operations for the three months ended March 31, 2007 was $0.1 million (2006 - $1.1 million), down primarily due to the sale of the Trust's US hotel management business. Income from discontinued operations for the three months increased $3.9 million to $4.1 million (2006 - $0.2 million), due to the gain realized on the sale of the Trust's US hotel management business.

LIQUIDITY AND CAPITAL RESOURCES

As at March 31, 2007, the Trust had cash and cash equivalents of $44.0 million (December 31, 2006 - $92.1 million) and liquid marketable securities of $15.7 million (December 31, 2006 - $2.0 million). In addition, the Trust had undrawn credit facilities of $12.0 million.

The Trust also had restricted cash as at March 31, 2007 of $3.5 million (December 31, 2006 - $5.3 million). Restricted cash consists primarily of funds held by lenders pursuant to financing arrangements for future planned capital expenditures.

The 9.25% Convertible Debentures (RYL.DB) matured on March 1, 2007. Prior to maturity, $5.6 million of Convertible Debentures were converted into 0.8 million Trust Units. The Trust repaid the remaining $32.5 balance of this obligation upon maturity with funds on hand.

Royal Host's cash and marketable securities, together with its future cash flows, are expected to be sufficient to fund all anticipated cash requirements over the next year, including distributions, required debt repayments, planned capital investment and operating expenses.

As the Trust evaluates opportunities, it invests excess cash not required for daily operations in liquid income-earning instruments. As a result of the higher levels of cash available in 2007 and improved investment rates, the Trust realized interest and investment income of $1.0 million (2006 - $0.2 million).

Contractual Obligations

The following tables identify Royal Host's mortgages, obligations under capital leases and convertible debentures and the amounts due during the periods indicated:

Mortgages and Leases

As at March 31, 2007, the carrying value of the Trust's mortgages was $124.7 million, which is net of $1.5 million of debt issuance costs, for total outstanding principal of $126.2 million (December 31, 2006 - $126.9 million). The $2.2 million decrease is attributable to the classification of debt issuance costs effective January 1, 2007, and $0.8 million of mortgage principal repayments made during the three months ended March 31, 2007.



As at March 31, 2007
($000's) Total 2008 2009 2010 2011 2012 Thereafter
----------------------------------------------------------------------------

Mortgages 126,163 3,160 3,383 59,848 25,458 13,123 21,191
Capital Leases 972 481 235 81 81 81 13


Convertible Debentures

($000's) March 31, December 31, Maturity Date Conversion
2007 2006 Price
----------------------------------------------------------------------------

Current:
9.25% Convertible
Unsecured Subordinated - 38,021 March 2007 $7.00
-----------------------
-----------------------

Long-term:
9.25% Convertible
Unsecured Subordinated - -
7.90% Convertible
Unsecured Subordinated,
Series A 32,514 35,000 April 2009 $6.00
6.00% Convertible
Unsecured Subordinated,
Series B 59,415 58,464 October 2015 $6.85
6.25% Convertible
Unsecured Subordinated,
Series C 59,995 58,225 September 2013 $7.00
-----------------------
151,924 151,689
-----------------------
-----------------------


Royal Host's Convertible Debentures have a total outstanding balance of $151.9 million (December 31, 2006 -$151.7 million). The carrying value of the Convertible Debentures as at March 31, 2007 is $143.2 million, reflecting $5.6 million of debt issuance costs and conversion options.

As at March 31, 2007, the average maturity of mortgages was 3.5 years, the average maturity of Convertible Debentures was 6.4 years, and the average maturity of mortgages and Convertible Debentures combined was 5.1 years. As at March 31, 2007, Royal Host's debt had an average overall interest rate of 7.28% (December 31, 2006 - 7.52%).

During the two months prior to maturity on March 1, 2007, $5.6 million of the 9.25% Convertible Debentures were converted into 0.8 million Trust Units. On March 1, 2007, $32.5 million of the 9.25% Convertible Debentures were repaid and cancelled.

During the three months ended March 31, 2007, $2.2 million of the 7.90% Convertible Debentures were converted into 0.4 million Trust Units, and $0.6 million of the 6.00% Convertible Debentures were converted into 0.1 million Trust Units.

Subsequent to March 31, 2007, $0.2 million of the 7.90% Convertible Debentures were converted into 39,833 Trust Units and $30,000 of the 6.25% Convertible Debentures were converted into 4,285 Trust Units.

Investing Activities

During the three months ended March 31, 2007, the Trust's capital additions totalled $2.2 million (2006 - $1.3 million) and included the renovation of the waterpark at the Travelodge Medicine Hat and guest room renovations at the Travelodge Barrie on Bayfield. The total cash expended in the quarter related to capital was $3.1 million (2006 - $1.3 million).

A total of $2.5 million was drawn from restricted cash in the quarter for reimbursement of previous capital investment. Restricted cash, described above, is available for funding certain hotel capital expenditures.

Equity

During the three months ended March 31, 2007, equity increased $4.8 million to $92.0 million. The overall increase is attributable to net earnings of $2.3 million, the conversion of $8.3 million of convertible debentures into Trust Units, less $4.1 million of declared distributions and $2.0 million related to the repurchase of Trust Units under the Trust's Normal Course Issuer Bid (described below).

As at March 31, 2007, 25,521,091 Trust Units were issued and outstanding, and as at May 7, 2007, 25,314,629 Trust Units were issued and outstanding.

