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

InnVest Real Estate Investment Trust

March 09, 2007 08:00 ET

InnVest REIT Reports Results for the Three Months and Year Ended December 31, 2006

TORONTO, ONTARIO--(Marketwire - March 9, 2007) - InnVest Real Estate Investment Trust (TSX:INN.UN) today announced financial results for the three months and year ended December 31, 2006.

"2006 was a solid year for InnVest due to the strong fundamentals experienced in the industry combined with our ability to capitalize on accretive acquisitions. This strong trend continued in the fourth quarter with RevPAR growth of 4.9% on a same hotel basis", said Mr. Kenneth Gibson, President and Chief Executive Officer of InnVest REIT.



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Financial Highlights
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(In thousands of Canadian dollars except average daily rate,
revenue per available room and per unit amounts)

Three months ended Year ended
December 31 December 31
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2006 2005 +/- 2006 2005 +/-
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Occupancy 57.0% 58.1% (1.1)% 63.8% 63.0% 0.8%
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Average daily rate
("ADR") $100.03 $90.37 $9.66 $97.37 $91.92 $5.45
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Revenue Per Available
Room ("RevPAR") $56.97 $52.52 $4.45 $62.09 $57.93 $4.16
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Operating revenues $99,384 $80,641 $18,743 $389,649 $324,090 $65,559
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Hotel operating
income $23,391 $20,374 $3,017 $117,489 $101,107 $16,382
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Net (loss) income ($745) ($2,198) $1,453 $38,596 $16,950 $21,646
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Add / (deduct)
Depreciation,
amortization and
accretion 14,409 12,098 2,311 52,548 43,256 9,292
Future income
tax (recovery)
expense (1,302) 15 (1,317) (15,473) (1,464) (14,009)
Reserve for
replacement of
furniture,
fixtures and
equipment and
capital
improvements (3,994) (3,248) (746) (15,682) (13,175) (2,507)
Writedown of
assets held
for sale - 40 (40) 1,000 1,722 (722)
Convertible
debentures
accretion 221 239 (18) 816 1,014 (198)
Corporate
reorganization
expense 506 - 506 506 - 506
Non-cash executive
and trustee
compensation 88 89 (1) 349 362 (13)
Deferred land lease
expense and retail
lease income, net 27 39 (12) 111 56 55
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Distributable
income(1) $9,210 $7,074 $2,136 $62,771 $48,721 $14,050
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Distributable
income per unit
- basic $0.168 $0.148 $0.020 $1.194 $1.039 $0.155
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Distributable income
per unit - diluted $0.168 $0.148 $0.020 $1.141 $1.015 $0.126
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Distributions
per unit $0.2813 $0.2813 - $1.1250 $1.1250 -
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(1) Distributable income is a measure of earnings and cash flow that is
not required or does not have a prescribed meaning under Canadian
generally accepted accounting principles, and accordingly, may not be
comparable to similar measures used by other organizations.
Distributable income per unit is calculated on a basis consistent
with earnings per unit.


The key performance measures related to room revenue for the REIT's
portfolio of hotels on a same hotel basis, excluding the hotels that have been
classified as discontinued operations and the hotels acquired in the second
and third quarters of 2006, for which comparative data is not available, are
as follows:

Three months ended Year ended
December 31 December 31
2006 2005 Var % 2006 2005 Var %
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Occupancy
Ontario 57.4% 57.9% (0.9)% 63.0% 62.7% 0.5 %
Quebec 59.0% 57.8% 2.1 % 63.8% 64.4% (0.9)%
Atlantic 54.0% 56.7% (4.8)% 62.4% 63.0% (1.0)%
Western 61.4% 54.2% 13.3 % 64.2% 59.0% 8.8 %
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Total 57.9% 57.2% 1.2 % 63.3% 62.6% 1.1 %
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ADR
Ontario $100.31 $97.28 3.1 % $102.62 $99.17 3.5 %
Quebec $88.50 $86.15 2.7 % $92.04 $90.22 2.0 %
Atlantic $85.85 $81.89 4.8 % $91.93 $87.51 5.1 %
Western $79.08 $71.53 10.6 % $79.65 $74.03 7.6 %
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Total $93.51 $90.19 3.7 % $96.29 $92.94 3.6 %
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RevPAR
Ontario $57.62 $56.30 2.3 % $64.67 $62.20 4.0 %
Quebec $52.25 $49.78 5.0 % $58.68 $58.10 1.0 %
Atlantic $46.37 $46.43 (0.1)% $57.35 $55.10 4.1 %
Western $48.55 $38.77 25.2 % $51.15 $43.66 17.2 %
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Total $54.15 $51.62 4.9 % $60.91 $58.14 4.8 %
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RECENT DEVELOPMENTS

In 2006, the REIT obtained the approval of unitholders to effect a
proposed reorganization (the "Reorganization"). The purpose of the
Reorganization is to reorganize the REIT and its subsidiaries in order to
achieve a more efficient and integrated operational structure that will
position the REIT to pursue additional hotel acquisitions in accordance with
its long-term objectives. It is anticipated that the REIT will achieve
operating and other cost reductions and a more tax-efficient structure by
virtue of the Reorganization.
In the fourth quarter, the REIT received an advanced ruling from the
Canada Revenue Agency in respect of the Reorganization. The REIT obtained the
requisite approval of unitholders at the annual and special meeting of
unitholders held on May 17, 2006. The Reorganization was completed on January
2, 2007.

