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

Royal Host Real Estate Investment Trust

August 15, 2005 09:45 ET

Royal Host Reports Strong Second Quarter Results and an Increase in Monthly Distributions

CALGARY, ALBERTA--(CCNMatthews - Aug. 15, 2005) - Royal Host Real Estate Investment Trust (TSX:RYL.UN) (TSX:RYL.DB) (TSX:RYL.DB.A) ("Royal Host" or the "Trust"), today announced financial results for the three and six months ended June 30, 2005.

In the second quarter of 2005, Royal Host continued to make significant progress towards its stated goal of focusing on its core businesses, and delivered strong operating and financial results. "We are encouraged with our progress to date, and with how the focus on our core businesses and ongoing strategy is reflected in the improved results realized in the second quarter," said Greg Royer, President and Chief Executive Officer. "We believe that Royal Host is in an excellent position to take advantage of the ongoing growth in the hospitality industry."

Total revenue from continuing operations increased to $38.0 million in the second quarter of 2005 from $35.6 million in the second quarter of 2004. Year-to-date revenue increased by 4% to $68.1 million. The increase in revenue, in both the three and six months ended June 30, 2005, was seen in all areas of the Trust's operations, and was led by strong improvement in room revenue, supported by higher food and beverage and other hospitality revenue.

As a result of improving cash available from operations and a positive outlook, Royal Host is pleased to announce that it will be increasing its monthly distribution to $0.035 for unitholders of record on September 15, payable on September 30. This is the second increase announced in 2005, as monthly distributions were increased from $0.02 to $0.03 per unit in January.

Cash available for distribution in the second quarter increased by 32% to $5.9 million compared to $4.5 million in the second quarter of 2004, bringing year-to-date cash available for distribution to $6.2 million, a 20% improvement over the $5.2 million realized in 2004. On a per unit basis, the Trust generated $0.23 in the second quarter, which compares to $0.18 per unit in the second quarter of 2004. Total cash available for distribution for the six months ended June 30, 2005 is $0.25 per unit, a 17% increase over the $0.21 per unit generated in the same period in 2004.



Key Hotel Operating Statistics

------------------------------------------------------------------------
Three Months Six Months
Ended June 30 Ended June 30

2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Average Daily Rate $94.29 $91.63 2.9% $91.23 $88.64 2.9%
Occupancy 69.1% 68.6% 0.7% 64.1% 65.1% (1.5%)
Revenue Per Available
Room $65.12 $62.82 3.7% $58.51 $57.71 1.4%
------------------------------------------------------------------------
------------------------------------------------------------------------


The hotel portfolio average daily rate ("ADR") from continuing operations for the quarter increased to $94.29, bringing the year-to-date ADR to $91.23, a 2.9% increase over the same period in 2004. For the quarter, a modest improvement in Occupancy of 0.7% to 69.1% was seen by the Trust, bringing the year-to-date Occupancy to 64.1%, a decrease of 1.5% over the same period in 2004. The revenue per available room (RevPAR) from continuing operations increased by $2.30 to $65.12 in the second quarter of 2005, compared to the $62.82 realized in the second quarter of 2004. The improvement in ADR and Occupancy resulted in a 3.7% improvement in RevPAR for the quarter. The strong ADR for the period more than offset the modest decrease in Occupancy to bring year-to-date RevPAR to $58.51; an increase of 1.4% over the $57.71 in the first half of 2004.

Room revenue for the second quarter increased by 4% to $26.4 million compared to $25.3 million in 2004 as a result of the improved RevPAR and Occupancy. Year-to-date revenue improved to $47.2 million from $46.5 million in 2004, reflecting the strong RevPAR, which more than offset the decrease in Occupancy of 1.5% from 2004.

Food and beverage revenue continued to be strong, and increased by $0.7 million to $7.3 million in the second quarter, bringing total food and beverage revenue for the six months to $12.8 million. This compares to $6.6 million for the three months and $11.8 million for the six months of 2004. In addition to improving overall sales at our major properties, the Trust has benefited from the addition of two restaurant operations that, in the prior year, were leased to third parties.

Other hospitality revenue increased to $4.3 million from $3.7 million in 2004, bringing year-to-date revenue to $8.1 million; a 15% increase over 2004. Travelodge franchise fees and other hotel management revenue were steady during the period. The majority of this increase was a result of the additional management contracts for 69 Supertel Hospitality, Inc. hotels and the Wingate Inn in Edmonton, Alberta.

Total hospitality expenses for the quarter increased to $26.3 million from $25.3 million in 2004 as a result of additional food and beverage operations, which have higher proportionate costs than room operations. For the period, hospitality expenses were $50.0 million; up from $48.7 million in 2004. However, the resulting gross margin improved to $11.7 million; an increase of 14% over the $10.3 million in 2004. For the six months, gross margin improved to $18.0 million; an 8% increase from the $16.7 million in 2004. On a percentage basis, gross margin for the quarter was 30.8% which was a 6% improvement over the 29% realized in 2004. For the six-month period, gross margin percentage improved to 26.5% from 25.6% in 2004.

Overall, Royal Host was very pleased with the strong second quarter results, and is cautiously optimistic for the balance of 2005. The Trust will continue to focus on its core businesses and on achieving its mission, which is to be considered by all stakeholders as one of the best mid-market hotel companies in North America.

A conference call will be held on August 16, 2005 at 11:30 A.M. Eastern Standard Time. Investors and analysts are invited to access the call by dialling 1-877-323-2091 or 1-416-695-9724. 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 August 16 through August 19, 2005. To access this recording, please dial 1-888-509-0081 or 1-416-695-5275.

Royal Host owns 37 hotels, manages 117 properties, and franchises 120 locations for over 18,000 guestrooms in the mid-market to upscale segments. Royal Host also owns the master franchise rights for Travelodge in Canada and provides hotel and resort management services for its portfolio and to third party owned properties.

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 in 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", and "RYL.DB.A".

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
AND
CONSOLIDATED FINANCIAL STATEMENTS


FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2005


MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE PERIOD ENDED JUNE 30, 2005

The following Management's Discussion and Analysis of Operations and Financial Condition ("MD&A") dated August 12, 2005, should be read in conjunction with the unaudited consolidated financial statements and notes of Royal Host Real Estate Investment Trust ("Royal Host" or the "Trust") for the six months ended June 30, 2005, the audited consolidated financial statements and accompanying notes for the years ended December 31, 2004 and 2003 and management's discussion and analysis thereon. The consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP").



