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

InnVest Real Estate Investment Trust

March 07, 2008 08:00 ET

InnVest REIT Reports Results for the Three Months and Year Ended December 31, 2007

TORONTO, ONTARIO--(Marketwire - March 7, 2008) - InnVest Real Estate Investment Trust (TSX:INN.UN) today announced financial results for the three months and year ended December 31, 2007.

"Strong performance in our hotels in all regions allowed InnVest to grow its same hotel RevPAR in the quarter and the contribution from the acquired hotels allowed InnVest to continue to grow its distributable income," 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 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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2007 2006 +/- 2007 2006 +/-
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Occupancy 60.7% 59.3% 1.4% 63.9% 64.2% (0.3)%
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Average daily
rate ("ADR") $113.03 $96.93 $16.10 $106.68 $97.52 $9.16
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Revenue Per
Available Room
("RevPAR") $68.56 $57.51 $11.05 $68.15 $62.59 $5.56
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(In thousands
of dollars,
except per
unit amounts)
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Operating
revenues $162,316 $97,431 $64,885 $495,955 $380,470 $115,485
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Hotel operating
income $38,130 $23,137 $14,993 $138,808 $115,565 $23,243
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Net income
(loss) and
comprehensive
income (loss) $16,972 ($745) $17,717 $41,222 $38,596 $2,626
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Add/(deduct)
Depreciation,
amortization
and
accretion 22,212 13,678 8,534 64,154 49,878 14,276
Future income
tax
recovery (27,891) (1,302) (26,589) (25,869) (15,473) (10,396)
Non-cash
executive
and trustee
compensation 286 88 198 672 349 323
Write down of
assets held
for sale,
net of gain 7,155 - 7,155 6,322 1,000 5,322
Corporate
reorganization
expense - 506 (506) 1,514 506 1,008

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Funds from
operations(1) $18,734 $12,225 $6,509 $88,015 $74,856 $13,159
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Funds from
operations
per unit
- basic $0.257 $0.223 $0.034 $1.403 $1.424 ($0.021)
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- diluted $0.257 $0.222 $0.035 $1.345 $1.347 ($0.002)
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Amortization
of deferred
financing
costs 836 731 105 836 2,670 (1,834)
Non-cash
portion of
interest
expense 570 - 570 2,587 - 2,587
Reserve for
replacement
of furniture,
fixtures and
equipment
and capital
improvements (6,741) (3,994) (2,747) (20,371) (15,682) (4,689)
Convertible
debentures
accretion 271 221 50 887 816 71
Deferred land
lease expense
and retail
lease income,
net 16 27 (11) 41 111 (70)
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Distributable
income(1) $13,686 $9,210 $4,476 $71,995 $62,771 $9,224
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Distributable
income per
unit
- basic $0.188 $0.168 $0.020 $1.148 $1.194 ($0.046)
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- diluted $0.188 $0.168 $0.020 $1.102 $1.141 ($0.039)
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Distributions
per unit $0.2813 $0.2813 - $1.125 $1.125 -
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(1) Funds from operations and distributable income are measures of
earnings and cash flow that are 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. Funds from operations and
distributable income per unit are calculated on a basis consistent
with earnings per unit.


The key performance measures related to room revenues are on a same hotel basis, excluding the hotels that have been classified as discontinued operations, the hotels acquired in the second and third quarters of 2006 for the year ended December 31 only, the two new build hotels opened in the third quarter of 2007 and the 11 hotels acquired as part of the Legacy transaction for which comparative data is not available:



Three months ended Year ended
December 31 December 31
2007 2006 Var % 2007 2006 Var %
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Occupancy
Ontario 59.1% 58.5% 1.0 % 62.5% 63.8% (2.0)%
Quebec 60.8% 61.0% (0.3)% 63.0% 64.2% (1.9)%
Atlantic 57.3% 57.4% (0.2)% 65.4% 65.3% 0.2 %
Western 60.1% 61.4% (2.1)% 65.2% 64.2% 1.6 %
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Total 59.5% 59.3% 0.3 % 63.3% 64.1% (1.2)%
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ADR
Ontario $105.36 $102.47 2.8 % $105.62 $103.28 2.3 %
Quebec $104.53 $97.85 6.8 % $94.66 $91.31 3.7 %
Atlantic $95.78 $90.35 6.0 % $96.51 $91.93 5.0 %
Western $85.88 $79.08 8.6 % $86.43 $79.65 8.5 %
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Total $101.60 $96.93 4.8 % $99.73 $96.40 3.5 %
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RevPAR
Ontario $62.31 $59.91 4.0 % $65.97 $65.88 0.1 %
Quebec $63.58 $59.73 6.4 % $59.67 $58.58 1.9 %
Atlantic $54.90 $51.90 5.8 % $63.15 $60.02 5.2 %
Western $51.66 $48.55 6.4 % $56.36 $51.15 10.2 %
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Total $60.41 $57.51 5.0 % $63.10 $61.77 2.2 %
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RECENT DEVELOPMENTS

In February 2008, the REIT secured $350 million of mortgage financing on certain of the hotels acquired as part of its participation in the acquisition of Legacy Hotels Real Estate Investment Trust ("Legacy"). The average interest rate on the financing is 5.6% with an average term of just under 5 years. Proceeds were used to repay the $215 million bridge loan financing and certain existing mortgages.