Normal Course Issuer Bid - Trust Units

Commencing on December 29, 2006, Royal Host initiated a Normal Course Issuer Bid ("NCIB") to repurchase a maximum of 2.0 million of its issued and outstanding Trust Units. During the three months ended March 31, 2007, 0.3 million Trust Units with an aggregate cost of $2.0 million (average cost of $7.00 per unit) were repurchased pursuant to this NCIB. Subsequent to March 31, 2007, 4,400 Trust Units with an aggregate cost of $31,155 (average cost of $7.08 per unit) were repurchased pursuant to this NCIB.

Cumulatively to May 7, 2007, Royal Host has repurchased 3.3 million Trust Units pursuant to its NCIBs at an average price of $6.15 per Unit.

Normal Course Issuer Bid - 9.25% Convertible Debentures

Commencing on July 17, 2006, Royal Host initiated an NCIB to repurchase up to $3.9 million principal amount of its issued and outstanding 9.25% Convertible Debentures. From January 1, 2007 through March 1, 2007, the maturity date, no debentures were repurchased pursuant to this NCIB. From commencement of the NCIB, Royal Host repurchased a total of $2.0 million of Convertible Debentures.

Normal Course Issuer Bid - 7.90% Convertible Debenture

Commencing on November 23, 2006, Royal Host initiated an NCIB to repurchase up to $3.5 million principal amount of its issued and outstanding 7.90% Convertible Debentures. During the three months ended March 31, 2007, Royal Host repurchased $0.3 million in principal balance with an aggregate cost of $0.4 million (average cost of $116.92) of 7.90% debentures pursuant to this NCIB. From commencement of the NCIB, Royal Host has repurchased $0.3 million in principal balance of the Convertible Debentures.

Normal Course Issuer Bid - 6.00% Convertible Debenture

Commencing on March 30, 2007, Royal Host initiated an NCIB to repurchase up to $5.9 million principal amount of its issued and outstanding 6.00% Convertible Debentures. No debentures have been repurchased pursuant to this NCIB.

Normal Course Issuer Bid - 6.25% Convertible Debenture

Commencing on March 30, 2007, Royal Host initiated an NCIB to repurchase up to $6.0 million principal amount of its issued and outstanding 6.25% Convertible Debentures. During the three months ended March 31, 2007, no debentures were repurchased. Subsequent to March 31, 2007, $0.1 million of debentures (average cost of $107.12) were repurchased pursuant to this NCIB.



SUMMARY OF QUARTERLY FINANCIAL RESULTS

($000's,
except as
otherwise 2007 2006 2005
noted) Q1 Q4 Q3 Q2 Q1 Q4 Q3 Q2
----------------------------------------------------------------------------

Revenue 31,717 37,468 93,653 37,658 31,170 33,834 40,049 36,916
---------------------------------------------------------------
---------------------------------------------------------------

Net Income
(Loss)
From
Continuing
Operations (1,782) 226 13,296 2,174 (2,220) (14) 3,032 2,112
From
Discontinued
Operations 4,125 (470) 643 415 194 (316) 577 202
---------------------------------------------------------------
2,343 (244) 13,939 2,589 (2,026) (330) 3,609 2,314
---------------------------------------------------------------
---------------------------------------------------------------

Per Unit
Results ($)

Income (Loss)
from
Continuing
Operations
Basic (0.07) 0.01 0.52 0.08 (0.09) - 0.11 0.08
Diluted (0.07) 0.01 0.31 0.08 (0.09) - 0.11 0.08

Income (Loss)
from Total
Operations
Basic 0.10 (0.01) 0.54 0.10 (0.08) (0.01) 0.13 0.08
Diluted 0.10 (0.01) 0.32 0.10 (0.08) (0.01) 0.13 0.08

Quarterly financial results as presented reflect the changes to discontinued
operations.


DISCLOSURE CONTROLS AND PROCEDURES

The President & Chief Operating Officer (acting as Chief Executive Officer for this purpose) and Chief Financial Officer evaluated the effectiveness of the Trust's disclosure controls and procedures as at March 31, 2007. Based on that evaluation, the President & Chief Operating Officer and the Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as at March 31, 2007 to provide reasonable assurance that material information relating to the Trust, including its consolidated subsidiaries, would be made known to them.

INTERNAL CONTROL OVER FINANCIAL REPORTING

There have been no changes in the Trust's internal control over financial reporting that occurred during the most recent interim period ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Trust's internal control over financial reporting.

Upon the adoption of new accounting standards described in "Changes in Accounting Policies", Royal Host is required to record certain financial instruments at fair market value, instead of the previously used amortized cost basis. Controls and procedures have been implemented by Royal Host to ensure the accuracy of recording these financial instruments using the fair market value basis of accounting.

KEY ACCOUNTING POLICIES AND ESTIMATES

Note 2 to the audited consolidated financial statements for the year ended December 31, 2006 includes a summary of the Trust's significant accounting policies. Effective January 1, 2007, Royal Host adopted new accounting policies related to financial instruments, as described further herein under "Changes in Accounting Policies".

The application of some of these policies requires the Trust to make estimates of future events that may have a material effect on current or future financial results. These estimates require experience and judgement and are subject to the inherent risk of inaccuracy, particularly where they relate to events that are expected to take place well into the future.

