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

Royal Host Real Estate Investment Trust

November 10, 2005 09:00 ET

Royal Host Reports Strong Third Quarter Results

CALGARY, ALBERTA--(CCNMatthews - Nov. 10, 2005) - Royal Host Real Estate Investment Trust (TSX:RYL.UN) (TSX:RYL.DB) (TSX:RYL.DB.A) (TSX:RYL.DB.B) ("Royal Host" or the "Trust"), today announced its financial results for the three and nine months ended September 30, 2005.

In the third quarter of 2005, Royal Host continued to make significant progress towards its stated goal of focusing on its core businesses, and again delivered strong operating and financial results. The third quarter is traditionally the Trust's strongest and this quarter was no exception, with results in line with Management's expectations. Cash available for distribution for the three months ended September 30, 2005 was $9.6 million, an increase of $1 million or 11.7% over the same period in 2004. For the nine months ended September 30, 2005, cash available for distribution was $15.8 million, an increase of $2.1 million or 15.0% over the $13.7 million in the same period in 2004. For the nine months, cash available for distribution improved to $0.61 per unit, an increase of 8.9% over the $0.56 per unit realized in 2004.

Mr. Greg Royer, President and Chief Executive Officer, stated, "I am very pleased with the third quarter results and they reflect the company's focus on its core strengths. In particular the growth in ADR and improvement in gross margin and earnings is a result of our proven ability to prioritize activities that add to the bottom line. With the strong team that we have in place and the recent successful capital funding completed in October, Royal Host is well positioned to move forward."



Key Hotel Operating Statistics
------------------------------------------------------------------------
Three Months Ended Sept 30 Nine Months Ended Sept 30
2005 2004 Change 2005 2004 Change
------------------------------------------------------------------------
Average Daily
Rate (ADR) $99.50 $95.81 3.9% $94.32 $91.30 3.3%
Occupancy 75.0% 75.2% (0.3%) 67.8% 68.5% (1.0%)
Revenue Per
Available Room
(RevPAR) $74.63 $72.06 3.6% $63.91 $62.51 2.2%
------------------------------------------------------------------------


Revenue for the quarter was $41.2 million, an increase of $1.1 million or 2.9% over the same period in 2004. This brings revenue for the nine month period to $109.3 million, a $3.8 million increase of 3.7% as compared to 2004. The improvements are in all areas of the Trust's business, driven primarily by an overall increase in rooms revenue driven by improving Average Daily Rate of 3.3%, a focus on adding to our food and beverage base, delivering on third party management services and continued strong franchise fees. Even more encouraging is the continued improvement in gross margins where the Trust delivered an increase of 5.5% to $14.8 million or 36.0% of revenue for the quarter. For the year-to-date, the Trust realized a gross margin improvement of $2.1 million to $32.9 million. The 6.8% increase represents a gross margin of just over 30% of revenue for the nine months.

During 2005 the Trust, in addition to a focus on controlling costs, has undertaken a program that is directed at promoting customer retention. During the first nine months the Trust has replaced over 2,200 beds in 18 of its hotels and has replaced over 1,200 televisions in 20 of its hotels. Its high-speed Internet access program is almost complete and by year-end, it is expected that this service will be available in all of its properties.

On October 20, 2005, the Trust completed a successful offering of 6.0% Convertible Unsecured Subordinated Debentures. The debentures mature in 10 years in 2015 and the holders have a conversion option at a price of $6.85 per unit. The size of the offering was $60 million and the Trust netted $57.5 million after all estimated costs. These funds provide the Trust with greater overall financial flexibility and ensures Royal Host has a stable and long-term, cost-effective base of capital, which is a very important component to its strategy going forward.

The Trust has applied $27.8 million of these funds to retire outstanding mortgage debt. Of this amount, $25.8 million was used to repay principal and interest, with the balance of $2.0 million being penalties incurred for the early retirement. The early retirement payments will be recorded as an expense in the fourth quarter. As a result, the Trust now has seven hotels which are no longer pledged as security, thereby providing additional financial flexibility.

Overall, Royal Host was very encouraged with the strong third quarter results. 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. The Trust anticipates that the growth in ADR will continue and is optimistic about the remainder of 2005. In looking forward, with the funds received from the successful Convertible Debenture offering, the Trust is well positioned to continue its growth and realize on opportunities to add value and deliver on its goal of providing sustainable distributions. The Trust will continue to focus on improving and adding to 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 Friday, November 11, 2005, at 11:30 AM Eastern Standard Time. Investors and analysts are invited to access the call by dialing 1-888-333-4519 or 1-416-695-9711. 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 12 through November 18, 2005. To access this recording please dial 1-888-509-0081 or 1-416-695-5275.

Royal Host REIT owns 37 hotels, manages 118 properties, and franchises 118 locations representing 18,000 guestrooms in the mid-market to upscale segments. Royal Host also owns the master franchise rights for the Travelodge brand in Canada and provides hotel and resort management services for its portfolio and to third party 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 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", and "RYL.DB.B", respectively.

This press release contains certain forward-looking statements relating, but not limited to, Royal Host's operations, anticipated financial performance, business prospects, and strategies. Forward-looking information typically contains statements with words such as "anticipate", "believe", "expect", "plan", or similar words suggesting future outcomes. Such forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by such forward-looking statements. Such factors include, but are not limited to economic, competitive, and lodging industry conditions. Royal Host disclaims any responsibility to update any such forward-looking statements except as required by law.