SELECTED FINANCIAL AND OPERATING HIGHLIGHTS

Three Months Ended Six Months Ended
June 30 June 30 June 30 June 30
($000's, except /05 /04 Change /05 /04 Change
as otherwise noted) (Restated) % (Restated) %
------------------------------------------------------------------------


Hospitality Revenue
(from Continuing
Operations)
Rooms 26,403 25,320 4.3 47,161 46,503 1.4
Food and beverage 7,324 6,638 10.3 12,827 11,828 8.4
Other 4,271 3,663 16.6 8,085 7,037 14.9
----------------- -----------------
Total 37,998 35,621 6.7 68,073 65,368 4.1
----------------- -----------------
----------------- -----------------


Gross Margin 11,718 10,317 13.6 18,028 16,714 7.9
----------------- -----------------
----------------- -----------------
30.8% 29.0% 26.5% 25.6%

Net Earnings (Loss)
From continuing
operations 2,528 339 645.7 (610) (1,809) (66.3)
From discontinued
operations (214) (587) (63.5) (323) (653) (50.5)
----------------- -----------------
2,314 (248) (933) (2,462)
----------------- -----------------
----------------- -----------------

Basic and Diluted
Per Unit Net
Earnings (Loss) ($)
From continuing
operations 0.09 0.01 800.0 (0.04) (0.09) (55.5)
From discontinued
operations (0.01) (0.02) (50.0) (0.01) (0.03) (66.7)
----------------- -----------------
0.08 (0.01) (0.05) (0.12)
----------------- -----------------
----------------- -----------------

Cash Available
for Distribution 5,938 4,492 32.2 6,220 5,164 20.4
----------------- -----------------
----------------- -----------------

Distributions
Declared 2,353 1,468 60.3 4,575 2,934 55.9
----------------- -----------------
----------------- -----------------

Cash Distribution
as a % of Cash
Available 40% 33% 21.2 74% 57% 29.4
----------------- -----------------
----------------- -----------------

Basic Per Unit Cash
Available For
Distribution ($) 0.23 0.18 25.4 0.25 0.21 17.1
----------------- -----------------
----------------- -----------------

Number of Units
Outstanding (000's) 27,469 24,794
-----------------
-----------------


The following table summarizes key performance operating indicators
for the period ended June 30, 2005 and 2004:

Three Months Ended Six Months Ended
June 30 June 30 Change June 30 June 30 Change
/05 /04 % /05 /04 %
------------------------------------------------------------------------
Average Daily Rate
("ADR")
- Continuing
Operations $94.29 $91.63 2.9 $91.23 $88.64 2.9
- Total Operations $94.14 $90.28 4.3 $90.81 $87.63 3.6

Occupancy
- Continuing
Operations 69.1% 68.6% 0.7 64.1% 65.1% (1.5)
- Total Operations 68.1% 66.6% 2.3 62.8% 63.0% (0.3)

Revenue Per Available
Room ("RevPAR")
- Continuing
Operations $65.12 $62.82 3.7 $58.51 $57.71 1.4
- Total Operations $64.13 $60.13 6.7 $57.01 $55.17 3.3


Seasonality

The hospitality business is seasonal in nature. Our revenue and profitability are typically stronger in the second and third quarters, as compared to the first and fourth quarters. The Board of Trustees sets cash distributions based on annual performance; as a result, actual distributions will not equal cash available for distribution in any one quarter.

FORWARD-LOOKING STATEMENTS

Certain statements in this MD&A, including those in the Outlook section, relate to future periods commencing after June 30, 2005 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 our key market areas, political conditions and events, competitive pressures, changes in government policy or regulations and other risk factors. Royal Host does not undertake to update such forward-looking statements should our estimates or assumptions change, except as required by law. Additional information relating to Royal Host, including our Annual Information Form, is available at www.sedar.com.


THREE MONTHS ENDED JUNE 30, 2005 (Continuing Operations)

Hospitality Revenue

Revenue for the three months increased $2.4 million or 6.7% to $38.0 million (2004 - $35.6 million). Overall, Royal Host delivered strong growth in all areas with room revenue being the single largest contribution.

Room Revenue

Room revenue for the three months increased $1.1 million or 4.3% to $26.4 million (2004 - $25.3 million), a result of the 2.9% increase in ADR to $94.29 (2004 - $91.63) and increase in Occupancy of 0.7% to 69.1% (2004 - 68.6%).

Food and Beverage Revenue

Food and beverage revenue for the three months increased $0.7 million or 10.3% to $7.3 million (2004 - $6.6 million), primarily due to the addition of food and beverage operations in two hotel properties, which were previously leased to third parties.

Other Hospitality Revenue

Other hospitality revenue for the three months increased $0.6 million or 16.6% to $4.3 million (2004 - $3.7 million). Travelodge franchise fees and ongoing management fees continue to be strong. The largest factors in the increase is the Trust's contract to manage Supertel Hospitality's 69 hotel properties, which commenced on August 1, 2004, and the new management contract for the Wingate Inn Edmonton West, which commenced on January 1, 2005. Royal Host receives management fees based on the properties' gross revenue.

Hospitality Expenses

Royal Host has committed particular attention to managing its costs, as reflected in the quarter as hospitality expenses decreased as a percentage of revenues to 69.2% (2004 - 71.0%). Overall, hospitality expenses increased $1.0 million or 3.9% to $26.3 million (2004 - $25.3 million).

Gross Margin

As a result of strong revenue growth in all areas of operations and success in managing hospitality expenses, gross margin for the three months ended to June increased $1.4 million or 13.6% to $11.7 million (2004 - $10.3 million). Gross margin percentage increased to 30.8%, a 6.2% increase compared to the 2004 gross margin percentage of 29.0%. This overall improvement was realized despite an increase in food and beverage operations, which have higher proportionate costs than room revenue.

Other Expenses

Other expenses decreased to $9.2 million (2004 - $10.0 million). This is attributable mainly to a $0.6 million decrease in depreciation and amortization due to a number of assets being fully depreciated in 2005. Trust administration costs increased by $0.2 million primarily due to non-recurring legal and executive search costs.

Net Earnings

As a result of the strong revenue growth, improved gross margins, and overall decrease in other expenses, net earnings from continuing operations improved to $2.5 million and net earnings from total operations increased to $2.3 million. This compares to net earnings from continuing operations of $0.3 million and a loss of $0.2 million from total operations in 2004.