FINANCIAL REVIEW

Three months ended December 31, 2006

Room revenues increased $13.0 million from $68.1 million to
$81.1 million. The increase in room revenues primarily reflects a $9.6 million
increase in revenues from the seven hotels acquired in 2006 (the "acquired
hotels"). The remaining $3.4 million improvement stems from increases in room
revenue in the REIT's base portfolio.
Non-room revenues increased by $5.8 million, primarily reflecting the
non-room revenues generated by the REIT's acquired hotels not owned in the
comparative period.
Hotel expenses for the fourth quarter of 2006 increased by $15.7 million
or 26.1% compared to the same period in 2005, excluding the results of the
hotels classified as discontinued operations, primarily due to increases
related to the acquired hotels.
The net amount of other income and expenses for the three months ended
December 31, 2006 was $25.6 million, $3.3 million or 14.9% more than the same
period in 2005. The increase is due primarily to the acquired hotels.
Current income tax recovery for the three months ended December 31, 2006
was $206, a decrease of $408 from the same period expense in 2005. This is
attributable to refunds received in the current period as the result of
taxable losses generated in corporate subsidiaries of the REIT. Further,
InnVest experienced a $1.3 million future income tax recovery in the current
period.
Distributable income for the three months ended December 31, 2006 was
$9.2 million or $0.168 per unit basic and diluted. This reflects a $2.1
million improvement over the distributable income experienced for the same
period in the prior year of $7.1 million or $0.148 per unit basic ($0.148 -
diluted).

Year ended December 31, 2006

Room revenues increased $51.4 million from $282.1 million to
$333.5 million. The improvement in room revenues for the year primarily
reflects the $38.4 million increase in revenues from the acquired hotels. The
remaining $13.0 million improvement stems from increases in room revenue in
all regions of the REIT's base portfolio.
Non-room revenues increased by $14.1 million, reflecting primarily the
non-room revenues generated by the REIT's acquired hotels not owned for the
entire comparative period.
Hotel expenses for the year December 31, 2006 increased by $49.2 million
or 22.1% when compared to 2005, excluding the results of the hotels classified
as discontinued operations. This primarily reflects $40.2 million in expenses
incurred in the acquired hotels that were not owned for the entire comparative
period.
The net amount of other income and expenses for the year ended December
31, 2006 was $94.0 million, $10.7 million or 12.9% more than 2005. This is
mainly a result of an increase in depreciation expense for the acquired
hotels.
Current income tax recovery for the year ended December 31, 2006 was
$392, a decrease of $1.1 million from the expense recorded for the same period
in 2005. This is attributable to income tax refunds received during the year
which resulted from taxable losses generated in corporate subsidiaries of the
REIT and the reversal of the large corporation tax recorded in the first
quarter due to the elimination of the large corporation tax by the Federal
Government. Further, InnVest experienced a $14.0 million increase in future
income tax recovery over the same period in the prior year, mainly from using
a lower blended income tax rate as the result of a change in the federal
income tax rate in June 2006 for the corporate subsidiaries of the REIT.
Distributable income for the year ended December 31, 2006 was
$62.8 million or $1.194 per unit basic ($1.141 - diluted). This reflects an
$14.1 million improvement over the distributable income experienced in the
prior year of $48.7 million or $1.039 per unit basic ($1.015 - diluted)

BALANCE SHEET REVIEW

At December 31, 2006, InnVest's cash totaled $9.2 million, of which
$4.7 million is restricted for replacement of furniture, fixture and equipment
and capital improvements. Financial leverage was 39.7% debt to gross asset
value (defined as total assets before accumulated depreciation less future
income tax liability) excluding convertible debentures and 50.0% including
convertible debentures at the end of the year.
Continuing with its strategy of investing in its hotels, InnVest deployed
approximately $7.9 million for capital asset improvements during the fourth
quarter and committed an additional $1.1 million.
The REIT had unused operating loan availability of $21.7 million at
December 31, 2006 and eight hotel properties that remain unencumbered that the
REIT estimates could generate approximately $45 million in mortgage proceeds.
The REIT also has an unused acquisition facility of $40 million available to
acquire hotel properties and an unused loan facility of $29.1 million
available to fund 50% of capital expenditures incurred.

INCOME TAX DEFERRAL PERCENTAGE

In 2006, the REIT estimates that 41% of the distributions made to
unitholders will not be taxable to unitholders.

OUTLOOK

The strong trend experienced in the Canadian hospitality industry in 2006
is expected to continue in 2007. PKF Consulting Inc., lodging industry experts
are forecasting a 4% increase in RevPAR in 2007 due to the growth in demand
continuing to outpace supply. Accordingly, InnVest is expecting growth within
its base portfolio and from its 2006 acquisitions.

InnVest's objectives for 2007 are:

1. To provide stable and growing distributions,
2. To maximize the long term value of our portfolio by investing in and
actively managing hotel assets, and
3. To pursue acquisitions expected to be accretive to earnings and
cash flow.

Our confidence that we will be able to achieve these objectives is based
on the anticipated growth in the hospitality industry, our ability to manage
cost pressures the industry has experienced in recent years and our ability to
capitalize on acquisition opportunities.

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 2005
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 REIT 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 137 hotel properties, with
15,661 guest rooms, operated under internationally recognized franchise brands
such as Comfort Inn®, Holiday Inn® Quality Suites/Inn®, Radisson®,
Travelodge®, Delta®, Hilton Hotel®, Hilton Garden Inn® and Hilton
Homewood Suites®. InnVest's trust units and outstanding convertible
debentures trade on the Toronto Stock Exchange under the symbols INN.UN,
INN.DB.A and INN.DB.B, respectively.

