InnVest Real Estate Investment Trust
TSX : INN.UN
TSX : INN.DB.A
TSX : INN.DB.B

InnVest Real Estate Investment Trust

March 06, 2009 08:00 ET

InnVest REIT reports fourth quarter results

TORONTO, ONTARIO--(Marketwire - March 6, 2009) - InnVest Real Estate Investment Trust ("InnVest" or the "Trust") (TSX:INN.UN) today announced financial results for the three months and the year ended December 31, 2008.

"Overall, we delivered a year of solid performance under challenging circumstances. Fourth quarter revenues were up slightly, a formidable achievement in light of the broader economic environment. For the year, InnVest's same-hotel portfolio generated RevPAR growth of 2.0%, outperforming the Canadian lodging industry performance," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "Looking ahead, 2009 is expected to be a difficult year for the hospitality sector. Our objectives through this period are to solidify our balance sheet liquidity and effectively manage our assets."

Fourth Quarter Highlights

- Improved average daily rate ("ADR") by 4.3% on a same hotel basis. A 2.7 point reduction in occupancies resulted in a nominal 0.3% decline in revenue per available room ("RevPAR"). Fourth quarter same-hotel statistics include the Legacy Portfolio since it was owned for the entire current and prior period;

- Hotel operating income ("HOI") was down 3.3% to $36.9 million. The HOI decline reflects the profitability impact of negative revenue growth. HOI margin declined to 22.7% compared to 23.5% in 2007;

- Recognized a non-cash impairment provision of $34.5 million following an extensive market-by-market review of future operating expectations across the entire portfolio triggered by current negative economic indicators and their expected impact on future results. Subsequent to the end of the year, five of these assets were reclassified as held for sale;

- Excluding the impairment provision and the change in future income taxes, net loss from continuing operations was up modestly at $3.8 million compared to $3.4 million for the same period in 2007. The Trust generated a net loss from continuing operations of $28.3 million in 2008 compared to net income from continuing operations of $24.5 million in 2007;

- Distributable income decreased 2.5% to $13.3 million or $0.179 per unit basic and diluted (2007 - $0.188 per unit basic and diluted). Monthly distributions were reduced during the fourth quarter to an annual rate of $0.75 per unit from $1.125 per unit. The Trust achieved a payout ratio of 91.7% in 2008;

- Fourth quarter FFO improved to $19.2 million, as compared to $18.7 million in the prior period. FFO per unit basic and diluted was up modestly to $0.258 (2007 - $0.257 per unit basic and diluted);

- Invested $14.6 million to maintain and enhance the portfolio's competitive position, funded from capital reserves, capital loan facilities and cash from operations; and

- Sold the Travelodge Oshawa for $4.8 million less closing costs. Net proceeds from the sale were used to settle outstanding mortgage debt of $2.5 million. This asset had been classified as held for sale since December 2007.



FINANCIAL HIGHLIGHTS
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(In thousands of dollars except average daily rate, revenue per
available room and per unit amounts)
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Three months ended Year ended
December 31 December 31
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2008 2007 +/- 2008 2007 +/-
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Occupancy 58.0% 60.7% (2.7)% 63.4% 63.9% (0.5)%
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Average daily
rate ("ADR") $117.86 $113.03 $4.83 $120.34 $106.68 $13.66
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Revenue Per
Available Room
("RevPAR") $68.33 $68.56 ($0.23) $76.27 $68.15 $8.12
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Hotel
revenues $162,365 $162,316 $49 $678,722 $495,955 $182,767
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Hotel operating
income $36,871 $38,131 ($1,260) $181,173 $138,808 $42,365
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Net (loss)
income and
comprehensive
(loss)
income ($28,332) $16,972 ($45,304) ($3,377) $41,222 ($44,599)
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Add/(deduct)
Depreciation
and
amortization 22,793 22,212 581 88,209 64,154 24,055
Future income
tax
(recovery)
expense (10,010) (27,891) 17,881 (14,526) (25,869) 11,343
Non-cash
executive
and trustee
compensation 154 286 (132) 619 672 (53)
Writedown of
assets held
for sale, net
of loss (gain)
on sale of
assets 50 7,155 (7,105) 2,714 6,322 (3,608)
Writedown of
hotel
properties 34,535 - 34,535 34,535 - 34,535
Corporate
reorganization
expense - - - - 1,514 (1,514)
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Funds from
operations(2) $19,190 $18,734 $456 $108,174 $88,015 $20,159
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Funds from
operations
per unit(2)
- basic $0.258 $0.257 $0.001 $1.465 $1.403 $0.062
- diluted $0.258 $0.257 $0.001 $1.402 $1.345 $0.057
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Amortization
of deferred
financing
costs 25 836 (811) 1,398 836 562
Non-cash
portion of
interest
expense 861 570 291 3,141 2,587 554
Reserve for
replacement
of furniture,
fixtures and
equipment
and capital
improvements (7,030) (6,741) (289) (28,352) (20,371) (7,981)
Convertible
debentures
accretion 289 271 18 1,152 887 265
Deferred land
lease expense
and retail
lease income,
net 5 16 (11) 27 41 (14)
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Distributable
income(2) $13,340 $13,686 ($346) $85,540 $71,995 $13,545
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Distributable
income per
unit(3)
- basic $0.179 $0.188 ($0.009) $1.159 $1.148 $0.011
- diluted $0.179 $0.188 ($0.009) $1.115 $1.102 $0.013

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Distributions
per unit(4) $0.2188 $0.2813 ($0.063) $1.0625 $1.1250 ($0.063)
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(1) For purposes of the calculation of funds from operations, amortization of deferred financing is excluded from depreciation and amortization.

(2) Hotel operating income, funds from operations and distributable income are non-GAAP measures of earnings and cash flow commonly used by industry analysts. Non-GAAP financial measures do not have a standardized meaning and are unlikely to be comparable to similar measures used by other organizations.

(3) Distributable income per unit has been calculated on basis consistent with mat precribed by GAAP for calculating earnings per unit.

(4) Distributions per unit include cash distributions and distributions arising from the Distribution Reinvestment Plan.

The operating statistics below relating to room revenues are on a same hotel basis and exclude the hotels that have been classified as discontinued operations and hotels that have not been owned for the full fourth quarter or full year current and comparative periods. The fourth quarter is the first full period of comparable data reflecting the Legacy Portfolio acquisition. For the year ended December 31, 2008, InnVest has categorized 131 of its 133 hotels owned for the entire current and comparative period as its "Base Portfolio. Twelve hotels acquired in 2007, which include of a portfolio of 11 upscale and first-class hotels in late 2007 (the "Legacy Portfolio") are categorized as the "2007 Acquisitions".



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For the three For the
months ended year ended
December 31, Variance to December 31, Variance to
2008 2007 2008 2007
Occupancy

Ontario 54.8% (4.1 pts) 60.4% (2.0 pts)
Quebec 60.0% (0.8 pts) 64.5% (0.3 pts)
Atlantic 56.5% (2.1 pts) 63.3% (2.4 pts)
Western 64.1% (2.0 pts) 62.1% (3.1 pts)
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Total 58.0% (2.7 pts) 61.9% (1.8 pts)
ADR
Ontario $110.58 2.8% $109.55 3.0%
Quebec $116.26 4.5% $113.68 7.8%
Atlantic $111.90 4.1% $104.10 4.1%
Western $138.48 6.3% $93.88 8.6%

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Total $117.86 4.3% $107.92 5.0%
RevPAR
Ontario $60.64 (4.4%) $66.13 (0.3%)
Quebec $69.76 3.2% $73.37 7.3%
Atlantic $63.25 0.3% $65.90 0.3%
Western $88.78 3.1% $58.28 3.4%
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Total $68.33 (0.3%) $66.80 2.0%
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FINANCIAL REVIEW (In thousands of dollars, except per unit amounts unless otherwise stated)

Three months ended December 31, 2008

Fourth quarter hotel revenues were relatively unchanged at $162.4 million. Overall, a 4.3% increase in ADR as compared to the prior year was offset by a 2.7 pts decline in occupancy during the period, resulting in a modest same-hotel RevPAR decrease of 0.3%. These trends reflect the deteriorating economic environment through the end of 2008, and its impact on discretionary spending for travel. Diligent cost controls coupled with continued efforts to drive room rates throughout the portfolio helped mitigate the impact of a decline in demand.

Room revenues decreased modestly to $118.7 million from $119.1 million reflecting the RevPAR decline during the quarter which was somewhat offset by acquisitions in early 2008. RevPAR growth was achieved in all regions with the exception of Ontario during the fourth quarter. The Quebec region continued to achieve the highest room revenue growth, increasing 3.2% as compared to 2007. The occupancy decline was modest in the region, aided by Quebec City's 400th anniversary celebrations. The western region realized room revenue growth of 3.1% over the prior year. Continued emphasis on room rate growth in the region, up 6.3% this quarter, was somewhat offset by occupancy declines. Lower crew business from the oil and gas and energy sectors is impacting occupancies in certain markets. For the Atlantic region, ADR growth was partly offset by occupancy declines leading to modest year-over-year revenue improvement. Room revenue declined 4.4% in Ontario caused by softening demand during the quarter. This softness was most prevalent in markets impacted by the manufacturing sector decline and which have also been subject to new supply in recent years, notably the Toronto airport area, Kitchener, London and Oshawa. Declines in these markets offset improvements in northern and eastern Ontario.

Despite the decline in overall occupancies for the period, non-room revenues improved 1.0% to $43.7 million during the fourth quarter, reflecting ongoing efforts to maximize all ancillary revenue.

Hotel expenses for the three months ended December 31, 2008 increased by 1.1%, or $1.3 million, to $125.5 million. Inflationary cost increases compared to the prior year were somewhat offset by cost containment initiatives implemented across the portfolio. Given the seasonal nature of operations, the fourth quarter is typically a low demand, and earnings, period for the Trust. As a result, the ability to reduce expenses during this period is somewhat limited given that certain costs such as property taxes, insurance and staffing at low occupancy levels are fixed, or virtually fixed.

Fourth quarter HOI declined $1.3 million, or 3.3%, to $36.9 million. This decline reflects the profitability impact of the revenue in the relatively fixed cost environment at seasonally-low occupancy levels. As a result, InnVest's HOI margin declined 0.8 points to 22.7% for the fourth quarter of 2008 as compared to 2007.

Other income and expenses for the three months ended December 31, 2008 totaled $75.2 million, up $33.7 million as compared to the same period in 2007. Other expenses in 2008 include a non-cash $34.5 million impairment provision for hotel properties following an extensive market-by-market review of future operating expectations across the entire portfolio triggered by current negative economic indicators and their expected impact on future results. This provision relates to eight non-strategic hotels in tertiary markets impacted by the manufacturing sector decline and which have also been particularly impacted by new supply in recent years. Following the end of the year, five of these assets were reclassified as held for sale. The impairment provision for these five assets reflects the anticipated proceeds from their sale.

For the three months ended December 31, 2008, the Trust generated a future income tax recovery of $10.0 million as compared to $27.9 million in 2007. The future income tax recovery realized in 2008 takes into account ongoing operations and capital expenditures as well as the fourth quarter impairment provision for hotel properties. The prior period included a future income tax recovery resulting from the reduction of federal corporate income tax rates.

InnVest generated a net loss from continuing operations for the three months ended December 31, 2008 of $28.3 million or a loss of $0.381 per unit basic and diluted. This compares with net income from continuing operations of $24.5 million, or $0.337 per unit basic ($0.325 diluted) in the prior year. Excluding the non-cash impairment provision and the change in future income taxes, the Trust would have generated a net loss from continuing operations of $3.8 million compared to a loss of $3.4 million for the same period in 2007.

