Highland Hospitality Corporation Reports Results for the Second Quarter 2005; Strong RevPAR and Prof

Highland Hospitality Corporation , a REIT, today reported its consolidated financial results for the

. October 14, 2008

VIRGINIA, July 27, 2005.

Consolidated Financial Results

For the second quarter 2005, the Company reported consolidated total revenue of $63.2 million and consolidated net income of $4.2 million, or $.10 per diluted share, compared to consolidated total revenue of $25.3 million and consolidated net income of $2.2 million, or $.05 per diluted share, for the second quarter 2004. Funds from operations, or FFO, which is defined as consolidated net income plus depreciation and amortization, were $9.5 million, or $.24 per diluted share, for the second quarter 2005 compared to $4.3 million, or $.11 per diluted share, for the second quarter 2004. Earnings before interest, income taxes and depreciation and amortization, or EBITDA, were $16.4 million, or $.41 per diluted share, for the second quarter 2005 compared to $4.3 million, or $.11 per diluted share, for the second quarter 2004.

"Our stabilized hotels continued to produce strong RevPAR and EBITDA results in the second quarter 2005 compared to the second quarter 2004, as our portfolio benefited from the continued improvement in the lodging industry," said James L. Francis, Highland's President and Chief Executive Officer. "As well, we were also pleased with the progress that we made during the quarter on our renovation and repositioning efforts which continue at a number of our hotels. We expect to see continued improvement in the performance of our hotel portfolio over the remainder of the year and into 2006 driven by our renovation, repositioning and asset management efforts."

For the six months ended June 30, 2005, the Company reported consolidated total revenue of $113.4 million and consolidated net income of $4.2 million, or $.10 per diluted share, compared to consolidated total revenue of $44.0 million and consolidated net income of $2.8 million, or $.07 per diluted share, for the prior year period. FFO was $14.2 million, or $.36 per diluted share, for the six months ended June 30, 2005 compared to $6.5 million, or $.16 per diluted share, for the prior year period. EBITDA was $24.8 million, or $.63 per diluted share, for the six months ended June 30, 2005 compared to $5.9 million, or $.15 per diluted share, for the prior year period.

Both FFO and EBITDA are non-GAAP financial measures within the meaning of the rules of the Securities and Exchange Commission. Management believes that FFO and EBITDA are key measures of a REIT's financial performance and should be considered along with, but not as an alternative to, net income as a measure of the Company's operating performance. A reconciliation of these non-GAAP financial measures to net income is included in the accompanying financial tables.

Hotel Operating Performance

Included in the following table is information regarding occupancy, average daily rate (ADR) and revenue per available room (RevPAR), the key operating statistics that the Company uses to assess the performance of its domestic hotel properties, for the Company's 18 domestic hotel properties for the second quarter 2005 and 2004. Since 13 of the 18 hotels owned as of June 30, 2005 were acquired at various times in 2004 and 2005, the key operating statistics for the aforementioned 13 hotels reflect the results of operations of the hotels under previous ownership for either a portion of, or the entire, second quarter 2004.

Operating Statistics Quarter Ended Quarter Ended

June 30, 2005 June 30, 2004

Occ % ADR RevPAR Occ % ADR RevPAR

Stabilized (11 hotels) 77.7% $118.68 $92.24 75.0% $111.10 $83.28

Rebranded/Renovated

(7 hotels)(1) 64.6% $127.18 $82.12 74.3% $119.52 $88.82

U.S. Hotel Portfolio

(18 hotels) 71.1% $122.56 $87.15 74.6% $115.31 $86.06

(1) Rebranded/Renovated includes hotels that are currently going through

significant renovation and/or in the process of changing their

franchise affiliation.

For the second quarter 2005, RevPAR for the Company's stabilized hotels increased 10.8% to $92.24, versus the same period in 2004. Occupancy increased by 2.7 percentage points to 77.7%, while ADR increased by 6.8%. For the Company's hotels that are being renovated and/or rebranded, RevPAR decreased 7.5% to $82.12, versus the same period in 2004. Occupancy decreased by 9.7 percentage points to 64.6%, while ADR increased by 6.4%. For the Company's U.S. hotel portfolio of 18 hotels, RevPAR increased by 1.3% to $87.15, versus the same period in 2004. Occupancy decreased by 3.5 percentage points to 71.1%, while ADR increased by 6.3% to $122.56.

For the second quarter 2005, the Company's 18 domestic hotel properties contributed $60.9 million of total revenue and $18.1 million of hotel operating income. Included in the following table is the hotel operating income and hotel operating income margin for the Company's 18 domestic hotel properties for the second quarter 2005 and 2004. Since 13 of the 18 hotels owned as of June 30, 2005 were acquired at various times in 2004 and 2005, the hotel operating income and hotel operating income margin for the aforementioned 13 hotels reflect the results of operations of the hotels under previous ownership for either a portion of, or the entire, second quarter 2004.

Hotel Operating Income and Margins Quarter Ended Quarter Ended

June 30, 2005 June 30, 2004

Stabilized (11 hotels) $10.1 32.4% $8.0 28.4%

Rebranded/Renovated (7 hotels)(2) $8.0 26.9% $9.5 29.2%

U.S. Hotel Portfolio (18 hotels) $18.1 29.7% $17.5 28.8%

(1) In millions

(2) Rebranded/Renovated includes hotels that are currently going through

significant renovation and/or in the process of changing their

franchise affiliation.