QUARTERLY CONFERENCE CALL

Management will host a conference call on Friday March 9, 2007 at
11:00 a.m. Toronto time to discuss the performance of InnVest. Investors are
invited to access the call by dialing (416)-644-3424 or 1-800-814-4859. 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 9
beginning at 1:00 pm through to 11:59 p.m. on March 16. To access the
recording please call (416)-640-1917 and use the reservation number 21215741
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) 2006 2005
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(Restated)
(Notes 2 and
Note 24)
ASSETS

Current Assets
Cash $ 4,531 $ 5,893
Accounts receivable 13,242 10,122
Prepaid expenses and other assets 5,627 4,929
Assets held for sale (Note 24) 42 69
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23,442 21,013

Restricted cash (Note 4) 4,693 6,079

Hotel properties (Note 5) 1,136,730 1,036,309

Other real estate properties (Note 6) 16,933 -

Licence contracts (Note 7) 20,485 21,800

Deferred financing and other assets (Note 8) 19,067 10,560

Assets held for sale (Note 24) 5,566 6,729
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$ 1,226,916 $ 1,102,490
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LIABILITIES

Current Liabilities
Bank indebtedness (Note 10) $ 3,300 $ 7,100
Accounts payable and accrued liabilities 41,515 29,553
Distributions payable 5,161 4,496
Current portion of long-term debt (Note 11) 11,434 8,377
Liabilities related to assets held for sale
(Note 24) 139 160
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61,549 49,686

Long-term debt (Note 11) 490,998 423,303

Other long-term obligations (Note 12) 4,535 3,322

Convertible debentures (Note 13) 126,339 125,917

Future income tax liability (Note 14) 124,759 140,386

Long-term debt related to assets held for sale
(Note 24) 2,191 2,233
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810,371 744,847
Commitments and contingencies (Note 16)

UNITHOLDERS' EQUITY 416,545 357,643
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$ 1,226,916 $ 1,102,490
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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 INCOME

Year Ended Year Ended
(in thousands of dollars, December 31, December 31,
except per unit amounts) 2006 2005
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(Restated)
(Note 24)

Total revenues (reference only) (Note 22) $ 397,370 $ 329,951
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Hotel revenues $ 389,649 $ 324,090
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Hotel expenses
Operating expenses (Note 20) 223,524 180,722
Property taxes, rent and insurance 35,542 31,323
Management fees (Note 20) 13,094 10,938
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272,160 222,983
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Hotel operating income 117,489 101,107
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Other (income) and expenses
Interest on mortgages 30,403 26,856
Convertible debentures interest and accretion 9,445 11,667
Corporate and administrative (Note 20) 5,384 3,777
Capital tax 1,523 1,447
Other business income, net (Note 23) (4,850) (3,110)
Other income (310) (190)
Depreciation, amortization and accretion 52,359 42,768
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93,954 83,215
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Income before income tax (recovery) expense 23,535 17,892
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Income tax (recovery) expense (Note 14)
Current (392) 727
Future (15,473) (1,464)
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(15,865) (737)
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Net income from continuing operations 39,400 18,629

Income from discontinued operations (Note 24) 196 43
Write down of assets held for sale (Note 24) (1,000) (1,722)
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Net loss from discontinued operations (804) (1,679)
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Net income $ 38,596 $ 16,950
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Net income from continuing operations,
per unit (Note 18)
Basic $ 0.750 $ 0.397
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Diluted $ 0.749 $ 0.397
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Net income per unit (Note 18)
Basic $ 0.734 $ 0.362
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Diluted $ 0.734 $ 0.361
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Net loss from discontinued operations,
per unit
Basic $ (0.016) $ (0.035)
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Diluted $ (0.016) $ (0.036)
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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

Distri-
(in thousands of dollars) Units in $ Net Income butions
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(Note 17) (Restated)
(Note 2)

Balance December 31, 2004 $ 438,652 $ 40,083 $(116,444)

CHANGES DURING THE YEAR

Net income - 16,950 -
Unit distributions (Note 19) - - (52,884)
Issue of new units 18,870 - -
Costs incurred regarding issue
of new units (100) - -
Distribution reinvestment
plan units issued 3,303 - -
Conversion of debentures 3,035 - -
Vested executive compensation 283 - -
Executive and trustee compensation 121 - -

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Balance December 31, 2005 $ 464,164 $ 57,033 $(169,328)
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CHANGES DURING THE YEAR

Net income - 38,596 -
Unit distributions (Note 19) - - (59,605)
Distribution reinvestment plan units
issued 4,166 - -
Conversion of debentures (Note 13) 70,054 - -
Redemption of debentures (Note 13) 4,719
Issue of new debentures
Vested executive compensation 152
Executive and trustee compensation 108 - -

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Balance December 31, 2006 $ 543,363 $ 95,629 $(228,933)
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Holders'
Executive Conversion
(in thousands of dollars) Compensation Option Total
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Balance December 31, 2004 $ 226 $ 5,705 $ 368,222

CHANGES DURING THE YEAR

Net income - - 16,950
Unit distributions (Note 19) - - (52,884)
Issue of new units - - 18,870
Costs incurred regarding issue
of new units - - (100)
Distribution reinvestment
plan units issued - - 3,303
Conversion of debentures - (117) 2,918
Vested executive compensation (283) - -
Executive and trustee compensation 243 - 364

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Balance December 31, 2005 $ 186 $ 5,588 $ 357,643
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CHANGES DURING THE YEAR

Net income - - 38,596
Unit distributions (Note 19) - - (59,605)
Distribution reinvestment plan units
issued - - 4,166
Conversion of debentures (Note 13) - (2,608) 67,446
Redemption of debentures (Note 13) (172) 4,547
Issue of new debentures 3,400 3,400
Vested executive compensation (152) -
Executive and trustee compensation 244 - 352

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Balance December 31, 2006 $ 278 $ 6,208 $ 416,545
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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 CASH FLOWS

