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

Royal Host Real Estate Investment Trust

November 09, 2006 05:00 ET

Royal Host REIT Reports Record Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 9, 2006) - Royal Host Real Estate Investment Trust (TSX:RYL.UN) (TSX:RYL.DB) (TSX:RYL.DB.A) (TSX:RYL.DB.B) (TSX:RYL.DB.C) ("Royal Host" or the "Trust") today announced record financial results for the period ended September 30, 2006 as it realized net earnings from continuing operations for the three months of $13.9 million and for the nine months of $14.7 million. The trust also announced today that it has increased its monthly distribution to $0.05 per trust unit, an increase of 25%.

Net earnings from hospitality activities totaled $5.2 million in the third quarter, a 44.4% increase over 2005. Net earnings for the nine months from hospitality activities were $5.8 million, a 115.8% increase over 2005. In addition, during the third quarter of 2006, the Trust realized an $8.7 million profit on the Royal Private Residence Club ("PRC").

Hospitality revenue in the third quarter increased to $42.7 million bringing year-to-date revenue to $113.7 million, an increase of $4.3 million, or 4.0%, over the same period in 2005. Hospitality Gross Margin percentage increased to 36.9% in the third quarter (2005 - 36.0%) and increased to 31.2% (2005 - 30.1%) for the nine month period of 2006. The increases were driven by improved revenue per available room ("RevPAR") from continuing operations, which increased by 2.8% in the third quarter of 2006, attributable to a $4.77, or 4.8% increase in average daily rate ("ADR"). Year-to-date RevPAR from Continuing Operations grew by 4.1%, attributable to a healthy $4.20, or 4.5%, increase in ADR.

During the quarter the Trust completed the PRC development, a 71-unit luxury residential condominium project at the Grand Okanagan Resort in Kelowna. The Trust commenced closing sales of units in July, and as of today, the project is 99.8% sold. During the quarter, 92% of sales were closed and $8.7 million in profit was recorded.

Cash Available for Distribution increased by 114.9% to $17.4 million for the third quarter while Cash Available for Distribution for the nine months increased by $11.3 million to $23.2 million, or 94.4%. Basic Per Unit Cash Available for Distribution was $0.68 for the three months and $0.89 for the nine months of 2006, which compares to $0.30 and $0.46 generated for the three and nine month periods of 2005.

In September, the Trust completed a $60 million, 6.25% seven year Convertible Debenture (RYL.DB.C). As at September 30, 2006, the Trust had cash and short-term investments of $92.2 million, cash held in escrow of $8.2 million and undrawn credit facilities of $12.0 million. The Trust is currently reviewing various options for the deployment of funds including the repayment of debt and investment and acquisition opportunities with the goal of continuing to deliver long-term Unitholder value.

Mr. Mike Jackson, President and Chief Operating Officer of the Trust, stated, "I am very pleased with these record results, as they add to our positive trend. Our solid financial position, combined with favourable industry forecasts and our proven management performance, bodes well for Royal Host going forward. I would also like to congratulate our team on the completion of the Royal Private Residence Club in Kelowna, which has reinforced the resort's position as a world-class facility."

A conference call will be held on Friday, November 10, 2006 at 1:00 p.m. Eastern Standard Time. Investors and analysts are invited to access the call by dialing 1-888-334-7880 or 1-416-695-9714. 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 November 13 through November 17, 2006. To access this recording please dial 1-888-509-0081 or 1-416-695-5275 and provide the playback password 634114.

Royal Host's core businesses are hotel ownership, management and franchising. As at September 30, 2006, Royal Host owned 37 hotels (comprising 4,500 rooms), managed an additional 89 properties for third parties, and franchised 111 locations (including 16 owned by the Trust) under the Travelodge and Thriftlodge banners, for a total of 18,000 guestrooms in the economy, mid-market and upscale hospitality segments.

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", "RYL.DB.A", "RYL.DB.B" and "RYL.DB.C", respectively.


MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006

The following Management's Discussion and Analysis of Operations and Financial Condition ("MD&A") dated November 8, 2006 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 and nine months ended September 30, 2006 and the annual consolidated financial statements and accompanying MD&A for the year ended December 31, 2005. The unaudited interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and were prepared using accounting policies and methods of their application consistent with those used in the preparation of the Trust's audited consolidated financial statements for the year ended December 31, 2005.

FORWARD-LOOKING STATEMENTS

Certain statements in this MD&A, including those in the Outlook section, relate to periods commencing after September 30, 2006 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, including its Annual Information Form, is available at www.sedar.com.

HIGHLIGHTS

The Trust realized record results in the third quarter of 2006. Net earnings from hospitality activities totaled $5.2 million in the third quarter, a 44.4% increase over 2005. Net earnings for the nine months from hospitality activities were $5.8 million, a 115.8% increase over 2005. In addition, during the third quarter of 2006, the Trust realized an $8.7 million profit on the Royal Private Residence Club ("PRC"), bringing the Trust's total earnings from continuing operations for the nine months ended September 30, 2006 to $14.7 million.

- Basic per unit Cash Available for Distribution for the three months increased by 126.7% to $0.68 (2005 - $0.30) and for the nine months increased by 93.5% to $0.89 (2005 - $0.46).

- Distributions to Unitholders for the three months increased by 20.0% to $0.12 per unit (2005 - $0.10 per unit) and for the nine months increased by 25.0% to $0.35 (2005 - $0.28).

- Revenue from hotel operations increased to $42.7 million (2005 - $41.2 million) for the three months and to $113.7 million ($109.3 million) for the nine months. Gross margin from hotel operations increased to 36.9% (2005 - 36.0%) for the three months and increased to 31.2% (2005 - 30.1%) for the nine months.

- Revenue per Available Room for the three months increased 2.8% to $76.69 (2005 - $74.63) and for the nine months increased 4.1% to $66.53 (2005 - $63.91).

- Construction of PRC was completed in the third quarter of 2006, and sales of 92% of the condominiums were closed. Revenue from the sale of condominiums and the corresponding gross margin recognized in the third quarter of 2006 were $52.2 million and $8.7 million, respectively. To date, 99.8% of the condominiums have been sold.

- In September 2006, the Trust issued $60 million 6.25% convertible debentures that have a term of seven years. This, combined with the funds from PRC, leaves the Trust in a very strong financial position.

- The Trust actively repurchased its Trust Units pursuant to its Normal Course Issuer Bid, repurchasing 331,500 trust units with an aggregate cost of $2.0 million in the quarter, bringing cumulative repurchases for the nine months ended September 30, 2006 to 557,200 trust units with an aggregate cost of $3.4 million.

- The Trust announced a 25% increase in monthly distributions to unitholders to $0.05 per month commencing with the November 2006 distribution.



SELECTED FINANCIAL INFORMATION

Three months ended Nine months ended
September 30 September 30
($000's, except as Change Change
otherwise noted) 2006 2005 (%) 2006 2005 (%)
---------------------------------------------------------------------------

Hospitality Revenue
(continuing operations)
Rooms 31,131 30,317 2.7 80,654 77,478 4.1
Food and Beverage 6,290 6,110 2.9 19,266 18,937 1.7
Other 5,231 4,811 8.7 13,738 12,896 6.5
------------------ ------------------
42,652 41,238 3.4 113,658 109,311 4.0

Hospitality Expenses 26,899 26,393 1.9 78,156 76,438 2.2
------------------ ------------------
15,753 14,845 6.1 35,502 32,873 8.0
------------------ ------------------
Hospitality Gross
Margin % 36.9% 36.0% 31.2% 30.1%

Royal Private
Residence Club
Revenue 52,245 - 52,245 -
Cost of Sales 43,518 - 43,518 -
------------------ ------------------
8,727 - 8,727 -
------------------ ------------------

Gross Margin 24,480 14,845 64.9 44,229 32,873 34.5
------------------ ------------------