In September 2007, LGY Acquisition LP ("LGY"), a joint venture of InnVest and Cadbridge Investors LP, acquired Legacy, a publicly traded real estate investment trust focused on the ownership of first-class hotels. Following LGY's acquisition, eleven hotels (and the operating assets relating thereto) previously held by Legacy were transferred to affiliates of the InnVest as part of a reorganization of the affairs of Legacy.

The purchase price of $652 million, plus closing and transaction costs was partially funded through the issuance of $200 million of equity at a price of $12.35 per subscription receipt representing the right to receive trust units of the REIT and $70 million of convertible extendible unsecured subordinated debentures. The remainder of the purchase price was satisfied with the assumption of $194 million in mortgage debt secured by the properties and $215 million of bridge financing from a Canadian chartered bank.

The subscription receipts were exchanged on a one-for-one basis for units of InnVest upon completion of LGY's take-over bid for Legacy. The convertible debentures have a maturity date of August 1, 2014, a coupon of 5.85% per annum and will pay interest semi-annually in arrears on August 1 and February 1 in each year commencing on February 1, 2008. The convertible debentures are convertible into 68.027 units of the REIT per $1,000 principal amount, at any time, at the option of the holder, representing a conversion price of $14.70 per unit.

In the first quarter of 2007, InnVest entered into a contract to purchase three hotels and develop a fourth, for a combined purchase price of $48.3 million plus transaction costs and construction costs of $14.0 million. In the third quarter of 2007, InnVest acquired two new build hotels, the 117 room Staybridge Suites located in London, Ontario and a 116 room Holiday Inn Express located in North Bay, Ontario for a combined cost of $31.5 million plus transaction costs. The REIT assumed first mortgages of $8.3 million and $7.1 million, which bear interest at 6.4% and 6.0% respectively, each for a term of 10 years, with the balance being funded from cash on hand.

FINANCIAL REVIEW (In thousands of dollars, except per unit amounts unless otherwise stated)

Three months ended December 31, 2007

In the fourth quarter, hotel revenue increased by $64.9 million, with the majority of the increase due to the hotels acquired in 2007. The Base Portfolio of 131 hotels contributed $4.5 million of the increase. The 2007 Acquisitions include the 11 hotels acquired in the Legacy transaction on September 18, 2007 and the newly built London Staybridge Suites and the North Bay Holiday Inn Express, which were acquired in the third quarter.

The increase of $39.9 million in room revenues for the three months ended December 31, 2007 reflects $35.9 million from the hotels acquired in 2007. The balance of $4.0 million of improvement reflects an overall increase in room revenue of 5.0% in the Base Portfolio. There were increases in all regions, with the largest dollar increase achieved in Ontario and the largest percentage increases experienced in Quebec and the Western region.

Non-room revenues increased by $25.0 million, reflecting the non-room revenues generated by the hotels the REIT acquired in 2007, which were not owned for any of the comparative period. The hotels which were acquired in 2007 typically generate a higher proportion of total revenues from non-room revenues such as food and beverage sales.

Hotel expenses for the three months ended December 31, 2007 increased by $49.9 million or 67.2% when compared to the same period in 2006. This increase reflects $47.5 million in expenses incurred in the hotels acquired in 2007, which were not owned for any of the comparative period. The remaining $2.4 million related to the Base Portfolio represents a 3.2% increase over 2006, which was consistent with the increase in room and total revenues. The decline in property taxes, rent and insurance was the result of property tax refunds received in the quarter related to successful tax appeals at several hotels.

The net amount of other income and expenses for the three months ended December 31, 2007 was $41.5 million, $16.5 million or 66.0% more than the same period in 2006. The main contributors to this increase were a $7.7 million increase in interest on mortgages and interest on operating and bridge loans, a $1.3 million increase in convertible debentures interest and accretion, an $8.7 million increase in depreciation and amortization, a $733 reduction in corporate and administrative expenses and a $337 reduction in capital tax. The increases were mainly related to the hotels acquired during 2006 and 2007. The increase in convertible debentures interest and accretion was the result of the issuance of the Series C - 5.85% Debentures on August 3, 2007. The reduction in capital tax was the result of the corporate reorganization completed on January 2, 2007. The decrease in corporate and administrative expenses was mainly the result of a reduction in corporate reorganization expense.

Current income tax expense for the three months ended December 31, 2007 was $1, a decrease of $207 from the same period in 2006. This decrease is attributable to refunds received in the prior period as the result of taxable losses generated in corporate subsidiaries of the REIT. Further, InnVest experienced a $27.9 million future income tax recovery during the quarter as the result of the reduction in corporate income tax rates.