Year Ended Year Ended
December 31, December 31,
(in thousands of dollars) 2006 2005
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(Restated)
(Note 24)
OPERATING ACTIVITIES
Net income from continuing operations $ 39,400 $ 18,629
Add (deduct) items not affecting operations
Depreciation and amortization 47,924 40,242
Amortization of deferred financing and
other assets 4,435 2,526
Future income tax (recovery) expense (15,473) (1,464)
Non-cash executive and trustee compensation 352 364
Convertible debentures accretion 815 1,014
Discontinued operations 391 232
Changes in non-cash working capital 6,576 8,840
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84,420 70,383
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FINANCING ACTIVITIES
Repayment of long-term debt (8,875) (45,458)
Proceeds from long-term debt 63,300 126,933
Issue of convertible debentures (Note 13) 75,000 -
Unit distributions (54,774) (49,581)
Decrease in bank indebtedness and loan payable (3,800) (3,900)
Discontinued operations repayment of debt (42) (5,592)
Deferred financing (4,018) (1,926)
Changes in non-cash working capital related to
financing activities 380 (6)
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67,171 20,470
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INVESTING ACTIVITIES
Capital expenditures on hotel properties (27,242) (30,766)
Discontinued operations capital expenditures (26) (104)
Hotel under development (342) -
Sale of assets held for sale - 9,424
Other assets 54 (525)
Acquisition of hotel properties (Note 3) (127,445) (96,871)
Changes in restricted cash 1,386 10,945
Collection of vendor-take-back mortgage 200 -
Changes in non-cash working capital related
to investing activities 462 300
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(152,953) (107,597)
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Decrease in cash during the year (1,362) (16,744)
Cash, beginning of year 5,893 22,637
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Cash, end of year $ 4,531 $ 5,893
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Supplemental disclosure of cash flow
information:
Cash paid for interest $ 39,004 $ 19,959
Cash paid for income taxes
(including capital tax) $ 1,256 $ 1,794


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



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InnVest Real Estate Investment Trust

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006 (all dollar amounts are in thousands,
except unit and per unit amounts)
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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, 2006, the REIT owned 137 Canadian hotels
with 15,661 guest rooms 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 joint ventures, including the
REIT's 50% interest in CHC.

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, depreciation and amortization, hedge effectiveness, conditional
asset retirement obligations and fair value of mortgage debt for
disclosure purposes.

Hotel Properties

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

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
Paving - 10 years


Asset Retirement Obligation

Effective April 1, 2006 the REIT adopted the guidelines contained in the
Emerging Issues Committee Abstract No. 159 "Conditional Asset Retirement
Obligations" and accordingly has retroactively recorded a conditional
asset retirement obligation in accordance with Section 3110 Asset
Retirement Obligations of the CICA Handbook. The REIT recorded a
liability in the amount of $1,321, a net increase in hotel properties of
$906 and a decrease in unitholders' equity of $415 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 (PCB's) 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
term of the obligations and accretion will be included in depreciation,
amortization and accretion expense in the consolidated statement of net
income.

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, licence contracts and other
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.

Deferred Financing

Deferred financing costs consist of commitment fees, underwriting costs
and legal costs associated with the sourcing of new debt and the renewal
of existing debt of the REIT. These costs are amortized over the term of
the applicable debt.

Other Assets

Other assets include franchise fee costs, 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.

The franchise fee costs, lease origination costs, above and below market
leases and franchise relationships are amortized over the term of
contracts.

The customer and tenant relationships are amortized over five years.

Long-term Debt

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 on a
straight-line basis over the then average remaining period until
maturity.

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.

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.

Hedging Relationships

The Trust 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.

Income Taxes

Pursuant to the terms of the Declaration of Trust, the REIT is required
to make distributions or designate all taxable income earned by the
REIT's unitholders, including the taxable part of net realized capital
gains, and will deduct such distributions and designations for income tax
purposes. Therefore, no provision for income taxes is required on income
earned by the REIT.

The REIT's corporate subsidiaries are subject to tax on their taxable
income. 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
substantively enacted corporate 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
issue 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 issue 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.

3. Asset Acquisitions

On March 3, 2006, the REIT purchased the Comfort Inn Leamington, Ontario
for cash consideration of $3,275.

During the second quarter, the REIT entered into two separate agreements
to acquire four hotels with a total of 540 rooms for a combined purchase
price of $74,500 plus transaction costs. Two of the hotels are branded
Delta hotels and are city centre located hotels in Sherbrooke and
Trois Rivieres, Quebec ("Quebec Deltas"). These hotels operate in the
full-service segment and include convention centres, office and retail
space. The Trois Rivieres location also includes a retirement home.
The remaining two hotels are newly built hotels located in Burlington,
Ontario, one of which is branded a Hilton Garden Inn and the other a
Homewood Suites ("Burlington Hiltons"). The acquisitions were financed
through the assumption of $14,327 of mortgages, a vendor-take-back loan
of $2,000 and cash. The Burlington Hiltons transaction closed on
April 28, 2006, while the Quebec Deltas transaction closed on May 25,
2006.

On September 19, 2006, the REIT acquired two Hiltons, a 571 room hotel in
Quebec City, Quebec and a 197 room hotel in Saint John, New Brunswick
("2006 Hilton Acquisition"). The purchase price of $62,656 plus
transaction costs was financed with cash and new mortgage debt of
$49,800.

Quebec
City &
Leamington Saint
Comfort Burlington Quebec John
Inn Hiltons Deltas Hiltons Total
-------------------------------------------------------------------------
Cash $ 1 $ 3 $ 22 $ 100 $ 126
Current assets 21 112 196 1,985 2,314
Hotel properties 3,117 28,128 26,618 61,777 119,640
Other real estate - - 17,181 - 17,181
Other assets 143 122 4,501 4,241 9,007
-------------------------------------------------------------------------
3,282 28,365 48,518 68,103 148,268
Assumption of
long-term debt - (14,327) - - (14,327)
Current liabilities (7) - (1,019) (2,053) (3,079)
Pension liability (1,291) (1,291)
-------------------------------------------------------------------------
$ 3,275 $ 14,038 $ 47,499 $ 64,759 $ 129,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The consideration
paid consists of
the following:
Cash $ 3,275 $ 12,038 $ 47,499 $ 14,959 $ 77,771
New mortgage debt - - - 49,800 49,800
Loan payable - 2,000 - - 2,000
-------------------------------------------------------------------------
$ 3,275 $ 14,038 $ 47,499 $ 64,759 $ 129,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------

4. Restricted Cash

The restricted cash of $4,693 (2005 - $6,079) is being held by the REIT
to undertake capital refurbishments in accordance with the REIT's
Declaration of Trust.