Net Earnings (Loss)
From Continuing
Operations 13,932 3,528 294.9 14,651 2,918 402.1
From Discontinued
Operations 7 81 (149) (242)
------------------ ------------------
13,939 3,609 286.2 14,502 2,676 441.9
------------------ ------------------
------------------ ------------------
Basic Per Unit
Net Earnings (Loss) ($)
From Continuing
Operations 0.54 0.13 0.56 0.10
From Discontinued
Operations - - (0.01) (0.01)
------------------ ------------------
0.54 0.13 315.4 0.55 0.09 511.1
------------------ ------------------
------------------ ------------------

Diluted Per Unit
Net Earnings (Loss) ($)
From Continuing
Operations 0.32 0.13 0.46 0.10
From Discontinued
Operations - - - (0.01)
------------------ ------------------
0.32 0.13 146.2 0.46 0.09 411.1
------------------ ------------------
------------------ ------------------

Cash Available For
Distribution 17,417 8,105 114.9 23,186 11,925 94.4
------------------ ------------------
------------------ ------------------

Distributions Declared
on Trust Units 3,083 2,717 13.5 9,004 7,292 23.5
------------------ ------------------
------------------ ------------------

Basic Per Unit Cash
Available For
Distribution ($) 0.68 0.30 126.7 0.89 0.46 93.5
------------------ ------------------
------------------ ------------------

Per Unit Distributions
Declared ($) 0.12 0.10 20.0 0.35 0.28 25.0
------------------ ------------------
------------------ ------------------

Weighted Average Number
of Trust Units
Outstanding (000's) 25,755 27,240 (5.5) 25,958 25,925 0.1
------------------ ------------------
------------------ ------------------


OVERVIEW

Royal Host's core businesses are hotel ownership, management and franchising. As at September 30, 2006, Royal Host owned 37 hotels (comprising 4,500 rooms), managed an additional 89 properties (8 in Canada, 79 in the United States and 2 in Mexico) for third parties, and franchised 111 locations (including 16 owned by the Trust) under the Travelodge and Thriftlodge banners, for a total of 18,000 guestrooms in the economy, mid-market and upscale hospitality segment.

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: Average Daily Rate ("ADR"), Occupancy, Revenue per Available Room ("RevPAR"), Cash Available for Distribution and Basic and Diluted Per Unit Cash Available for Distribution.

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:

- 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;

- 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; and

- 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 time period into the room revenue in the same period.

Cash Available for Distribution

Cash Available for Distribution is a non-GAAP financial measure commonly used by hotel real estate investment trusts and other Canadian income funds. As a "non-GAAP" measure, no standards exist for the calculation of Cash Available for Distribution and reporting practices vary widely.

Royal Host calculates Cash Available for Distribution as Cash from Operating Activities adjusted for changes in non-cash working capital balances; changes in its investment in PRC; distributions declared on its redeemable partnership units; and its provision for capital replacement. Royal Host considers this measure indicative of its cash available for distribution to Unitholders. This is a change from Royal Host's prior presentation in that the calculation's starting point previously was net earnings. The guidance issued by the Canadian Securities Administrators and the draft guidance issued by the Canadian Institute of Chartered Accountants consider distributable cash a cash flow measure and, as such, require that it be reconciled to Cash from Operating Activities. This change does not impact the Cash Available for Distribution as previously presented in prior periods.



Room Statistics - Total

Three months ended Nine months ended
September 30 September 30
Change Change
2006 2005 (%) 2006 2005 (%)
---------------------------------------------------------------------------
CONTINUING OPERATIONS
Occupancy 73.5% 75.0% (2.0) 67.5% 67.8% (0.4)
ADR $104.27 $99.50 4.8 $98.52 $94.32 4.5
RevPAR $ 76.69 $74.63 2.8 $66.53 $63.91 4.1

TOTAL OPERATIONS
Occupancy 72.8% 74.2% (1.9) 66.7% 66.3% 0.6
ADR $103.95 $99.23 4.8 $98.33 $93.89 4.7
RevPAR $ 75.71 $73.64 2.8 $65.55 $62.23 5.3


The third quarter of 2006 saw RevPAR from continuing operations increase by 2.8%. The increase resulted from a $4.77, or 4.8%, increase in ADR offset by a 2.0% decrease in Occupancy which was attributable to four of the Trust's properties. Year-to-date RevPAR from continuing operations grew by 4.1% in 2006, attributable to a $4.20 or 4.5% increase in ADR.



Room Statistics - By Region (Continuing Operations)

Three months ended Nine months ended
September 30 September 30
Change Change
2006 2005 (%) 2006 2005 (%)
---------------------------------------------------------------------------
ONTARIO (53% of
Rooms Revenue)
Occupancy 72.6% 72.2% 0.6 67.4% 66.3% 1.7
ADR $99.01 $96.80 2.3 $98.26 $95.62 2.8
RevPAR $71.90 $69.87 2.9 $66.25 $63.38 4.5


The Trust's Ontario region produced healthy rooms revenue. RevPAR for the three and nine months increased 2.9% and 4.5% over 2005. The London Hilton, the Holiday Inn Oakville, the Chimo Hotel in Ottawa and Travelodge Ottawa West all produced particularly strong results in the quarter.



Three months ended Nine months ended
September 30 September 30
Change Change
2006 2005 (%) 2006 2005 (%)
---------------------------------------------------------------------------
WESTERN (40% of
Rooms Revenue)
Occupancy 72.3% 76.3% (5.2) 66.0% 68.0% (2.9)
ADR $114.34 $104.91 9.0 $101.59 $94.67 7.3
RevPAR $ 82.67 $ 80.02 3.3 $ 67.05 $64.37 4.2


The Grand Okanagan Lakefront Resort and Conference Centre in Kelowna, the Best Western Village Park Inn in Calgary, the Holiday Inn (The Palace) in Edmonton and the Travelodge Fort Nelson all produced very strong results in the Trust's Western region. Three of the Trust's Southern Alberta limited service hotels and the Yellowknife Inn produce relatively weak rooms revenue.



Three months ended Nine months ended
September 30 September 30
Change Change
2006 2005 (%) 2006 2005 (%)
---------------------------------------------------------------------------
ATLANTIC (7% of
Rooms Revenue)
Occupancy 83.4% 85.7% (2.7) 72.3% 73.7% (1.9)
ADR $99.54 $98.40 1.2 $91.05 $89.33 1.9
RevPAR $83.00 $84.37 (1.6) $65.87 $65.80 -




Cash Available for Distribution

Three months ended Nine months ended
September 30 September 30
Change Change
2006 2005 (%) 2006 2005 (%)
---------------------------------------------------------------------------

Cash from Operating
Activities 51,166 6,973 48,593 (1,038)

Less:
Changes in Non-Cash
Working Capital 330 (2,211) 3,640 3,372
Distributions on
Redeemable Partnership
Units - - - (378)
Changes in investment
in PRC (32,582) 4,800 (25,050) 13,826
Provision for Capital
Replacement (1,497) (1,457) (3,997) (3,857)
------------------ ------------------

Cash Available for
Distribution 17,417 8,105 114.9 23,186 11,925 94.4
------------------ ------------------
------------------ ------------------

Distributions Declared 3,083 2,717 13.5 9,004 7,292 23.5
------------------ ------------------
------------------ ------------------

Basic Per Unit Cash
Available For
Distribution ($) 0.68 0.30 126.7 0.89 0.46 93.5
------------------ ------------------
------------------ ------------------
Diluted Per Unit Cash
Available For
Distribution ($) 0.38 0.25 52.0 0.61 0.43 41.9
------------------ ------------------
------------------ ------------------
Per Unit Distributions
Declared ($) 0.12 0.10 20.0 0.35 0.28 25.0
------------------ ------------------
------------------ ------------------


Cash Available for Distribution for the three months ended September 30, 2006 increased by 114.9% to $17.4 million (2005 - $8.1 million), and for the nine months ended September 30, 2006 increased by 94.4% to $23.2 million (2005 - $11.9 million).