Fourth quarter funds from operations ("FFO") improved to $19.2 million or $0.258 per unit basic and diluted as compared to FFO of $18.7 million or $0.257 basic and diluted for the same period in 2007.

Distributable income was $13.3 million or $0.179 per unit basic and diluted for the three months ended December 31, 2008. This compares to distributable income of $13.7 million or $0.188 per unit basic and diluted in the prior year. Distributions declared during the quarter totaled $16.3 million or $0.2188 per unit, reflecting the reduced level of monthly distributions to $0.0625 per unit beginning in November 2008. InnVest's payout ratio for the year ended December 31, 2008 was 91.7%, compared to 98.3% for the prior year.

Year ended December 31, 2008

For the year ended December 31, 2008, hotel revenues increased by $182.8 million, or 36.9%, to $678.7 million. The full period inclusion of the 2007 Acquisitions contributed the majority of this increase, generating $173.2 million in incremental hotel revenues as compared to 2007. Revenues for InnVest's Base Portfolio increased 2.3% or $9.6 million as compared to the prior year.

A 5.0% increase in ADR was offset by a 1.8 point decline in overall occupancy for the Base Portfolio. The trend of ADR growth offsetting occupancy declines was experienced consistently throughout the year. Overall, annual RevPAR increased 2.0%.

Hotel expenses for the year ended December 31, 2008 increased by $140.4 million when compared to 2007. This reflects $132.1 million in higher expenses incurred following the full period inclusion of the hotels acquired in 2007. Hotel expenses for the Base Portfolio were up 2.7% over the prior year. The increase reflects inflationary cost increases which were somewhat offset by several steps taken by the Trust to manage costs throughout the portfolio in anticipation of a softer economic environment. These initiatives include implementing hiring freezes and salary freezes throughout most of the portfolio and at the Trust's corporate offices, as well as seeking to maximize value from vendors through pricing concessions. These efforts should benefit future periods.

For the year ended December 31, 2008, HOI improved by 30.5% or $42.4 million to $181.2 million. The full period inclusion of the 2007 Acquisitions contributed $41.1 million of the overall HOI increase. The Base Portfolio HOI improved 1.1% or $1.3 million reflecting the benefit of cost controls implemented throughout the portfolio.

Overall for the year ended December 31, 2008, InnVest's HOI margin declined 130 points to 26.7% as compared to 2007. The decline is attributable to the impact of the 2007 Acquisitions, most notably the Legacy Portfolio, which generates a larger portion of its business in non-room revenues, which typically yield lower margins. Operating margins for the Base Portfolio were down modestly to 28.5% compared to 28.9% in 2007. Margins improvements realized through the first three quarters in 2008 were offset by declines experienced in the fourth quarter.

Other income and expenses for the year ended December 31, 2008 totaled $196.6 million, up $80.5 million as compared to the prior year. Other expenses in 2008 include a non-cash $34.5 million impairment provision for hotel properties. The remaining increase in expenses is attributable to higher depreciation and amortization of $26.0 million, as well as increased interest expenses of $19.2 million resulting from the full period inclusion of the 2007 Acquisitions. Annual corporate and administrative costs declined $1.1 million, primarily realized in the first quarter of 2008, in connection with land transfer tax and legal costs associated with the corporate reorganization completed in early 2007. These savings were largely offset by a $1.4 million reduction in other income in 2008 owing to interest earned in 2007 on the interim holding of cash balances from equity and convertible debentures raised in advance of their deployment for the Legacy Portfolio acquisition.

For the year ended December 31, 2008, the Trust generated a future income tax recovery of $14.5 million, as compared to $25.9 million in 2007. During the prior year, a future income tax expense of $122.6 million in the second quarter relating to changes in the income tax legislation for Real Estate Investment Trusts was offset by a future income tax recovery of $115.4 million in the first quarter related to the corporate reorganization completed in early 2007, which eliminated certain corporate subsidiaries of InnVest. In addition, during the fourth quarter of 2007, InnVest recognized a $22.2 million future income tax recovery as a result of the reduction of federal corporate income tax rates. The future income tax recovery realized in 2008 takes into account ongoing operations and capital expenditures as well as the impairment provision for hotel properties.

InnVest realized a net loss from continuing operations of $895 or a loss of $0.012 per unit basic and diluted, compared to net income from continuing operations of $48.5 million, or $0.774 per unit basic (diluted - $0.773) in the prior year. This $49.4 million variance primarily results from the non-cash $34.5 million impairment provision in 2008 as well as the $11.3 million decrease in income tax recoveries as compared to the prior year.

For the year ended December 31, 2008, discontinued operations generated a net loss of $2.5 million compared to a loss of $7.3 million in the prior period. Annual results in 2008 include a $3.9 million writedown of the book value of assets held for sale. This writedown was partially offset by a gain of $1.2 million relating to the sale of three assets during the year. The net writedown in the prior period was $7.2 million following the classification of four assets as held for sale at the end of 2007. One asset remains classified as held for sale at December 31, 2008.

For the year ended December 31, 2008, InnVest increased FFO by 22.9% to $108.2 million or $1.465 per unit basic ($1.402 diluted) as compared to FFO of $88.0 million or $1.403 basic ($1.345 diluted) in 2007. The $20.2 million increase is primarily driven by a $42.4 million improvement in HOI for the year which was somewhat offset by higher interest expenses of $19.2 million.

Distributable income improved $13.5 million to $85.5 million or $1.159 per unit basic ($1.115 diluted). This compares to distributable income of $72.0 million or $1.148 per unit basic ($1.102 diluted) in the prior year.

Distributions declared in 2008 totaled $78.5 million or $1.0625 per unit.

BALANCE SHEET REVIEW

At December 31, 2008, InnVest had cash on hand totaling $21.2 million, of which $3.0 million is restricted under its Declaration of Trust for the replacement of furniture, fixtures, and equipment and for capital improvements.

InnVest has an operating line of $40.0 million to fund short-term changes in working capital. At December 31, 2008, this credit facility was undrawn.

At December 31, 2008, the Trust's leverage excluding and including convertible debentures was 47.2% and 56.5%, respectively. At December 31, 2008, InnVest has mortgages payable of $958.3 million with a weighted average term of 3.7 years and a weighted average effective interest rate of 5.8%. Currently, approximately 9.6% of the Trust's mortgage debt is at floating rate.

In addition, InnVest has access to a loan facility, granted in conjunction with property mortgages, for up to $36.1 million to fund 50% to 100% of capital expenditures incurred at individual hotels. At December 31, 2008, the Trust has drawn $12.2 million on this facility to fund certain capital investments. The remaining capacity under this facility approximates $23.9 million.

Continuing with its strategy of investing in its hotels, InnVest deployed approximately $14.6 million for capital asset improvements during the fourth quarter. Annual capital investments totaled $42.9 million. Capital expenditures in excess of the reserve in 2008 included profit-improving investments relating to certain full service hotels acquired by the Trust over the last few years.

INCOME TAX DEFERRAL PERCENTAGE

For 2008, 44% of unitholder distributions will not be taxable to unitholders.

RECENT DEVELOPMENTS

During the fourth quarter of 2008, InnVest initiated a normal course issuer bid ("NCIB") to repurchase up to 5,924,617 trust units, representing approximately 10% of InnVest's public float. The NCIB expires on November 10, 2009. Under the NCIB, units purchased will be cancelled. During the period ending December 31, 2008, the Trust repurchased 278,500 trust units at an aggregate cost of $939 (average cost of $3.36 per unit). Subsequent to December 31, 2008, InnVest repurchased 131,500 units at an aggregate cost of $439 (average cost base of $3.33 per unit).

InnVest issues additional units each month through its DRIP. Unit repurchases under the NCIB will help to minimize the dilutive effect of those issuances. Furthermore, InnVest believes that the market price of its units at certain times may be attractive and that the purchase of units from time to time would be an appropriate use of InnVest's funds. In November 2008, the Trust amended its DRIP to eliminate the 3% discount offered to unitholders who elect to participate in the DRIP.

In October 2008, the Trust adopted a unitholder rights plan (the "Plan"), which will be in effect for a maximum of 180 days, following which it will expire automatically. InnVest did not adopt the Plan in response to any specific take-over proposal, nor has it been made aware of any such proposal. The Plan is intended to ensure that unitholders receive fair treatment in the event of an unsolicited attempt to gain control of InnVest and, in such event, to ensure that unitholders receive full value and that the Board of Trustees has time to consider alternatives to maximize unitholder value. The rights will only become exercisable upon the occurrence of certain triggering events, including the acquisition by a person or group of persons of 15% or more of the outstanding units in a transaction not approved by the Board. On October 28, 2008, the Toronto Stock Exchange advised InnVest that it has deferred its consideration of adoption of the Plan based on the fact that the Plan will expire within 180 days of its effective date. In the interim, the Plan remains in full effect in accordance with its terms. Unitholders will be asked to consider adopting a new unitholders rights plan at the annual and special meeting on April 14, 2009.

During the fourth quarter, InnVest sold the Travelodge Oshawa (120 rooms) for $4.8 million less closing costs. Net proceeds from the sale were used to settle outstanding mortgage debt of $2.5 million.

OUTLOOK

The economic outlook for 2009 remains uncertain and we expect turbulent credit markets to continue, which leads us to a cautious outlook in the near term. In response, we have adapted our strategy to position the Trust to address the current environment with particular attention to our balance sheet and liquidity. Our efforts in 2008 included the selective sale of low-yielding assets, aggressive asset management initiatives to reduce costs throughout the portfolio and the reduction of distributions in late 2008.

Our priority in 2009 will be to continue to be proactive in our capital management initiatives including efforts to address debt maturities. We are continually seeking opportunities to recycle our capital efficiently and have actively expanded our sales efforts for certain underperforming assets. Building on our success in 2008, we continue to manage our portfolio aggressively to maximize performance from each hotel. Further contingency plans have been developed at all hotels to enable us to quickly adapt to potential ongoing changes in operating demand trends.

Historically, the lodging industry performance has been highly correlated with the economy given the largely discretionary nature of leisure and business travel. While Canada cannot escape the impact of the volatile global trends, Canada remains fundamentally stronger than many other countries, including the U.S. Looking ahead, PKF Consulting Inc., lodging industry experts, currently forecast Canadian lodging industry RevPAR to contract approximately 2% in 2009.

Despite the near term operating environment, we are positive about the intermediate and longer term prospects for the lodging industry as a whole, and InnVest specifically. With new supply effectively constrained by the credit markets, InnVest is positioned for a stronger recovery when demand trends improve. InnVest's portfolio of 147 hotels is diversified by geography, customer and brand. This diversity, combined with our partnership with experienced hotel operators, contributes to the resiliency of the portfolio and positions the Trust to effectively manage through the current economic environment.

FORWARD LOOKING STATEMENTS

Statements contained in this press release that are not historical facts are forward-looking statements which involve risk and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Among the key factors that could cause such differences are real estate investment risks, hotel industry risks and competition. These and other factors are discussed in InnVest REIT's 2008 annual information form which is available at http://www.sedar.com. InnVest disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable securities law.

TRUST PROFILE

InnVest holds Canada's largest hotel portfolio together with an interest in Choice Hotels Canada Inc. the largest franchisor of hotels in Canada. The hotel portfolio currently comprises 147 hotel properties, with over 19,000 guest rooms, operated under internationally recognized franchise brands such as Comfort Inn®, Holiday Inn® Quality Suites/Inn®, Radisson®, Delta®, Travelodge®, Hilton Hotel®, Staybridge Suites®, Fairmont Hotels®, Sheraton Suites® and Best Western®. InnVest's trust units and outstanding convertible debentures trade on the Toronto Stock Exchange under the symbols INN.UN, INN.DB.A, INN.DB.B and INN.DB.C, respectively.