ROYAL HOST REAL ESTATE INVESTMENT TRUST

MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION

FOR THE PERIOD ENDED SEPTEMBER 30, 2005

THIRD QUARTER 2005

The following Management's Discussion and Analysis of Operations and Financial Condition ("MD&A") dated November 9, 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 nine months ended September 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 Nine Months Ended
($000's, except Sept. Sept. Sept. Sept.
as otherwise noted) 30/05 30/04 Change 30/05 30/04 Change
(Restated) % (Restated) %
------------------------------------------------------------------------

Hospitality Revenue
(continuing operations)
Room 30,317 29,199 3.8 77,478 75,702 2.3
Food and Beverage 6,110 5,950 2.7 18,937 17,778 6.5
Other 4,811 4,938 (2.6) 12,896 11,975 7.7
----------------- ------------------
41,238 40,087 2.9 109,311 105,455 3.7
----------------- ------------------
----------------- ------------------


Gross Margin 14,845 14,072 5.5 32,873 30,786 6.8
----------------- ------------------

Gross Margin % 36.0 35.1 2.6 30.1 29.2 3.1
----------------- ------------------

Net Earnings (Loss)
From Continuing
Operations 3,528 2,774 27.2 2,918 965 202.4
From Discontinued
Operations 81 532 (84.8) (242) (121) 100.0
----------------- ------------------
3,609 3,306 9.2 2,676 884 202.7
----------------- ------------------
----------------- ------------------

Basic Per Unit Net
Earnings (Loss) ($)
From Continuing
Operations 0.13 0.11 18.2 0.10 0.02 400.0
From Discontinued
Operations - 0.02 - (0.01) (0.01) -
----------------- ------------------
0.13 0.13 - 0.09 0.01 800.0
----------------- ------------------
----------------- ------------------

Diluted Per Unit Net
Earnings (Loss) ($)
From Continuing
Operations 0.13 0.10 30.0 0.10 0.02 400.0
From Discontinued
Operations - 0.02 - (0.01) (0.01) -
----------------- ------------------
0.13 0.12 8.3 0.09 0.01 800.0
----------------- ------------------
----------------- ------------------

Cash Available
for Distribution 9,562 8,558 11.7 15,782 13,722 15.0
----------------- ------------------
----------------- ------------------

Basic Per Unit Cash
Available For
Distribution ($) 0.35 0.35 - 0.61 0.56 8.9
----------------- ------------------
----------------- ------------------

Diluted Per Unit
Cash Available for
Distribution ($) 0.29 0.26 11.5 0.54 0.50 8.0
----------------- ------------------
----------------- ------------------

Distributions
Declared 2,748 1,468 87.2 7,377 4,404 67.5
----------------- ------------------
----------------- ------------------

Basic Per Unit
Distributions
Declared ($) 0.10 0.06 66.7 0.28 0.18 55.6
----------------- ------------------
----------------- ------------------

Number of Units
Outstanding (000's),
end of period 27,479 24,809 10.8
-----------------
-----------------
(375,000 were
repurchased in late
September under the
Normal Course Issuer
Bid and cancelled
subsequent to
quarter end)


The third quarter is traditionally the Trust's strongest and this quarter was no exception, with results in line with Management expectations. The Trust believes that a key measure of performance is cash available for distribution to unitholders. Cash available for distribution for the three months ended September 30, 2005 was $9.6 million, an increase of $1.0 million, or 11.7%, over the same period in 2004. For the nine months ended September 30, 2005, cash available for distribution was $15.8 million, an increase of $2.1 million or 15.0% over the $13.7 million in the same period in 2004. On a per unit basis cash available for distribution for the three months was $0.35, equal to the $0.35 realized in 2004. This reflects a 10.8% increase in the underlying number of units as a result of the conversion of redeemable partnership units in the second quarter. For the nine months, cash available for distribution improved to $0.61 per unit, an 8.9% increase over the $0.56 per unit realized in 2004.

On October 20, 2005, the Trust completed a $60 million offering of Convertible Unsecured Subordinated Debentures. The debentures have a coupon rate of 6% and mature in ten years (2015). The holders have a conversion option at a price of $6.85 per unit. The net proceeds from the offering totaled $57.5 million after all estimated costs. This is a very important step in positioning the Trust for future success and providing overall financial flexibility. These funds ensure the Trust has a stable and long-term, cost-effective base of capital, which is a very important component to our strategy going forward.

Subsequent to September 30, 2005, the Trust applied $27.8 million of these funds towards the retirement of outstanding mortgage debt. Of this amount $25.6 million was used to repay principal, $0.2 million to pay interest, with the balance of $2.0 million being penalties incurred for the early retirement. The early retirement payments will be expensed in the fourth quarter.

As a result, the Trust has no mortgage debt obligations, other than ongoing principal repayments, that are due before November 2009. In addition, the repayment of this debt has resulted in the removal of security on seven properties, which provides the Trust with additional financial flexibility. Of the properties that are now unsecured, Management has identified two that have development opportunities with substantial upside.

Royal Host is now positioned to fund all capital activities that have been identified in its existing asset base and that meet its return on investment thresholds. The Trust intends to continue to pursue and maximize its Normal Course Issuer Bids for both its Units and the 9.25% Convertible Debentures. Management anticipates funding the balance of the Royal Private Residence Club development project with internal cash on hand. The Trust is also now positioned to ensure it has funding to repay the 9.25% $40 million Convertible Debentures when they become due in March 2007. Royal Host will continue to actively seek acquisition opportunities that meet its parameters and are in its core areas and expertise.

In summary, this financing will allow the Trust to take the next step from focusing on internal strengths to measured growth. The goal, as always, is to produce increasing distributions that are generated from a very stable base.

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 (ADR), Occupancy, Revenue per Available Room (RevPAR), 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.