For purposes of calculating Cash Available for Distribution, Cash from Operating Activities have been adjusted to exclude changes in non-cash working capital requirements as the Trust's working capital requirements are not permanent and will reverse based on seasonal fluctuations in working capital. Cash flows from operating activities have also been adjusted to exclude the changes in the Trust's investment in PRC as this is the recovery of its investment and recognizes only the profit from the project as cash available for distribution. 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 $1.5 million for the three months ended September 30, 2006 (2005 - $1.5 million) and $4.0 million for the nine months ended September 30, 2006 (2005 - $3.9 million). Royal Host considers the resulting measure, Cash Available for Distribution, as indicative of the Trust's Cash Available for Distribution to unitholders.

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. The PRC profit will be used to fund long-term initiatives and to support future distributions in meeting the Trust's stated objective of generating sustainable distributions. As a result of improving results, it was announced that the Trust will increase monthly distributions to $0.05 per month beginning in November 2006.

During the third quarter of 2006, the Trust declared monthly distributions on trust units of $0.04 per trust unit, or $3.1 million, an increase of 13.5% over the $2.7 million declared in 2005. During the nine months ended September 30, 2006, the Trust declared distributions on trust units of $9.0 million, an increase of 23.3% (2005 - $7.3 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.

During the third quarter of 2006, the Trust used cash on hand to make debt principal repayments of $8.2 million. The total amount of funds used for capital investment was $3.4 million, funded from cash from operations and restricted cash. During the nine month period, the Trust made total debt principal repayments of $18.0 million, as described further under "Liquidity and Capital Resources", spent $6.0 million on capital investment, and repurchased $3.4 million of Trust Units pursuant to its NCIB.

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 SEPTEMBER 30, 2006 (Continuing Operations)

Hospitality Revenue

Hospitality revenue from continuing operations in the third quarter of 2006 increased by $1.4 million to $42.7 million (2005 - $41.2 million).



Three months ended September 30
($000's, except as otherwise noted) 2006 2005 Change (%)
---------------------------------------------------------------------------

Hospitality Revenue
(continuing operations)
Rooms 31,131 30,317 814 2.7
Food and Beverage 6,290 6,110 180 2.9
Other 5,231 4,811 420 8.7
------------------------
42,652 41,238 1,414 3.4
------------------------
------------------------


Rooms revenue increased $0.8 million, or 2.7%, to $31.1 million (2005 - $30.3 million), a product of the 4.8% increase in ADR to $104.27 (2005 - $99.50), and the 2.0% decrease in Occupancy to 73.5% (2005 - 75.0%). The increase in ADR is a result of management's continued focus on managing room rate yield and improvement in overall industry rates. The Trust's Ontario region produced generally healthy rooms revenue, including strong results from the London Hilton. The Grand Okanagan Lakefront Resort and Conference Centre, the Best Western Village Park, the Holiday Inn (The Palace) and the Travelodge Fort Nelson produced strong results in the Trust's Western region, more than offsetting decreased rooms revenue in 2006 at certain of the Trust's Southern Alberta limited service hotels and the Yellowknife Inn.

Food and beverage revenue increased 2.9% to $6.3 million (2005 - $6.1 million).

Other hospitality revenue increased $0.4 million, or 8.7%, to $5.2 million (2005 - $4.8 million), attributable in part to the increase in third party management fees. Travelodge franchise fees were relatively constant from 2005.



Hospitality Expenses

Three months ended September 30 2006 2005 Change (%)
($000's, except as otherwise noted)
---------------------------------------------------------------------------

Hospitality Expenses 26,899 26,393 506 1.9


Total hospitality expenses increased $0.5 million to $26.9 million (2005 - $26.4 million). Hospitality expenses decreased as a percentage of hospitality revenue to 63.1% (2005 - 64.0%), reflecting the increase in ADR and the success of the operations team in managing costs.



Hospitality Gross Margin

Three months ended September 30
($000's, except as otherwise noted) 2006 2005 Change (%)
---------------------------------------------------------------------------

Gross Margin 15,753 14,845 908 6.1


Hospitality gross margin increased $0.9 million, or 6.1%, to $15.8 million in 2006 (2005 - $14.8 million), as a result of the higher overall revenue and lower incremental hospitality expenses. Gross margin as a percentage of hospitality revenue improved to 36.9% (2005 - 36.0%). These results are particularly noteworthy given the Trust's strong performance in the third quarter of 2005.

Royal Private Residence Club

During the third quarter of 2006, the Trust completed construction and closed the sales of 92% of the condominiums. Revenue and cost of sales are recorded at the time each condominium is closed and title and possession have been transferred to the buyer. The Trust recognized revenue from the sale of condominiums of $52.2 million, cost of sales of $43.5 million and gross margin of $8.7 million. Currently, 99.8% of the condominiums have been sold.

Other Expenses

Other expenses decreased $0.8 million to $10.5 million (2005 - $11.3 million). Mortgage repayments in 2005 resulted in a $0.7 million decrease in interest on mortgages and capital leases. This was offset by an increase in convertible debenture interest of $1.1 million, a result of the $60 million debenture issued in the fourth quarter of 2005. Trust administration was in line with 2005. In the third quarter, the Trust also recorded a future income tax expense of $1.1 million (2005 - $1.6 million). In the third quarter of 2005, the Trust recorded a $0.6 million property impairment provision.

Net Earnings

Earnings from continuing operations, excluding the $8.7 million contribution from PRC, totaled $5.2 million, a 47.5% increase over 2005. Earnings from continuing operations, including the contribution from PRC, increased $10.4 million to $13.9 million (2005 - $3.5 million). Net earnings from total operations in 2006 also increased to $13.9 million, compared to net earnings from total operations of $3.6 million in 2005.

NINE MONTHS ENDED SEPTEMBER 30, 2006 (Continuing Operations)

Hospitality Revenue

Hospitality revenue from continuing operations for the nine months of 2006 increased by $4.3 million to $113.7 million (2005 - $109.3 million).



Nine months ended September 30 Change
($000's, except as otherwise noted) 2006 2005 Change (%)
---------------------------------------------------------------------------
Hospitality Revenue (continuing
operations)
Rooms 80,654 77,478 3,176 4.1
Food and Beverage 19,266 18,937 329 1.7
Other 13,738 12,896 842 6.5
-----------------------------------
113,658 109,311 4,347 4.0
-----------------------------------
-----------------------------------


Rooms revenue increased $3.2 million, or 4.1%, to $80.7 million (2005 - $77.5 million), a result of the 4.5% increase in ADR to $98.52 (2005 - $94.32). The increase in ADR is a result of management's continued focus on managing room rate yield and the improvement in overall industry rates. The Grand Okanagan Resort and Conference Centre, the London Hilton, the Best Western Village Park Inn and the Holiday Inn (The Palace) produced particularly strong results, more than offsetting lower rooms revenue at the Yellowknife Inn and certain of the Trust's Southern Alberta limited service hotels.

Food and beverage revenue increased $0.3 million, or 1.7%, to $19.3 million (2005 - $18.9 million).

Other hospitality revenue increased $0.8 million, or 6.5%, to $13.7 million (2005 - $12.9 million), attributable to an increase in third-party management fees. Travelodge franchise fees were consistent with 2005.



Hospitality Expenses

Nine months ended September 30 Change
($000's, except as otherwise noted) 2006 2005 Change (%)
---------------------------------------------------------------------------
Hospitality Expenses 78,156 76,438 1,718 2.2


Total hospitality expenses increased $1.7 million, or 2.2%, to $78.2 million (2005 - $76.4 million). Hospitality expenses decreased as a percentage of hospitality revenue to 68.8% (2005 - 69.9%). Utility costs for the period decreased modestly from 2005.



Hospitality Gross Margin

Nine months ended September 30 Change
($000's, except as otherwise noted) 2006 2005 Change (%)
---------------------------------------------------------------------------
Hospitality Gross Margin 35,502 32,873 2,629 8.0


Hospitality gross margin increased $2.6 million, or 8.0%, to $35.5 million in 2006, which compares to $32.9 million in 2005, as a result of the higher overall revenue and lower incremental hospitality expenses. Gross margin as a percentage of hospitality revenue improved to 31.2% (2005 - 30.1%).