QUARTERLY CONFERENCE CALL

Management will host a conference call on Friday March 6, 2009 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing (416) 644-3415 or 1-800-733-7560. You will be required to identify yourself and the organization on whose behalf you are participating. A recording of this call will be made available March 6th beginning at 1:00 pm through to 11:59 p.m. on March 13th. To access the recording please call (416) 640-1917 and use the reservation number 21294369 followed by the number sign.



InnVest Real Estate Investment Trust
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CONSOLIDATED BALANCE SHEETS

December 31, December 31,
(in thousands of dollars) 2008 2007
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ASSETS
Current Assets
Cash $ 18,143 $ 22,271
Accounts receivable 27,716 28,677
Prepaid expenses and other assets 8,993 9,487
Assets held for sale (Note 25) 81 301
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54,933 60,736
Restricted cash 3,013 2,995
Hotel properties (Note 3 and Note 4) 1,839,271 1,884,765
Other real estate properties (Note 5) 16,078 16,428
Licence contracts (Note 6) 17,853 19,169
Intangible and deferred assets (Note 7) 42,280 55,101
Assets held for sale (Note 25) 3,676 23,085
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$ 1,977,104 $ 2,062,279
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LIABILITIES
Current Liabilities
Bank indebtedness (Note 9) $ 9,000 $ 223,200
Accounts payable and accrued liabilities 72,847 73,682
Acquisition related liabilities 2,561 17,569
Distributions payable 4,651 6,844
Current portion of long-term debt (Note 10) 10,763 12,725
Liabilities related to assets held
for sale (Note 25) 186 610
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100,008 334,630
Long-term debt (Note 10) 940,513 698,892
Other long-term obligations (Note 11) 6,895 6,692
Convertible debentures (Note 12) 180,170 177,387
Future income tax liability (Note 14) 210,977 225,503
Long-term liabilities related to assets
held for sale (Note 25) 2,811 14,509
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1,441,374 1,457,613
Commitments and contingencies (Note 17)
UNITHOLDERS' EQUITY 535,730 604,666
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$ 1,977,104 $ 2,062,279
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The accompanying notes are an integral part of these consolidated financial statements.



InnVest Real Estate Investment Trust
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CONSOLIDATED STATEMENTS OF NET (LOSS) INCOME AND COMPREHENSIVE (LOSS)
INCOME

Year Ended Year Ended
(in thousands of dollars, December 31, December 31,
except per unit amounts) 2008 2007
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Total revenues (reference only) (Note 23) $ 692,118 $ 508,559
Hotel revenues $ 678,722 $ 495,955
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Hotel expenses

Operating expenses (Note 21) 414,962 297,454
Property taxes, rent and insurance 55,707 41,964
Management fees (Note 21) 26,880 17,729
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497,549 357,147
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Hotel operating income 181,173 138,808
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Other (income) and expenses
Interest on mortgages and other debt 54,279 36,814
Interest on operating and bridge loans 3,769 5,262
Convertible debentures interest and accretion 14,269 11,047
Corporate and administrative (Note 21) 5,763 6,883
Capital tax 175 75
Other business income, net (Note 24) (5,630) (5,916)
Other income (173) (1,614)
Depreciation and amortization 89,607 63,583
Writedown of hotel properties (Note 4 and 7) 34,535 -
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196,594 116,134
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(Loss) income before income tax recovery (15,421) 22,674
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Income tax recovery (Note 14)
Current - (4)
Future (14,526) (25,869)
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(14,526) (25,873)
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Net (loss) income from continuing operations (895) 48,547
Income (loss) from discontinued
operations (Note 25) 232 (1,003)
Writedown of assets held for sale, net of gain
on sale of assets (Note 25) (2,714) (6,322)
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(2,482) (7,325)
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Net (loss) income and
comprehensive (loss) income $ (3,377) $ 41,222
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Net (loss) income from continuing operations,
per unit (Note 19)
Basic $ (0.012) $ 0.774
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Diluted $ (0.012) $ 0.773
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Net (loss) income, per unit (Note 19)
Basic and diluted $ (0.046) $ 0.657
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Net loss from discontinued operations,
per unit
Basic and diluted $ (0.034) $ (0.117)
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The accompanying notes are an integral part of these consolidated financial statements.



InnVest Real Estate Investment Trust
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CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY
Net (Loss)
Income and
Comprehensive Distri- Units
(in thousands of dollars) (Loss) Income butions Deficit in $
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Balance December 31, 2006 $ 96,701 $(228,933) $(132,232) $ 543,363

CHANGES DURING THE YEAR
Net income and comprehensive
income 41,222 - 41,222 -
Unit distributions (Note 20) - (70,758) (70,758) -
Distribution reinvestment
plan units issued - - - 10,606
Conversion of debentures - - - 10,605
Issue of new debentures - - - -
Issue of new units - - - 192,268
Vested executive compensation - - - 275
Executive and trustee
compensation - - - 258
-------------------------------------------------------------------------
Balance December 31, 2007 $ 137,923 $(299,691) $(161,768) $ 757,375
-------------------------------------------------------------------------

CHANGES DURING THE YEAR
Net loss and comprehensive
loss (3,377) - (3,377) -
Unit distributions (Note 20) - (78,473) (78,473) -
Distribution reinvestment
plan units issued - - - 13,234
Units repurchased pursuant
to normal course issuer
bid (Note 18) - - - (2,877)
Vested executive compensation - - - 151
Executive and trustee
compensation - - - 151
-------------------------------------------------------------------------

Balance December 31, 2008 $ 134,546 $(378,164) $(243,618) $ 768,034
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Executive
and
Contri- Trustee Holders'
buted Compen- Conversion
(in thousands of dollars) Surplus sation Option Total
-------------------------------------------------------------------------

Balance December 31, 2006 $ - $ 278 $ 6,208 $ 417,617
CHANGES DURING THE YEAR
Net income and comprehensive
income - - - 41,222
Unit distributions (Note 20) - - - (70,758)
Distribution reinvestment
plan units issued - - - 10,606
Conversion of debentures - - (519) 10,086
Issue of new debentures - - 2,953 2,953
Issue of new units - - - 192,268
Vested executive compensation - (275) - -
Executive and trustee
compensation - 414 - 672
-------------------------------------------------------------------------
Balance December 31, 2007 $ - $ 417 $ 8,642 $ 604,666
-------------------------------------------------------------------------
CHANGES DURING THE YEAR
Net loss and comprehensive
loss - - - (3,377)
Unit distributions (Note 20) - - - (78,473)
Distribution reinvestment
plan units issued - - - 13,234

Units repurchased pursuant
to normal course issuer
bid (Note 18) 1,938 - - (939)
Vested executive compensation - (151) - -
Executive and trustee
compensation - 468 - 619
-------------------------------------------------------------------------
Balance December 31, 2008 $ 1,938 $ 734 $ 8,642 $ 535,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The accompanying notes are an integral part of these consolidated financial statements.



InnVest Real Estate Investment Trust
-------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended
December 31, December 31,
(in thousands of dollars) 2008 2007
-------------------------------------------------------------------------

OPERATING ACTIVITIES

Net (loss) income from continuing operations $ (895) $ 48,547
Add (deduct) items not affecting operations
Depreciation and amortization 89,607 63,583
Writedown of hotel properties 34,535 -
Non-cash portion of interest expense 3,141 2,587
Future income tax recovery (14,526) (25,869)
Non-cash executive and trustee compensation 619 672
Convertible debentures accretion 1,152 887
Discontinued operations (300) 392
Changes in non-cash working capital 1,387 11,666
-------------------------------------------------------------------------
114,720 102,465
-------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of long-term debt (164,430) (10,204)
Proceeds from long-term debt 398,920 42,473
Issue of convertible debentures - 66,875
Issue of new units, net - 191,748
Units repurchased pursuant to normal course
issuer bid (Note 18) (939) -
Unit distributions (67,432) (58,469)
(Decrease) increase in operating loan (8,200) 4,900
Proceeds from bridge loan 8,899 212,850
Repayment of bridge loan (215,000) -
Discontinued operations, repayment of debt (5,723) (2,788)
-------------------------------------------------------------------------
(53,905) 447,385
-------------------------------------------------------------------------

INVESTING ACTIVITIES

Capital expenditures on hotel properties (42,857) (28,851)

Discontinued operations, capital expenditures - (185)

Hotel under development expenditures, net of

related working capital items (6,078) (12,128)
Proceeds from sale of discontinued assets,
net of costs 16,631 6,400
Proceeds from sale of other real estate assets - 121
Gain on sale of other real estate assets - (78)
Change in other assets (305) (2,859)
Acquisition of hotel properties and other
real estate properties (Note 3) (32,316) (496,228)
Changes in restricted cash (18) 1,698
-------------------------------------------------------------------------
(64,943) (532,110)
-------------------------------------------------------------------------
(Decrease) increase in cash during the year (4,128) 17,740
Cash, beginning of year 22,271 4,531
-------------------------------------------------------------------------
Cash, end of year $ 18,143 $ 22,271
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplemental disclosure of cash flow
information:
Cash paid for interest $ 68,196 $ 48,741
Cash paid for income taxes
(including capital tax) $ 186 $ 216


The accompanying notes are an integral part of these consolidated financial statements.



-------------------------------------------------------------------------
InnVest Real Estate Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008 (all dollar amounts are in thousands, except unit and
per unit amounts)
-------------------------------------------------------------------------


1. Basis of Presentation

InnVest Real Estate Investment Trust ("InnVest" or the "REIT") is an unincorporated open-ended real estate investment trust governed by the laws of Ontario. The REIT began operations on July 26, 2002. The units of the REIT are traded on the Toronto Stock Exchange under the symbol of "INN.UN". As at December 31, 2008, the REIT owned 147 Canadian hotels operated under international brands and has a 50% interest in Choice Hotels Canada Inc. ("CHC").

2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the REIT and its subsidiaries and the proportionate share of the assets, liabilities, revenues and expenses of a joint venture, the REIT's 50% interest in CHC, and a co-tenancy that owns one of its hotels.

Comprehensive Income

The REIT recognizes comprehensive income which represents changes in the unitholders' equity during a period arising from transactions and other events with non-owner sources. For the years ended December 31, 2008 and 2007, there is no difference between the REIT's Consolidated Statement of Net (Loss) Income and its Statement of Comprehensive (Loss) Income.

Use of Estimates

The preparation of the REIT's financial statements in conformity with Canadian generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Significant estimates are required in the determination of future cash flows and probabilities in assessing the recoverability of hotel properties and other long-term assets, the allocation of the purchase price to components of hotels and other real estate assets acquired, determination of useful lives for depreciation and amortization purposes, conditional asset retirement obligations, fair value of financial instruments for disclosure purposes, value of conversion options in convertible debentures and the determination of future income tax assets and liabilities.

Inventory

Effective January 1, 2008, the REIT adopted and applied the new Canadian Institute of Chartered Accountants ("CICA") recommendations under Section 3031 - Inventories. This change in accounting policy did not have an impact on the financial statements of the REIT. Inventory, comprised of operating supplies including food and beverage, is valued at the lower of cost, determined on a first-in, first-out basis, and replacement cost.

Inventory is included in 'Prepaid expenses and other assets' on the balance sheet.

Hotel Properties

Hotel properties, consisting of land, buildings and furniture, fixtures and equipment, are stated at cost less accumulated depreciation.