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



Three Months Ended Nine Months Ended
Sept. Sept. Sept. Sept.
30/05 30/04 Change 30/05 30/04 Change
$ $ % $ $ %
------------------------------------------------------------------------
Average Daily Rate
("ADR")
- Continuing
Operations 99.50 95.81 3.9 94.32 91.30 3.3
- Total Operations 99.23 95.26 4.2 94.02 90.87 3.5

Occupancy
- Continuing
Operations 75.0 75.2 (0.3) 67.8 68.5 (1.0)
- Total Operations 74.2 74.8 (0.8) 66.7 67.8 (1.6)

Revenue Per Available
Room ("RevPAR")
- Continuing
Operations 74.63 72.06 3.6 63.91 62.51 2.2
- Total Operations 73.64 71.21 3.4 62.74 61.59 1.9


The RevPAR in the third quarter from same store sales, increased primarily as a direct result of the overall improvement in ADR. The biggest gain was seen in the Western region where RevPAR increased by 6.8% as a result of a 4.1% increase in ADR and 2.6% increase in Occupancy. In Ontario, the largest region, the Trust saw an increase in ADR of 3.9% offset by a decline in Occupancy of 1.6%, resulting in a net overall RevPAR increase of 2.2%. In the Atlantic region, the smallest area, there was an overall decline in RevPAR of 3.3% driven by a decline in Occupancy of 5.8%.

Seasonality

The hospitality business is seasonal in nature. The Trust's 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.



Cash Available from Operations and Cash Available for Distribution


($000's, except Three Months Ended Nine Months Ended
as otherwise noted) Sept. 30/05 Sept. 30/04 Sept. 30/05 Sept. 30/04
------------------------------------------------------------------------

Earnings From
Continuing Operations 3,528 2,774 2,918 965

Add:
Depreciation and
Amortization 3,790 4,265 11,306 12,817
Property Impairment
Provision 590 - 980 -
Future Income Taxes 1,627 1,314 1,271 378
------------------------------------------------

Cash Available from
Continuing Operations 9,535 8,353 16,475 14,160
Cash Available from
Discontinued Operations 27 394 (315) 129
------------------------------------------------
Cash Available from
Operations 9,562 8,747 16,160 14,289

Less: Distributions
on Redeemable
Partnership Units - (189) (378) (567)
------------------------------------------------

Cash Available
for Distribution 9,562 8,558 15,782 13,722
------------------------------------------------
------------------------------------------------

Distributions Declared 2,748 1,468 7,377 4,404
------------------------------------------------
------------------------------------------------

Basic Per Unit Cash
Available For
Distribution ($) 0.35 0.35 0.61 0.56
------------------------------------------------
------------------------------------------------

Diluted Per Unit Cash
Available For
Distribution ($) 0.29 0.26 0.54 0.50
------------------------------------------------
------------------------------------------------

Basic Per Unit
Distributions
Declared ($) 0.10 0.06 0.28 0.18
------------------------------------------------
------------------------------------------------


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 September 30, 2005 increased by 11.7% to $9.6 million (2004 - $8.6 million). Cash available for distribution for the nine months ended September 30, 2005 increased by 15.0% to $15.8 million (2004 - $13.7 million). This is a direct result of the strong third quarter driven by an overall improvement in ADR and steady Occupancy, coupled with strong other revenue and an improved gross margin.

Royal Host's Trustees approve distributions based on, among other things, projected cash flows, capital requirements, and working capital needs. 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. In January 2005, as a direct result of improved results, distributions per unit were increased from $0.02 to $0.03 per month. The Trustees further increased distributions per unit to $0.035 commencing with the September 2005 distribution.

During the quarter the Trust declared distributions of $2.7 million (2004 - $1.5 million) bringing distributions declared to the end of September to $7.4 million (2004 - $4.4 million).

In addition to the distributions, the Trust used cash from operations to fund recurring principal repayments of $1.0 million for the quarter bringing total principal repayments to $3.0 million for the nine month period. Ongoing maintenance capital is estimated at 4% of total revenues. Based on this estimate, approximately $4.4 million of the total capital of the $5.1 million spent during the period would be considered maintenance capital. Of this amount a certain portion is to be funded from restricted cash.

FORWARD-LOOKING STATEMENTS

Certain statements in this MD&A, including those in the Outlook section, relate to future periods commencing after September 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2005 (Continuing Operations)

Hospitality Revenue

Hospitality revenue for the three months increased $1.1 million or 2.9% to $41.2 million (2004 - $40.1 million). Substantially, all of the increase is attributable to the improvement in rooms revenue.

Hospitality revenue for the nine months increased $3.8 million or 3.7% to $109.3 million (2004 - $105.5 million). Increases were realized in all areas with improving rooms revenue being supplemented by very strong food and beverage and other hospitality revenue.

Rooms Revenue

Rooms revenue for the three months from same store sales increased $1.1 million or 3.8% to $30.3 million (2004 - $29.2 million), a result of the 3.9% increase in ADR to $99.50 (2004 - $95.81), which more than offset a decrease in Occupancy of 0.3% to 75.0% (2004 - 75.2%). The increase in ADR is a result of Management's focused program on room rate yield management and improving overall industry rates.

Rooms revenue for the nine months increased $1.8 million or 2.3% to $77.5 million (2004 - $75.7 million). This is due to a 3.3% increase in ADR to $94.32 (2004 - $91.30), which more than offset a 1.0% decrease in Occupancy to 67.8%.

Food and Beverage Revenue

Food and beverage revenue for the three months increased $0.1 million, or 2.7% to $6.1 million (2004 - $6.0 million), based on same store sales. Improvements were realized in all areas with only the Grand Okanagan Resort experiencing a year over year decrease, as a direct result of a decrease in banquets. The Grand had an exceptionally large number of banquets in the third quarter of 2004, which were not repeated in 2005.

Food and beverage revenue for the nine months increased by $1.1 million or 6.5% to $18.9 million (2004 - $17.8 million), due to improving operations in a number of properties and the addition of food and beverage operations in two of our hotel properties.

Other Hospitality Revenue

Other hospitality revenue for the three months decreased $0.1 million or 2.6% to $4.8 million (2004 - $4.9 million). Travelodge franchise fees and ongoing management fees continue to be strong. Royal Host receives management fees based on the properties' gross revenue.