Royal Private Residence Club

As described above, the Trust recognized revenue from the sale of condominiums of $52.2 million, cost of sales of $43.5 million and gross margin of $8.7 million in 2006.

Other Expenses

Other expenses decreased $0.4 million. Interest on mortgages and capital leases decreased by $2.2 million and convertible debenture interest increased by $2.8 million. Trust administration was unchanged at $1.6 million (2005 - $1.6 million). The Trust recorded a future income tax expense of $1.1 million in 2006 (2005 - $1.3 million). The nine months ended September 30, 2005 includes a $1.0 million property impairment provision.

Net Earnings

The Trust's earnings from continuing operations for the nine months ended September 30, 2006 of $14.7 million was a significant improvement over the $2.9 million for the nine months ended September 30, 2005, primarily due to the recognition of profit on PRC in 2006. Net earnings from total operations in 2006 increased to $14.5 million, compared to net earnings from total operations of $2.7 million in 2005. Earnings excluding the PRC profit were $5.8 million, a healthy115.8% increase over 2005.

PROPERTY HELD FOR SALE AND DISCONTINUED OPERATIONS

Discontinued operations consist primarily of two properties. On February 23, 2005, Royal Host sold the Travelodge North York hotel, and Royal Host continues to actively seek a buyer for its 95-room Travelodge Orillia. Property held for sale on the Trust's Consolidated Balance Sheets represents the Travelodge Orillia.

Revenue from discontinued operations for the three months ended September 30, 2006 was $0.3 million, attributable entirely to the Travelodge Orillia (2005 - $0.2 million). Earnings from discontinued operations for the three months ended September 30, 2006 totaled $Nil (2005 - $0.1 million), and the loss from discontinued operations for the nine months ended September 30, 2006 was $0.2 million (2005 - $0.2 million).

ROYAL PRIVATE RESIDENCE CLUB

In the third quarter of 2006, the Trust completed construction of PRC, a 71-unit luxury condominium development being developed adjacent to the Grand Okanagan Lakefront Resort and Conference Centre, and commenced closing of sales of the condominiums. As at September 30, 2006, sales of 92% of the condominiums were closed. Currently, 99.8% of the condominiums have been sold.

In the third quarter of 2006, the Trust recognized revenue from the sale of condominiums of $52.2 million and cost of sales of $43.5 million, producing a gross margin of $8.7 million.

During the three months ended September 30, 2006, the Trust also repaid the $7.4 million PRC construction loan, which retired all of the debt associated with the project.

LIQUIDITY AND CAPITAL RESOURCES

As at September 30, 2006, the Trust had cash and short-term investments of $92.2 million, cash held in escrow of $8.2 million and undrawn credit facilities of $12.0 million. Subsequent to September 30, 2005, $5.8 million of the cash held in escrow was received by the Trust.

The 9.25% convertible debentures (RYL.DB) mature in March 2007 and, accordingly, have been classified as a current liability as at September 30, 2006. With funds on hand, the Trust has the financial capacity to repay this obligation when it matures. In addition to planning for the retirement of this obligation, the Trust is currently reviewing various options for the deployment of funds including the repayment of debt and investment and acquisition opportunities with the goal of continuing to maximize Unitholder value over the longer term.

In addition, the Trust had restricted cash as at September 30, 2006 of $5.9 million (December 31, 2005 - $6.0 million). Restricted cash consists primarily of funds held by lenders pursuant to financing arrangements for future planned capital expenditures.

Royal Host's cash and short-term investments, together with its future cash flows, are expected to be sufficient to fund all anticipated cash requirements over the next year.

Financing Activities

As at September 30, 2006, the Trust's mortgages totaled $127.6 million (December 31, 2005 - $145.2 million). During the nine months ended September 30, 2006, the $7.4 million PRC construction loan and the $8.0 million PRC mezzanine loan were repaid in full, and $2.6 of additional mortgage principal repayments were made.

In September 2006, the Trust issued $60.0 million of convertible debentures (RYL.DB.C). The convertible debentures bear interest at 6.25% per annum and have a term of seven years.

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 September 30, 2006
($000's) Total 2007 2008 2009 2010 2011 Thereafter
---------------------------------------------------------------------------
Mortgages 127,647 3,036 3,269 3,502 82,640 11,994 23,206
Capital Leases 707 375 332 - - - -


Convertible Debentures

($000's) September 30, December 31, Maturity Date Conversion
2006 2005 Price
---------------------------------------------------------------------------
9.25% Convertible March 2007
Unsecured
Subordinated 38,493 39,712 $ 7.00
7.90% Convertible April 2009
Unsecured
Subordinated,
Series A 35,000 35,000 $ 6.00
6.00% Convertible October 2015
Unsecured
Subordinated,
Series B 58,432 58,340 $ 6.85
6.25% Convertible September 2013
Unsecured
Subordinated,
Series C 58,200 - $ 7.00
--------------------------
190,125 133,052
--------------------------
--------------------------


As at September 30, 2006, the average maturity of mortgages was 4.0 years, the average maturity of convertible debentures was 5.5 years, and the average maturity of mortgages and convertible debentures combined was 4.9 years. As at September 30, 2006, Royal Host's overall debt had an average interest rate of 7.52% (December 31, 2005 - 7.83%).

Investing Activities

During the three and nine months ended September 30, 2006, the Trust spent $2.9 million and $6.2 million, respectively, on capital expenditures (2005 - $2.3 million and $5.1 million, respectively), including guest room and exterior upgrades at several of the Trust's hotels. In addition, capital assets increased by $1.2 million as a result of the parkade addition at the Grand Okanagan Resort in connection with the completion of PRC.

As at September 30, 2006, the Trust has invested $6.2 million and made project commitments of an additional $4.5 million. In addition to its anticipated 2006 provision for capital replacement of $5.4 million, the Trust is investing funds in certain properties to improve their overall market position. Restricted cash, described above, is available for funding certain hotel capital expenditures.

Equity

During the three months ended September 30, 2006, equity increased $10.6 million to $98.9 million. The increase is attributable to net earnings of $13.9 million and the recognition of a $1.8 million equity element related to the conversion option of the $60.0 million convertible debenture issued in the third quarter of 2006. These items were offset by $3.1 million of declared distributions and $2.0 million related to the repurchase of 331,500 Trust Units under the Trust's Normal Course Issuer Bid (described below).

During the nine months ended September 30, 2006, equity increased $4.0 million to $98.9 million. The increase is attributable to net earnings of $14.5 million and the recognition of the aforementioned $1.8 million equity element, offset by $9.0 million of declared distributions and $3.4 million related to the repurchase of 557,200 Trust Units.

As at September 30, 2006, 25,547,581 trust units were issued and outstanding, and as at November 8, 2006, 25,220,795 trust units were issued and outstanding.

Normal Course Issuer Bid - Trust Units

Commencing on December 29, 2005, Royal Host initiated a Normal Course Issuer Bid ("NCIB") to repurchase a maximum of 1.8 million of its issued and outstanding trust units. During the three months ended September 30, 2006, 331,500 trust units were repurchased at an aggregate cost of $2.0 million (average cost of $6.07 per unit). During the nine months ended September 30, 2006, and cumulatively to September 30, 2006, 557,200 trust units have been repurchased at an aggregate cost of $3.4 million (average cost of $6.01 per unit). Subsequent to September 30, 2006, Royal Host repurchased 542,200 trust units at an aggregate cost of $3.3 million (average cost of $6.10 per unit). As at November 8, 2006, 2,299,400 trust units have been repurchased at an aggregate cost of $13.7 million (average cost of $5.98 per unit), including 1,200,000 trust units repurchased at an aggregate cost of $7.1 million (average cost of $5.90 per unit) in 2005 pursuant to the preceding NCIB commencing December 21, 2004.