Newly Built Hotels Acquired or Developed On January 1, 2008, the REIT has retroactively implemented a new accounting policy with respect to costs capitalized to development properties. The capitalized costs include pre-construction costs essential to the development of the hotel, construction costs, chattel costs, real estate taxes, interest on hotel specific debt, general and administrative expenses incurred directly in connection with the acquisition and/or development of hotel properties, and net operating losses until the earlier of hotel operating income break-even or one year (see Note 4). This change in accounting policy did not have any impact on the comparative amounts presented in these consolidated financial statements.

Other Real Estate Properties

Other real estate properties include office and retail properties as well as a retirement residence.

Office and retail properties include land and buildings. The buildings
are stated at cost less accumulated depreciation. The retirement residence includes land, buildings and furniture, fixtures and equipment. The buildings and furniture, fixtures and equipment are stated at cost less accumulated depreciation.

Depreciation

Depreciation for Hotel Properties and Other Real Estate Properties is provided on a straight-line basis over a period not to exceed the following:



Buildings - 40 years
Building renovations - 7 years
Furniture, fixtures and equipment - 7 years


Asset Retirement Obligation

The REIT recorded an asset retirement obligation related to various environmental obligations for certain properties where the quantum of such costs and the timing for settlement is reasonably determinable. The obligation relates to the eventual removal of asbestos, underground storage tanks and polychlorinated biphenyls (PCBs) and eventual remediation of land contamination. The asset will be amortized over the remaining life of the building. The liability will be accreted over the terms of the obligations.

Impairment of Long-lived Assets

Management reviews long-lived assets on a regular basis for impairment to determine if any events or changes in circumstances exist that would indicate that the carrying amount of an asset may not be recoverable over time. If it is determined that the cumulative future cash flows of a long-lived asset are less than its carrying value, the long-lived asset is written down to its fair value. Cumulative future cash flows represent the undiscounted estimated future cash flow expected to be received from the long-lived asset. Assets reviewed for impairment under this policy include hotel properties, other real estate properties, licence contracts and intangible assets.

Licence Contracts

Licence contracts include franchise contracts related to the REIT's joint venture interest in CHC, and are recorded at the value attributed to the discounted cash flow of the expected earnings stream under the contract terms at the time of acquisition. This amount is amortized over the average life or expected renewal life of the contracts, which is estimated to be twenty years.

Intangible and Deferred Assets

Intangible assets may include customer and tenant relationships, lease origination costs, above and below market leases and franchise rights recognized upon acquisition of new hotel properties and other real estate properties. Deferred assets include deferred financing fees on the bridge loan.

Lease origination costs, above and below market leases and franchise rights are amortized over the term of the respective leases. Customer and tenant relationships are amortized over five years. Deferred financing fees are amortized over the term of the bridge loan.

Capital Disclosures

Effective January 1, 2008, the REIT adopted the Canadian Institute of Chartered Accountants ("CICA") Section 1535 - Capital Disclosures. This standard specifies the disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non- compliance (see Note 13).

Guarantees

The REIT is required to disclose its obligations undertaken in issuing certain guarantees on the date the guarantee is issued or modified. Where the REIT expects to make a payment in respect of the guarantee, a liability will be recognized to the extent that one has not yet been recognized.

Financial Instruments - Recognition and Measurement

Financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities.

The REIT has designated its accounts receivable as "loans and receivables" and its long-term debt, convertible debentures, and accounts payable and accrued liabilities as "other liabilities", all of which are reflected on the balance sheet at amortized cost using the effective interest method ("EIM"). The REIT has recorded the interest expense for both the mortgage debt and convertible debentures using EIM. Transaction costs that are directly attributable to the issue of financial instruments classified as other than "held-for-trading" are included in the initial carrying value of such instruments and amortized using the EIM so as to yield a constant rate of interest over the life of the respective financial instrument.

Cash, restricted cash and bank indebtedness have been designated as "held- for-trading" and are reflected on the balance sheet at fair value. Deferred financing costs related to the credit facility are included in Intangible and Deferred Assets.

Long-term debt assumed on the acquisition of hotel properties is recorded at their estimated fair value on the date of acquisition (the "fair value amount"). The difference between the fair value amount and the face value of the long-term debt has been amortized to interest expense using EIM until maturity.

Effective January 1, 2008, the REIT adopted two new CICA accounting standards: Section 3862 - Financial Instruments - Disclosures and Section 3863 - Financial Instruments - Presentation. These new standards replace Section 3861 - Financial Instruments - Disclosure and Presentation. These standards revise and enhance disclosure requirements, and carry forward, unchanged, existing presentation requirements. These new standards place increased emphasis on disclosure about the nature and extent of risks arising from financial instruments and how the entity manages those risks (see Note 16).

Defined Benefit Pension Plans

The REIT maintains defined benefit pension plans for the benefit of management employees and non-union non-management employees of certain hotels acquired in 2006 and 2007.

The REIT accrues its obligations under employee benefit plans and the related costs, net of plan assets. This accrual is included in Other Long-term Obligations. The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method pro- rated on service and management's best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. The excess of the net actuarial gain or loss over 10% of the greater of the benefit obligation and the fair value of plan assets, at the beginning of the year, is amortized over the remaining service period of active employees. The transitional asset or liability is amortized over the average remaining service period of active employees expected to receive benefits under the benefit plans. The average remaining service periods of the active employees covered by the pension plan for the benefit of management employees and non-union non-management employees are 14 years and 16 years, respectively.

Revenue Recognition

Hotel Revenue

Revenues from hotel operations are recognized when services are provided and ultimate collection is reasonably assured.

Franchise Revenue

Monthly revenues from licence contracts are based on gross room revenue as reported by the franchisees and are recorded when earned with an appropriate provision for estimated uncollectible amounts. Initial franchise fees are recorded as income when the cash has been received and upon execution of binding contracts.

Retail, Office and Retirement Residence Revenue

The REIT retains all the risks and benefits of ownership of its other real estate properties and therefore accounts for leases with its tenants as operating leases. Rental revenue from retail, office and retirement residence leases includes all amounts earned from tenants related to lease agreements and recognizes the revenues on a straight-line basis.

Hedging Relationships

The REIT utilizes derivative financial instruments primarily to manage financial risks related to the use of commodities. Hedge accounting is applied when the derivative is designated as a hedge of a specific exposure and there is reasonable assurance that the hedge will be effective. Financial instruments that are not designated as hedges are carried at estimated fair values and gains and losses arising from the changes in fair values are recognized in income as a component of other income. The use of derivative financial instruments is governed by documented risk management policies. Currently, the REIT does not have any instruments that qualify as a hedge.

Income Taxes

Income taxes are accounted for using the liability method, whereby future income tax assets and liabilities are determined based on differences between the carrying amount of the balance sheet items and their corresponding tax values. Future income taxes are computed using enacted or substantively enacted income tax rates for the years in which tax and accounting basis differences are expected to reverse.

Executive Compensation Plan

The senior executives participate in an incentive plan that involves the issuance of REIT units. A unit granted entitles the holder to receive on the vesting date the then current fair market value of the unit plus the value of the cash distributions that would have been paid on the unit if it had been issued on the date of grant assuming the reinvestment of the distribution into REIT units. The payment will be satisfied through the issuance of units. The benefit resulting from the issuance of units under this plan is recorded as compensation expense, on a straight-line basis over the vesting period, based on the market price of the REIT units on the date of grant.

Future Accounting Changes

Goodwill and Intangible Assets

On January 31, 2008, the CICA issued a new accounting standard, Section 3064 - Goodwill and Intangible Assets. Section 3064 will replace Section 3062 - Goodwill and Other Intangible Assets and Section 3450 - Research and Development Costs. Section 3064 establishes standards for the recognition, measurement and disclosure of goodwill and intangible assets. This new standard, regarding intangible assets, will be effective for the REIT in the first quarter of 2009. There is no material impact of this standard to the REIT.

Business Combinations

In January 2009, the CICA issued new accounting standards concerning Section 1582 - Business Combinations, Section 1602 - Non-controlling Interests and Section 1601 - Consolidated Financial Statements, which is based on the International Accounting Standards Board's ("IASB") International Financial Reporting Standard 3 - Business Combinations. The new standards replace the existing guidance on business combinations and consolidated financial statements. The objective of the new standards is to harmonize Canadian accounting for business combinations with the international and United States accounting standards. The new standards are to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with earlier application permitted. Assets and liabilities that arose from business combinations whose acquisition dates preceded the application of the new standards shall not be adjusted upon application of these new standards.

The Non-controlling Interests standard should be applied retrospectively
except for certain items.

The REIT is assessing whether it will apply the new accounting standard sat the beginning of its 2011 fiscal year or elect to early adopt the new accounting standards at the beginning of its 2010 fiscal year in order to minimize the amount of restatement when the REIT adopts International Financial Reporting Standards ("IFRS"). The impact of the new standards on the REIT's results of operations, financial position and disclosures will be assessed as part of the REIT's IFRS transition project.

3. Acquisitions

On February 12, 2008, the REIT purchased the Staybridge Suites Guelph for $17,423 including transaction costs. The acquisition was funded through new mortgage debt of $8,300 and cash on hand.

During the year ended December 31, 2007, InnVest became the owner of nine, and the lessee of two, of the following eleven first class hotels: The Fairmont Palliser, Sheraton Suites Calgary Eau Claire, Delta Calgary Airport, Fairmont Hotel Macdonald, Delta Winnipeg, Delta Ottawa Hotel and Suites, Delta Centre-Ville, Delta Beauséjour, Delta Prince Edward, Delta Barrington and the Delta Halifax (collectively, the "Legacy Portfolio").

The REIT also completed the purchases of the Staybridge Suites London and the Holiday Inn Express North Bay in 2007.

The purchase price allocations associated with these acquisitions for December 31, 2008 and 2007 are as follows:


2008 2007
-------------------------------------------------------------------------
Current assets $ - $ 24,473
Hotel properties 17,423 794,152
Intangible and deferred assets - 47,466
-------------------------------------------------------------------------
17,423 866,091
Assumption of existing long-term debt - (196,674)
Future income tax liability - (127,133)
Current liabilities - (26,882)
Long-term liabilities - (2,493)
-------------------------------------------------------------------------
$ 17,423 $ 512,909
-------------------------------------------------------------------------
-------------------------------------------------------------------------



The consideration paid, including transaction costs, consists of the following:



Cash $ 9,019 $ 32,127
Bank indebtedness - 212,850
Units issued - 191,748
Debentures issued - 58,615
New mortgage debt 8,289 -
-------------------------------------------------------------------------
17,308 495,340
-------------------------------------------------------------------------
Acquisition related liabilities 115 17,569
-------------------------------------------------------------------------
$ 17,423 $ 512,909
-------------------------------------------------------------------------
-------------------------------------------------------------------------

4. Hotel Properties

December 31,
2008
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------
Land $ 186,457 $ - $ 186,457
Buildings 1,745,894 186,952 1,558,942
Furniture, fixtures
and equipment 146,547 52,675 93,872
-------------------------------------------------------------------------
$ 2,078,898 $ 239,627 $ 1,839,271
-------------------------------------------------------------------------
-------------------------------------------------------------------------

December 31,
2007
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------
Land $ 182,960 $ - $ 182,960
Buildings 1,745,667 133,017 1,612,650
Furniture, fixtures
and equipment 120,243 31,088 89,155
-------------------------------------------------------------------------

$ 2,048,870 $ 164,105 $ 1,884,765
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Included in Hotel Properties as at December 31, 2008, is one newly built hotel acquired and one hotel developed internally adjacent to a hotel owned by the REIT, with a combined net book value of $35,352 (2007 - $12,470) which meet the criteria under the REIT's Significant Accounting Policy - Newly Built Hotels Acquired or Developed (see Note 2). Included in this balance is $838 (2007 - $ nil) of capitalized net operating losses. No depreciation has been recorded for these two hotels during the year. Another newly built hotel acquired in 2007 with a net book value of $17,324 as of December 31, 2008, met the criteria to be accounted for as a development property until the third quarter 2008. This property includes capitalized net operating losses of $340 (2007 - $ nil) and was subject to amortization beginning in the third quarter 2008. Mortgage interest capitalized in 2008 amounted to $1,009 (2007 - $ nil). The REIT's ongoing review of hotel properties for impairment of value identified seven owned hotels and one leasehold hotel which required a
writedown of their carrying values by $34,436 to their estimated fair value. The writedown included $4,840 related to two Ontario hotels and one Ontario leasehold hotel as well as $29,596 related to five hotels which have been identified as assets held for sale, subsequent to December 31, 2008 (Note 26).