SIX MONTHS ENDED JUNE 30, 2005 (Continuing Operations)

Hospitality Revenue

As a result of the strong second quarter, revenue for the six months increased $2.7 million or 4.1% to $68.1 million (2004 - $65.4 million). Increases were realized in all areas with improving room revenue being supplemented by very strong food and beverage and other hospitality revenue.

Room Revenue

Room revenue for the six months increased $0.7 million or 1.4% to $47.2 million (2004 - $46.5 million). This is due to a 2.9% increase in ADR to $91.23 (2004 - $88.64), which more than offset a 1.5% decrease in Occupancy to 64.1%.

Food and Beverage Revenue

Food and beverage revenue for the six months increased by $1.0 million or 8.4% to $12.8 million (2004 - $11.8 million), due to improving operations in a number of locations and the addition of food and beverage operations in two of our hotel properties, which were leased to third parties in the prior year.

Other Hospitality Revenue

Other hospitality revenue for the six months was very solid, increasing $1.0 million or 14.9% to $8.1 million (2004 - $7.0 million). Travelodge franchise fees continue to be strong and the large increase is primarily the result of the success of Royal Host's management of Supertel Hospitality's 69 hotel properties, which commenced on August 1, 2004, and the management contract for the Wingate Inn Edmonton West, which commenced on January 1, 2005.

Hospitality Expenses

Hospitality expenses for the six months decreased as a percentage of revenue to 73.5% a decrease from 74.4% in the same period in 2004. Total hospitality expenses increased by $1.4 million or 2.9% to $50.0 million (2004 - $48.7 million). Despite increased food and beverage revenues, which have higher proportionate costs than room revenue, 49% of the $2.7 million increase in revenue that Royal Host realized in the period translated into gross margin. This reflects management's continuing focus on operations and the success of the operations managers.

Gross Margin

Gross margin for the six months increased $1.3 million or 7.9% to $18.0 million (2004 - $16.7 million). Gross margin percentage increased by 3.5% to 26.5% (2004 - 25.6%).

DISCONTINUED OPERATIONS

For the three months ended June 30, 2005, revenue and gross margin from discontinued operations were $0.2 million (2004 - $1.4 million) and a negative $0.2 million (2004 - $nil). For the six months ended June 30, 2005, revenue and gross margin from discontinued operations were $0.8 million (2004 - $2.7 million) and a negative $0.3 million (2004 - $0.2 million loss), respectively.

On February 23, 2005, the Travelodge North York hotel was sold to a condominium developer. Under the agreement of purchase and sale, the Trust received $10.8 million for its 50% interest in the property. Payment was made by way of $7.0 million in cash and a $3.8 million vendor take-back mortgage. The vendor take-back mortgage is secured by the property, bears interest at 8.0%, and is due when proceeds from construction financing are advanced on the condominium development. In addition, Royal Host received a subordinated vendor take-back mortgage for a maximum of $2.0 million to recover certain costs associated with closing the hotel. As at June 30, 2005, $2.0 million of the subordinated vendor take-back mortgage was recognized and included in Long-term Notes Receivable. Cash proceeds received in the first quarter from the transaction were used to repay a $5.5 million mortgage on the property and for general corporate purposes.

Royal Host has received an offer of $3.1 million to purchase its 95-room hotel in Orillia, Ontario. Currently the Trust is working to complete the purchase and sale agreements.

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 our 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 (loss) determined in accordance with GAAP as an indicator of Royal Host's financial performance. However, we believe these measures are useful in supplementing the reader's understanding of the Trust's performance.

The following non-GAAP financial measures have been included in this MD&A: Average Daily Rate, Occupancy, Revenue per Available Room, Cash Available from Operations, and Cash Available for Distribution. These non-GAAP financial measures are key indicators commonly used within the hospitality industry and by Real Estate Investment Trusts.



Cash Available from Operations and Cash Available for Distribution

($000's, except as Three Months Ended Six Months Ended
otherwise noted) June 30/05 June 30/04 June 30/05 June 30/04
------------------------------------------------------------------------

Earnings (Loss) From
Continuing Operations 2,528 339 (610) (1,809)

Add (Deduct):
Depreciation and
Amortization 3,717 4,290 7,516 8,552
Property Impairment
Provision - - 390 -
Future Income Taxes
(Recovery) (11) 68 (356) (936)
-----------------------------------------------

Cash Available from
Continuing Operations 6,234 4,697 6,940 5,807
Cash Available from
Discontinued Operations (202) (16) (342) (265)
-----------------------------------------------
Cash Available from
Operations 6,032 4,681 6,598 5,542

Less: Distributions on
Redeemable Partnership
Units (94) (189) (378) (378)
-----------------------------------------------

Cash Available for
Distribution 5,938 4,492 6,220 5,164
-----------------------------------------------
-----------------------------------------------


Basic Per Unit Cash
Available For
Distribution ($) 0.23 0.18 0.25 0.21

Diluted Per Unit Cash
Available For
Distribution ($) 0.20 0.18 0.24 0.21


Cash available for distribution is calculated as cash available from operations less distributions on redeemable partnership units. It represents cash available to distribute to unitholders from total operations.

Cash available for distribution for the three months ended June 30, 2005 increased by 32.2% to $5.9 million (2004 - $4.5 million). Cash available for distribution for the six months ended June 30, 2005 increased by 20.4% to $6.2 million (2004 - $5.2 million). This is a direct result of a strong second quarter driven by an improvement in RevPAR and Occupancy, coupled with strong other revenue and improved gross margin.

For the three months ended June 30, 2005, cash distributions declared were $2.4 million, a 60% increase (2004 - $1.5 million). For the six months ended June 30, 2005, distributions declared were $4.6 million or 74% of cash available for distribution, which compares to $2.9 million declared in 2004 or 57% of cash available for distribution.

For the first six months of 2005, cash distributions have been maintained at $.03 per unit per month as compared to $.02 per unit per month in 2004.

DISTRIBUTIONS TO UNITHOLDERS

Royal Host's Trustees approve distributions based on, among other things, projected cash flows, capital requirements, and working capital needs. In December 2004, as a direct result of the improved results, distributions per unit were increased from $0.02 to $0.03 per month, commencing in January 2005. Based on Royal Host's 2005 results to date and current outlook, the Trustees have approved an increase in distributions per unit to $0.035 for unitholders of record on September 15 to be distributed on September 30.

Royal Host pays cash distributions on a monthly basis to unitholders of record on or about the fifteenth day of each month. Distributions are payable on or about the last business day of the month.