Other hospitality revenue for the nine months was very solid, increasing $0.9 million or 7.7% to $12.9 million (2004 - $12.0 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. The revenue from the new contracts more than offset the reduction resulting from the termination of the Peninsula contract and continuing planned decrease in timeshare activities.

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 64.0% (2004 - 64.9%).

Hospitality expenses for the nine months decreased as a percentage of revenue to 69.9% a decrease from 70.8% in the same period in 2004. Total hospitality expenses increased by $1.7 million or 2.3% to $76.4 million (2004 - $74.7 million). Despite increased food and beverage revenues, which have higher proportionate costs than room revenue, 54% of the $3.8 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

As a result of strong revenue growth in rooms revenue, a direct consequence of higher ADR and success in managing hospitality expenses, gross margin percentage for the quarter increased to 36.0%. This is a 2.6% increase compared to the 2004 gross margin percentage of 35.1%.

Gross margin for the nine months increased $2.1 million or 6.8% to $32.9 million (2004 - $30.8 million) as a result of the higher revenues. Gross margin as a percentage of revenue improved by 3.1% to 30.1% (2004 - 29.2%). This overall improvement was realized despite an increase in food and beverage operations, which have higher proportionate costs than rooms revenue.

Other Expenses

Other expenses were steady during the quarter at $11.3 million (2004 - $11.3 million). The Trust realized a $0.5 million decrease in depreciation and amortization due to a number of assets being fully depreciated in 2005. This was offset by an impairment provision of $0.6 million taken on the timeshare property in Mexico. Interest expense decreased primarily as a result of lower overall capital costs and offsetting interest income.

Year-to-date other expenses increased by less than 1% to $30.0 million as compared to $29.8 million. The Trust was able to reduce net interest expense by $0.8 million from lower overall rates and interest income received on notes receivable. This was offset by a higher future income tax estimate, which is a non-cash item. Also included is $1.0 million in property impairment provisions, which is also a non-cash item.

Net Earnings

As a result of the strong revenue growth, improved gross margins, and an overall decrease in other expenses, net earnings from continuing operations for the quarter improved to $3.5 million and net earnings from total operations increased to $3.6 million. This compares to net earnings from continuing operations of $2.7 million and earnings of $3.3 million from total operations in the third quarter 2004.

Year-to-date net earnings are $2.7 million as a result of the strong third quarter. This is an increase of $1.8 million, or 202.7% over the $0.9 million net earnings realized in 2004.

DISCONTINUED OPERATIONS

For the three months ended September 30, 2005, revenue and gross margin from discontinued operations were $0.2 million (2004 - $1.6 million) and $Nil (2004 - $0.3 million). For the nine months ended September 30, 2005, revenue and gross margin from discontinued operations were $1.1 million (2004 - $4.3 million) and negative $0.3 million (2004 - $0.1 million), 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, which was collected in the third quarter. 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 September 30, 2005, $2.0 million of the subordinated vendor take-back mortgage was recognized and included in Long-term Notes Receivable. Cash proceeds received 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 agreement.



SUMMARY OF QUARTERLY FINANCIAL RESULTS

2005 2004 2003
($000's, except
as otherwise
noted) Q3 Q2 Q1 Q4 Q3 Q2 Q1 Q4
------------------------------------------------------------------------
Revenue 41,238 37,998 30,075 33,330 40,087 35,621 29,747 30,379
----------------------------------------------------------
----------------------------------------------------------

Net Earnings
(Loss)
From
Continuing
Operations 3,528 2,528 (3,138) (6,102) 2,774 339 (2,148) (2,740)
From
Discontinued
Operations 81 (214) (109) 388 532 (587) (66) (95)
----------------------------------------------------------
3,609 2,314 (3,247) (5,714) 3,306 (248)(2,214) (2,835)
----------------------------------------------------------
----------------------------------------------------------

Cash Available
for
Distribution
From
Continuing
Operations 9,535 6,140 422 (1,995) 8,164 4,508 921 2,630
From
Discontinued
Operations 27 (202) (140) 1,043 394 (16) (249) 156
----------------------------------------------------------
9,562 5,938 282 (952) 8,558 4,492 672 2,786
----------------------------------------------------------
----------------------------------------------------------

Per Unit
Results
Earnings
from
Continuing
Operations
Basic 0.13 0.09 (0.14) (0.26) 0.11 0.01 (0.10) (0.12)
Diluted 0.13 0.09 (0.14) (0.26) 0.10 0.01 (0.10) (0.12)

Earnings
from
Total
Operations
Basic 0.13 0.08 (0.14) (0.24) 0.13 (0.01) (0.10) (0.12)
Diluted 0.13 0.08 (0.14) (0.24) 0.12 (0.01) (0.10) (0.13)

Cash
Available
from
Continuing
Operations
Basic 0.35 0.24 0.02 (0.08) 0.33 0.18 0.04 0.11
Diluted 0.29 0.20 0.01 (0.08) 0.25 0.18 0.03 0.07

Cash
Available
from
Total
Operations
Basic 0.35 0.23 0.01 (0.04) 0.35 0.18 0.03 0.11
Diluted 0.29 0.20 0.01 (0.04) 0.26 0.18 0.02 0.08


LIQUIDITY AND CAPITAL RESOURCES

As at September 30, 2005, cash and short-term investments were $10.5 million and undrawn credit facilities were $12.0 million. The $3.8 million vendor take-back mortgage was collected in the third quarter. Restricted cash as at September 30, 2005 was $8.5 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 and to cover municipal tax obligations. During the nine months ended September 30, 2005, the Trust added $1.2 million to restricted cash in connection with the Grand Okanagan Resort. It is anticipated that approximately $3 million of the restricted cash will be drawn down in the fourth quarter for approved expenditures made during 2005.

These liquid resources, together with Royal Host's future cash flows, and the Convertible Debenture issue completed in October, 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. 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 (PRC), 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 available to be used to complete the project. During the nine months ended September 30, 2005, $7.4 million was drawn on the construction loan with $4.0 million being drawn in the third quarter. The full amount of $8.0 million was drawn on the mezzanine loan in April 2005.