5. Other Real Estate Properties

Other real estate properties include the office and retail properties and a retirement residence which were acquired during 2006.



December 31,
2008
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------
Land $ 1,624 $ - $ 1,624
Buildings 15,416 1,004 14,412
Furniture, fixtures
and equipment 72 30 42
-------------------------------------------------------------------------
$ 17,112 $ 1,034 $ 16,078
-------------------------------------------------------------------------
-------------------------------------------------------------------------

December 31,
2007
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------
Land $ 1,624 $ - $ 1,624
Buildings 15,382 616 14,766
Furniture, fixtures
and equipment 56 18 38
-------------------------------------------------------------------------
$ 17,062 $ 634 $ 16,428
-------------------------------------------------------------------------
-------------------------------------------------------------------------

6. Licence Contracts

December 31,
2008
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Licence contracts $ 26,320 $ 8,467 $ 17,853
-------------------------------------------------------------------------

December 31,
2007
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Licence contracts $ 26,320 $ 7,151 $ 19,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------


During the year ended December 31, 2008, the licence contracts were amortized by $1,316 (2007 - $1,316).



7. Intangible and Deferred Assets

December 31,
2008
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Customer relationships $ 49,006 $ 15,088 $ 33,918
Tenant relationships 2,640 1,320 1,320
Franchise rights 1,936 1,155 781
Lease origination costs 6,256 515 5,741
Other 1,043 540 503
-------------------------------------------------------------------------
Total intangible assets 60,881 18,618 42,263
Deferred financing related
to bridge loan 101 84 17
-------------------------------------------------------------------------
$ 60,982 $ 18,702 $ 42,280
-------------------------------------------------------------------------
-------------------------------------------------------------------------

December 31,
2007
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------
Customer relationships $ 49,098 $ 5,512 $ 43,586
Tenant relationships 2,582 816 1,766
Franchise rights 1,929 819 1,110
Lease origination costs 6,256 221 6,035
Other 1,623 333 1,290
-------------------------------------------------------------------------
Total intangible assets 61,488 7,701 53,787
Deferred financing related
to bridge loan 2,150 836 1,314
-------------------------------------------------------------------------
$ 63,638 $ 8,537 $ 55,101
-------------------------------------------------------------------------
-------------------------------------------------------------------------


During the year ended December 31, 2008, the intangible assets were amortized by $10,958 (2007 - $5,490) and the deferred financing related to the bridge loans was amortized by $1,398 (2007 - $836).

The REIT's ongoing review of intangible assets for indications of impairment, identified a leased hotel which required a writedown of its carrying value. During the fourth quarter of 2008, a writedown of $99 was recorded.

8. Joint Venture and Co-tenancy

The following represents the proportionate share of the REIT's interest in a joint venture and a co-tenancy:




December 31, December 31,
2008 2007
-------------------------------------------------------------------------

Current assets $ 5,538 $ 3,853
Fixed assets 4,080 4,092
Current liabilities 3,943 3,023
Long-term liabilities 4,967 5,444
Revenues 10,382 9,358
Expenses 6,942 5,951
Net income 3,440 3,407
Cash flow from:
Operating activities 5,462 4,155
Financing activities (3,975) (3,886)
Investing activities (164) (126)
-------------------------------------------------------------------------


9. Bank Indebtedness

In the first quarter of 2008, the REIT provided five unencumbered properties as additional security for its operating line which was increased from $25,000 to $40,000. The operating line bears interest at the Canadian bank prime rate plus 0.5%. With the addition of the five properties, the operating line is now secured by 14 properties and is due August 1, 2009.

The REIT's bridge loan facility of $215,000, entered into as part of the closing for the acquisition of the Legacy Portfolio in 2007, was paid in full in the first quarter of 2008 as part of the refinancing of these assets (see Note 10). Deferred financing costs related to this bridge loan were written off to depreciation and amortization expense at the time of repayment.

Proceeds from a new bridge loan were received on March 19, 2008 for $9,000, whereby the REIT provided an additional unencumbered hotel as security. The bridge loan bears interest at Canadian Bankers' Acceptance rate plus 2.0%, is for a term of one year, and requires interest payments only.

There is a risk that bank lenders will not refinance the bank credit facility on terms and conditions acceptable to the REIT or on any terms at all.



December 31, December 31,
2008 2007
-------------------------------------------------------------------------
Bridge loan $ 9,000 $ -
Operating line - 8,200
Legacy Portfolio acquisition bridge loan - 215,000
-------------------------------------------------------------------------
$ 9,000 $ 223,200
-------------------------------------------------------------------------
-------------------------------------------------------------------------

10. Long-term Debt

December 31, December 31,
2008 2007
-------------------------------------------------------------------------
Mortgages payable $ 958,260 $ 715,699
Less debt issuance costs (6,984) (4,082)
-------------------------------------------------------------------------
Total long-term debt 951,276 711,617
Less current portion (10,763) (12,725)
-------------------------------------------------------------------------
Net long-term debt $ 940,513 $ 698,892
-------------------------------------------------------------------------


Substantially all of the REIT's assets have been pledged as security under debt agreements. At December 31, 2008, long-term debt had a weighted average interest rate of 5.7% (2007 - 6.4%) and a weighted average effective interest rate of 5.8% (2007 - 6.5%). The long-term debt is repayable in average monthly payments of principal and interest totalling $5,483 (2007 - $4,805) per month, and matures at various dates from February 28, 2010 to March 21, 2018.

Scheduled repayment of long-term debt is as follows:


Scheduled Due on
Repayments Maturity Total
-------------------------------------------------------------------------
2009 $ 10,763 $ - $ 10,763
2010 9,735 189,108 198,843
2011 9,290 318,835 328,125
2012 10,770 - 10,770
2013 11,417 - 11,417
2014 and thereafter 11,165 387,177 398,342
-------------------------------------------------------------------------
$ 63,140 $ 895,120 $ 958,260
------------------------------------------------------------------------
-------------------------------------------------------------------------


The estimated fair value of the REIT's long-term debt at December 31, 2008 was approximately $933,784 (2007 - $717,463). This estimate was determined by discounting expected cash flows at the interest rates currently being offered to the REIT for debt of the same remaining maturities.

Long-term debt includes $92,129 (2007 - $79,777) of mortgages payable, which are subject to floating interest rates. Annual interest expense will increase by $921 for every 1% increase in the base Bankers' Acceptance rate.

As part of the Staybridge Suites Guelph acquisition (see Note 3), the REIT obtained $8,300 of new debt bearing an interest rate of 5.5% for a ten- year term. The issuance costs associated with the debt amounted to $11.

On February 29, 2008, the REIT received $343,000 of the $350,000 mortgage financing on 10 of the 11 hotels in the Legacy Portfolio. Existing debt of $154,765 was repaid and the REIT obtained new debt of $40,000 on two assets which were previously unencumbered. Transaction costs of $4,565 were incurred for this transaction. InnVest fixed the interest rates on $370,000, with the remaining $20,000 subject to floating rates. The weighted average term to maturity is 4.9 years and the weighted average blended interest rate is 5.6%.

A portion of the proceeds from the February 29, 2008 refinancing transaction were used to repay the balance of the $215,000 bridge loan facility entered into for the acquisition of the Legacy Portfolio in 2007, which had a maturity date of June 13, 2008.

Interest expense on mortgages and other debt, interest on operating and bridge loans, as well as convertible debentures interest are considered operating items in the statement of cash flows.

The REIT has access to a loan facility, granted in conjunction with property mortgages, of up to $23,904 available to fund 50% to 100% of capital expenditures incurred at individual hotels. At December 31, 2008, the REIT has drawn $12,196 on this facility (2007 - $ nil).



11. Other Long-term Obligations

December 31, December 31,
2008 2007
-------------------------------------------------------------------------
Capital leases $ 1,662 $ 1,767
Other lease obligations 414 360
-------------------------------------------------------------------------
2,076 2,127
Less current portion (195) (165)
-------------------------------------------------------------------------
Total lease obligations 1,881 1,962
Pension liability 3,522 3,294
Asset retirement obligation 1,492 1,436
-------------------------------------------------------------------------
Total other long-term obligations $ 6,895 $ 6,692
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Defined Benefit Pension Plans

The defined benefit pension plans were assumed pursuant to the acquisition of certain hotels in 2006 and 2007. The most recent actuarial valuation with respect to the funding of the REIT's pension plans was prepared on December 31, 2008.

The pension plan assets as at December 31, 2008 consist of the following:



Non-Union
Non- December 31, December 31,
Management Management 2008 2007
Pension Pension Total Total
Benefit Benefit Benefit Benefit
Plans Plans Plans Plans
-------------------------------------------------------------------------
Accrued benefit
obligation $ 4,510 $ 1,003 $ 5,513 $ 6,908
Fair value of plan
assets 2,266 997 3,263 3,614
-------------------------------------------------------------------------
Funded status -
plan deficit 2,244 6 2,250 3,294
Unamortized net
actuarial gain 917 355 1,272 249
-------------------------------------------------------------------------
Accrued employee
future benefit
liability $ 3,161 $ 361 $ 3,522 $ 3,543
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The pension expense for the year ended December 31, 2008 is $651 (2007 -
$255).

12. Convertible Debentures

The details of the three series of convertible debentures are outlined in the tables below:



Effective Original Converted
Interest Interest Face to Trust
Debenture Maturity Date Rate Rate Amount Units
-------------------------------------------------------------------------

Series A April 15, 2011 6.25% 7.73% $ 57,500 $ (11,736)
Series B May 31, 2013 6.00% 7.53% 75,000 -
Series C August 1, 2014 5.85% 7.42% 70,000 -
-------------------------------------------------------------------------
$ 202,500 $ (11,736)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Face Holders'
Amount Conversion Transaction December
Debenture Outstanding Option Accretion Costs 31, 2008
-------------------------------------------------------------------------
Series A $ 45,764 $ (2,289) $ 1,398 $ (333) $ 44,540
Series B 75,000 (3,400) 1,241 (2,173) 70,668
Series C 70,000 (2,953) 577 (2,662) 64,962
-------------------------------------------------------------------------
$ 190,764 $ (8,642) $ 3,216 $ (5,168) $ 180,170
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Effective Original Converted
Interest Interest Face to Trust
Debenture Maturity Date Rate Rate Amount Units
-------------------------------------------------------------------------
Series A April 15, 2011 6.25% 7.73% $ 57,500 $ (11,736)
Series B May 31, 2013 6.00% 7.53% 75,000 -
Series C August 1, 2014 5.85% 7.42% 70,000 -
-------------------------------------------------------------------------
$ 202,500 $ (11,736)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Face Holders'
Amount Conversion Transaction December
Debenture Outstanding Option Accretion Costs 31, 2007
-------------------------------------------------------------------------

Series A $ 45,764 $ (2,289) $ 1,127 $ (1,356) $ 43,246
Series B 75,000 (3,400) 768 (2,497) 69,871
Series C 70,000 (2,953) 169 (2,946) 64,270
-------------------------------------------------------------------------
$ 190,764 $ (8,642) $ 2,064 $ (6,799) $ 177,387
-------------------------------------------------------------------------
-------------------------------------------------------------------------



The fair value of the REIT's convertible debentures based on their trading prices on the Toronto Stock Exchange at December 31, 2008 is $102,108 (December 31, 2007 - $180,917).