CHANGES IN ACCOUNTING POLICIES

Financial Instruments and Comprehensive Income

The Canadian Institute of Chartered Accountants ("CICA") issued new guidance related to financial instruments that are effective for the Trust commencing January 1, 2007.

CICA Handbook Section 3855, "Financial Instruments -- Recognition and Measurement" provides guidance on when a financial instrument must be recognized on the balance sheet and how it is to be measured. It also provides guidance on the presentation of gains and losses on financial instruments. The Trust has elected to apply the following treatment to each of its significant categories of financial instruments:



Cash equivalents Held-to-maturity
Marketable securities Held for trading or available-for-sale
Mortgages Amortized cost
Convertible debentures Amortized cost


CICA Handbook Section 1530, "Comprehensive Income" requires an entity to recognize certain unrealized gains and losses on financial instruments that are classified as available-for-sale in "other comprehensive income", an account included in unitholders' equity. When such gains and losses are realized, they are recognized in net income. During the three months ended March 31, 2007, Royal Host had unrealized losses on marketable securities classified as available-for-sale of $0.1 million.

Unrealized gains and losses on financial instruments classified as held for trading are recognized in net income based on the change in the fair market value of the financial instruments in the period.

For periods prior to January 1, 2007 Royal Host deferred and amortized debt issuance costs on a straight-line basis over the term of the loan. Commencing on January 1, 2007, debt issuance costs are no longer classified as assets on the balance sheet or amortized over the term of the debt. CICA Handbook Section 3855 "Financial Instruments - Recognition and Measurement" prescribes that under the effective interest method, debt issuance costs must be applied against the debt to which they relate. Over the term of the debt the long-term liability will increase to the face value of the debt, with the accretion being included in interest on mortgages or interest on convertible debentures on the Consolidated Statement of Net Income (Loss) and Comprehensive Income (Loss).

The adoption of these new accounting standards on January 1, 2007 has resulted in an adjustment to certain opening financial statement accounts. Prior periods' statements have not been restated for adoption of these new accounting standards. The adoption of the new accounting policies is done on a prospective basis. As a result of adopting these standards as at January 1, 2007 deferred debt issuance costs decreased from $7.4 million to $nil. Mortgages decreased from $126.9 million to $125.3 million, convertible debentures decreased from $189.7 million to $183.9 million and accumulated income increased by $0.1 million. The balances of cash and cash equivalents, and marketable securities were not impacted by the adoption of these new accounting policies.

RESTATEMENT

Royal Host's financial statements for the periods ended December 31, 2002 through June 30, 2006 included changes in property under development and minority interest in cash from investing activities on its Consolidated Statements of Cash Flows. Changes in property under development and minority interest have been retroactively restated to be reclassified and included in cash from operating activities. The effects of the reclassification are as follows: cash provided by (used in) operating activities for the three months ended March 31, 2006 decreased by $3.1 million to ($3.0 million) and cash used in investing activities for the three months ended March 31, 2006 increased by $3.1 million to ($1.2 million).

OFF BALANCE SHEET ARRANGEMENT

Royal Host had no undisclosed off balance sheet arrangements as at March 31, 2007.

RISKS AND UNCERTAINTIES

Royal Host's business is subject to various risks and uncertainties, which occur in the normal course of business that could adversely affect its earnings and cash flow, as well as its ability to make distributions to Unitholders. These risks include general economic risks, operating risks, competitive risks and environmental risks amongst others.

Additional information with respect to the risks and uncertainties to which Royal Host is subject is contained in its MD&A and Annual Information Form for the year ended December 31, 2006, which may be viewed on SEDAR at www.sedar.com.

On December 21, 2006, the Minister of Finance released for comment draft legislation concerning the taxation of certain publicly-traded trusts and partnerships. The legislation reflects proposals originally announced by the Minister on October 31, 2006. Under the proposed legislation, certain distributions will not be deductible by publicly-traded income trusts and partnerships, with the exception of certain real estate investment trusts and, as a result, these entities will, in effect, be taxed as corporations on the amount of the non-deductible distributions. For entities in existence on October 31, 2006, such as Royal Host, the proposed rules, if passed into law, would apply in four years in 2011. If the proposed legislation is passed into law in its current form, Royal Host will not qualify as a Real Estate Investment Trust.

BUSINESS ENVIRONMENT AND OUTLOOK

The hospitality industry experienced steady growth in 2006, and it is anticipated that growth will continue in 2007. Growth in demand is anticipated to exceed that of supply, resulting in anticipated improvements in RevPAR. Overall, Canada's general economic environment is strong and the hospitality industry's fundamentals remain sound.

Royal Host is in the fortunate position of having a strong balance sheet, a growing underlying business and a dedicated management team. The Trust is focused on owning, managing and franchising hotels in Canada and realizing value for its Unitholders.