Mortgages increased to $171.6 million (December 31, 2004 - $157.0 million) due in part to the replacement financing and PRC funding described above, offset by overall repayments of $12.3 million. The current portion of mortgages and other debt has decreased to $21.7 million and includes $15.4 million related to the Royal Private Residence Club from $39.1 million at December 31, 2004.

The Trust expects that the sale of residence units will be sufficient to repay all amounts related to the PRC as they become due in 2006. It anticipates funding all future development to completion from cash on hand. The Trust currently has $12.6 million available from undrawn project credit facilities available to fund the PRC if required. In addition the Trust has also arranged a takeout commitment of up to $13 million from a US lender who specializes in resort funding should it be required.

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



Mortgages and Leases
As at September 30, 2005
($000's) Total 2006 2007 2008 2009 2010 Thereafter
------------------------------------------------------------------------

Mortgages 171,621 21,733 21,054 4,224 3,834 59,936 60,840
Obligations
Under Capital
Leases 1,387 520 490 373 4 - -
Obligations
Under Operating
Leases 520 251 134 79 34 22 -
--------------------------------------------------------
173,528 22,504 21,678 4,676 3,872 59,958 60,840
--------------------------------------------------------
--------------------------------------------------------


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

As at September 30, 2005, the average maturity of the mortgages is 4.8 years. If the Convertible Debentures are included, the average maturity is 4.0 years. The weighted average interest rate on mortgages outstanding at September 30, 2005 is 8.29%, which compares to the December 2004 rate of 8.45% (September 2004 - 8.70%). Including the Convertible Debentures, the weighted average interest rate is 8.40%, which compares to the December 2004 rate of 8.50% (September 2004 - 8.66%).

Subsequent to September 30, 2005, the Trust completed a $60 million offering of 6.0% Convertible Debentures. The offering closed on October 20, 2005; net proceeds to the Trust were $57.5 million. The Trust used $27.8 million of the proceeds to repay debt. Of this amount $25.6 million was applied to principal repayments, $0.2 million to interest, with the balance of $2.0 million being prepayment costs. As a result the Trust has no material debt maturities until November 2009. Including these repayments, Royal Host now has an overall average maturity of debt of 5.4 years and an average interest rate calculated to be 7.83%.

Investing Activities

During the three months ended September 30, 2005, Royal Host incurred $2.3 million in capital expenditures (three months ended September 30, 2004 - $2.0 million). During the nine months ended September 30, 2005, the Trust spent $5.1 million on capital expenditures (nine months ended September 30, 2004 - $4.4 million). A key focus has been on its customer retention program by improving existing facilities. The Trust has an ongoing capital program whereby it has replaced over 2,200 beds in 18 of its hotels and over 1,200 televisions in 20 of its hotels thus far in 2005. High-speed Internet access has been added in almost all properties and it is expected that this program will be completed by the end of 2005.

Restricted cash, described above, is available for funding certain hotel capital expenditures. A portion of the capital expenditures planned for the balance of 2005 will be funded out of restricted cash. It is forecast that total expenditures for 2005 will be approximately $6.5 million. This is lower than the $8 million originally forecast, and the Trust will be including the additional planned 2005 capital expenditures as part of the 2006 budget.

Property under development was $31.5 million as at September 30, 2005, an increase of $14.1 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. As at September 30, 2005, 72% 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 early in 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 $100.7 million as at September 30, 2005, attributable to the net earnings for the nine months ended September 30, 2005 of $2.7 million and distributions of $7.7 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 Bids

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. The Trust believes that the repurchase of units at current levels is accretive to unitholders. During the three months ended September 30, 2005, 375,000 trust units were repurchased at an average cost of $5.95 per unit. These were cancelled subsequent to the quarter end. This brings the total trust units repurchased during the nine months ended September 30, 2005 to 475,000, at an average cost of $5.84 per unit.

Subsequently, to November 8, 2005, the Trust has repurchased an additional 249,600 units at an average price of $5.95.

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

Redeemable Partnership Units

During the nine months ended September 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 a payment of $2.4 million. 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.

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

CHANGES IN ACCOUNTING POLICIES

The financial statements for the nine months ended September 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.

As a result of the reclassification, other expenses for the three months ended September 30, 2005 increased by $1.7 million, other expenses for the nine months ended September 30, 2004 increased by $4.9 million, and deferred debt issuance costs as at December 31, 2004 increased by $2.3 million.

OFF BALANCE SHEET ARRANGEMENTS

As at September 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 has made significant progress in 2005 toward its goal of simplification by focusing on its core competencies of hotel ownership, management and franchising. The Trust intends to continue to focus on expansion within its areas of expertise, which may include acquiring limited, full and focused service hotels in Canada. The funding of the Royal Private Residence Club has been finalized, construction is on track and on budget, and the Trust anticipates profitably exiting this non-core business in 2006. The management contract with Supertel Hospitality is performing very well as the Trust is delivering on its management promises and is contributing to overall profitability in 2005. The Trust will continue to focus on its customer retention programs with more beds and televisions being replaced and other improvements being completed.

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. The Trust anticipates that the growth in ADR will continue and is optimistic about the remainder of 2005. The Trust exits the third quarter with a strong focused team, a diversified portfolio, and a strong capital base. The Trust is well positioned to take advantage of this positive environment to continue its growth and realize on opportunities to add value and deliver on its goal of providing increasing distributions from a stable base of well-managed assets.