Series A Debentures

On April 2, 2004, the REIT raised a total amount of $57,500 in convertible debentures, which bear interest at an annual rate of 6.25% payable semi-annually in arrears on April 15 and October 15 in each year ("Series A - 6.25% Debentures"). These convertible debentures have a term of seven years and each $1 principal amount is convertible at the option of the holder, into 80 units (representing the conversion price of $12.50 per unit). On or after April 15, 2008 to April 14, 2010, the Series A - 6.25% Debentures may be redeemed by the REIT, in whole or in part, on not more than 60 days and on not less than 30 days prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the volume- weighted average trading price of the units on the Toronto Stock Exchange ("TSX") for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the redemption is received, exceeds 125% of the conversion price. On or after April 15, 2010, the Series A - 6.25% Debentures may be redeemed by the REIT at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. During the year ended December 31, 2008, no units (2007 - 830,800 units) were issued as a result of conversions of debentures.

In accordance with GAAP, the holder conversion option was valued separately from the convertible debentures at $2,875, being the estimated fair market value of the option on the date the security was issued. The debenture discount equal to the value of the option is being accreted over the term of the Series A debentures. During the year ended December 31, 2008, $ nil (2007 - $519) of the holder conversion option was reallocated from unitholders' equity to the convertible debenture liability as accretion attributable to the converted debentures.

Series B Debentures

On May 16, 2006, the REIT announced the closing on a bought deal basis of $75,000 6% convertible unsecured subordinated debentures ("Series B - 6.00% Debentures"). These debentures are convertible into trust units at a strike price of $14.90 per unit, bear interest at 6.00% per annum payable semi- annually on May 31 and November 30 of each year and will mature May 31, 2013. The trust units to be issued upon conversion of the Series B - 6.00% Debentures are 5,033,557. Each $1 principal amount is convertible at the option of the holder into 67 units.

The Series B - 6.00% Debentures are not redeemable prior to May 31, 2009. From May 31, 2009 to May 31, 2011, the Series B - 6.00% Debentures may be redeemed by the REIT, in whole or in part, on not more than 60 days and on not less than 30 days prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the volume- weighted average trading price of the Units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the redemption is received, exceeds 125% of the conversion price. On or after June 1, 2011, the Series B - 6.00% Debentures may be redeemed by the REIT at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest.

The holder conversion option was valued separately from the convertible debentures at $3,400. The holder conversion option is being accreted over the term of the Series B - 6.00% Debentures. There were no conversions of Series B debentures during the year (2007 - $ nil).

Series C Debentures

On August 3, 2007, the REIT announced the closing on a bought deal basis of $70,000, 5.85% convertible unsecured subordinated debentures ("Series C - 5.85% Debentures"). These debentures are convertible into trust units at a strike price of $14.70 per unit, bear interest at 5.85% per annum payable semi- annually on February 1 and August 1 of each year and will mature August 1, 2014. The trust units to be issued upon conversion of the Series C - 5.85% Debentures are 4,761,905. Each $1 principal amount is convertible at the option of the holder into 68 units. The Series C - 5.85% Debentures are not redeemable prior to August 1, 2010. On or after August 1, 2010 and prior to August 1, 2012, the Series C - 5.85% Debentures may be redeemed by the REIT, in whole or in part, on not more than 60 days and on not less than 30 days prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the volume-weighted average trading price of the units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the
redemption is received, exceeds 125% of the conversion price. On or after August 1, 2012 and prior to August 1, 2014, the Series C - 5.85% Debentures may be redeemed by the REIT at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. The holder conversion option was valued separately from the convertible debentures at $2,953. The holder conversion option is being accreted over the term of the Series C - 5.85% Debentures. There were no conversions of Series C debentures during the year (2007 - $ nil).

13. Capital Management

The REIT manages its capital, which is defined as the aggregate of unitholders' equity and debt, under the terms of the Declaration of Trust. The REIT's capital management objectives are (i) to ensure compliance with debt and investment restrictions outlined in its Declaration of Trust as well as external existing debt covenants, (ii) to allow for the implementation of its acquisition strategy and hotel property refurbishment program, and (iii) to build long-term unitholder value. Issuances of equity and debt are approved by the Board of Trustees (the "Board") through their review and approval of the REIT's strategic plan and annual budget plan, along with changes to the approved plans periodically throughout each year.

At December 31, 2008, InnVest's primary contractual obligations consisted of long-term mortgage obligations and convertible debentures. InnVest is not permitted to exceed certain financial leverage amounts under the terms of the Declaration of Trust. The REIT is permitted to hold indebtedness excluding convertible debentures up to a level of 50% of gross asset value. Further, the REIT is permitted to have indebtedness and convertible debentures up to a level of 60% of gross asset value. The Declaration of Trust also governs that individual property mortgages, or mortgages on a pool of properties, cannot exceed 75% of the fair value of the underlying property. InnVest calculates indebtedness in accordance with GAAP excluding non-interest bearing indebtedness, trade accounts payable, and any future income tax liability. InnVest calculates gross asset value as the total book value of assets on the REIT's balance sheet, plus the accumulated depreciation and amortization, less future income tax liabilities.

At December 31, 2008, the REIT's leverage excluding and including convertible debentures was 47.2% and 56.5% respectively, calculated as follows:




December 31, December 31,
2008 2007
-------------------------------------------------------------------------
Total assets per Consolidated
balance sheet $ 1,977,104 $ 2,062,279
Accumulated depreciation
and amortization 269,331 192,973
Future income tax liability (210,977) (225,503)
Future income tax liability
not included in assets 18,834 23,909
-------------------------------------------------------------------------
Gross asset value $ 2,054,292 $ 2,053,658
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Book value of mortgages
and other
indebted-
ness(1) $ 970,071 47.2% $ 953,067 46.4%
Convertible
debentures(2) 190,764 9.3% 190,764 9.3%
-------------------------------------------------------------------------
$ 1,160,835 56.5% $ 1,143,831 55.7%
-------------------------------------------------------------------------
-------------------------------------------------------------------------


(1) Adjusted to eliminate financing issuance costs and include long-term debt related to assets held for sale.

(2) Adjusted to face value.

The REIT's Declaration of Trust also includes guidelines that limit capital expended to, among other items, the following:

(a) Direct and indirect investments in real property on which hotels are situated and the hotel business conducted thereon, primarily in Canada, and in entities whose activities consist primarily of franchising hotels;

(b) Temporary investments held in cash, deposits with a Canadian Chartered bank or trust company, short term government debt securities or in money market instruments of, or guaranteed by, a Schedule 1 Canadian bank, short term commercial paper, notes, bonds of other debt securities of a Canadian entity having a rating of at least R-1 (Mid) by Dominion Bond Rating Service or A-1 (Mid) by Standard & Poor's Corporation maturing prior to one year from the date of issue; and

(c) Investments in mortgages or mortgage bonds, where the related security is a first mortgage on income producing real property which otherwise complies with (a) above and is subject to certain leverage limits and debt service coverage. The aggregate value of such investments shall not exceed 20% of the unitholders' equity.

The REIT is in compliance with these guidelines.

The REIT is also subject to certain restrictions on the issuance of equity as discussed in Note 14. The REIT can issue on a cumulative basis a total of approximately $143,000 in equity annually in each of 2008 through 2010 and maintain its relief from taxation to the end of 2010. The REIT issued $13,536 in equity during 2008.

As outlined in the Declaration of Trust, the REIT is required to distribute monthly to unitholders not less than one-twelfth of eighty percent (80%) of distributable income of the REIT for the calendar year (see Note 20).

The REIT maintains an operating line of $40,000 with a Canadian Chartered bank with the following covenants in addition to the leverage limits under the Declaration of Trust:

(a) Trailing twelve months consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to consolidated interest expense of not less than 2.0 times (actual being 2.7 times at December 31, 2008 and 2.8 times at December 31 ,2007, respectively);

(b) Trailing twelve months consolidated EBITDA to consolidated debt service of not less than 1.5 times (actual being 2.3 times at December 31, 2008 and 2.3 times at December 31 ,2007); and

(c) Unitholders' Equity of not less than $300,000 (actual being $535,730 at December 31, 2008 and $604,666 at December 31, 2007, respectively).

14. Income Taxes and Future Income Tax Liability

The future income tax liability relates to tax and book basis differences of the following:


December 31, December 31,
2008 2007
-------------------------------------------------------------------------
Hotel properties $ 209,189 $ 221,763
Licence contracts 4,397 4,392
Financing costs and other assets (2,609) (652)
-------------------------------------------------------------------------
$ 210,977 $ 225,503
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The provision for income taxes is summarized as follows:

Year Ended Year Ended
December 31, December 31,
2008 2007
-------------------------------------------------------------------------
(Loss) income before income tax recovery $ (15,421) $ 22,674
-------------------------------------------------------------------------
Income tax based on a combined Federal and
Provincial income tax rate of 33.5%
(2007 - 36.0%) $ (5,166) $ 8,163
Income tax effect of statutory rate
adjustment - (22,239)
Tax effect of loss not allocable
(income attributable) to unitholders 5,217 (9,135)
Effects of the reorganization in the first
quarter of 2007 - (115,431)
Effects of the enactment of the Bill
in the second quarter of 2007 - 122,626
Effects of ongoing operations, capital
expenditures and writedowns (14,577) (9,857)
-------------------------------------------------------------------------
Income tax recovery $ (14,526) $ (25,873)
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The REIT currently qualifies as a Mutual Fund Trust for income tax purposes. As required by its Declaration of Trust, the REIT intends to distribute all taxable income to its unitholders and to deduct these distributions for income tax purposes (see Note 20).

In June 2007, a Bill was enacted for the taxation of publicly traded trusts, including income trusts (the "Bill"). The Bill applies to publicly traded trusts which existed prior to November 1, 2006 starting with taxation years ending in 2011, except for those trusts that qualify for the real estate investment trust ("Qualifying REIT") exception included in the legislation. An existing trust may lose its relief from taxation in the interim periods to 2011 where it undergoes "undue expansion". Pursuant to the legislation, a REIT which carries on Canadian hotel operations (including through subsidiaries) will not be a Qualifying REIT. As a result, the REIT will be subject to tax starting January 1, 2011.

The Bill may adversely affect the level of cash distribution to unitholders commencing in 2011 if the REIT does not become a Qualifying REIT by then. Management is reviewing whether it is feasible to reorganize the REIT so that non-qualifying operations and assets are transferred under a plan of arrangement to a taxable entity that is held by the REIT unitholders, and that the REIT hotels, which continue to be owned by the REIT, are leased by it to the taxable entity. It is not possible at this preliminary juncture to provide any assurances that any such reorganization or a similar reorganization can or will be implemented before 2011, or that any such reorganization, if implemented, would not result in material costs or other adverse consequences to the REIT and its unitholders.