ROYAL HOST REAL ESTATE INVESTMENT TRUST

Consolidated Interim Financial Statements
(unaudited)

For the three months ended March 31, 2007


ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
in $000's
unaudited)

As at
-----------------------
March 31, December 31,
2007 2006
---------- ------------
ASSETS
Current assets:
Cash and cash equivalents 43,990 92,144
Marketable securities 15,660 2,000
Accounts and notes receivable 8,577 9,529
Prepaid expenses 3,856 3,237
Inventories 3,145 3,174
Property under development 51 1,551
Assets of discontinued operations (Note 4) 181 4,285
Future income taxes (Note 12) 917 931
---------- ------------
76,377 116,851

Long-term notes receivable 44 47
Capital assets (Note 5) 306,808 308,396
Property held for sale (Note 4) 2,020 2,056
Restricted cash 3,518 5,261
Deferred debt issuance costs (Note 2) - 7,422
---------- ------------
388,767 440,033
---------- ------------
---------- ------------
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 14,249 16,421
Equity distributions payable 1,405 1,232
Interest accrued on convertible debentures 2,556 3,390
Mortgages (Note 6) 3,160 3,108
Convertible debentures (Notes 7 and 9) - 38,021
Obligations under capital leases (Note 8) 429 375
Other liabilities 2,264 2,288
Liabilities of discontinued operations (Note 4) 83 4,351
---------- ------------
24,146 69,186


Mortgages (Note 6) 121,519 123,820
Convertible debentures (Notes 7 and 9) 143,151 151,689
Obligations under capital leases (Note 8) 432 242
Deferred revenue 182 417
Future income taxes (Note 12) 7,366 7,479
---------- ------------
296,796 352,833

Unitholders' equity (Note 10) 91,971 87,200
---------- ------------
388,767 440,033
---------- ------------
---------- ------------

See accompanying Notes to the Interim Consolidated Financial Statements


ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss)
in $000's (except per unit amounts)
(unaudited)


Three Months Ended
----------- -----------
March 31, March 31,
2007 2006
----------- -----------
Hospitality revenue
Rooms 22,437 22,557
Food and beverage 5,835 5,769
Franchising and management 787 417
Other 2,658 2,427
----------- -----------
31,717 31,170

Hospitality expenses 24,530 24,063
----------- -----------

7,187 7,107
----------- -----------


Royal Private Residence Club (Note 3)
Revenue 1,498 -
Cost of sales 1,498 -
----------- -----------
- -
----------- -----------

Gross margin 7,187 7,107
----------- ----------

Other expenses
Trust administration 411 517
Interest on mortgages and capital leases 2,920 2,711
Interest on convertible debentures 3,210 2,479
Interest and investment income (1,041) (204)
Unrealized gain on marketable securities (Note 2) (362) -
Depreciation and amortization 3,816 3,802
Future income taxes recovery (Note 12) (19) (66)
Capital and other taxes 30 89
Loss (gain) on foreign currency translation 4 (1)
----------- -----------
8,969 9,327
----------- -----------

Loss from continuing operations (1,782) (2,220)

Income from discontinued operations (Note 4) 4,125 194
----------- -----------

Net income (loss) 2,343 (2,026)

Other comprehensive loss (Note 2) 32 -
----------- -----------

Comprehensive income (loss) 2,311 (2,026)
----------- -----------
----------- -----------
Basic per unit net earnings (loss) (Note 10)
- from continuing operations (0.07) (0.09)
- from discontinued operations 0.17 0.01
----------- -----------
0.10 (0.08)
----------- -----------
----------- -----------
Diluted per unit net earnings (loss) (Note 10)
- from continuing operations (0.07) (0.09)
- from discontinued operations 0.17 0.01
----------- -----------
0.10 (0.08)
----------- -----------
----------- -----------

See accompanying Notes to the Interim Consolidated Financial Statements


ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Unitholders' Equity in $000's
(unaudited)
--------- ------------ -------------
Trust Convertible Contributed
Units Equity Surplus
--------- ------------ -------------

Balance, December 31, 2005 217,541 1,680 2,824

Net loss - - -
Equity distributions
Trust units - - -
Issuance of trust units
pursuant to distribution
reinvestment plan 3 - -
Trust units repurchased
pursuant to normal
course issuer bid (Note 9) (2,559) - 1,216
Employee loans pursuant
to employee unit
purchase program (5) - 3
--------- ------------ -------------

Balance, March 31, 2006 214,980 1,680 4,043

Net income - - -
Equity distributions
Trust units - - -
Issuance of trust units
pursuant to distribution
reinvestment plan 9 - -
Issuance of trust units
pursuant to debenture
conversion option 5 - -
Trust units cancelled
pursuant to normal
course issuer bid (Note 9) (13,257) - 3,454
Employee loans pursuant to
employee unit purchase
program 38 - -
Conversion option related
to issued convertible
debentures - 1,800 -
--------- ------------ -------------

Balance, December 31,2006 201,775 3,480 7,497

Transitional adjustment on
adoption of new accounting
policy (Note 2) - - -
Comprehensive
income (loss) - - -
Equity distributions
Trust units - - -
Issuance of trust units
pursuant to distribution
reinvestment plan 3 - -
Issuance of trust units
pursuant to debenture
conversion option (Note 7) 8,323 - -
Trust units cancelled
pursuant to normal course
issuer bid (Note 9) (2,447) - 487
Employee loans pursuant to
employee unit purchase
program 124 - -
--------- ------------ -------------

Balance, March 31, 2007 207,778 3,480 7,984
--------- ------------ -------------
--------- ------------ -------------


------------ ------------- ------------- ---------
Accumulated
Other
Accumulated Comprehensive
Income Loss Distributions Total
------------ ------------- ------------- ---------
Balance, December 31, 2005 10,418 - (137,513) 94,950