Normal Course Issuer Bids - 9.25% Convertible Debentures

Commencing on July 17, 2006, Royal Host initiated a NCIB to repurchase up to $3.9 million principal amount of its issued and outstanding 9.25% Convertible Debentures. During the three and nine months ended September 30, 2006, Royal Host repurchased $0.4 million of Convertible Debentures at an average cost of $101.95 per debenture. Subsequent to September 30, 2006, Royal Host repurchased $0.5 million of Convertible Debentures at an average cost of $101.82 per debenture.

Commencing on July 15, 2005, Royal Host initiated a NCIB to repurchase up to $2.0 million principal amount of its issued and outstanding 9.25% Convertible Debentures. During the three months ended September 30, 2006, no Convertible Debentures were repurchased pursuant to this NCIB. During the nine months ended September 30, 2006, Royal Host repurchased $0.8 million of Convertible Debentures at an average cost of $104.00 per debenture. From commencement of the NCIB to expiration on July 15, 2006, Royal Host repurchased $1.1 million of Convertible Debentures.

As at November 8, 2006, a total of $2.0 million of Convertible Debentures have been repurchased pursuant to the NCIBs.



SUMMARY OF QUARTERLY FINANCIAL RESULTS


($000's,
except as
otherwise 2006 2005 2004
noted) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Revenue 94,897 38,839 32,168 34,988 41,238 37,998 30,075 33,330

Net
Earnings
(Loss)
From
Continuing
Operations 13,932 2,673 (1,953) (336) 3,528 2,528 (3,138) (6,246)
From
Discontinued
Operations 7 (83) (73) 6 81 (214) (109) 205
--------------------------------------------------------------
13,939 2,590 (2,026) (330) 3,609 2,314 (3,247) (6,041)
--------------------------------------------------------------
--------------------------------------------------------------

Per Unit
Results ($)

Earnings
(Loss) from
Continuing
Operations
Basic 0.54 0.10 (0.08) (0.01) 0.13 0.09 (0.14) (0.26)
Diluted 0.32 0.10 (0.08) (0.01) 0.13 0.09 (0.14) (0.26)

Earnings
(Loss) from
Total
Operations
Basic 0.54 0.10 (0.08) (0.01) 0.13 0.08 (0.14) (0.25)
Diluted 0.32 0.10 (0.08) (0.01) 0.13 0.08 (0.14) (0.25)


KEY ACCOUNTING POLICIES AND ESTIMATES

Note 2 to the audited consolidated financial statements for the year ended December 31, 2005 includes a summary of the Trust's significant 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.

RESTATEMENT

Royal Host's financial statements for the periods ended December 31, 2002 through June 30, 2006 included changes in property under development in cash from investing activities on its Consolidated Statements of Cash Flows. Changes in property under development have been retroactively restated to be included in cash from operating activities. The effects of the restatement are as follows: cash from operating activities for the three and nine months ended September 30, 2005 decreased by $4,800,000 to $6,973,000 and decreased by $13,826,000 to ($1,038,000), respectively; and cash from investment activities for the three and nine months ended September 30, 2005 increased by $4,800,000 to ($2,305,000) and increased by $13,826,000 to $1,366,000, respectively.

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, environmental risks, and development risks amongst others.

The risks and uncertainties facing the Trust's operations are described in the Trust's MD&A and Annual Information Form for the year ended December 31, 2005, which may be viewed on SEDAR at www.sedar.com.

BUSINESS ENVIRONMENT AND OUTLOOK

The hospitality industry experienced a steady recovery in 2005 and the first nine months of 2006, and it is anticipated that growth will continue through the remainder of 2006 and 2007. Growth in demand is anticipated to exceed that of supply, resulting in anticipated improvements in Occupancy and ADR. Pannell Kerr Forster, a recognized industry consultant, has projected national RevPAR growth of 4.8% and growth in industry-wide profitability of 5.8% in 2007.

The Trust has achieved several significant accomplishments in the first nine months of 2006. It delivered strong operating results, successfully completed PRC and closed a $60 million convertible debenture offering, leaving the Trust in an even stronger financial position. The Trust intends to use its funds to repay debt and reinvest in its properties. The Trust also has substantial resources and capacity, allowing it to target and complete accretive opportunities it identifies.

On October 31, 2006 the Department of Finance (Canada) introduced modifications to the income tax rules that will result in the taxation of distributions made by publicly traded income trusts and limited partnerships beginning in the year 2011. These measures result in the application of a tax to income trusts similar to that applied to corporations and apply a tax to taxable distributions similar to that applied to dividends on shares of a corporation. Management is reviewing the potential impact of these proposed changes. Management is, however, confident that the inherent value of the Trust's hotel properties is not impacted by the proposed changes and will continue to work to maximize its cash available for distribution.

Overall, Canada's general economic environment is strong and the hospitality industry's fundamentals remain sound. Royal Host views the remainder of 2006 and 2007 with optimism, and with its solid foundation, is well positioned to continue to deliver increased value to its unitholders.



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

As at
-----------------------------
September 30, December 31,
2006 2005
-----------------------------

ASSETS
Current assets:
Cash and short-term investments 92,169 31,483
Cash held in escrow(Note 3) 8,197 -
Accounts and notes receivable 13,996 12,291
Prepaid expenses 4,259 3,484
Inventories 3,156 3,150
Assets of discontinued operations(Note 4) 232 188
Property under development(Note 3) 3,471 37,908
Future income taxes 824 3,100
-----------------------------
126,304 91,604

Restricted cash 5,935 6,033
Long-term notes receivable 62 190
Capital assets(Note 5) 310,387 314,102
Property held for sale(Notes 4 and 13) 2,704 2,704
Deferred debt issuance costs 7,806 6,371
-----------------------------
453,198 421,004
-----------------------------
-----------------------------

LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 21,973 22,905
Equity distributions payable 1,030 924
Interest accrued on convertible debentures 3,063 2,429
Mortgages(Note 6) 3,036 18,304
Convertible debentures(Notes 7 and 9) 38,493 -
Obligations under capital leases(Note 8) 375 443
Other liabilities 1,677 2,086
Liabilities of discontinued
operations (Note 4) 35 58
-----------------------------
69,682 47,149

Mortgages(Note 6) 124,611 126,922
Convertible debentures(Notes 7 and 9) 151,632 133,052
Obligations under capital leases(Note 8) 332 660
Deferred revenue 318 639
Future income taxes 7,706 9,041
-----------------------------
354,281 317,463

Minority interest(Note 3) - 8,591

Unitholders' equity(Notes 9 and 11) 98,917 94,950
-----------------------------
453,198 421,004
-----------------------------
-----------------------------

See accompanying Notes to the Interim Consolidated Financial Statements.



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

Three Months Ended Nine Months Ended
----------------------------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
----------------------------------------------------------

Hospitality revenue
Rooms 31,131 30,317 80,654 77,478
Food and beverage 6,290 6,110 19,266 18,937
Other 5,231 4,811 13,738 12,896
----------------------------------------------------------
42,652 41,238 113,658 109,311

Hospitality expenses 26,899 26,393 78,156 76,438
----------------------------------------------------------
15,753 14,845 35,502 32,873
----------------------------------------------------------

Royal Private
Residence Club(Note 3)
Revenue 52,245 - 52,245 -
Cost of sales 43,518 - 43,518 -
----------------------------------------------------------
8,727 - 8,727 -
----------------------------------------------------------

Gross margin 24,480 14,845 44,229 32,873
----------------------------------------------------------

Other expenses
Trust
administration 451 433 1,563 1,615
Interest on
mortgages and
capital leases 2,398 3,092 7,445 9,661
Interest on
convertible
debentures 2,672 1,605 7,630 4,853
Depreciation
and amortization 3,889 3,790 11,534 11,306
Property impairment
provision(Note 10) - 590 - 980
Future income taxes 1,055 1,627 1,055 1,271
Capital and other
taxes 80 49 268 155
Loss on foreign
currency translation 3 131 83 114
----------------------------------------------------------
10,548 11,317 29,578 29,955
----------------------------------------------------------