5. Hotel Properties

December 31,
2006
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------

Land $ 94,623 $ - $ 94,623
Buildings 1,086,968 99,553 987,415
Furniture, fixtures and equipment 113,638 59,288 54,350
-------------------------------------------------------------------------
$ 1,295,229 $ 158,841 $ 1,136,388
Hotel under development 342 - 342
-------------------------------------------------------------------------
$ 1,295,571 $ 158,841 $ 1,136,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------


December 31,
2005
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------
(Restated,
Note 2 and
Note 24)

Land $ 83,371 $ - $ 83,371
Buildings 969,897 71,507 898,390
Furniture, fixtures and equipment 95,562 41,014 54,548
-------------------------------------------------------------------------
$ 1,148,830 $ 112,521 $ 1,036,309
-------------------------------------------------------------------------
-------------------------------------------------------------------------

6. Other Real Estate Properties

December 31,
2006
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------

Land $ 1,675 $ - $ 1,675
Buildings 15,447 227 15,220
Furniture, fixtures and equipment 59 21 38
-------------------------------------------------------------------------
$ 17,181 $ 248 $ 16,933
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Other real estate includes the office and retail properties and a
retirement residence which were acquired during the year as part of the
Quebec Deltas acquisition (Note 3).

7. Licence Contracts

December 31,
2006
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------

Licence Contracts $ 26,320 $ 5,835 $ 20,485
-------------------------------------------------------------------------
-------------------------------------------------------------------------


December 31,
2005
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------

Licence Contracts $ 26,320 $ 4,520 $ 21,800
-------------------------------------------------------------------------
-------------------------------------------------------------------------

8. Deferred Financing and Other Assets

December 31,
2006
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------

Deferred financing $ 16,563 $ 8,625 $ 7,938
Other assets 13,399 2,270 11,129
-------------------------------------------------------------------------
$ 29,962 $ 10,895 $ 19,067
-------------------------------------------------------------------------
-------------------------------------------------------------------------


December 31,
2005
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------

Deferred financing $ 12,544 $ 5,955 $ 6,589
Other assets 4,476 505 3,971
-------------------------------------------------------------------------
$ 17,020 $ 6,460 $ 10,560
-------------------------------------------------------------------------
-------------------------------------------------------------------------

9. Joint Ventures

The following represents the proportionate share of the REIT's interest
in joint ventures:

December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Current assets $ 4,467 $ 3,673
Fixed assets 4,121 4,260
Current liabilities 2,740 2,368
Long-term liabilities 5,371 5,489
Revenues 5,935 5,360
Expenses 3,091 2,751
Net income 2,844 2,609
Cash flow from:
Operating activities 3,683 3,633
Financing activities (3,534) (3,108)
Investing activities (43) (25)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

10. Bank Indebtedness

The REIT has a $25,000 operating loan facility that bears interest at
Canadian bank prime plus 0.5% or Canadian Bankers' Acceptance rate plus
1.5%. It is secured by nine properties and is payable on demand. At
December 31, 2006, the REIT had drawn $3,300 on this facility
(December 31, 2005 - $7,100).

11. Long-term Debt

December 31, December 31,
2006 2005
-------------------------------------------------------------------------
(Restated,
Note 24)

Mortgages payable $ 502,432 $ 431,680
Less current portion (11,434) (8,377)
-------------------------------------------------------------------------
Total long-term debt $ 490,998 $ 423,303
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Substantially all of the REIT's assets have been pledged as security
under various debt agreements. At December 31, 2006, long-term debt had a
weighted average interest rate of 6.5% (2005 - 6.3%). The long-term debt
is repayable in average monthly payments of principal and interest
totalling $3,495 (2005 - $2,982) per month, and matures at various dates
from April 28, 2007 to September 1, 2015.

Scheduled repayment of long-term debt is as follows:

2007 $ 11,434
2008 151,124
2009 8,029
2010 149,410
2011 52,058
2012 and thereafter 130,377
-------------------------------------------------------------------------
$ 502,432
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The estimated fair value of the REIT's long-term debt at December 31,
2006 was approximately $507,243 (2005 - $440,904). 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 $68,305 (2005 - $69,896) of mortgages
payable, which are subject to floating interest rates. Interest expense
will increase by $683 for every 1% increase in the base Bankers'
Acceptance rate.

12. Other Long-term Obligations

December 31, December 31,
2006 2005
-------------------------------------------------------------------------
(Restated,
Note 2)

Capital lease $ 1,861 $ 1,931
Other lease obligations 299 182
-------------------------------------------------------------------------
2,160 2,113
Less current portion (207) (121)
-------------------------------------------------------------------------
Total long-term obligations 1,953 1,992
-------------------------------------------------------------------------
Pension liability 1,212 -
Asset retirement obligation 1,370 1,330
-------------------------------------------------------------------------
Total other long-term obligations $ 4,535 $ 3,322
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Defined Benefit Pension Plans

The defined benefit pension plan was assumed pursuant to the 2006 Hilton
Acquisition. The most recent actuarial valuation with respect to the
funding of the REIT's pension plans was prepared on December 31, 2006.
The pension plan assets as at December 31, 2006 consist of the following:

Non-Union
Non-
Management Management
Pension Pension Total
Benefit Benefit Benefit
Plans Plans Plans
-------------------------------------------------------------------------
Accrued benefit obligation $ 2,334 $ 1,539 $ 3,873
Fair value of plan assets 1,611 1,050 2,661
-------------------------------------------------------------------------
Funded status - plan deficit 723 489 1,212
Unamortized net actuarial gain 99 68 167
-------------------------------------------------------------------------

Accrued employee future benefit
liability $ 822 $ 557 $ 1,379
-------------------------------------------------------------------------
-------------------------------------------------------------------------