Net loss (2,026) - - (2,026)
Equity distributions
Trust units - - (2,842) (2,842)
Issuance of trust units
pursuant to distribution
reinvestment plan - - - 3
Trust units repurchased
pursuant to normal
course issuer bid (Note 9) - - - (1,343)
Employee loans pursuant to
employee unit purchase
program - - - (2)
------------ ------------- ------------- ---------

Balance, March 31, 2006 8,392 - (140,355) 88,740

Net income 16,284 - - 16,284
Equity distributions
Trust units - - (9,873) (9,873)
Issuance of trust units
pursuant to distribution
reinvestment plan - - - 9
Issuance of trust units
pursuant to debenture
conversion option - - - 5
Trust units cancelled
pursuant to normal
course issuer bid (Note 9) (9,803)
Employee loans pursuant
to employee unit
purchase program - - - 38
Conversion option
related to issued
convertible debentures - - - 1,800
------------ ------------- ------------- ---------
Balance, December 31,2006 24,676 - (150,228) 87,200

Transitional adjustment
on adoption of new
accounting policy (Note 2) 111 - - 111
Comprehensive
income (loss) 2,343 (32) - 2,311
Equity distributions
Trust units - - (4,141) (4,141)
Issuance of trust units
pursuant to distribution
reinvestment plan - - - 3
Issuance of trust units
pursuant to debenture
conversion option (Note 7) - - - 8,323
Trust units cancelled
pursuant to normal
course issuer bid (Note 9) - - - (1,960)
Employee loans pursuant to
employee unit purchase
program - - - 124
------------ ------------- ------------- ---------
Balance, March 31, 2007 27,130 (32) (154,369) 91,971
------------ ------------- ------------- ---------
------------ ------------- ------------- ---------


Accumulated income and accumulated other comprehensive loss,
March 31, 2007 - $27,098

See accompanying Notes to the Interim Consolidated Financial Statements



ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows in $000's
(unaudited)


Three Months Ended
------------ ------------
March 31, March 31,
2007 2006
------------ ------------
(Restated -
See Note 13)
Operating activities
Loss from continuing operations (1,782) (2,220)
Items not affecting cash:
Depreciation and amortization 3,816 3,802
Future income taxes (19) (66)
Unrealized gain on marketable securities (Note 2) (362) -
Accretion of mortgages and convertible debentures
(Note 7 and 8) 582 30
------------ ------------
Cash flows provided by continuing operations 2,235 1,546
Cash flows provided by (used in) discontinued
operations (Note 4) (141) 161
Changes in non-cash working capital - continuing
operations (Note 11) (1,701) (1,246)
Changes in non-cash working capital - discontinued
operations (Note 4) (82) (390)
Decrease (increase) in property under development 1,500 (3,140)
Decrease in minority interest - 20
------------ ------------
1,811 (3,049)
------------ ------------
Financing activities
Redemption upon maturity of convertible debentures (32,469) -
Repurchase of convertible debentures pursuant to
normal course issuer bid (300) (800)
Principal repayments on mortgages and capital
leases (882) (859)
Repurchase of trust units pursuant to normal
course issuer bid (3,001) (1,343)
Equity distributions (3,968) (2,721)
Proceeds from repayment of employee unit purchase
program loan 124 -
------------ ------------
(40,496) (5,723)
------------ ------------
Investing activities
Purchase of marketable securities (14,267) -
Dispositions of marketable securities 937 -
Net cash on dispositions (Note 4) 5,251 451
Acquisition of capital assets (3,136) (1,278)
Decrease in restricted cash 1,743 (451)
Decrease in long-term notes receivable 3 90
------------ ------------
(9,469) (1,188)
------------ ------------

Decrease in cash and cash equivalents (48,154) (9,960)
Cash and cash equivalents, beginning of period 92,144 31,483
------------ ------------
Cash and cash equivalents, end of period 43,990 21,523
------------ ------------
------------ ------------
Cash interest paid
Mortgages and capital leases 2,569 2,721
Convertible debentures 3,620 1,829
------------ ------------
6,189 4,550
------------ ------------
------------ ------------

See accompanying Notes to the Interim Consolidated Financial Statements


ROYAL HOST REAL ESTATE INVESTMENT TRUST

Notes to the Interim Consolidated Financial Statements

(unaudited)

1. GENERAL INFORMATION

Royal Host Real Estate Investment Trust ("Royal Host" or the "Trust") was created pursuant to the Declaration of Trust dated August 27, 1997. Royal Host is an unincorporated open-end mutual fund trust established for the purpose of investing in hotel properties and hospitality businesses, under specified guidelines as defined under the Declaration of Trust.

2. CHANGE IN ACCOUNTING POLICY

These unaudited consolidated interim financial statements and notes have been prepared using the accounting policies that are consistent with the policies used in preparing the Trust's 2006 annual consolidated financial statements with the exception of the policies noted below. These financial statements do not include all disclosures required under Canadian generally accepted accounting principles for annual financial statements and should be read in conjunction with the annual consolidated financial statements.

(a) Financial Instruments and Comprehensive Income

The Canadian Institute of Chartered Accountants (CICA) has issued new guidance related to financial instruments that are effective for the Trust commencing January 1, 2007.