Earnings from
continuing
operations 13,932 3,528 14,651 2,918

Earnings (loss)
from discontinued
operations(Note 4) 7 81 (149) (242)
----------------------------------------------------------

Net earnings 13,939 3,609 14,502 2,676
----------------------------------------------------------
----------------------------------------------------------

Basic per unit
net earnings
(loss)(Note 11)
- from continuing
operations 0.54 0.13 0.56 0.10
- from discontinued
operations - - (0.01) (0.01)
----------------------------------------------------------
0.54 0.13 0.55 0.09
----------------------------------------------------------
----------------------------------------------------------

Diluted per unit
net earnings
(loss)(Note 11)
- from continuing
operations 0.32 0.13 0.46 0.10
- from discontinued
operations - - - (0.01)
----------------------------------------------------------
0.32 0.13 0.46 0.09
----------------------------------------------------------
----------------------------------------------------------

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 Accumulated
Units Equity Surplus Earnings
---------------------------------------------------

Balance, December 31,
2004 202,037 27,500 89 8,072

Net earnings - - - 2,676
Equity distributions
Trust units - - - -
Redeemable partnership
units - - - -
Issuance of trust units
pursuant to redemption
of redeemable
partnership units 25,085 (27,500) - -
Issuance of trust units
pursuant to
distribution reinvestment
plan 255 - - -
Employee loans pursuant to
employee unit purchase
program - - 13 -
Trust units cancelled
pursuant to normal course
issuer bid (901) - 360 -
Trust units repurchased
pursuant to normal
course issuer bid (2,242) - -
---------------------------------------------------

Balance, September 30,
2005 224,234 - 462 10,748

Net earnings - - - (330)
Equity distributions
Trust units - - - -
Issuance of trust units
pursuant to distribution
reinvestment plan 2 - - -
Trust units cancelled
pursuant to normal
course issuer bid(Note 9) (5,410) - 2,353
Trust units repurchased
pursuant to normal
course issuer bid(Note 9) (1,270) - - -
Employee loans pursuant
to employee unit
purchase program - - 9 -
Restatement of convertible
debenture issuance costs (15) - - -
Conversion option related
to issued convertible
debentures - 1,680 - -
---------------------------------------------------

Balance, December 31,
2005 217,541 1,680 2,824 10,418

Net earnings - - - 14,502
Equity distributions
Trust units - - - -
Issuance of trust units
pursuant to distribution
reinvestment plan 9 - - -
Trust units cancelled
pursuant to normal
course issuer bid(Note 9) (5,441) - 2,076 -
Employee loans pursuant
to employee unit
purchase program 22 - 3 -
Conversion option
related to issued
convertible debentures - 1,800 - -
---------------------------------------------------

Balance, September 30,
2006 212,131 3,480 4,903 24,920
---------------------------------------------------
---------------------------------------------------

See accompanying Notes to the Interim Consolidated Financial Statements.



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


---------------------------------------------------
Distributions Total
---------------------------------------------------

Balance, December 31, 2004 (127,091) 110,607

Net earnings - 2,676
Equity distributions
Trust units (7,292) (7,292)
Redeemable partnership units (378) (378)
Issuance of trust units
pursuant to redemption
of redeemable partnership units - (2,415)
Issuance of trust units
pursuant to distribution
reinvestment plan - 255
Employee loans pursuant to
employee unit purchase program - 13
Trust units cancelled pursuant to
normal course issuer bid - (541)
Trust units repurchased pursuant
to normal course issuer bid - (2,242)
---------------------------------------------------

Balance, September 30, 2005 (134,761) 100,683

Net earnings - (330)
Equity distributions
Trust units (2,752) (2,752)
Issuance of trust units
pursuant to distribution
reinvestment plan - 2
Trust units cancelled pursuant to
course issuer bid(Note 9) (3,057)
Trust units repurchased pursuant
to normal course issuer bid(Note 9) - (1,270)
Employee loans pursuant to employee
unit purchase program - 9
Restatement of convertible debenture
issuance costs - (15)
Conversion option related to issued
convertible debentures - 1,680
---------------------------------------------------

Balance, December 31, 2005 (137,513) 94,950

Net earnings - 14,502
Equity distributions
Trust units (9,004) (9,004)
Issuance of trust units pursuant
to distribution reinvestment plan - 9
Trust units cancelled pursuant to normal
course issuer bid(Note 9) - (3,365)
Employee loans pursuant to employee unit
purchase program - 25
Conversion option related to issued
convertible debentures - 1,800
---------------------------------------------------

Balance, September 30, 2006 (146,517) 98,917
---------------------------------------------------
---------------------------------------------------

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 Nine Months Ended
---------------------------------------------------------
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
---------------------------------------------------------
(Restated - (Restated -
Note 13) Note 13)


Operating activities
Net earnings from
continuing
operations 13,932 3,528 14,651 2,918
Items not affecting
cash:
Depreciation and
amortization 3,889 3,790 11,534 11,306
Future income
taxes 1,055 1,627 1,055 1,271
Property impairment
provision - 590 - 980
Accretion of
convertible debentures 31 - 92 -
---------------------------------------------------------

Funds from continuing
operations 18,907 9,535 27,332 16,475
Funds from discontinued
operations 7 27 (149) (315)
Changes in non-cash
working capital(Note 12) (330) 2,211 (3,640) (3,372)
Decrease (increase) in
property under
development 40,779 (4,800) 33,247 (13,826)
Increase in cash held
in escrow (8,197) - (8,197) -
---------------------------------------------------------
51,166 6,973 48,593 (1,038)
---------------------------------------------------------

Financing activities
Principal repayments
on mortgages and
capital leases (8,247) (1,444) (17,976) (12,342)
Equity distributions (3,074) (2,480) (8,864) (6,968)
Repurchase of trust
units pursuant to
normal course issuer
bid (2,021) (2,242) (3,365) (2,783)
Repurchase of
convertible debentures
pursuant to normal
course issuer bid (419) - (1,219) -
Issuance of convertible
debentures 60,000 - 60,000 -
Debt issuance costs (2,542) - (2,544) (428)
Proceeds from the
acquisition
of mortgages - 4,023 - 26,426
Redemption of
redeemable partnership
units - - - (2,415)
---------------------------------------------------------
43,697 (2,143) 26,032 1,490
---------------------------------------------------------

Investing activities
Acquisition of
capital assets (3,370) (2,286) (6,025) (5,350)
(Increase) decrease
in restricted cash (674) (461) 98 (2,165)
Net cash from sale
of capital assets - - 451 10,048
Decrease (increase) in
long-term notes
receivable 27 96 128 (1,777)
(Decrease) increase
in minority interest (8,599) 346 (8,591) 610
---------------------------------------------------------
(12,616) (2,305) (13,939) 1,366
---------------------------------------------------------

Increase in cash and
short-term
investments 82,247 2,525 60,686 1,818
Cash and short-term
investments, beginning
of period 9,922 8,000 31,483 8,707
---------------------------------------------------------
Cash and short-term
investments, end of
period 92,169 10,525 92,169 10,525
---------------------------------------------------------
---------------------------------------------------------

Cash interest paid
Mortgages and
capital leases 2,318 3,301 7,769 9,818
Convertible debentures 1,791 1,850 6,864 5,083
---------------------------------------------------------
4,109 5,151 14,633 14,901
---------------------------------------------------------
---------------------------------------------------------

See accompanying Notes to the Interim Consolidated Financial Statements.


ROYAL HOST REAL ESTATE INVESTMENT TRUST
Notes to the 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. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements and notes have been prepared using the accounting policies that are consistent with the policies used in preparing the Trust's 2005 Annual Consolidated Financial Statements. They do not include all disclosures required under Generally Accepted Accounting Principles for annual financial statements and should be read in conjunction with the annual consolidated financial statements.