13. Convertible Debentures

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

Original
Interest Face
Issue Date Maturity Date Rate Amount
-------------------------------------------------------------------------
Initial
Debentures July 26, 2002 June 30, 2007 9.75% $ 75,000
Series A
Debentures April 2, 2004 April 15, 2011 6.25% 57,500
Series B
Debentures May 16, 2006 May 31, 2013 6.00% 75,000
-------------------------------------------------------------------------
$ 207,500
-------------------------------------------------------------------------

Converted Face Holders'
to Trust Amount Conversion December 31,
Units Outstanding Option Accretion 2006
-------------------------------------------------------------------------
Initial
Debentures $ 75,000 $ - $ - $ - $ -
Series A
Debentures 1,351 56,149 2,808 1,096 54,437
Series B
Debentures - 75,000 3,400 302 71,902
-------------------------------------------------------------------------
$ 76,351 $ 131,149 $ 6,208 $ 1,398 $ 126,339
-------------------------------------------------------------------------


Original
Interest Face
Issue Date Maturity Date Rate Amount
-------------------------------------------------------------------------
Initial
Debentures July 26, 2002 June 30, 2007 9.75% $ 75,000
Series A
Debentures April 2, 2004 April 15, 2011 6.25% 57,500
-------------------------------------------------------------------------
$ 132,500
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Converted Face Holders'
to Trust Amount Conversion December 31,
Units Outstanding Option Accretion 2005
-------------------------------------------------------------------------
Initial
Debentures $ 3,355 $ 71,645 $ 2,723 $ 1,851 $ 70,773
Series A
Debentures 210 57,290 2,865 719 55,144
-------------------------------------------------------------------------
$ 3,565 $ 128,935 $ 5,588 $ 2,570 $ 125,917
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Initial Debentures

The Initial Debentures bore interest at the rate of 9.75% per annum
payable semi-annually in arrears and matured on June 30, 2007. Each $1
principal amount of the initial debentures was convertible at the option
of the holder into 93.0233 units (representing a conversion price of
$10.75 per unit). These convertible debentures were redeemable, in whole
or from time to time in part, on and after July 1, 2005 at the option of
the REIT, provided that the volume-weighted average trading price of the
units for a stipulated period prior to the date on which the notice of
redemption is given exceeds 115% of the conversion price. The REIT had
the option to satisfy its obligation to pay the principal amount of these
convertible debentures due at maturity or upon redemption, in whole or in
part, by issuing the number of units equal to the principal amount of
convertible debentures then outstanding divided by 95% of the volume-
weighted average trading price of the units for a stipulated period prior
to the date of redemption or maturity, as applicable. During the year
ended December 31, 2006, 6,242,415 units (2005 - 262,782 units) were
issued as a result of conversions of debentures at a price of $10.75 per
unit.

In accordance with GAAP, the holder conversion option was valued
separately from the convertible debentures at $2,850, 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 initial debentures. During the year ended
December 31, 2006, $2,551 (2005 - $107) of the holder conversion option
was reallocated from unitholders' equity to the convertible debenture
liability as accretion attributable to the converted debentures.

On April 26, 2006 the REIT issued a redemption notice for all issued and
outstanding Initial Series Debentures. The redemption was effective
June 1, 2006. There were 392,307 units issued for the redemption, at a
price of $11.57 per unit. There was no gain or loss recorded on the
redemption of the outstanding Initial Series Debentures.

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 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, 2006, 91,280 units (2005 - 16,800 units) were issued as a
result of conversions of debentures at a price of $12.50 per unit.

The holder conversion option was valued separately from the convertible
debentures at $2,875. The holder conversion option is being accreted over
the term of the Series A debentures. During the year ended December 31,
2006, $57 (2005 - $10) 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, 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 principle 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 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.

14. Income Taxes and Future Income Tax Liability

The future income tax liability relates to tax and book basis differences
for assets held by corporate subsidiaries of InnVest and consists of the
following:

December 31, December 31,
2006 2005
-------------------------------------------------------------------------

Hotel properties $ 121,275 $ 136,184
Licence contracts 3,380 3,925
Financing costs and other assets 104 277
-------------------------------------------------------------------------
$ 124,759 $ 140,386
-------------------------------------------------------------------------

The provision for income taxes is summarized as follows:

Year Ended Year Ended
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Income before income tax (recovery) expense $ 23,535 $ 17,892
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income tax based on a combined Federal and
Provincial income tax rate of 36%
(2005 - 36%) $ 8,473 $ 6,441
Income tax effect of statutory rate adjustment (11,575) 1,045
Tax effect of income attributable to
unitholders (12,245) (8,908)
-------------------------------------------------------------------------
Future income tax recovery (15,347) (1,422)
Large corporations tax - 685
Recovery of income tax paid (518) -
-------------------------------------------------------------------------
Income tax recovery $ (15,865) $ (737)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In June 2006, the federal general corporate income tax rate reductions
were enacted. The federal corporate income tax rate reductions were as
follows: 20.5% effective January 1, 2008; 20% effective January 1, 2009;
and 19% effective January 1, 2010. Since the majority of InnVest REIT's
temporary differences are expected to reverse in 2010 and onward, a
future income tax recovery of $11,575 relating to these federal rate
reductions was recognized in the consolidated statement of net income.

In respect of the assets and liabilities of the REIT, where income is
taxed directly in the hands of the unitholders, the net book value for
accounting purposes of those net assets exceeds their tax basis by an
amount of approximately $86,185 (2005 - $89,117).

InnVest currently qualifies as a Mutual Fund Trust for income tax
purposes. As required by its Declaration of Trust, InnVest intends to
distribute all taxable income to its unitholders and to deduct these
distributions for income tax purposes. Except for corporate subsidiaries
of InnVest, no provision for income taxes is required under the current
Canadian income tax legislation.

On December 21, 2006, the Minister of Finance Canada released draft
legislation for the federal income taxation of publicly traded trusts,
including income trusts. The draft legislation would apply to publicly
traded trusts which existed prior to November 1, 2006 starting with
taxation years ending in or after 2011, except for those existing trusts
that qualify for the real estate investment trust ("Qualifying REIT")
exception included in the draft legislation. There are certain
circumstances where an existing trust may lose its relief in the interim
periods to 2011 where it undergoes "undue expansion".