CICA Handbook Section 3855, "Financial Instruments - Recognition and Measurement " provides guidance on when a financial instrument must be recognized on the balance sheet and how it is to be measured. It also provides guidance on the presentation of gains and losses on financial instruments. The Trust has elected to apply the following treatment to each of its significant categories of financial instruments:



Cash equivalents Held-to-maturity
Marketable securities Held for trading or available-for-sale
Mortgages Amortized cost
Convertible debentures Amortized cost


CICA Handbook Section 1530, "Comprehensive Income" requires an entity to recognize unrealized gains and losses on financial instruments that are classified as available-for-sale in "other comprehensive income", an account included in unitholders' equity. When such gains and losses are realized they are recognized in net income. During the three months ended March 31, 2007, Royal Host had unrealized losses on marketable securities classified as available-for-sale of $0.1 million.

Unrealized gains or losses on financial instruments classified as held for trading are recognized in net income based on the change in the fair market value of the financial instrument in the period.

For periods prior to January 1, 2007 Royal Host deferred and amortized debt issuance costs on a straight-line basis over the term of the debt. Commencing January 1, 2007, debt issuance costs are no longer classified as assets on the balance sheet or amortized over the term of the debt. CICA Handbook Section 3855,"Financial Instruments - Recognition and Measurement" prescribes that under the effective interest method, debt issuance costs must be applied against the debt to which they relate. Over the term of the debt the long term liability will increase to the face value of the debt, with the accretion being included in interest on mortgages or interest on convertible debentures on the consolidated statement of net income (loss) and comprehensive income (loss).

The adoption of these new accounting standards on January 1, 2007 has resulted in an adjustment to certain opening financial statement accounts. Prior periods' statements have not been restated for the adoption of these new accounting policies. The adoption of the new accounting policies is done on a prospective basis. As a result of adopting these standards as at January 1, 2007 deferred debt issuance costs decreased from $7.4 million to $nil. Mortgages decreased from $126.9 million to $125.3 million, convertible debentures decreased from $189.7 million to $183.9 million and accumulated income increased by $0.1 million. These changes are the result of the implementation of the new accounting guidance described in the paragraph above. The balances of cash and cash equivalents, and marketable securities were not impacted by the adoption of these new policies.

3. ROYAL PRIVATE RESIDENCE CLUB

A subsidiary of Royal Host developed, for resale, the Royal Private Residence Club, a residential condominium, on a property adjacent to the Grand Okanagan Lakefront Resort and Conference Centre in Kelowna, British Columbia. Revenue and cost of sales (including commissions and other selling costs) are recorded at the time each condominium sale is closed, and title and possession have been transferred to the buyer

4. PROPERTY HELD FOR SALE, DISPOSAL OF LONG-LIVED ASSETS AND DISCONTINUED OPERATIONS

The operations of properties and businesses that were disposed of during the period ended March 31, 2007 or subsequent thereto, or that are held for sale as at March 31, 2007, have been included in discontinued operations on the consolidated statements of net income (loss) and comprehensive income (loss), and reflected as assets and liabilities of discontinued operations and property held for sale on the consolidated balance sheets.

Effective December 31, 2006, Royal Host sold its timeshare business unit for $1.2 million, resulting in a loss on disposition of $0.3 million.

During the period ending March 31, 2007, Royal Host sold its US management business, resulting in a gain on disposition of approximately $4.2 million.

On February 23, 2005, Royal Host completed the sale of its 50% interest in a hotel property located in Toronto, Ontario to a condominium developer. The net cost of winding up the business, to a maximum of $2.0 million, is to be reimbursed by the purchaser to Royal Host in the form of a non-interest bearing VTB mortgage (included in accounts receivable).

The Trust is actively seeking a buyer for a hotel property in Ontario. During the fourth quarter of 2006, the Trust recorded a property impairment provision in discontinued operations of $0.7 million relating to this property.

The following table sets forth the results of operations associated with the noted property held for sale and long-lived assets, separately reported as discontinued operations for the current and prior year.



(in $000's)
------------------------
March 31, March 31,
2007 2006
------------------------
Revenue
Rooms 80 104
Management 60 998
Other 5 9
------------------------
145 1,111

Operating expenses 180 888
------------------------

Gross margin (35) 223
------------------------

Other expenses
Depreciation and amortization 3 11
Future income taxes recovery (32) (44)
Capital and other taxes 75 49
Loss on foreign currency translation 31 13
------------------------
77 29
------------------------

Income (loss) before gain on disposition (112) 194

Gain on disposition 4,237 -
------------------------

Income from discontinued operations 4,125 194
------------------------
------------------------

Cash flows from discontinued operations, reported on the statement of cash
flows, are reconcilied to the earnings from discontinued operations as
follows:

(in $000's)
------------------------
March 31, March 31,
2007 2006
------------------------
Income from discontinued operations 4,125 194
Items not affecting cash:
Future income taxes recovery (32) (44)
Depreciation and amortization 3 11
Gain on disposition (4,237) -
------------------------
Cash flows provided by (used in) discontinued
operations (141) 161
------------------------
------------------------
Changes in non-cash working capital
Assets of discontinued operations 4,104 (294)
Liabilities of discontinued operations (4,186) (96)
------------------------
(82) (390)
------------------------
------------------------


5. CAPITAL ASSETS

(in $000's)
----------- ------------ ----------
Gross Book Accumulated Net Book
Value Amortization Value
----------- ------------ ----------
March 31, 2007

Buildings 321,993 73,307 248,686
Land 37,192 - 37,192
Furniture, fixtures, and equipment 49,191 40,093 9,098
Other 1,248 397 851
----------- ------------ ----------
409,624 113,797 295,827