Assuming no significant deterioration in operating results from the level realized thus far in 2005, the Trust expects to be able to support the established level of cash distributions to unitholders, as well as meet capital expenditure and working capital requirements.

LIQUIDITY AND CAPITAL RESOURCES

As at June 30, 2005, cash and short-term investments were $8.0 million and undrawn credit facilities were $12 million. In addition, subsequent to the quarter-end, the $3.8 million vendor take-back mortgage is expected to be collected in the third quarter. Restricted cash as at June 30, 2005 was $8.1 million (December 31, 2004 - $6.4 million). Restricted cash consists primarily of funds held by lenders pursuant to financing arrangements for future planned capital expenditures within the next twelve months. During the six months ended June 30, 2005, the Trust added $1.0 million to restricted cash in connection with the Grand Okanagan Resort and Conference Centre, which will be used for planned capital expenditures.

These liquid resources, together with Royal Host's future cash flows, are more than sufficient to fund anticipated cash requirements over the next year.

Financing Activities

On January 13, 2005, the Trust replaced the $25 million mortgage on the Grand Okanagan Resort and Conference Centre. The mortgage was originally scheduled to mature in August 2005 and was included in the current portion of mortgages as at December 31, 2004. The mortgage was increased to $35 million for a five-year term at a 7.5% fixed interest rate. The additional proceeds from the financing, net of expenses, were used for working capital and general corporate purposes.

In April 2005, Royal Host, along with the joint venture partner in the Royal Private Residence Club, 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. The loan proceeds are to be used to complete the project. During the period, $3.4 million was drawn on the construction loan and $8.0 million was drawn on the mezzanine loan.

Mortgages increased to $168.9 million (December 31, 2004 - $157.0 million) due in part to the replacement financing described above and offset by repayments of $9.5 million. The current portion of mortgages and other debt has decreased to $17.7 million (including $11.4 million related to the Royal Private Residence Club) from $39.1 million at December 31, 2004.

The Trust expects that the sale of units will be sufficient to repay all amounts related to the Royal Private Residence Club as they become due in 2006. The Trust has also arranged a contingency line of up to $13 million from a US lender who specializes in resort funding should it be required.

With the replacement of the mortgage on the Grand Okanagan Resort and Conference Centre, the Trust has no material debt maturities until the first quarter of 2007.

The $40 million 9.25% convertible debentures mature in March 2007; the $35 million 7.9% convertible debentures mature in April 2009.

The following table identifies Royal Host's mortgage and lease obligations:



Mortgages and Leases
Payment Due by Period
As at June 30, 2005
($000's) Total 2006 2007 2008 2009 2010 Thereafter
------------------------------------------------------------------------

Mortgages 168,913 17,715 4,239 21,163 3,790 25,074 96,932
Obligations Under
Capital Leases
(Including
Interest) 1,544 591 471 406 76 - -
Obligations Under
Operating Leases 713 172 225 135 70 32 79
------------------------------------------------------
171,170 18,478 4,935 21,704 3,936 25,106 97,011
------------------------------------------------------
------------------------------------------------------


Investing Activities

During the three months ended June 30, 2005, Royal Host incurred $1.4 million in capital expenditures (three months ended June 30, 2004 - $0.9 million). During the six months ended June 30, 2005, the trust spent $2.8 million on capital expenditures (six months ended June 30, 2004 - $2.3 million).

Restricted cash, described above, is available for funding certain hotel capital expenditures. A portion of the capital expenditure planned for the balance of 2005 will be funded out of restricted cash. Some of the planned capital expenditures may not be completed until the first quarter of 2006.

Property under development was $26.7 million as at June 30, 2005, an increase of $9.3 million from the $17.4 million as at December 31, 2004. Property under development relates to the Royal Private Residence Club, a 70-unit luxury condominium development in which the Trust is the lead joint venture partner, which is being developed adjacent to the Grand Okanagan Lakefront Resort and Conference Centre. As at June 30, 2005, 70% of the development's residence units have been sold. Construction of the development's first phase, the parkade, was completed in 2005. Construction on the residence units commenced in May 2004 and is expected to be completed the first quarter of 2006.

Equity

As described under "Changes in Accounting Policies" below, convertible debentures have been reclassified from equity to liabilities. Equity as at December 31, 2004, originally reported at $183.4 million has been restated to $110.6 million (to reflect the reclassification of convertible debentures and related debt issuance costs). Equity has decreased to $102.0 as at June 30, 2005, attributable to the net loss for the six months ended June 30, 2005 of $0.9 million and distributions of $5.0 million. In addition the Trust paid $2.4 million in cash pursuant to the redemption of the redeemable partnership units (described below), resulting in a reduction of equity.

Normal Course Issuer Bid

Royal Host initiated a Normal Course Issuer Bid, commencing December 21, 2004, to repurchase a maximum of 1.2 million of the Trust's issued and outstanding trust units. In the second quarter, 100,000 trust units were repurchased at an aggregate cost of $541,000.

Subsequent to June 30, 2005, Royal Host initiated a Normal Course Issuer Bid, commencing July 15, 2005, to repurchase a maximum of $2.0 million of our 9.25% subordinated unsecured convertible debentures. To date no debentures have been repurchased.

Redeemable Partnership Units

During the six months ended June 30, 2005, 3,151,433 redeemable partnership units were redeemed by way of a combination of issuance of 2,706,682 Royal Host trust units and $2,414,998 in cash. The partnership units were held by entities controlled by certain officers and trustees of Royal Host. As such, the redemption was a related party transaction and was recorded at the historical amount of $27.5 million that the partnership units had been recorded in the financial statements. The redemption brings the total number of trust units outstanding to 27,468,787 as of June 30, 2005.

As at June 30, 2005 a total of 10 (2004 - 3,151,443) redeemable partnership units remained outstanding.

CHANGES IN ACCOUNTING POLICIES

The financial statements for the six months ended June 30, 2005 have been prepared in accordance with accounting policies described in our financial statements for the year ended December 31, 2004, except as follows:

Consolidation of Variable Interest Entities

In November 2003, the CICA issued Accounting Guideline 15 "Consolidation of Variable Interest Entities" ("AcG-15"), effective for fiscal years beginning after November 1, 2004. The objective of AcG-15 is to improve financial reporting by companies involved with variable interest entities. AcG-15 provides guidance related to identifying variable interest entities and determining whether the assets, liabilities, and results of activities of the entity should be consolidated. AcG-15 requires an enterprise to consolidate a variable interest entity when the enterprise is the primary beneficiary of the entity, the enterprise absorbs the majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity.