15. Guarantees

Significant guarantees provided by the REIT to third parties are as follows:

Trustee and Officer Indemnification Agreements

The REIT has entered into indemnification agreements with its trustees and officers to indemnify them, to the extent permitted by law, against any and all charges, costs, expenses, amounts paid in settlement and damages incurred by the trustees and officers as a result of any lawsuit or any other judicial, administrative proceeding in which the trustees and officers are sued as a result of their service. These indemnification claims will be subject to any statutory or other legal limitation period. The nature of the indemnification agreements prevents the REIT from making a reasonable estimate of the maximum potential amount it could be required to pay to counter parties. The REIT has purchased trustees' and officers' liability insurance. No amount has been recorded in the financial statements with respect to these indemnification agreements.

Indemnification of Underwriters

The REIT has entered into agreements that provide for indemnification in underwriting agreements. These indemnifications generally require the REIT to indemnify the underwriters for costs incurred as a result of losses from litigation that may be suffered by the underwriters arising from the transactions. These types of indemnifications normally extend over an unspecified period of time and do not provide for any limit on the maximum potential amount.

16. Financial Instruments

Risk Management

In the normal course of business, the REIT is exposed to a number of risks that can affect its operating performance. These risks, and the actions taken to manage them, are as follows:

Interest Rate Risk

The time period over which Management is spreading the debt maturities implies an average term to maturity of approximately five years. This strategy reduces the REIT's exposure to re-pricing risk resulting from short-term interest rate fluctuations in any one year. Management is of the view that such a strategy will provide the most effective interest rate risk management for debt.

The REIT's floating rate debt balance is monitored by Management to minimize the REIT's exposure to interest rate fluctuations. As at December 31, 2008 the REIT's floating rate debt balance of $92,129 (2007 - $79,777) is approximately 9.6% of total long-term debt.

Credit Risk

Credit risks relate to the possibility that hotel guests, either individual or corporate, do not pay the amounts owed to the REIT. The REIT mitigates this risk by limiting its exposure to customers allowed to pay by invoice after check out ("direct bill"). Accounts receivable as at December 31, 2008 is $27,716 (2007 - $28,677). InnVest reviews accounts receivable and the allowance for doubtful accounts is adjusted for any balances which are determined by management to be uncollectable. This provision adjustment is expensed in the hotel operating income. The allowance as at December 31, 2008 is $812 (2007 - $670) or 2.9% (2007 - 2.3%) of total receivables. The provision adjustment included in hotel expenses for the year ended December 31, 2008 is $274 (2007 - $116). Amounts outstanding for over 90 days, which have not been provided for, total $355 at December 31, 2008 (2007 - $790).

Liquidity Risk

Liquidity risk arises from the possibility of not having sufficient debt and equity capital available to the REIT to fund its growth and capital maintenance programs and refinance its obligations as they arise. There is a risk that lenders will not refinance maturing debt on terms and conditions acceptable to the REIT or on any terms at all. Management's strategy mitigates the REIT's exposure to excessive amount of debt maturing in any one year. There is also a risk that bank lenders will not refinance the operating credit facility on terms and conditions acceptable to the REIT or on any terms at all.

Estimated maturities of the REIT's financial liablities for the following 24 months:



Contractual
2009 2010 Cash flows(1)
-------------------------------------------------------------------------
Mortgage payable - principal $ 10,763 $ 198,843 $ 209,606
Mortgage payable - interest(2) 55,178 49,745 104,923
Convertible debentures
- interest 11,455 11,455 22,910
Bank loans - principal 9,000 - 9,000
Bank loans - interest 126 - 126
-------------------------------------------------------------------------
Total $ 86,522 $ 260,043 $ 346,565
-------------------------------------------------------------------------
-------------------------------------------------------------------------


(1) Contractual cash flows include principal and interest payments for the following 24 months and ignore extensions options available to the REIT.

(2) Interest amounts for floating rate debt is based on interest rates prevailing at December 31, 2008.

Fair Values

The fair values of the REIT's financial assets and liabilities, representing net working capital, approximate their recorded values at December 31, 2008 and 2007 due to their short-term nature. The fair value of the REIT's long-term debt is less than the carrying value by approximately $24,476 at December 31, 2008 (2007 - fair value exceeded carrying value by approximately $5,846) due to changes in interest rates since the dates on which the individual mortgages were received. The fair value of long-term debt has been estimated based on the current market rates for mortgages with similar terms and conditions. The fair value of the REIT's convertible debentures is less than the carrying value by approximately $78,062 at December 31, 2008 (2007 - fair value exceeded carrying value by approximately $3,530). The fair value of convertible debentures has been estimated based on the market rates for
convertible debentures, as at December 31, 2008 and December 31, 2007.

17. Commitments and Contingencies

Lease Commitments

The REIT is committed under various equipment operating leases to minimum annual rental payments and under long-term land and building leases to minimum annual payments as follows:



Land and
Equipment Building
Leases Leases Total
-------------------------------------------------------------------------
2009 $ 643 $ 4,893 $ 5,536
2010 392 4,945 5,337
2011 172 4,492 4,664
2012 50 4,492 4,542
2013 35 4,492 4,527
2014 and thereafter - 89,933 89,933
-------------------------------------------------------------------------
$ 1,292 $ 113,247 $ 114,539
-------------------------------------------------------------------------
-------------------------------------------------------------------------


The land leases expire between 2010 and 2088. Certain of the operating leases are rentals that are determined as a percentage of revenues with no minimum amounts. They are excluded from these figures as they are not quantifiable.

Letters of Credit

As at December 31, 2008, the REIT has letters of credit totalling $3,693 (2007 - $3,378) held on behalf of security deposits for various utility companies and liquor licences, and additional security for the pension liabilities.

Contingencies

The REIT is subject to lawsuits and claims arising in the ordinary course of business. Management believes that the resolution of such matters will not have a material adverse effect on the REIT's financial position or future results of operations.

18. Unitholders' Equity

The REIT is authorized to issue an unlimited number of units, each of which represents an equal undivided beneficial interest in any distributions from the REIT. All units are of the same class with equal rights and privileges. Per the Declaration of Trust, units cannot be issued from treasury unless the trustees consider it not to be dilutive to ensuing annual distributions of distributable income to existing unitholders.


Units Amount
-------------------------------------------------------------------------

Balance at December 31, 2006 55,045,351 $ 543,363
Units issued for acquisition of
Legacy Portfolio 16,195,000 $ 192,268
Units issued on conversion of debentures 830,800 10,605
Units issued under distribution
reinvestment plan 887,745 10,606
Units issued for vested executive
compensation plan 20,139 275
Units issued under trustee compensation plan 21,659 258
-------------------------------------------------------------------------
Balance at December 31, 2007 73,000,694 $ 757,375
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Units issued under distribution
reinvestment plan 1,658,339 13,234
Units repurchased pursuant to normal course
issuer bid (278,500) (2,877)
Units issued for vested executive
compensation plan 16,033 151
Units issued under trustee compensation plan 15,751 151

-------------------------------------------------------------------------
Balance at December 31, 2008 74,412,317 $ 768,034
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Pursuant to the REIT's normal course issuance bid (the "Bid"), the REIT purchased and cancelled 278,500 units at an average price of $3.36 per unit. The REIT recognized $1,938 of contributed surplus upon the cancellation of these units. Purchases under the Bid commenced on November 11, 2008 and will terminate on November 10, 2009.

Trustee Compensation Plan

The members of the Board of Trustees receive 50% of their annual retainer in units (based on the then current market price of the units). The REIT has set aside 100,000 units in reserve for this purpose. The balance in this reserve account at December 31, 2008 is 23,668 units. Under the Trustee Compensation Plan, 15,751 units were issued during the year ended December 31, 2008 (2007 - 21,659 units).

Executive Compensation Plan

The senior executives participate in the executive compensation plan under which units are granted by the Board of Trustees from time to time. The REIT has reserved a maximum of 1,000,000 units for issuance under the plan. The balance in this reserve account at December 31, 2008 is 818,872 units. A unit granted through the plan entitles the holder to receive, on the vesting date, the then current fair market value of the unit plus the value of the cash distributions that would have been paid on the unit if it had been issued on the date of grant assuming the reinvestment of the distribution into REIT units. The payment will be satisfied through the issuance of units.

The following table summarizes the status of the executive compensation plan at December 31, 2008, excluding granted units which have fully vested:



Units
Unvested Accumulated
Executive from Distri- Total
units butions Units
-------------------------------------------------------------------------

January 1, 2005 - granted 13,118 5,511 18,629
January 1, 2006 - granted 12,968 5,092 18,060
January 1, 2007 - granted 15,000 4,110 19,110
January 1, 2008 - granted 20,455 3,357 23,812
Units vested 2008 (6,559) (2,049) (8,608)
-------------------------------------------------------------------------
54,982 16,021 71,003
-------------------------------------------------------------------------
-------------------------------------------------------------------------


In March 2008, the Board of Trustees approved the granting of 20,455 units effective as of January 1, 2008. These units vest equally on the third and fourth anniversaries of the effective date of grant.

Distribution Reinvestment Plan ("DRIP")

The REIT has a DRIP whereby eligible Canadian unitholders may elect to have their distributions of income from the REIT automatically reinvested in additional units.

19. Per Unit Information



Year Ended Year Ended
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
-------------------------------------------------------------------------
Net (loss) income
from continuing
operations
- basic $ (895) 73,827,775 $ 48,547 62,714,239
Dilutive effect
of executive
compensation
plan - 65,093 - 54,749
-------------------------------------------------------------------------
Net (loss) income
from continuing
operations
- diluted $ (895) 73,892,868 $ 48,547 62,768,988
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Year Ended Year Ended
December 31, 2008 December 31, 2007
-------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
-------------------------------------------------------------------------
Net (loss) income
- basic $ (3,377) 73,827,775 $ 41,222 62,714,239
Dilutive effect
of executive
compensation
plan - 65,093 - 54,749
-------------------------------------------------------------------------
Net (loss) income
- diluted $ (3,377) 73,892,868 $ 41,222 62,768,988
-------------------------------------------------------------------------
-------------------------------------------------------------------------



The impact of the convertible debentures has been excluded from the per unit calculations above because the impact of the conversions would not be dilutive.

20. Distributions to Unitholders

Distributions to unitholders are computed based on distributable income as defined by the Declaration of Trust.

Distributable income is a measure of cash flow that is not defined under Canadian GAAP and, accordingly, may not be comparable to similar measures used by other issuers. Distributable income per unit has been calculated on a basis consistent with that prescribed by Canadian GAAP for calculating earnings per unit.

Distributable income is defined as net income in accordance with Canadian GAAP, subject to certain adjustments as set out in the Declaration of Trust, including adding back depreciation and amortization, amortization of fair value debt adjustment and future income tax (recovery) expense, excluding any gains or losses on the disposition of real property and future income taxes, deducting the amount calculated, at 4% to 5% of hotel revenues, for the reserve for the replacement of furniture, fixtures and equipment and capital improvements, the accretion on convertible debentures that is included in the computation of net income, and making any other adjustments determined by the trustees of the REIT in their discretion. As outlined in the Declaration of Trust, the REIT is required to distribute monthly to unitholders not less than one-twelfth of eighty percent (80%) of distributable income of the REIT for the calendar year.