Capital assets under development 3,193 - 3,193
Intangible assets:
Franchise rights and management contracts 27,414 19,626 7,788
----------- ------------ ----------
440,231 133,423 306,808
----------- ------------ ----------
----------- ------------ ----------

(in $000's)
----------- ------------ ----------
Gross Book Accumulated Net Book
Value Amortization Value
----------- ------------ ----------
December 31, 2006

Buildings 321,413 71,018 250,395
Land 37,192 - 37,192
Furniture, fixtures, and equipment 48,532 39,029 9,503
Other 1,247 381 866
----------- ------------ ----------
408,384 110,428 297,956

Capital assets under development 2,157 - 2,157
Intangible assets:
Franchise rights and management contracts 27,414 19,131 8,283
----------- ------------ ----------
437,955 129,559 308,396
----------- ------------ ----------
----------- ------------ ----------

During the three months ended March 31, 2007, capital additions to Royal
Host's hotel properties totalled $2.2 million (March 31, 2006 - $1.3
million).

6. MORTGAGES

(in $000's)
------------------------
March 31, December 31,
2007 2006
----------- ------------

Mortgages secured by hotel properties 124,679 126,928
Less: current portion 3,160 3,108
----------- ------------
121,519 123,820
----------- ------------
----------- ------------

Principal repayments required for the twelve months ending March 31:
(in $000's)
-----------
2008 3,160
2009 3,383
2010 59,848
2011 25,458
2012 13,123
Subsequent 21,191
-----------
Total principal outstanding 126,163
Debt issuance costs (1,484)
-----------
124,679
-----------
-----------


7. CONVERTIBLE DEBENTURES

(in $000's)
------------------------
March 31, December 31,
2007 2006
----------- ------------
9.25% Convertible Unsecured Subordinated Debentures - 38,021
7.90% Convertible Unsecured Subordinated
Debentures, Series A 31,708 35,000
6.00% Convertible Unsecured Subordinated
Debentures, Series B 55,601 58,464
6.25% Convertible Unsecured Subordinated
Debentures, Series C 55,842 58,225
----------- ------------
143,151 189,710
Less: current portion - 38,021
----------- ------------
143,151 151,689
----------- ------------
----------- ------------


Principal repayments required for the twelve months ending March 31:
(in $000's)
------------

2008 -
2009 -
2010 32,514
2011 -
2012 -
Subsequent 119,410
------------
Total principal outstanding 151,924
Debt issuance costs (5,571)
Equity conversion option (3,202)
------------
143,151
------------
------------


During the three months ended March 31, 2007, $5.6 million of Royal Host's 9.25% convertible unsecured subordinated debentures were converted into 793,140 trust units. The remaining $32.5 million of the 9.25% convertible unsecured subordinated debentures were redeemed upon maturity on March 1, 2007.

During the three months ended March 31, 2007, $2.2 million of Royal Host's 7.90% convertible unsecured subordinated debentures were converted into 364,330 trust units. Subsequent to March 31, 2007, $0.2 million of the debentures were converted into 39,833 trust units.

During the three months ended March 31, 2007, $0.6 million of Royal Host's 6.0% convertible unsecured subordinated debentures were converted into 85,399 trust units.

Subsequent to March 31, 2007, $30,000 of Royal Host's 6.25% convertible unsecured subordinated debentures were converted into 4,285 trust units.

8. OBLIGATIONS UNDER CAPITAL LEASES

Royal Host has entered into various capital lease obligations to acquire computers and furniture, fixtures, and equipment. The present values of future minimum lease payments under capital leases as at December 31, 2006 are as follows:



(in $000's)
------------------------
March 31, December 31,
2007 2006
----------- ------------
Present value of future minimum lease payments 861 617
Less: current portion of principal payments 429 375
----------- ------------
432 242
----------- ------------
----------- ------------

Total repayments required for the twelve months ending March 31:
(in $000's)
------------

2008 481
2009 235
2010 81
2011 81
2012 81
Subsequent 13
------------
Future minimum lease payments 972
Less: amounts representing interest 111
------------
Present value of future minimum lease payments 861
------------
------------


9. NORMAL COURSE ISSUER BIDS

(a) Trust Units

Commencing on December 29, 2006, Royal Host initiated a normal course issuer bid to repurchase a maximum of 2.0 million of its issued and outstanding trust units. During the three months ended March 31, 2007, 279,100 trust units with an aggregate cost of $2.0 million (average cost of $7.00 per unit) were repurchased pursuant to this bid. As at March 31, 2007, 28,100 of these units were cancelled with the remaining 251,000 units being cancelled subsequent thereto. Subsequent to March 31, 2007, 4,400 trust units with an aggregate cost of $31,155 (average cost of $7.08) were repurchased pursuant to this bid.

Commencing on December 29, 2005, Royal Host initiated a normal course issuer bid to repurchase a maximum of 1.8 million of its issued and outstanding trust units. During the three months ended March 31, 2006, Royal Host repurchased 225,700 trust units with an aggregate cost of $1.3 million (average cost of $5.93 per unit) pursuant to this bid.

(b) 9.25% Convertible Unsecured Subordinated Debentures

Commencing on July 17, 2006, Royal Host initiated a normal course issuer bid to repurchase up to $3.9 million in principal of its issued and outstanding 9.25% convertible debentures. During the three months ended March 31, 2007, no debentures were repurchased pursuant to this bid.