ROYAL HOST REAL ESTATE INVESTMENT TRUST

Consolidated Financial Statements
(unaudited)

For the period ended September 30, 2005


ROYAL HOST REAL ESTATE INVESTMENT TRUST
Consolidated Balance Sheets
in $000's
(unaudited)
As at
------------- ------------
September 30, December 31,
2005 2004
------------- ------------
(restated -
Notes 2
ASSETS and 3)
Current assets:
Cash and short-term investments 10,525 8,707
Accounts and notes receivable 11,567 9,435
Prepaid expenses 4,561 3,686
Inventories 3,072 2,993
Assets of discontinued operations (Note 3) 325 306
Property held for sale (Note 3) 2,704 2,704
Property under development (Note 4) 31,510 17,437
Future income taxes 716 1,004
------------- ------------
64,980 46,272

Restricted cash 8,545 6,380
Long-term notes receivable (Note 3) 2,243 466
Assets of discontinued operations (Note 3) - 10,456
Capital assets (Note 5) 314,538 320,246
Deferred debt issuance costs 4,387 5,061
------------- ------------
394,693 388,881
------------- ------------
------------- ------------


LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities 23,222 20,795
Equity distributions payable 995 561
Interest accrued on convertible debentures 1,456 1,686
Current portion of mortgages
(Notes 4, 6 and 13) 21,733 39,083
Current portion of obligations under
capital leases (Note 7) 442 563
Other liabilities 1,480 2,249
Liabilities of discontinued operations
(Note 3) 192 546
------------- ------------
49,520 65,483

Mortgages (Notes 4, 6 and 13) 149,888 117,896
Convertible debentures 75,000 75,000
Obligations under capital leases (Note 7) 799 961
Deferred revenue 713 688
Future income taxes 8,739 8,329
------------- ------------
284,659 268,357

Minority interest (Note 4) 9,351 9,917

Unitholders' equity (Note 8) 100,683 110,607
------------- ------------
394,693 388,881
------------- ------------
------------- ------------

See accompanying Notes to the 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 September September September
30, 2005 30, 2004 30, 2005 30, 2004
---------- ---------- ---------- ----------
(restated - (restated -
Notes 2 Notes 2
and 3) and 3)
Hospitality revenue
Rooms 30,317 29,199 77,478 75,702
Food and beverage 6,110 5,950 18,937 17,778
Other 4,811 4,938 12,896 11,975
---------- ---------- ---------- ----------
41,238 40,087 109,311 105,455

Hospitality expenses 26,393 26,015 76,438 74,669
---------- ---------- ---------- ----------

Gross margin 14,845 14,072 32,873 30,786
---------- ---------- ---------- ----------

Other expenses
Interest on
mortgages and
capital leases 3,092 3,500 9,661 10,499
Interest on
convertible
debentures 1,605 1,560 4,853 4,479
Depreciation and
amortization 3,790 4,265 11,306 12,817
Trust administration 433 465 1,615 1,420
Future income taxes 1,627 1,314 1,271 378
Capital and other
taxes 49 50 155 138
Loss on foreign
currency
translation 131 144 114 90
Property impairment
provision (Note 9) 590 - 980 -
---------- ---------- ---------- ----------
11,317 11,298 29,955 29,821
---------- ---------- ---------- ----------

Earnings from
continuing
operations 3,528 2,774 2,918 965

Earnings (loss)
from discontinued
operations (Note 3) 81 532 (242) (121)
---------- ---------- ---------- ----------

Net earnings 3,609 3,306 2,676 844
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------


Basic per unit net
earnings (Note 10)
- from continuing
operations 0.13 0.11 0.10 0.02
- from discontinued
operations 0.00 0.02 (0.01) (0.01)
---------- ---------- ---------- ----------
0.13 0.13 0.09 0.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Diluted per unit net
earnings (Note 10)
- from continuing
operations 0.13 0.10 0.10 0.02
- from discontinued
operations 0.00 0.02 (0.01) (0.01)
---------- ---------- ---------- ----------
0.13 0.12 0.09 0.01
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------


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 Nine Months Ended
---------- ---------- ---------- ----------
CASH PROVIDED BY September September September September
(USED IN): 30, 2005 30, 2004 30, 2005 30, 2004
---------- ---------- ---------- ----------
Operating activities
Net earnings 3,609 3,306 2,676 844
Net (earnings) loss
from discontinued
operations (Note 3) (81) (532) 242 121
Items not affecting cash:
Depreciation and
amortization 3,790 4,265 11,306 12,817
Future income taxes 1,627 1,314 1,271 378
Property impairment
provision (Note 9) 590 - 980 -
---------- ---------- ---------- ----------
Funds from continuing
operations 9,535 8,353 16,475 14,160
Funds from discontinued
operations 27 588 (315) (369)
Changes in non-cash
working capital
(Note 12) 2,211 (122) 1,604 (1,138)
---------- ---------- ---------- ----------
11,773 8,819 17,764 12,653
---------- ---------- ---------- ----------
Financing activities
Net additions to
mortgages 4,023 - 26,426 5,750
Principal repayments
on mortgages and
capital leases (1,444) (3,971) (12,342) (12,571)
Issuance of
convertible
debentures, net of
retirements - - - 13,000
Financing issuance costs - 16 (428) (1,648)
Repurchase of trust
units pursuant to
normal course issuer
bid (2,242) - (2,783) -
Redemption of
redeemable
partnership units - - (2,415) -
Equity distributions (2,480) (1,629) (6,968) (4,777)
---------- ---------- ---------- ----------
(2,143) (5,584) 1,490 (246)
---------- ---------- ---------- ----------
Investing activities
Capital expenditures (2,286) (2,042) (5,103) (4,391)
Net cash from sale
of properties - - 6,248 654
Property under
development (4,800) (2,052) (14,073) (3,294)
Restricted cash (461) (688) (2,165) (1,379)
Long-term notes
receivable 96 (19) (1,777) 132
Minority interest
in joint venture 346 - (566) -
---------- ---------- ---------- ----------
(7,105) (4,801) (17,436) (8,278)
---------- ---------- ---------- ----------
Net change in cash
and short-term
investments 2,525 (1,566) 1,818 4,129
Cash and short-term
investments, beginning
of period 8,000 10,878 8,707 5,183
---------- ---------- ---------- ----------
Cash and short-term
investments,
end of period 10,525 9,312 10,525 9,312
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

Cash interest paid
Mortgages and capital
leases 3,301 3,798 9,818 10,318
Convertible debentures 1,850 1,850 5,083 3,700
---------- ---------- ---------- ----------
5,151 5,648 14,901 14,018
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------

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 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 financial statements. Operating results for the nine months ended September 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 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 $6.9 million to $17.4 million, current assets have been restated from $36.9 million to $46.3 million, current liabilities have been restated from $65.2 million to $65.5 million and minority interest in joint venture has been restated from $Nil to $9.9 million. Previously reported earnings and unitholders' equity did not change as a result of this restatement.