Under the draft legislation, a publicly traded fund will not be a
Qualifying REIT if it or its subsidiaries hold any Canadian business
assets, other than real estate that is not eligible for a high rate of
capital cost allowance (greater than 5%).

Under the draft legislation, InnVest would not be a Qualifying REIT,
given that it carries on a hotel business and related activities through
subsidiaries and holds some real estate assets that are eligible for
higher rates of capital cost allowance. Accordingly, the draft
legislation in its current form could adversely affect the level of cash
distribution to unitholders commencing in 2011 if InnVest does not become
a Qualifying REIT by then. Unless the draft legislation is amended prior
to being enacted in a manner that will accommodate the holding of REIT-
related business operations, InnVest will become subject to tax under the
proposals, or will only be able to become a Qualifying REIT by making
asset dispositions prior to 2011.

15. 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.

The REIT has not provided to third parties any significant guarantees
other than the following:

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. Commitments and Contingencies

Lease Commitments

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

Operating Land
Leases Leases Total
-------------------------------------------------------------------------

2007 $ 573 $ 2,179 $ 2,752
2008 441 2,183 2,624
2009 362 2,203 2,565
2010 221 2,203 2,424
2011 55 1,743 1,798
2012 and thereafter 15 83,889 83,903
-------------------------------------------------------------------------
$ 1,667 $ 94,400 $ 96,067
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The land leases expire between 2010 and 2088. Rentals that are determined
as a percentage of revenues with no minimum amounts are excluded from
these figures.

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.

17. 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.

Units Amount
-------------------------------------------------------------------------
Balance as at December 31, 2004 45,815,071 $ 438,652
New units issued, net of costs 1,553,345 18,770
Units issued under distribution reinvestment
plan 280,263 3,303
Units issued on conversion of debentures 279,582 3,035
Units issued for vested executive compensation 22,681 283
Units issued under trustee compensation plan 10,221 121
-------------------------------------------------------------------------
Balance at December 31, 2005 47,961,163 $ 464,164
-------------------------------------------------------------------------
Units issued on conversion of debentures 6,333,692 70,054
Units issued under distribution reinvestment
plan 338,123 4,166
Units issued on redemption of debentures 392,307 4,719
Units issued for vested executive compensation 12,218 152
Units issued under trustee compensation plan 7,848 108
-------------------------------------------------------------------------
Balance at December 31, 2006 55,045,351 $ 543,363
-------------------------------------------------------------------------

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, 2006 is 54,078 units. Under the
Trustee Compensation Plan, 7,848 units were issued during the year ended
December 31, 2006 (2005 - 10,221 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, 2006 is 869,215
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, 2006, excluding granted units which have fully
vested:

Units
Unvested Accumulated
Executive from Total
units Distributions Units
-------------------------------------------------------------------------
January 1, 2003 - granted 17,846 7,726 25,572
January 1, 2004 - granted 10,218 3,350 13,568
January 1, 2005 - granted 13,118 2,614 15,732
January 1, 2006 - granted 12,968 1,208 14,176
January 1, 2006 - units vested (8,923) (3,295) (12,218)
-------------------------------------------------------------------------
45,227 11,603 56,830
-------------------------------------------------------------------------

On March 5, 2006, the Board of Trustees approved the granting of
12,968 units effective as of January 1, 2006. These units vest equally on
the third and fourth anniversary 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. Unitholders who so elect will receive a further
bonus distribution of units equal in value to 3% of each distribution
that was reinvested.

18. Per Unit Information

Year Ended Year Ended
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
-------------------------------------------------------------------------
Net income from continuing
operations - basic $ 39,400 52,558,268 $ 18,629 46,886,192
Dilutive effect of
executive compensation
plan - 54,430 - 63,282
-------------------------------------------------------------------------
Net income from continuing
operations - diluted $ 39,400 52,612,698 $ 18,629 46,949,474
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Year Ended Year Ended
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
-------------------------------------------------------------------------
Net income - basic $ 38,596 52,558,268 $ 16,950 46,886,192
Dilutive effect of
executive compensation
plan - 54,430 - 63,282
-------------------------------------------------------------------------
Net income - diluted $ 38,596 52,612,698 $ 16,950 46,949,474
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

19. 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% 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.


Year Ended Year Ended
December 31, December 31,
2006 2005
-------------------------------------------------------------------------
Net income $ 38,596 $ 16,950
-------------------------------------------------------------------------

Add (deduct)
Depreciation, amortization and accretion 52,548 43,256
Future income tax recovery (15,473) (1,464)
Reserve for replacement of furniture, fixtures
and equipment and capital improvements (15,682) (13,175)
Writedown of asset held for sale 1,000 1,722
Convertible debentures accretion 816 1,014
Corporate reorganization costs 506 -
Non-cash executive and trustee compensation 349 362
Deferred land lease expense and retail lease
income, net 111 56
-------------------------------------------------------------------------
24,175 31,771
-------------------------------------------------------------------------
Distributable income 62,771 48,721
Distributions (in excess of) less than
distributable income (3,166) 4,163
-------------------------------------------------------------------------
Distributions $ 59,605 $ 52,884
-------------------------------------------------------------------------
-------------------------------------------------------------------------

20. Management Agreements

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 manages all but four of the REIT's hotels.
The total management fees paid to other parties is $619.

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. The Agreements will expire July 25, 2012. 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 (see
Note 19) 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.

In addition to the base management fee and incentive fee, Westmont is
entitled to reasonable 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.