3. ROYAL PRIVATE RESIDENCE CLUB

A subsidiary of Royal Host is participating in a joint venture to develop the Royal Private Residence Club, a residential condominium development, on a portion of the property at the Grand Okanagan Lakefront Resort and Conference Centre in Kelowna, British Columbia for resale. Royal Host proportionately consolidates its interest in the joint venture.

During the three months ended September 30, 2006, Royal Host completed construction and commenced closings of sales of condominiums. Revenue and cost of sales (including commissions and other selling costs) are recorded at the time each condominium is closed, and title and possession have been transferred to the buyer. Revenue and cost of sales were recognized on 92% of the condominiums during the three months ended September 30, 2006. Subsequent to September 30, 2006, sales of an additional 7.8% of the condominiums were closed.

The cash held in escrow on the consolidated balance sheet represents proceeds from the sales of condominium held in trust by legal counsel. Subsequent to September 30, 2006, $5.8 million of the cash held in escrow was received by Royal Host.

Another subsidiary of Royal Host is the General Partner of the Limited Partnership which is the other party to the joint venture agreement. This Limited Partnership is a variable interest entity for which Royal Host is the primary beneficiary. As a result, Royal Host consolidates the Limited Partnership as required by the CICA issued Accounting Guideline 15 "Consolidation of Variable Interest Entities", effective for fiscal years beginning after November 1, 2004. The minority interest on the consolidated balance sheet represents the proportion of net assets of the Limited Partnership not owned by Royal Host.

In April 2005, Royal Host, along with its joint venture partner, entered into a non-revolving $28.0 million financing arrangement consisting of a $20.0 million construction loan and an $8.0 million mezzanine loan. Royal Host provided a completion, cost overrun and debt service deficiency guarantee on the construction loan and a specific guarantee of payment of notes receivable from the limited partners. During the six months ended June 30, 2006, the $8.0 million mezzanine loan was repaid in full. During the three months ended September 30, 2006, the amount drawn on the construction loan of $7.4 million was repaid in full.

Property under development includes $0.2 million of capitalized interest as at September 30, 2006 (December 31, 2005 - $1.3 million).

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

On February 23, 2005, Royal Host completed the sale of its 50% interest in a hotel property located in Toronto, Ontario, and as a result, this property's operations have been included in discontinued operations on the consolidated statements of net earnings.

The Trust is actively pursuing a buyer for a hotel property in Ontario. Accordingly, this property has been reflected as "property held for sale" and "assets and liabilities of discontinued operations" on the consolidated balance sheets and the property's operations have been included in discontinued operations on the consolidated statements of net earnings.

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 years.





Three Months Ended Nine Months Ended
(in $000's) (in $000's)
-----------------------------------------
September September September September
30, 30, 30, 30,
2006 2005 2006 2005
-----------------------------------------
Hospitality revenue
Rooms 256 233 507 840
Food and beverage - - - 169
Other 9 7 29 44
-----------------------------------------
265 240 536 1,053

Hospitality expenses 255 213 671 1,365
-----------------------------------------

Gross margin 10 27 (135) (312)
-----------------------------------------
Other expenses
(Gain) loss on foreign currency
translation - - 11 (4)
Future income taxes (recovery) - (83) - (382)
Depreciation and amortization - 3 - 83
Property impairment provision
(recovery) - - - (21)
Capital and other taxes 3 - 2 5
Interest on capital leases - - 1 2
(Gain) loss on disposition - 26 - 247
-----------------------------------------
3 (54) 14 (70)
-----------------------------------------

Earnings (loss) from discontinued
operations 7 81 (149) (242)
-----------------------------------------
-----------------------------------------

5. CAPITAL ASSETS

(in $000's)
------------------------------------
Gross Book Accumulated Net Book
Value Amortization Value
------------------------------------
September 30, 2006

Buildings 317,727 69,047 248,680
Land 37,799 - 37,799
Furniture, fixtures, and equipment 48,865 39,542 9,323
Other 2,914 377 2,537
------------------------------------
407,305 108,966 298,339

Capital assets under development 3,270 - 3,270
Intangible assets:
Franchise rights and management
contracts 27,414 18,636 8,778
------------------------------------
437,989 127,602 310,387
------------------------------------
------------------------------------

(in $000's)
------------------------------------
Gross Book Accumulated Net Book
Value Amortization Value
------------------------------------
December 31, 2005

Buildings 313,421 62,872 250,549
Land 38,815 - 38,815
Furniture, fixtures, and equipment 46,451 36,999 9,452
Other 1,152 343 809
------------------------------------
399,839 100,214 299,625

Capital assets under development 4,214 - 4,214
Intangible assets:
Franchise rights and management
contracts 27,414 17,151 10,263
------------------------------------
431,467 117,365 314,102
------------------------------------
------------------------------------

During the three and nine months ending September 30, 2006, respectively,
capital additions to Royal Host's hotel properties totaled $3.9 million
(2005 - $2.3 million) and $7.2 million (2005 - $5.1 million).

6. MORTGAGES

(in $000's)
----------------------------
September 30, December 31,
2006 2005
----------------------------
Mortgages secured by hotel properties 127,647 129,800
Mortgages secured by property under development - 15,426
----------------------------
127,647 145,226
Less: current portion 3,036 18,304
----------------------------
124,611 126,922
----------------------------
----------------------------

Principal repayments required for the years ending September 30:

(in $000's)
----------------------------
2007 3,036
2008 3,269
2009 3,502
2010 82,640
2011 11,994
Thereafter 23,206
----------------------------
127,647
----------------------------
----------------------------


Debt issuance costs are deferred and amortized over the term of the related debt. During the three and nine months ended September 30, 2006, respectively, $0.4 million (2005 - $0.4 million) and $1.1 million (2005 - $1.1 million) was included in depreciation and amortization expense.

During the nine months ended September 30, 2006, an $8.0 million mezzanine loan and a $7.4 million construction loan secured by property under development were repaid.



7. CONVERTIBLE DEBENTURES

(in $000's)
----------------------------
September 30, December 31,
2006 2005
----------------------------

9.25% Convertible Unsecured Subordinated
Debentures 38,493 39,712
7.90% Convertible Unsecured Subordinated
Debentures, Series A 35,000 35,000
6.00% Convertible Unsecured Subordinated
Debentures, Series B 58,432 58,340
6.25% Convertible Unsecured Subordinated
Debentures, Series C 58,200 -
----------------------------
190,125 133,052
Less: current portion 38,493 -
----------------------------
151,632 133,052
----------------------------
----------------------------


The convertible debentures' maturity dates are as follows: the 9.25% debentures - March 1, 2007; the 7.90% debentures - April 30, 2009; the 6.00% debentures - October 31, 2015 and the 6.25% debentures - September 30, 2013.

In September 2006, $60.0 million of convertible unsecured subordinated debentures were issued with a term of seven years. These debentures bear interest at 6.25% per annum and are payable semi-annually in arrears on March 31 and September 30 in each year commencing March 31, 2007.

The Series C debentures may not be redeemed by Royal Host prior to September 30, 2009. On or after September 30, 2009, but prior to September 30, 2011, the debentures are redeemable, in whole at any time or in part from time to time, at the option of Royal Host on at least 30 days prior notice at a price equal to the principal amount thereof, plus accrued and unpaid interest provided that the current market price preceding the date upon which notice of redemption is given is at least 125% of the conversion price of $7.00 per unit. After September 30, 2011, but prior to the maturity date of September 30, 2013, the debentures are redeemable without stipulation. The term "current market price" is defined in the Indenture to mean the weighted average trading price of the units on the TSX for the twenty (20) consecutive trading days ending on the fifth (5) trading day preceding the date of redemption or maturity.

On redemption or at maturity on September 30, 2013, Royal Host has the option to repay the debentures in either cash or in equivalent units of Royal Host. The number of units to be issued will be determined by dividing the principal amount of the debentures by 95% of the current market price of the units.