(b) Liabilities and Equity

In November, 2003, the CICA amended Section 3860 (replaced in April, 2005 by Section 3861), " 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 balance sheets and the associated interest expense correspondingly being classified as "interest on convertible debentures" on the consolidated statements of net earnings.

As a result of the reclassification, other expenses for the three months ended September 30, 2004 increased by $1.7 million, other expenses for the nine months ended September 30, 2004 increased by $4.9 million and deferred debt issuance costs as at December 31, 2004 increased by $2.3 million.

As the associated interest expense was already included in the September 30, 2004 per unit net earnings (loss) calculations, this reclassification does not impact per unit earnings for the three months and nine months ended September 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 which was received in August, 2005. 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 winding up 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 September 30, 2004 consolidated statement of net earnings 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 Nine Months Ended
(in $000's) (in $000's)
--------- ----------- ---------- ----------
September September September September
30, 30, 30, 30,
2005 2004 2005 2004
--------- ----------- ---------- ----------
Hospitality revenue
Rooms 233 1,286 840 3,042
Food and beverage - 262 169 989
Other 7 37 44 240
--------- ----------- ---------- ----------
240 1,585 1,053 4,271

Hospitality expenses 213 1,260 1,365 4,164
--------- ----------- ---------- ----------
Gross margin 27 325 (312) 107
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------
Other expenses
Interest on capital
leases - 7 2 12
Depreciation
and amortization 3 55 83 361
Future income taxes
(recovery) (83) (193) (382) (413)
Capital and other taxes - 3 5 10
Gain on foreign currency
translation - (79) (4) (44)
Property impairment
provision - - (21) 498
(Gain) loss on disposition 26 - 247 (196)
--------- ----------- ---------- ----------
(54) (207) (70) 228
--------- ----------- ---------- ----------

Earnings (loss) from
discontinued operations 81 532 (242) (121)
--------- ----------- ---------- ----------
--------- ----------- ---------- ----------


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 $9.4 million (December 31, 2004 - $9.9 million) minority interest in joint venture on the consolidated balance sheet as at September 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. As at September 30, 2005, $7.4 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 $0.4 million in capitalized interest as at September 30, 2005 (December 31, 2004 - $Nil).



5. CAPITAL ASSETS

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

Buildings 311,169 60,271 250,898
Land 38,815 - 38,815
Furniture, fixtures,
and equipment 46,077 36,826 9,251
Other 1,632 738 894
------------ -------------- ----------
397,693 97,835 299,858
Intangible assets:
Franchise rights
and management contracts 27,414 16,658 10,756
Customer lists and
intellectual capital 7,270 7,083 187
Capital assets under
development 3,737 - 3,737
------------ -------------- ----------
436,114 121,576 314,538
------------ -------------- ----------
------------ -------------- ----------


(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
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)
--------------- -------------
September 30, December 31,
2005 2004
--------------- -------------

Mortgages secured by hotel properties 171,621 156,979
Less: current portion 21,733 39,083
--------------- -------------
149,888 117,896
--------------- -------------
--------------- -------------

Principal repayments required for the years ending September 30:

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

2006 21,733
2007 21,054
2008 4,224
2009 3,834
2010 59,936
Subsequent 60,840
---------------
171,621
---------------
---------------


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 nine months ended September 30, 2005, $1.1 million was included in amortization (2004 - $0.9 million).

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 September 30, 2005 are as follows:



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

Present value of future minimum lease
payments 1,241 1,524
Less: current portion of principal
payments 442 563
--------------- -------------
799 961
--------------- -------------
--------------- -------------


Total repayments required for the years ending September 30:
(in $000's)


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

2006 520
2007 490
2008 373
2009 4
---------------
Future minimum lease payments 1,387
Less: amounts representing interest 146
---------------
Present value of future minimum
lease payments 1,241
---------------
---------------


8. UNITHOLDERS' EQUITY

(in $000's)
--------------- -------------
September 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 earnings (loss) (2004 restated
- Note 2(b)) 2,676 (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 255 309
Employee loans pursuant to employee
unit purchase program 13 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 (Note 11(a)) (541) -
Trust units repurchased pursuant to
normal course issuer bid (Note 11(a)) (2,242) -
Equity distributions
Trust units (7,292) (5,872)
Redeemable partnership units (378) (756)
--------------- -------------
100,683 83,107
Convertible equity
Redeemable partnership units - 27,500
--------------- -------------

Balance, end of period 100,683 110,607
--------------- -------------
--------------- -------------



(a) Trust units
--------------- -------------
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 47,208 255
Trust units cancelled pursuant to
normal course issuer bid (Note 11(a)) (100,000) (901)
Issuance of trust units pursuant to
redemption of redeemable partnership
units (Note 8(c)) 2,706,682 24,387
--------------- -------------

Balance, September 30, 2005 27,478,832 247,587
--------------- -------------
--------------- -------------


(b) Accumulated Deficit

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 $142.0 million at September 30, 2005 (December 31, 2004 - $137.0 million).

(c) Redeemable Partnership Units

In May, 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 $2.4 million 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 September 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.