Prior to the issuance of AcG-15, an enterprise generally consolidated an entity when the enterprise had a controlling financial interest in the entity through ownership of a majority voting interest.

Prior to the adoption of AcG-15, the Trust proportionately consolidated the Royal Private Residence Club Joint Venture. However, the Joint Venture is a variable interest entity as Royal Host absorbs a majority of the Joint Venture's expected losses and receives the majority of the Joint Venture's expected residual returns. Accordingly, effective January 1, 2005, Royal Host is now consolidating the joint venture.

Equity Settled Obligations

In November 2003, the CICA amended Section 3860 "Financial Instruments - Disclosure and Presentation" requiring that certain obligations that may be settled at the issuer's option in cash or the equivalent value by a variable number of the issuer's own equity instruments to be presented as liabilities. The amendments to Section 3860 are effective for fiscal years beginning on or after November 1, 2004. We have applied the provisions of Section 3860 retroactively, and have restated prior years' comparatives. The amendments result in our convertible debentures being classified as a liability on the Consolidated Balance Sheets and the associated interest expense correspondingly being classified as Interest on Convertible Debentures on the Consolidated Statements of Net Earnings (Loss).

As a result of the reclassification, other expenses for the three months ended June 30, 2004 increased by $1.7 million, other expenses for the six months ended June 30, 2004 increased by $3.2 million, and deferred debt issuance costs as at December 31, 2004 increased by $2.3 million.

OFF BALANCE SHEET ARRANGEMENTS

As at June 30, 2005, Royal Host had no undisclosed off balance sheet arrangements.

RISKS AND UNCERTAINTIES

The Trust's business is subject to various risks and uncertainties that occur in the normal course of business that could adversely affect our cash flow and our ability to make distributions to unitholders. These risks include general economic risks, operating risks, competitive risks, environmental risks, and development risks amongst others.

These risks and uncertainties facing Royal Host's operations are described in detail in the MD&A and Annual Information Form for the year ended December 31, 2004.

OUTLOOK

Royal Host intends to continue to focus on expansion within our areas of expertise, which may include acquiring Limited, Full and Focused Service hotels in Canada. The Trust made significant progress toward its goal of simplification by focusing on our core competencies of hotel ownership, management and franchising. As a result of the continued focus on cost control and profitable businesses, Royal Host cancelled an unprofitable management contract, effective March 31, 2005, for 24 hotel properties in the Pacific Northwest, and disposed of the Travelodge North York hotel. Similarly, financing of the Royal Private Residence Club has been finalized, construction is well underway, and we anticipate exiting this non-core business in 2006. The management contract with Supertel Hospitality is contributing to our profitability in 2005.

National demand in the hospitality industry is growing and is returning to 2000 levels. Pannell Kerr Forster Consulting Inc., a recognized industry consultant, is forecasting solid growth in ADR and steady Occupancy rates. The Trust anticipates continued recovery and are cautiously optimistic about the remainder of 2005.



ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
in $000's
(unaudited)
As at
---------------------------------
June 30, December 31,
2005 2004
---------------------------------
(restated -
ASSETS Notes 2 and 3)
Current assets:
Cash and short-term investments 8,000 8,707
Accounts and notes receivable 11,290 9,435
Mortgage receivable (Note 3) 3,800 -
Prepaid expenses 4,766 3,686
Inventories 3,059 2,993
Assets of discontinued operations (Note 3) 446 306
Property held for sale (Note 3) 2,704 2,704
Property under development (Note 4) 26,710 17,437
Future income taxes 2,086 1,004
---------------------------------
62,861 46,272

Restricted cash 8,084 6,380
Long-term notes receivable (Note 3) 2,339 466
Assets of discontinued operations (Note 3) - 10,456
Capital assets (Note 5) 316,328 320,246
Deferred debt issuance costs 4,721 5,061
---------------------------------
394,333 388,881
---------------------------------
---------------------------------


LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 24,078 20,795
Equity distributions payable 827 561
Interest accrued on convertible debentures 1,702 1,686
Current portion of mortgages (Note 6) 17,715 39,083
Current portion of obligations under
capital leases (Note 7) 491 563
Other liabilities 1,811 2,249
Liabilities of discontinued
operations (Note 3) 201 546
---------------------------------
46,825 65,483

Mortgages (Note 6) 151,198 117,896
Convertible debentures 75,000 75,000
Obligations under capital leases (Note 7) 879 961
Deferred revenue 706 688
Future income taxes 8,756 8,329
---------------------------------
283,364 268,357

Minority interest (Note 4) 9,005 9,917

Unitholders' equity (Note 8) 101,964 110,607
---------------------------------
394,333 388,881
---------------------------------
---------------------------------

See accompanying Notes to the Consolidated Financial Statements


ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Net Earnings (Loss)
in $000's (except per unit amounts)
(unaudited)
Three Months Ended Six Months Ended
---------------------------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
---------------------------------------------
(restated- (restated-
Notes 2 Notes 2
and 3) and 3)
Hospitality revenue
Rooms 26,403 25,320 47,161 46,503
Food and beverage 7,324 6,638 12,827 11,828
Other hospitality
revenue 4,271 3,663 8,085 7,037
---------------------------------------------
37,998 35,621 68,073 65,368

Hospitality expenses 26,280 25,304 50,045 48,654
---------------------------------------------

Gross margin 11,718 10,317 18,028 16,714
---------------------------------------------

Other expenses
Interest on mortgages
and capital leases 3,240 3,520 6,569 6,999
Interest on
convertible debentures 1,658 1,560 3,248 2,919
Depreciation and
amortization 3,717 4,290 7,516 8,552
Trust administration 638 469 1,182 955
Future income taxes
(recovery) (11) 68 (356) (936)
Capital and other taxes 52 17 106 88
(Gain) loss on foreign
currency translation (104) 54 (17) (54)
Property impairment
provision - - 390 -
---------------------------------------------
9,190 9,978 18,638 18,523
---------------------------------------------

Earnings (loss) from
continuing operations 2,528 339 (610) (1,809)

Loss from discontinued
operations (Note 3) (214) (587) (323) (653)
---------------------------------------------

Net earnings (loss) 2,314 (248) (933) (2,462)
---------------------------------------------
---------------------------------------------


Basic and diluted per
unit net earnings
(loss) (Note 9)
- from continuing
operations 0.09 0.01 (0.04) (0.09)
- from discontinued
operations (0.01) (0.02) (0.01) (0.03)
---------------------------------------------
0.08 (0.01) (0.05) (0.12)
---------------------------------------------
---------------------------------------------