Based on certain conditions, the debentures are convertible, at the holders' discretion, at $7.00 per trust unit at any time from the date of issue to close of business on the day prior to the maturity date, September 30, 2013.

In accordance with EIC ("Emerging Issues Committee") 158, "Accounting for Convertible Debt Instruments", the principal amount of the debenture has been allocated between its liability and equity elements and classified separately on the balance sheet. As a result, $58.2 million was recorded as a long-term liability with the balance of $1.8 million recorded as conversion option in equity. The long-term liability will increase to the $60.0 million face value of the debenture over its seven year term, with the accretion being included in interest on convertible debentures on the consolidated statements of net earnings.

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 September 30, 2006 are as follows:



(in $000's)
----------------------------
September 30, December 31,
2006 2005
----------------------------
Present value of future minimum lease payments 707 1,103
Less: current portion of principal payments 375 443
----------------------------
332 660
----------------------------
----------------------------


Total repayments required for the years ending September 30:

(in $000's)
----------------------------
2007 421
2008 341
2009 4
----------------------------
Future minimum lease payments 766
Less: amounts representing interest 59
----------------------------
Present value of future minimum lease payments 707
----------------------------
----------------------------


9. NORMAL COURSE ISSUER BIDS

(a) Trust Units

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 September 30, 2006, 331,500 trust units with an aggregate cost of $2.0 million (average cost of $6.07 per unit) were repurchased and cancelled. During the nine months ended September 30, 2006, 557,200 trust units with an aggregate cost of $3.4 million (average cost of $6.01 per unit) were repurchased and cancelled. Subsequent to September 30, 2006, 542,200 trust units with an aggregate cost of $3.3 million (average cost of $6.10 per unit) were repurchased.

(b) 9.25% Convertible Unsecured Subordinated Debentures

Commencing on July 15, 2005, Royal Host initiated a normal course issuer bid to repurchase up to $2.0 million in principal of its issued and outstanding 9.25% convertible debentures. During the nine months ended September 30, 2006, Royal Host repurchased $0.8 million of debentures (average cost of $104.00 per debenture). As of June 30, 2006, Royal Host repurchased and cancelled $1.1 million of debentures pursuant to this bid. The normal course issuer bid expired on July 15, 2006.

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 and nine months ended September 30, 2006, Royal Host repurchased $0.4 million of debentures (average cost of $101.95). Subsequent to September 30, 2006, Royal Host repurchased $0.5 million of debentures (average cost of $101.82).

10. PROPERTY IMPAIRMENT PROVISION

During the third quarter of 2005, the Trust recorded a property impairment provision of $0.6 million relating to a property in Cabo San Lucas, Mexico. During the first quarter of 2005, the Trust recorded a property impairment provision of $0.4 million relating to a hotel property in Lethbridge, Alberta.

11. PER UNIT CALCULATIONS

As at September 30, 2006, a total of 25,547,581 trust units (December 31, 2005 - 26,595,545) were issued and outstanding. Per unit computations are based on the weighted average number of trust units outstanding for the period, after adjusting the net loss for distributions on the redeemable partnership units of $Nil (September 30, 2005 - $378,000).




-----------------------------------
For the three months ended September Weighted
30, 2006: Average Units Per Unit
(in $000's) (in 000's) ($)
-----------------------------------

Basic earnings - continuing
operations 13,932 0.54
Basic earnings - discontinued
operations 7 -
------------ ---------
Basic earnings - total operations 13,939 25,755 0.54
------------ ---------
------------ ---------

Net earnings - continuing operations 13,932
Add: interest on convertible
debentures 3,447
-----------
Diluted earnings - continuing
operations 17,379 0.32
Diluted earnings - discontinued
operations 7 -
------------ ---------
Diluted earnings - total operations 17,386 54,418 0.32
------------ ---------
------------ ---------


For the three months ended September Weighted
30, 2005: Average Units Per Unit
(in $000's) (in 000's) ($)
-----------------------------------

Basic earnings - continuing
operations 3,528 0.13
Basic earnings - discontinued
operations 81 -
------------ ---------
Basic earnings - total operations 3,609 27,240 0.13
------------ ---------
------------ ---------

Net earnings - continuing operations 3,528
Add: interest on convertible
debentures 697
-----------
Diluted earnings - continuing
operations 4,225 0.13
Diluted earnings - discontinued
operations 81 -
------------ ---------
Diluted earnings - total operations 4,306 33,073 0.13
------------ ---------
------------ ---------


For the nine months ended September Weighted
30, 2006: Average Units Per Unit
(in $000's) (in 000's) ($)
-----------------------------------

Basic earnings - continuing
operations 14,651 0.56
Basic loss - discontinued operations (149) (0.01)
------------ ---------
Basic earnings - total operations 14,502 25,958 0.55
------------ ---------
------------ ---------

Net earnings - continuing operations 14,651
Add: interest on convertible
debentures 10,229
-----------
Diluted earnings - continuing
operations 24,880 0.46
Diluted loss - discontinued
operations (149) -
------------ ---------
Diluted earnings - total operations 24,731 54,621 0.46
------------ ---------
------------ ---------


For the nine months ended September Weighted
30, 2005: Average Units Per Unit
(in $000's) (in 000's) ($)
-----------------------------------

Net earnings - continuing operations 2,918
Less: distributions on redeemable
partnership units (378)
-----------
Basic and diluted earnings -
continuing operations 2,540 0.10
Basic and diluted loss - discontinued
operations (242) (0.01)
------------ ---------
Basic and diluted earnings - total
operations 2,298 25,925 0.09
------------ ---------
------------ ---------

Net earnings - continuing operations 2,918
Add: interest on convertible
debentures -
-----------
Diluted earnings - continuing
operations 2,918 0.10
Diluted loss - discontinued operations (242) (0.01)
------------ ---------
Diluted earnings - total operations 2,676 25,925 0.09
------------ ---------
------------ ---------


12. CHANGES IN NON-CASH WORKING CAPITAL


Three Nine Months
Months Ended Ended
(in $000's) (in $000's)
--------------------------------------------
September September September September
30, 30, 30, 30,
2006 2005 2006 2005
--------------------------------------------
(Increase) decrease in:
Accounts and notes
receivable (1,089) (277) (1,705) (3,308)
Mortgage receivable - 3,800 - -
Prepaid expenses 506 205 (775) (875)
Inventories 34 (13) (6) (79)
Assets of discontinued
operations 16 121 (44) (19)
--------------------------------------------
(533) 3,836 (2,530) (4,281)
--------------------------------------------

Increase (decrease) in:
Accounts payable and accrued
liabilities (239) (856) (877) 2,427
Interest accrued on
convertible debentures 842 (246) 634 (230)
Other liabilities (176) (331) (409) (769)
Deferred revenue (261) 7 (321) 25
Future income taxes 57 (190) (114) (190)
Liabilities of discontinued
operations (20) (9) (23) (354)
--------------------------------------------
203 (1,625) (1,110) 909
--------------------------------------------

(330) 2,211 (3,640) (3,372)
--------------------------------------------
--------------------------------------------


13. COMPARATIVE FIGURES AND RESTATEMENT

Certain comparative figures have been reclassified to conform to the presentation adopted for 2006.

Royal Host's financial statements for the periods ended December 31, 2002 through June 30, 2006 included changes in property under development in cash from investing activities on Royal Host's Consolidated Statements of Cash Flows. Changes in property under development have been retroactively restated to be included in cash from operating activities. The effects of the restatement are as follows: cash from operating activities for the three and nine months ended September 30, 2005 decreased by $4,800,000 to $6,973,000 and decreased by $13,826,000 to ($1,038,000), respectively; and cash from investing activities for the three and nine months ended September 30, 2005 increased by $4,800,000 to ($2,305,000) and increased by $13,826,000 to $1,366,000, respectively.

Royal Host's financial statements for the periods ended June 30, 2004 through June 30, 2006 included property held for sale in current assets on its Consolidated Balance Sheets. Property held for sale has been retroactively restated to be included in long-term assets.


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