(d) Unit Options

Royal Host has reserved 1,883,000 units under its unit option plan. As at September 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 September 30, 2005 and December 31, 2004. The options currently outstanding expire on October 31, 2007.

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

9. PROPERTY IMPAIRMENT PROVISION

During the third quarter of 2005, the Trust recorded a property impairment provision of $0.6 million relating to its timeshare resort 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.

10. PER UNIT CALCULATIONS

There were 27,478,832 trust units outstanding as at September 30, 2005 (September 30, 2004 - 24,809,250). 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 (September 30, 2004 - $567,000).



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

Net earnings
- continuing operations 3,528
Less: distributions on
redeemable partnership units -
-------------
Basic earnings
- continuing operations 3,528 0.13
Basic earnings
- discontinued operations 81 0.00
------------- ----------
Basic earnings
- total operations 3,609 27,239,950 0.13
------------- --------------- ----------
------------- --------------- ----------

Net earnings
- continuing operations 3,528
Less: distributions on
redeemable partnership units -
-------------
3,528
Add: interest on 7.90%
convertible debentures 697
-------------
Diluted earnings
- continuing operations 4,225 0.13
Diluted earnings
- discontinued operations 81 0.00
------------- ----------
Diluted earnings
- total operations 4,306 33,073,283 0.13
------------- --------------- ----------
------------- --------------- ----------


------------- --------------- ----------
For the three months ended Weighted
September 30, 2005: Average Units Per Unit
(restated - Notes 2 and 3) (in $000's) (in 000's) ($)
------------- --------------- ----------

Net earnings
- continuing operations 2,774
Less: distributions on
redeemable partnership units (189)
-------------
Basic earnings
- continuing operations 2,585 0.11
Basic earnings
- discontinued operations 532 0.02
------------- ----------
Basic earnings
- total operations 3,117 24,581,267 0.13
------------- --------------- ----------
------------- --------------- ----------

Net earnings
- continuing operations 2,774
Less: distributions on
redeemable partnership units (189)
-------------
2,585
Add: redeemable partnership
units 189
-------------
Diluted earnings
- continuing operations 2,774 0.10
Diluted earnings
- discontinued operations 532 0.02
------------- ----------
Diluted earnings
- total operations 3,306 27,732,710 0.12
------------- --------------- ----------
------------- --------------- ----------


------------- --------------- ----------
Weighted
For the nine months ended Average Units Per Unit
September 30, 2005: (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 25,925,187 0.09
------------- --------------- ----------
------------- --------------- ----------


------------- --------------- ----------
For the nine months ended Weighted
September 30, 2005: Average Units Per Unit
(restated - Notes 2 and 3) (in $000's) (in 000's) ($)
------------- --------------- ----------

Net earnings
- continuing operations 965
Less: distributions on
redeemable partnership units (567)
-------------
Basic and diluted earnings
- continuing operations 398 0.02
Basic and diluted loss
- discontinued operations (121) (0.01)
------------- ----------
Basic and diluted earnings
- total operations 277 24,565,773 0.01
------------- --------------- ----------
------------- --------------- ----------



11. NORMAL COURSE ISSUER BIDS

(a) Trust units

Commencing on December 21, 2004, Royal Host initiated a normal course issuer bid to repurchase a maximum of 1,200,000 of its issued and outstanding trust units.

In April, 2005, 100,000 Royal Host trust units were repurchased and cancelled at an aggregate cost of $0.5 million, net of contributed surplus of $0.4 million.

In September, 2005, 375,000 Royal Host trust units were repurchased at an aggregate cost of $2.2 million. These units were cancelled subsequent to quarter-end, and as such, remain in unit capital as at September 30, 2005.

(b) Convertible 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. To date, Royal Host has not repurchased any of the debentures.



12. CHANGES IN NON-CASH WORKING CAPITAL

Three Months Ended Nine Months Ended
(in $000's) (in $000's)
-------------- ------------- ------------- -------------
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
-------------- ------------- ------------- -------------
(Increase)
decrease in:
Accounts
and notes
receivable (277) (1,838) (2,132) (1,515)
Mortgage
receivable 3,800 - 3,800 -
Prepaid
expenses 205 (75) (875) (2,040)
Inventories (13) (116) (79) 39
Assets of
discontinued
operations 121 - (19) -
-------------- ------------- ------------- -------------
3,836 (2,029) 695 (3,516)
-------------- ------------- ------------- -------------

Increase
(decrease) in:
Accounts payable
and accrued
liabilities (856) 2,309 2,427 2,346
Interest accrued
on convertible
debentures (246) (211) (230) 328
Other liabilities (331) (293) (769) (130)
Deferred revenue 7 102 25 (166)
Future income
taxes (190) - (190) -
Liabilities of
discontinued
operations (9) - (354) -
-------------- ------------- ------------- -------------
(1,625) 1,907 909 2,378
-------------- ------------- ------------- -------------

2,211 (122) 1,604 (1,138)
-------------- ------------- ------------- -------------
-------------- ------------- ------------- -------------


13. SUBSEQUENT EVENTS

On October 20, 2005, Royal Host issued $60.0 million of 6.00% convertible unsecured subordinated debentures, due October 31, 2015, for net proceeds of $57.5 million.

Subsequently, $27.8 million of the net proceeds was applied to mortgage repayments, comprised of principal repayments of $25.6 million, interest of $0.2 million and prepayment fees of $2.0 million. Prepayment fees will be expensed in the fourth quarter of 2005.

14. COMPARATIVE FIGURES

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

Contact Information

  • Royal Host REIT
    Greg Royer
    President, and CEO
    (403) 259-9800
    (403) 259-8580 (FAX)
    or
    Royal Host REIT
    Wayne King
    Chief Financial Officer
    (403) 259-9800
    (403) 259-8580 (FAX)
    Email: investorinfo@royalhost.com
    Website: www.royalhost.com