See accompanying Notes to the Consolidated Financial Statements



ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Statements of Cash Flows
in $000's
(unaudited)
Three Months Ended Six Months Ended
---------------------------------------------
CASH PROVIDED June 30, June 30, June 30, June 30,
BY (USED IN): 2005 2004 2005 2004
---------------------------------------------

Operating activities
Net earnings (loss) 2,314 (248) (933) (2,462)
Add: net loss from
discontinued
operations (Note 3) 214 587 323 653
Items not affecting cash:
Depreciation and
amortization 3,717 4,290 7,516 8,552
Future income taxes
(recovery) (11) 68 (356) (936)
Property impairment
provision - - 390 -
---------------------------------------------
Funds from continuing
operations 6,234 4,697 6,940 5,807
Funds from discontinued
operations (202) (708) (342) (957)
Changes in non-cash
working capital
(Note 10) 2,474 672 (607) (1,016)
---------------------------------------------
8,506 4,661 5,991 3,834
---------------------------------------------

Financing activities
Net additions to
mortgages 12,403 100 22,403 5,750
Principal repayments
on mortgages and
capital leases (3,188) (6,909) (10,898) (8,600)
Issuance of convertible
debentures, net of
retirements - 13,000 - 13,000
Financing issuance costs (84) (1,619) (428) (1,664)
Repurchase of trust
units pursuant to
normal course issuer bid (541) - (541) -
Redemption of redeemable
partnership units (2,415) - (2,415) -
Equity distributions (2,367) (1,575) (4,488) (3,148)
---------------------------------------------
3,808 2,997 3,633 5,338
---------------------------------------------
Investing activities
Capital expenditures (1,424) (896) (2,817) (2,349)
Net cash from sale
of properties - 654 6,248 654
Property under
development (5,652) (548) (9,273) (1,242)
Restricted cash 382 (325) (1,704) (691)
Long-term notes
receivable (685) 261 (1,873) 151
Minority interest in
joint venture (3,028) - (912) -
---------------------------------------------
(10,407) (854) (10,331) (3,477)
---------------------------------------------
Net change in cash
and short-term
investments 1,907 6,804 (707) 5,695
Cash and short-term
investments, beginning
of period 6,093 4,074 8,707 5,183
---------------------------------------------
Cash and short-term
investments, end of
period 8,000 10,878 8,000 10,878
---------------------------------------------
---------------------------------------------

Cash interest paid
Mortgages and capital
leases 3,126 3,156 6,517 4,670
Convertible debentures 1,383 - 3,233 1,850
---------------------------------------------
4,509 3,156 9,750 6,520
---------------------------------------------
---------------------------------------------

See accompanying Notes to the 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.

These consolidated interim financial statements follow the same accounting policies and methods as Royal Host's consolidated financial statements for the year ended December 31, 2004, except as stated in Note 2, and include all adjustments necessary to present fairly the results of the interim period. Certain information and disclosure included in the year-end consolidated financial statements has been condensed or omitted. In the opinion of Management, all adjustments considered necessary for fair presentation have been included in these consolidated interim financial statements. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005 due to the seasonal nature of operations. These consolidated interim financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2004.

2. CHANGES IN ACCOUNTING POLICIES

(a) Variable Interest Entities

In November 2003, the CICA issued Accounting Guideline 15, "Consolidation of Variable Interest Entities " ("AcG-15"), effective for fiscal years beginning after November 1, 2004. The objective of AcG-15 is to improve financial reporting by companies involved with variable interest entities. AcG-15 provides guidance related to identifying variable interest entities and determining whether such assets, liabilities and results of activities of the entity should be consolidated. AcG-15 requires an enterprise to consolidate a variable interest entity when the enterprise is the primary beneficiary of the entity, meaning that the enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, whether that is contractually or by other financial interests in the entity.

Prior to issuance of AcG-15, an enterprise generally consolidated an entity when the enterprise had a controlling financial interest in the entity through ownership of a majority voting interest.

Prior to the adoption of AcG-15, Royal Host proportionately consolidated the Royal Private Residence Club Joint Venture (the "Joint Venture"). However, the Joint Venture is a variable interest entity as Royal Host absorbs a majority of the Joint Venture's expected losses and receives a majority of the Joint Venture's expected residual returns. Therefore, effective January 1, 2005, Royal Host consolidates the Joint Venture. The consolidated balance sheet as at December 31, 2004 has been restated to include all of the Joint Venture's assets and liabilities. In particular, property under development has been restated from $6,870,000 to $17,437,000, current assets have been restated from $36,856,000 to $46,272,000, current liabilities have been restated from $65,181,000 to $65,483,000 and minority interest in joint venture has been restated from $Nil to $9,917,000.

(b) Liabilities and Equity

In November 2003, the CICA amended Section 3860, "Financial Instruments - Disclosure and Presentation ", to require that certain obligations that may be settled at the issuer's option in cash or the equivalent value by a variable number of the issuer's own equity instruments be presented as a liability. The amendments to Section 3860 are effective for fiscal years beginning on or after November 1, 2004. The Trust has applied the provisions of Section 3860 retroactively, with restatement of prior years presented. The amendments result in the Trust's convertible debentures being classified as a liability on the consolidated interim balance sheets and the associated interest expense correspondingly being classified as "interest on convertible debentures" on the consolidated interim statements of net earnings (loss).

As a result of the reclassification, other expenses for the three months ended June 30, 2004 increased by $1,709,000, other expenses for the six months ended June 30, 2004 increased by $3,161,000, and deferred debt issuance costs as at December 31, 2004 increased by $2,251,000.

As the associated interest expense was already included in the June 30, 2004 per unit net earnings (loss) calculations, this reclassification does not impact per unit earnings for the three months and six months ended June 30, 2004.

3. 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 to a condominium developer. The property was sold for proceeds of $10.8 million, consisting of $7.0 million cash and a $3.8 million vendor take-back ("VTB") mortgage. The VTB mortgage is secured by the property, bears interest at 8.0% and is due when the proceeds from construction financing are advanced on the condominium development, which is expected during the third quarter. Royal Host operated the property as a hotel for the period subsequent to the closing date in order to wind-up the hotel operations. Royal Host was entitled to all operating revenues and funded all operating and closing costs during the wind-up period. The net cost of the winding up of the business, to a maximum of $2.0 million, is to be reimbursed to Royal Host in the form of a non-interest bearing, 18-month VTB mortgage (included in "long-term notes receivable"). The December 31, 2004 consolidated balance sheet and June 30, 2004 consolidated statement of net earnings (loss) have been restated to reflect these discontinued operations.