For the second quarter 2005, hotel operating income for the Company's stabilized hotels increased 26.3% to $10.1 million versus the same period in 2004 and hotel operating income margin increased by 4.0 percentage points to 32.4%. For the Company's hotels that are being renovated and/or rebranded, hotel operating income decreased 15.8% to $8.0 million versus the same period in 2004 and hotel operating income margin decreased by 2.3 percentage points to 26.9%. For the Company's U.S. hotel portfolio of 18 hotels, hotel operating income increased by 3.4% to $18.1 million versus the same period in 2004 and hotel operating income margin increased by 0.9 percentage points to 29.7%.

Acquisition Activity/Investment Outlook

On April 15, 2005, the Company acquired the 332-room Tucancun Beach Resort and Villas in Cancun, Mexico, for approximately $32.5 million. Barcelo Hotels and Resorts, a global lodging company based in Palma de Mallorca, Spain, will manage the hotel as an all-inclusive resort under the Barcelo brand name pursuant to the terms of the management agreement. Barcelo Hotels & Resorts operates 130 hotels and resorts in 14 countries across four continents, including eight hotels in Mexico. For the second quarter 2005, Tucancun Beach Resort and Villas contributed $2.3 million to the Company's consolidated total revenue, which is approximately 16.1% more than total revenues for the hotel for the comparable period in 2004.

On July 14, 2005, the Company acquired the 410-room Wyndham Palm Springs hotel in Palm Springs, California for approximately $57 million. The Company financed the acquisition with approximately $37 million of first mortgage debt from CIGNA Investments with a fixed rate of interest of 5.35%, along with proceeds from its term loan facility. The Company has selected Crestline Hotels & Resorts, Inc. to manage the property under a Wyndham-license agreement.

Mr. Francis stated, "We are excited about our recent acquisitions considering the highly competitive hotel market in the U.S. We continue to actively pursue investment opportunities in the U.S., but will be prudent in spending capital given the competitive hotel acquisition environment. With respect to our first investment in Mexico, we believe that Barcelo's ability to efficiently market and operate the Tucancun Beach Resort and Villas will help to generate significant current returns and create value over time for our shareholders. We believe that our ability to leverage our strategic alliance with Barcelo Hotels and Resorts provides us with a competitive advantage in markets such as Mexico and the Caribbean."

Balance Sheet/Liquidity

As of June 30, 2005, the Company had $15.8 million of cash and cash equivalents and $26.2 million of restricted cash. Total assets were $734.2 million, including $644.5 million of net investment in hotel properties, long- term debt was $356.0 million, and stockholders' equity was $343.2 million.

During the second quarter 2005, the Company generated $9.7 million of cash flow from its operations, used $44.8 million in net investing activities, including $12.1 million in hotel capital expenditures, and obtained $7.2 million through net financing activities.

As of July 27, 2005, the Company had approximately $20 million of cash and cash equivalents. In addition, the Company had $10 million of remaining borrowing capacity under its term loan facility after drawing $25 million in July 2005 to fund a portion of the Wyndham Palm Springs hotel acquisition.

Dividend Update

During the second quarter 2005, the Company declared a dividend of $.14 per share payable to its stockholders of record as of June 30, 2005. The dividend was paid on July 15, 2005. The level of future dividends will continue to be determined by the Company's quarterly operating results, general economic conditions, capital requirements and other operating trends.

2005 Outlook

Based on the Company's current hotel operating trends, the status of the Company's renovation and repositioning program, and the Company's investment outlook, the Company estimates that for the third quarter 2005:

Total revenues will range between $59.5 - $63.2 million;
Corporate EBITDA will range between $13.2 - $14.2 million;
Earnings per diluted share will range between $.02 - $.04; and
FFO per diluted share will range between $.17 - $.19.

In addition, based on the financial results for the first half of 2005, estimated third quarter 2005 financial results, and the Company's projection of the impact of the renovations and acquisition timing on its operations for the remainder of the year, the Company now estimates that for the full year 2005:

Total revenues will range between $237.8 - $252.5 million;
Corporate EBITDA will range between $54.9 - $56.5 million;
Earnings per diluted share will range between $.21 - $.25; and
FFO per diluted share will range between $.78 - $.82.

Mr. Francis stated, "We continue to be encouraged by the performance of our stabilized hotel portfolio and we anticipate significant growth from our renovated properties during the remainder of this year and into 2006. Our positive outlook remains intact regarding the strength of the rebound in our properties once the renovations are complete. We are adjusting our FFO range for 2005 downward slightly to reflect the seasonality of our latest acquisition, the 410-room Wyndham Palm Springs hotel, in Palms Springs, California. As a result of acquiring the hotel in its off-peak season, the Wyndham Palm Springs hotel will have a $.02 to $.03 FFO per diluted share negative impact to our prior FFO guidance for the full year 2005. However, on a full year basis in 2006, we expect that the Wyndham Palm Springs hotel will be accretive to FFO. We are pleased with the continued strength of the lodging industry recovery and we believe that our portfolio will be well positioned to benefit from the improved fundamentals."

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