Year Ended Year Ended
December December
31, 2008 31, 2007
-------------------------------------------------------------------------
Net (loss) income $ (3,377) $ 41,222
-------------------------------------------------------------------------
Add (deduct)
Depreciation and amortization 89,607 64,990
Writedown of hotel properties 34,535 -
Future income tax recovery (14,526) (25,869)
Non-cash portion of interest expense 3,141 2,587
Reserve for replacement of furniture,
fixtures and equipment and capital
improvements (28,352) (20,371)
Writedown of assets held for sale,
net of gain on sale of assets 2,714 6,322
Convertible debenture accretion 1,152 887
Non-cash executive and trustee compensation 619 672
Deferred land lease expense and retail
lease income, net 27 41
Corporate reorganization costs - 1,514
-------------------------------------------------------------------------
88,917 30,773
-------------------------------------------------------------------------
Distributable income 85,540 71,995
Distributions
Required under the Declaration of Trust 68,432 57,596
Discretionary 10,041 13,162
-------------------------------------------------------------------------
Distributions paid or payable 78,473 70,758
-------------------------------------------------------------------------

Distributions less than distributable income $ 7,067 $ 1,237
-------------------------------------------------------------------------
-------------------------------------------------------------------------


21. Management Agreements

Westmont Hospitality Canada Limited

On July 26, 2002, the REIT entered into a Management Agreement for hotel management and accounting services and an Administrative Services Agreement (the "Agreements") with Westmont Hospitality Management Canada Limited ("Westmont"). Westmont is considered a related party to the REIT as a result of its ability to exercise significant influence through the Agreements. Westmont manages all but fifteen of the REIT's hotels. The Agreements have an initial term of 10 years with two successive five-year renewal terms, subject to the consent of Westmont and approval of the REIT. On September 15, 2008, the REIT exercised the first five-year extension term on the Agreements, extending the expiration to July 25, 2017. The REIT's independent trustees approved the extension following a review by third party hospitality consulting firms based in Canada. The Agreements provide for the payment of an annual management fee to Westmont in an amount equal to 3.375% of gross revenues during the term of the Agreements, including renewal periods. In addition, Westmont may receive an annual incentive fee if the REIT achieves distributable income in excess of $1.25 per unit. No management incentive fees were paid during the periods presented.

Accounting fees are calculated based on a fixed charge per room which increases by the Consumer Price Index change annually. For assets sold which are managed by Westmont, the REIT pays a termination fee equal to the fees paid based on trailing twelve months revenues. The REIT recorded $215 of termination fees during the year ended December 31, 2008 (2007 - $80).

In addition to the base management fee and incentive fee, Westmont is entitled to fees based on a percentage of the cost of purchasing certain goods and supplies and certain construction costs and capital expenditures, fees for accounting services, reasonable out-of-pocket costs and expenses (other than general and administrative expenses or overhead costs except as otherwise provided in the Administrative Services Agreement) and project management and general contractor service fees related to hotel renovations managed by Westmont.

Also, for certain hotels owned by InnVest and not managed by Westmont, Westmont is entitled to an asset management fee based on a fixed percentage of the purchase price of the hotel or a fixed percentage of hotel operating income, after the reserve for replacement of furniture, fixtures and equipment and capital improvements, subject to an annual minimum fee.

During the years ended December 31, 2008 and 2007, the fees charged to the REIT pursuant to the Agreements were as follows:



2008 2007
-------------------------------------------------------------------------

Fees from continuing operations:
Management fees $ 12,893 $ 12,521
Asset management fees (included in
management fee expense) 2,309 370
Accounting services (included in hotel
operating expenses) 2,321 2,226
Administrative services (included in
corporate and administrative expenses) 452 440
Project management and general contractor
services (capitalized to hotel properties) 1,000 621
Fees from discontinued operations 512 476
-------------------------------------------------------------------------
$ 19,487 $ 16,654
-------------------------------------------------------------------------
-------------------------------------------------------------------------


In addition, salaries of REIT employees paid by Westmont and reimbursed by the REIT were $237 (2007 - $192). Included in accounts payable and accrued liabilities are amounts owed to Westmont at December 31, 2008 totalling $1,484 (2007 - $1,137).

Other Management Agreements

The REIT entered into management agreements with Hilton Canada Co. ("Hilton") to manage the two Hilton hotels acquired in 2006. The agreements provide for the payment of an annual management fee to Hilton in an amount equal to 2.5% until December 31, 2008 and then 3.0% of gross revenues during the balance of the term of the agreements. The agreements mature on December 31, 2026. For the year ended December 31, 2008, total management fees paid to Hilton were $1,212 (2007 - $1,123).

The REIT assumed the hotel management agreements with Delta Hotels Limited ("Delta"), dated January 1, 2003 when two Delta hotels were purchased in 2006. The agreements provide for the payment of an annual management fee to Delta in an amount equal to 3% of total revenues from the hotel, plus 0.5% of total revenues from the hotel if the hotel's annual gross operating profit is greater than the budgeted gross operating profit. The agreements mature on December 31, 2015, with two ten-year extension options. For the year ended December 31, 2008, total management fees paid to Delta were $508 (2007 - $633).

With the acquisition of the Legacy Portfolio in September 2007, InnVest assumed the existing hotel management agreements with Fairmont Hotel and Resorts ("Fairmont") or Delta for each of the Legacy Portfolio hotels. The agreements provide for the payment of a base management fee and an incentive management fee to either Fairmont or Delta. The REIT also assumed a portfolio incentive fee in which 11 of the 25 hotels of Legacy Hotels Real Estate Investment Trust participated, of which six are now owned or leased by InnVest. The base management fee is equal to 3% of total hotel revenues for nine of the hotels and 2% of total hotel revenues for the remaining two hotels. The agreements mature from December 31, 2010 to December 31, 2047. The incentive management fees and portfolio incentive fees are calculated based on net operating income from hotel operations plus amortization less the capital replacement reserve, in excess of a threshold. For the year ended December 31, 2008, total management fees paid for the Legacy Portfolio were $10,090 (2007 - $3,276).

22. Segmented Financial Information

The REIT operates hotel properties throughout Canada. Information related to these properties by geographic segment is presented below. The REIT primarily evaluates operating performance based on hotel operating income. All key financing, investing and capital allocation decisions are centrally managed. The comparatives have been restated to exclude discontinued operations and assets held for sale at December 31, 2008.



Western Ontario Quebec Atlantic Total
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Year ended
December 31,
2008
Hotel revenues $ 177,108 $ 250,600 $ 151,561 $ 99,453 $ 678,722
Hotel expenses 123,657 187,082 112,416 74,394 497,549
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Hotel operating
income $ 53,451 $ 63,518 $ 39,145 $ 25,059 $ 181,173

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Year ended
December 31,
2007
Hotel revenues $ 81,860 $ 234,923 $ 118,554 $ 60,618 $ 495,955
Hotel expenses 55,664 171,291 87,269 42,923 357,147
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Hotel operating
income $ 26,196 $ 63,632 $ 31,285 $ 17,695 $ 138,808
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Capital
expenditures on
hotel properties
Year ended
December 31,
2008 $ 9,197 $ 13,996 $ 12,048 $ 7,616 $ 42,857
Year ended
December 31,
2007 $ 3,712 $ 15,201 $ 5,601 $ 4,337 $ 28,851
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Hotel properties
December 31,
2008 $ 512,032 $ 673,215 $ 417,950 $ 236,074 $1,839,271
December 31,
2007 $ 525,322 $ 690,284 $ 430,570 $ 238,589 $1,884,765
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23. Total Revenues

Year Ended Year Ended
December December
31, 2008 31, 2007
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Hotel revenues $ 678,722 $ 495,955
Other business income (Note 24) 13,396 12,604
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$ 692,118 $ 508,559
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24. Other Business Income

Year Ended
Franchise Retail/ Retirement December
Business Office Residence 31, 2008
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Revenues $ 9,678 $ 2,627 $ 1,091 $ 13,396
Expenses 5,885 1,197 684 7,766
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Other business

income, net $ 3,793 $ 1,430 $ 407 $ 5,630
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Year Ended
Franchise Retail/ Retirement December
Business Office Residence 31, 2007
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Revenues $ 8,713 $ 2,801 $ 1,090 $ 12,604
Expenses 4,884 1,123 681 6,688
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Other business
income, net $ 3,829 $ 1,678 $ 409 $ 5,916
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Other business income includes franchise business income, which is InnVest's 50% share of CHC's operations, and the income from the other real estate properties. Franchise business revenues and expenses comparative balances were increased by $2,806 from those reported in the 2007 audited notes to the Consolidated financial statements to conform to the current year presentation. There was no impact on the net other business income.

25. Assets Held for Sale and Discontinued Operations

At December 31, 2007, the results of discontinued operations were comprised of three Ontario hotel properties and one Quebec hotel property which were reclassified as assets held for sale on December 18, 2007. During August 2008, the REIT sold two hotel properties which had been reclassified to assets held for sale on December 18, 2007. One of the Ontario hotel properties was sold on August 21, 2008 for $6,700 less closing costs of $421, resulting in a gain of $622. The Quebec hotel property was sold on August 26, 2008 for $6,200 less closing costs of $469, resulting in a gain of $638. The debt owing of $890 and $2,174, respectively, was paid out of the proceeds.

A third hotel property, which is located in Ontario, was sold by the REIT on December 1, 2008 for $4,750 less closing costs of $401 resulting in a loss of $50. During the year ended December 31, 2008 this hotel was written down $1,254. The debt owing of $2,468 was paid out of the proceeds.

At December 31, 2008, assets held for sale consists of one Ontario hotel which was previously reclassified in December 2007, but has not yet been sold.

On March 30, 2007, the REIT sold a hotel held for sale in Atlantic Canada for $2,350 less closing costs of $250, and recorded a gain of $659. On April 10, 2007, an Ontario asset held for sale was sold for $4,650 less closing costs of $350, and the REIT recorded a gain of $174. The debt owing of $1,010 and $1,181, respectively, was paid out of the proceeds. Both these hotels had been reclassified to assets held for sale in 2006. Discontinued operations for the years ended December 31, 2008 and 2007 are as follows:



2008 2007
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Hotel revenues $ 6,424 $ 8,846
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Hotel expenses
Operating expenses 4,556 5,936
Property taxes, rent and insurance 933 1,257
Management fees 217 299
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5,706 7,492
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Hotel operating income 718 1,354
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Interest on mortgages 486 950
Depreciation and amortization - 1,407
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486 2,357
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Income (loss) from discontinued operations 232 (1,003)
Gain on sale of assets previously held for
sale 1,210 833
Writedown of assets held for sale (3,924) (7,155)
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(2,714) (6,322)
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Net loss from discontinued operations $ (2,482) $ (7,325)
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26. Subsequent Events

Subsequent to the year ended December 31, 2008, InnVest identified five hotel properties to be held for sale. The following table summarizes the amounts included in the Consolidated Statements of Net (Loss) Income and Comprehensive (Loss) Income for the years ended December 31, 2008 and

2007 related to these properties:



2008 2007
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Hotel revenues $ 18,700 $ 20,316
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Hotel expenses
Operating expenses 12,861 13,319
Property taxes, rent and insurance 3,655 3,737
Management fees 631 686
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17,147 17,742
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Hotel operating income 1,553 2,574
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Interest on mortgages 666 1,207

Depreciation and amortization 2,754 3,066
Writedown of hotel properties 29,596 -
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33,016 4,274
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Net loss $ (31,463) $ (1,700)
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The assets and liabilities related to the assets determined to be held for sale subsequent to December 31, 2008 were as follows:



2008 2007
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ASSETS
Current $ 779 $ 640
Hotel properties and other long-term assets 76,336 79,273
Writedown of hotel properties (29,596) -
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Assets held for sale $47,519 $79,913
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LIABILITIES
Current $ 964 $ 997
Long-term 9,952 19,566
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Liabilities held for sale $ 10,916 $ 20,563
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Contact Information

  • InnVest Real Estate Investment Trust
    Kenneth D. Gibson
    President and Chief Executive Officer
    (905) 206-7100
    Fax: (905) 206-7114

    InnVest Real Estate Investment Trust
    Tamara L. Lawson
    Chief Financial Officer and Corporate Secretary
    (905) 206-7100
    Fax: (905) 206-7114
    Website: www.innvestreit.com