The Trust has received an offer to purchase of $3.1 million for a 95-room 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.

On November 26, 2004, the Trust completed the sale of a hotel property located in North Battleford, Saskatchewan for $1.2 million.

On May 28, 2004, the Trust completed the sale of a marina and recreational vehicle facility in Oklahoma, USA for $1.2 million.

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



Three Months Ended Six Months Ended
----------------------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
----------------------------------------

Hospitality revenue
Rooms 152 969 607 1,756
Food and beverage 1 376 169 727
Other hospitality revenue 10 104 37 203
----------------------------------------
163 1,449 813 2,686

Hospitality expenses 369 1,416 1,152 2,904
----------------------------------------

Gross margin (206) 33 (339) (218)
----------------------------------------

Other expenses
Interest on capital leases 1 2 2 5
Depreciation and amortization 7 147 80 306
Future income taxes
(recovery) (21) 122 (299) (220)
Capital and other taxes - 6 5 7
(Gain) loss on foreign currency
translation (5) 41 (4) 35
Property impairment provision (4) 498 (21) 498
(Gain) loss on disposition 30 (196) 221 (196)
----------------------------------------
8 620 (16) 435
----------------------------------------

Loss from discontinued
operations (214) (587) (323) (653)
----------------------------------------
----------------------------------------


4. PROPERTY UNDER DEVELOPMENT

A subsidiary of Royal Host is participating in a joint venture to develop the Royal Private Residence Club on a portion of the property at the Grand Okanagan Lakefront Resort and Conference Centre in Kelowna, British Columbia for resale. Construction of the first phase of the project, a parkade, commenced in January 2004 and was completed in October 2004. Construction of the residence units commenced in May 2004. As the project is still in the development phase, no revenue has been recognized. All costs incurred have been capitalized to "property under development".

As stated in Note 2(a), Royal Host consolidates the joint venture. The $9,005,000 (December 31, 2004 - $9,917,000) minority interest in joint venture on the consolidated balance sheet as at June 30, 2005 represents the portion of net assets of the joint venture 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. The loan proceeds are to be used to complete the project. During the period, $3.4 million was drawn on the construction loan and $8.0 million was drawn on the mezzanine loan.

Royal Host has provided a completion, cost overrun and debt service deficiency guarantee on the $20.0 million construction loan, a specific guarantee of the payment of notes receivable from certain limited partners and a guarantee on an $8.0 million mezzanine loan.

Included in property under development is $141,335 in capitalized interest as at June 30, 2005 (December 31, 2004 - $Nil).



5. CAPITAL ASSETS

(in $000's)
----------------------------------------
Gross Book Accumulated Net Book
Value Amortization Value
----------------------------------------
June 30, 2005

Buildings 310,084 58,237 251,847
Land 38,815 - 38,815
Furniture, fixtures,
and equipment 45,293 35,950 9,343
Paving and other 1,635 724 911
----------------------------------------
395,827 94,911 300,916
Intangible assets:
Franchise rights and
management contracts 27,414 16,166 11,248
Customer lists and
intellectual capital 7,270 7,045 225
Capital assets under
development 3,939 - 3,939
----------------------------------------
434,450 118,122 316,328
----------------------------------------
----------------------------------------


(in $000's)
----------------------------------------
Gross Book Accumulated Net Book
Value Amortization Value
----------------------------------------

December 31, 2004

Buildings 309,113 53,966 255,147
Land 38,644 - 38,644
Furniture, fixtures,
and equipment 44,660 34,248 10,412
Paving and other 1,320 460 860
----------------------------------------
393,737 88,674 305,063
Intangible assets:
Franchise rights and
management contracts 27,414 15,278 12,136
Customer lists and
intellectual capital 7,270 6,970 300
Capital assets under
development 2,747 - 2,747
----------------------------------------
431,168 110,922 320,246
----------------------------------------
----------------------------------------


6. MORTGAGES

(in $000's)
------------------------
June 30, December 31,
2005 2004
------------------------

Mortgages secured by hotel properties 168,913 156,979
Less: current portion 17,715 39,083
------------------------
151,198 117,896
------------------------
------------------------


Principal repayments required for the years ending June 30:

(in $000's)
------------
2006 17,715
2007 4,239
2008 21,163
2009 3,790
2010 25,074
Subsequent 96,932
------------
168,913
------------
------------


On January 13, 2005, Royal Host completed the early replacement of mortgage debt on the Grand Okanagan Lakefront Resort and Conference Centre. The existing $25.0 million mortgage, which was originally scheduled to mature in August 2005, was increased to $35.0 million for a five-year term with a 7.50% fixed interest rate. The additional proceeds have been used for working capital and general corporate purposes.

Debt issuance costs are deferred and amortized over the term of the related debt. For the six months ended June 30, 2005, $768,000 was included in amortization (2004 - $305,000).


7. 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 June 30, 2005 are as follows:



(in $000's)
------------------------
June 30, December 31,
2005 2004
------------------------

Present value of future minimum lease payments 1,370 1,524
Less: current portion of principal payments 491 563
------------------------
879 961
------------------------
------------------------


Total repayments required for the years ending June 30:

(in $000's)
------------

2006 591
2007 471
2008 406
2009 76
------------
Future minimum lease payments 1,544
Less: amounts representing interest 174
------------
Present value of future minimum lease payments 1,370
------------
------------


8. UNITHOLDERS' EQUITY

(in $000's)
------------------------
June 30, December 31,
2005 2004
------------------------

Balance, beginning of period,
as previously reported 93,366
Prior period adjustment (Note 2(b)) 1,183
---------
Balance, beginning of period, restated 83,107 94,549

Net loss (2004 restated - Note 2(b)) (933) (5,197)
Issuance of trust units and contributed
surplus pursuant to redemption
of redeemable partnership units 25,085 -
Issuance of trust units pursuant
to distribution reinvestment plan 198 309
Employee loans pursuant to employee
unit purchase program 1 17
Equity financing issue costs - (1,607)
Restatement of debenture financing
issue costs (Note 2(b)) - 1,664
Trust units cancelled pursuant to normal
course issuer bid, net
of contributed surplus of $360,000 (541) -
Equity distributions
Trust units (4,575) (5,872)
Redeemable partnership units (378) (756)
------------------------
101,964 83,107
Convertible equity
Redeemable partnership units - 27,500
------------------------