(c) 7.90% Convertible Unsecured Subordinated Debentures, Series A

Commencing on November 23, 2006, Royal Host initiated a normal course issuer bid to repurchase up to $3.5 million in principal of its issued and outstanding 7.90% convertible debentures. During the three months ended March 31, 2007, $0.3 million in principal of the 7.9% convertible debentures were repurchased with an aggregate cost of $0.4 million (average cost of $116.92) were repurchased pursuant to this bid. As at March 31, 2007 $0.3 million in principal of the 7.9% convertible debenture repurchases were not yet cancelled.

(d) 6.00% Convertible Unsecured Subordinated Debentures, Series B

Commencing on March 30, 2007, Royal Host initiated a normal course issuer bid to repurchase up to $5.9 million in principal of its issued and outstanding 6.00% convertible debentures. No debentures have been repurchased pursuant to this bid.

(e) 6.25% Convertible Unsecured Subordinated Debentures, Series C

Commencing on March 30, 2007, Royal Host initiated a normal course issuer bid to repurchase up to $6.0 million in principal of its issued and outstanding 6.25% convertible debentures. During the three months ended March 31, 2007, no debentures were repurchased pursuant to this bid. Subsequent to March 31, 2007 Royal Host repurchased and cancelled $0.1 million of debentures (average cost of $107.12).

10. PER UNIT CALCULATIONS

As at March 31, 2007, a total of 25,521,091 trust units (December 31, 2006 - 24,500,976) were issued and outstanding. Per unit computations are based on the weighted average number of trust units outstanding for the period.



----------- ------------ ----------
For the three months ended March 31, Weighted
2007: Average
Units Per Unit
(in $000's) (in 000's) ($)
----------- ------------ ----------

Basic loss - continuing operations (1,782) (0.07)
Basic earnings - discontinued operations 4,125 0.17
----------- ----------
Basic earnings - total operations 2,343 24,868 0.10
----------- ----------
----------- ----------

Diluted loss - continuing operations (1,782) (0.07)
Diluted earnings - discontinued operations 4,125 0.17
----------- ----------
Diluted earnings - total operations 2,343 24,868 0.10
----------- ------------ ----------
----------- ------------ ----------

----------- ------------ ----------
For the three months ended March 31, Weighted
2006: Average
Units Per Unit
(in $000's) (in 000's) ($)
----------- ------------ ----------

Basic loss - continuing operations (2,220) (0.09)
Basic earnings - discontinued operations 194 0.01
----------- ----------
Basic loss - total operations (2,026) 25,949 (0.08)
----------- ----------
----------- ----------

Diluted loss - continuing operations (2,220) (0.09)
Diluted earnings - discontinued
operations 194 0.01
----------- ----------
Diluted loss - total operations (2,026) 25,949 (0.08)
----------- ------------ ----------
----------- ------------ ----------

The diluted earnings per unit for the three months ended March 31, 2007 and
2006 exclude trust units related to the conversion options of the
convertible debentures into trust units because all of the conversions are
anti-dilutive.


11. CHANGES IN NON-CASH WORKING CAPITAL

(in $000's)
------------------------
March 31, March 31,
2007 2006
----------- ------------
(Increase) decrease in:
Accounts and notes receivable (88) (101)
Prepaid expenses (619) (417)
Inventories 29 16
----------- ------------
(678) (502)
----------- ------------

Increase (decrease) in:
Accounts payable and accrued liabilities 118 (1,051)
Interest accrued on convertible debentures (834) 620
Other liabilities (24) (102)
Deferred revenue (235) (92)
Future income taxes (48) (119)
----------- ------------
(1,023) (744)
----------- ------------

(1,701) (1,246)
----------- ------------
----------- ------------


12. FUTURE INCOME TAXES

The net future income tax liability is calculated
as follows: (in $000's)
------------------------
March 31, December 31,
2007 2006
----------- ------------

Tax assets relating to subsidiary operating losses
and temporary differences on current items 917 931
Tax liabilities relating to temporary differences
in long-term items (7,366) (7,479)
----------- ------------
(6,449) (6,548)
----------- ------------
----------- ------------


On December 21, 2006, the Minister of Finance released for comment draft legislation concerning the taxation of certain publicly traded trusts and partnerships. The legislation reflects proposals originally announced by the Minister on October 31, 2006. Under the proposed legislation, certain distributions will not be deductible to publicly traded income trusts and partnerships with the exception of real estate investment trusts and, as a result, these entities will in effect be taxed as corporations on the amount of non-deductible distributions. For entities in existence on October 31, 2006, such as the Trust, the proposed rules, if passed into law, would not apply until 2011.

13. COMPARATIVE FIGURES AND RESTATEMENT

Certain comparative figures have been reclassified to conform to the presentation adopted for 2007.

Royal Host's financial statements for the periods ended December 31, 2002 through June 30, 2006 included changes in property under development and minority interest in cash from investing activities on Royal Host's Consolidated Statements of Cash Flows. Changes in property under development and minority interest have been retroactively restated to be included in cash from operating activities. The effects of the restatement are as follows: cash provided by (used in) operating activities for the three months ended March 31, 2006 decreased by $3.1 million to ($3.0 million), and cash used in investing activities for the three months ended March 31, 2006 increased by $3.1 million to ($1.2 million).

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