During the years ended December 31, 2006 and 2005, the fees charged to
the REIT pursuant to the Agreements were as follows:

2006 2005
-------------------------------------------------------------------------
Fees from continuing operations: (Restated,
Note 24)
Management fees $ 12,475 $ 10,938
Asset Management fees (included in hotel
operating expenses) 89 -
Accounting services (included in hotel
operating expenses) 2,249 2,064
Administrative services (included in
corporate and administrative expenses) 551 502
Project management and general contractor
services (capitalized to hotel properties) 546 682
Fees from discontinued operations 110 429
-------------------------------------------------------------------------
$ 16,020 $ 14,615
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In addition, salaries of REIT employees paid by Westmont and reimbursed
by the REIT were $189 (2005 - $185). Included in accounts payable and
accrued liabilities are amounts outstanding at December 31, 2006
totalling $1,076 (2005 - $977).

21. 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.


Western Ontario Quebec Atlantic Total
-------------------------------------------------------------------------

Year ended
December 31, 2006
Hotel revenues $ 39,044 $ 232,420 $ 79,884 $ 38,301 $ 389,649
Hotel expenses 25,213 166,398 55,586 24,963 272,160
-------------------------------------------------------------------------
Hotel operating
income $ 13,831 $ 66,022 $ 24,298 $ 13,338 $ 117,489
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Year ended
December 31, 2005
Hotel revenues $ 33,545 $ 197,200 $ 58,925 $ 34,420 $ 324,090
Hotel expenses 23,199 139,859 38,102 21,823 222,983
-------------------------------------------------------------------------
Hotel operating
income $ 10,346 $ 57,341 $ 20,823 $ 12,597 $ 101,107
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Capital expenditures
Year ended
December 31,
2006 $ 1,269 $ 21,162 $ 2,508 $ 2,303 $ 27,242
Year ended
December 31,
2005 $ 2,555 $ 19,615 $ 2,369 $ 6,227 $ 30,766
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Hotel properties
December 31, 2006 $ 73,233 $ 681,290 $ 266,140 $ 116,067 $1,136,730
December 31, 2005 $ 75,969 $ 657,390 $ 194,056 $ 108,894 $1,036,309
-------------------------------------------------------------------------
-------------------------------------------------------------------------

22. Total Revenues

Year Ended Year Ended
December 31, December 31,
2006 2005
-------------------------------------------------------------------------

Hotel revenues $ 389,649 $ 324,090

Other business revenues (Note 23) 7,721 5,861
-------------------------------------------------------------------------
$ 397,370 $ 329,951
-------------------------------------------------------------------------
-------------------------------------------------------------------------

23. Other Business Income

Year Ended
Franchise Retail/ Retirement December 31,
Business Office Residence 2006
-------------------------------------------------------------------------

Revenues $ 5,389 $ 1,675 $ 657 $ 7,721

Expenses 1,859 654 358 2,871
-------------------------------------------------------------------------
Other business
income, net $ 3,530 $ 1,021 $ 299 $ 4,850
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Year Ended
Franchise Retail/ Retirement December 31,
Business Office Residence 2006
-------------------------------------------------------------------------

Revenues $ 5,861 $ - $ - $ 5,861

Expenses 2,751 - - 2,751
-------------------------------------------------------------------------
Other business
income, net $ 3,110 $ - $ - $ 3,110
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Other business income includes Franchise Business Income, which is
InnVest's 50% share of Choice Canada's operations and the income from the
other real estate properties acquired with the Quebec Deltas (Note 3).

24. Assets Held for Sale and Discontinued Operations

On April 18, 2006, the REIT reclassified one Ontario hotel property to
assets held for sale. At September 30, 2006, the REIT reclassified a
second hotel property, in Atlantic Canada, to assets held for sale. The
long-term debt of $2,191 (2005 - $2,233) for these assets is with the
REIT's main mortgage lender and can be repaid at any time without
penalty. This debt matures on July 26, 2008. The operations for these two
hotels are included as discontinued operations as summarized below. The
comparative amounts include the operating results for these same two
hotels, along with three additional hotels sold in 2005.

Discontinued operations for the years ended December 31, 2006 and 2005
are as follows:

2006 2005
-------------------------------------------------------------------------
(Restated)
-------------------------------------------------------------------------
Hotel revenues $ 2,370 $ 5,299
-------------------------------------------------------------------------

Hotel expenses
Operating expenses 1,561 3,654
Property taxes, rent and insurance 193 453
Management fees 80 178
-------------------------------------------------------------------------
1,834 4,285
-------------------------------------------------------------------------
Hotel operating income 536 1,014
-------------------------------------------------------------------------
Interest on mortgages 151 483
Depreciation and amortization 189 488
-------------------------------------------------------------------------
340 971
-------------------------------------------------------------------------
Income from discontinued operations 196 43
Write down of assets held for sale (1,000) (1,722)
-------------------------------------------------------------------------
Net loss from discontinued operations $ (804) $ (1,679)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

25. Subsequent Event

In 2006, the REIT obtained the approval of unitholders to effect a
proposed reorganization (the "Reorganization"). The purpose of the
Reorganization is to reorganize the REIT and its subsidiaries in order to
achieve a more efficient and integrated operational structure that will
position the REIT to pursue additional hotel acquisitions in accordance
with its long-term objectives. It is anticipated that the REIT will
achieve operating and other cost reductions and a more tax-efficient
structure by virtue of the Reorganization.

In the fourth quarter, the REIT received an advanced ruling from the
Canada Revenue Agency in respect of the Reorganization. The REIT obtained
the requisite approval of unitholders at the annual and special meeting
of unitholders held on May 17, 2006. The Reorganization was completed on
January 2, 2007. Approximately $115,000 of the future income tax
liability will be reduced and included in net income in the first quarter
of 2007.

SEDAR: 00018005E

Contact Information

  • Kenneth D. Gibson
    President and Chief Executive Officer
    (905) 206-7100
    (905) 206-7114 (FAX)
    or
    Tamara L. Lawson
    Chief Financial Officer and Secretary
    (905) 206-7100
    (905) 206-7114 (FAX)
    Website: www.innvestreit.com