Balance, end of period 101,964 110,607
------------------------
------------------------



----------------------------
(a) Unit capital Number of
Units (in $000's)
----------------------------

Balance, December 31, 2003 24,762,344 223,537
Issuance of trust units pursuant
to distribution reinvestment plan 62,598 309
----------------------------

Balance, December 31, 2004 24,824,942 223,846
Issuance of trust units pursuant
to distribution reinvestment plan 37,163 198
Trust units cancelled pursuant
to normal course issuer bid (100,000) (901)
Issuance of trust units pursuant
to redemption of redeemable
partnership units (Note 8(b)) 2,706,682 24,387
----------------------------

Balance, June 30, 2005 27,468,787 247,530
----------------------------
----------------------------


As is common with Real Estate Investment Trusts and other income trusts, Royal Host distributes cash in excess of the net earnings, resulting in an accumulated deficit, which amounts to $142,909,000 at June 30, 2005 (December 31, 2004 - $137,023,000).

Commencing on December 21, 2004, Royal Host initiated a normal course issuer bid to repurchase a maximum of 1.2 million of its issued and outstanding trust units. In April 2005, 100,000 Royal Host trust units were repurchased at an aggregate cost of $541,000.

(b) Redeemable Partnership Units

During the period, 3,151,433 redeemable partnership units were redeemed by way of a combination of issuance of 2,706,682 Royal Host trust units and $2,414,998 in cash. The redeemable partnership units were held by entities controlled by certain officers and trustees of Royal Host. As such, the redemption of the redeemable partnership units was a related party transaction and was recorded at the historical amount of the redeemable partnership units in the financial statements. The trust units issued on the redemption have been recorded to unit capital and contributed surplus. The net carrying value of the redeemable partnership units of $25.1 million, being $27.5 million net of cash of $2.4 million, has been recorded to unit capital in the amount of $24.4 million with the balance of $0.7 million being recorded to contributed surplus.

As at June 30, 2005, a total of 10 (2004 - 3,151,443) redeemable partnership units were outstanding. Holders of these redeemable units are entitled to receive distributions from Royal Host equivalent to the distributions paid to holders of Royal Host trust units. In addition, each partnership unit is redeemable by the holders, for one Royal Host unit or for cash based on the market value of Royal Host's trust units. Royal Host, in its sole discretion, may redeem the redeemable partnership units by way of issuance of trust units of Royal Host or payment of cash.

(c) Unit Options

Royal Host has reserved 1,883,000 units under its unit option plan. As at June 30, 2005, Royal Host has unit options outstanding to certain board members, employees, and consultants to purchase an aggregate of 137,500 units (December 31, 2004 - 137,500 units) at an exercise price of $10.00 per unit (December 31, 2004 -$10.00). All unit options were issued prior to 1999 and were fully vested and exercisable at June 30, 2005 and December 31, 2004. The options currently outstanding expire on October 31, 2007.

During the six months ended June 30, 2005 and 2004, no options were issued or exercised and no options expired (December 31, 2004 - Nil).

9. PER UNIT CALCULATIONS

There were 27,468,787 trust units outstanding as at June 30, 2005 (June 30, 2004 - 24,793,785). 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 $378,000 (June 30, 2004 -$378,000).

The diluted earnings (loss) per unit are the same as the basic amounts presented as all items that can result in units being issued are anti-dilutive for both the three and six months ended June 30, 2005 and 2004.



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

Net earnings - continuing
operations 2,528
Less: distributions
on redeemable
partnership units (94)
--------------
Basic earnings - continuing
operations 2,434 0.09
Basic loss - discontinued
operations (214) (0.01)
-------------- --------------
Basic earnings - total
operations 2,220 25,894 0.08
-------------------------------------------
-------------------------------------------


-------------------------------------------
Weighted
For the three months Average
ended June 30, 2004: Units Per Unit
(restated - Notes 2 and 3) (in $000's) (in 000's) ($)
-------------------------------------------

Net earnings - continuing
operations 339
Less: distributions
on redeemable
partnership units (189)
--------------
Basic earnings - continuing
operations 150 0.01
Basic loss - discontinued
operations (587) (0.02)
-------------- --------------
Basic loss - total
operations (437) 24,566 (0.01)
-------------------------------------------
-------------------------------------------


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

Net earnings - continuing
operations (610)
Less: distributions
on redeemable
partnership units (378)
--------------
Basic earnings - continuing
operations (988) (0.04)
Basic loss - discontinued
operations (323) (0.01)
-------------- --------------
Basic earnings - total
operations (1,311) 25,257 (0.05)
-------------------------------------------
-------------------------------------------


-------------------------------------------
Weighted
For the six months Average
ended June 30, 2004: Units Per Unit
(restated - Notes 2 and 3) (in $000's) (in 000's) ($)
-------------------------------------------

Net earnings - continuing
operations (1,809)
Less: distributions
on redeemable
partnership units (378)
--------------
Basic earnings - continuing
operations (2,187) (0.09)
Basic loss - discontinued
operations (653) (0.03)
-------------- --------------
Basic loss - total
operations (2,840) 24,558 (0.12)
-------------------------------------------
-------------------------------------------


10. CHANGES IN NON-CASH WORKING CAPITAL


Three Months Ended Six Months Ended
(in $000's) (in $000's)
----------------------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
----------------------------------------

(Increase) decrease in:
Accounts and notes receivable 2,550 (288) (1,855) 323
Prepaid expenses (1,067) (1,134) (1,080) (1,965)
Inventories (68) 25 (66) 155
Assets of discontinued
operations (225) - (140) -
----------------------------------------
1,190 (1,397) (3,141) (1,487)
----------------------------------------

Increase (decrease) in:
Accounts payable and
accrued liabilities 2,713 492 3,283 37
Interest accrued on
convertible debentures 277 1,463 16 539
Other liabilities 49 257 (438) 163
Deferred revenue (89) (143) 18 (268)
Liabilities of discontinued
operations (1,666) - (345) -
----------------------------------------
1,284 2,069 2,534 471
----------------------------------------

2,474 672 (607) (1,016)
----------------------------------------
----------------------------------------


11. SUBSEQUENT EVENT

Commencing on July 15, 2005, Royal Host initiated a normal course issuer bid to repurchase up to $2,000,000 in principal of its issued and outstanding 9.25% convertible debentures. To date, Royal Host has not repurchased any of the debentures.

12. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the presentation adopted for 2005.


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