Funds from operations for the three months ended December 31, 2007 increased $6.5 million to $18.7 million or $0.257 per unit basic and diluted from $0.223 basic ($0.222 - diluted) for the same period in 2006. The increase is primarily attributable to the $15.0 million increase in hotel operating income net of an increase in interest expense on mortgages and interest expense on operating and bridge loans and convertible debentures interest and accretion of $9.0 million, a decrease of $227 in corporate and administrative expense (after eliminating corporate reorganization costs), a reduction of $337 in capital tax net of increases in other business income and other income of $123.

Distributable income for the three months ended December 31, 2007 was $13.7 million or $0.188 per unit basic and diluted. This reflects a $4.5 million improvement over the distributable income experienced for the same period in the prior year of $9.2 million or $0.168 per unit basic and diluted. This increase is consistent with the increase in funds from operations discussed above after taking into account an increase in the reserve for replacement of furniture, fixtures and equipment and capital improvements of $2.7 million.

Year ended December 31, 2007

The increase of $76.5 million in room revenues for the year ended December 31, 2007 reflects $26.6 million in revenues from the hotels acquired in 2006 and $43.4 million in revenues from the hotels acquired in 2007. The balance of $6.5 million improvement reflects an overall increase in room revenue of 2.1% in the Base Portfolio. There were increases in all regions, with the largest dollar and percentage increase experienced in the Western region.

Non-room revenues increased by $39.0 million, primarily reflecting the non-room revenues generated by the hotels the REIT acquired in 2007 and 2006, which were not owned for all of the comparative period. The majority of the hotels acquired in 2007 and 2006 compete in the mid-scale with food and beverage sector and earn a higher proportion of total revenues from non-room revenues.

Hotel expenses for the year ended December 31, 2007 increased by $92.2 million or 34.8% when compared to the prior year. This increase reflects $31.1 million in expenses incurred in the hotels acquired in 2006, which were not owned for the entire comparative period, and $55.5 million in expenses incurred in the 2007 Acquisitions. The remaining $5.6 million relates to the Base Portfolio and represents a 2.3% increase over the same period in 2006.

The net amount of other income and expenses for the year ended December 31, 2007 was $116.1 million, $24.7 million or 27.0% more than the same period in 2006. The main contributors to this increase were a $12.8 million increase in depreciation and amortization, a $12.6 million increase in interest on mortgages and interest on operating and bridge loans, a $1.5 million increase in corporate and administrative expenses, a $1.1 million increase in other business income and a $1.4 million reduction in capital tax and a $1.6 million increase in convertible debentures interest and accretion. The increases were mainly related to the hotels acquired during 2006 and 2007, while the corporate and administrative expense increase was the result of land transfer tax and legal costs associated with a reorganization of InnVest. The increase in convertible debentures interest and accretion was the net result of the issuance of the Series C - 5.85% Debentures on August 3, 2007, the conversion of debentures in the period and the amortization of costs associated with the issuing of the debentures because of the use of the effective interest method. The reduction in capital tax was the result of the corporate reorganization completed on January 2, 2007.

Current income tax recovery for the year ended December 31, 2007 was $4, a decrease of $388 from the recovery recorded as the net result of large corporation tax and losses carried back to prior periods in corporate subsidiaries of InnVest in 2006. Further, InnVest experienced a $25.9 future income tax recovery during the year as the net result of changes in the income tax legislation related to Real Estate Investment Trusts and the reduction of corporate income tax rates, as compared to a recovery of $15.5 million in 2006 which resulted from using lower blended income tax rates related to a change in the federal income tax rate in June 2006 for the corporate subsidiaries of the REIT.

Funds from operations for the year ended December 31, 2007 increased $13.2 million to $88.0 million or $1.403 per unit basic ($1.345 - diluted). The increase is primarily attributable to the $23.2 million increase in hotel operating income net of an increase in interest expense on mortgages, interest on operating and bridge loans and convertible debentures interest and accretion of $12.4 million (after adjusting for deferred financing costs included in depreciation and amortization), an increase of $491 in corporate and administrative expense (after eliminating corporate reorganization costs), a reduction of $1.4 million in capital tax net of increases in other business income, in other income of $2.4 million and in losses from discontinued operations before depreciation and amortization of $942.

Distributable income for the year ended December 31, 2007 was $72.0 million or $1.148 per unit basic ($1.102 - diluted). This reflects a $9.2 million improvement over the distributable income experienced the prior year of $62.8 million or $1.194 per unit basic ($1.141 - diluted). This increase is consistent with the increase in funds from operations discussed above after taking into account an increase in the reserve for replacement of furniture, fixtures and equipment and capital improvements of $4.7 million.

BALANCE SHEET REVIEW

At December 31, 2007, InnVest's cash totaled $25.3 million, of which $3.0 million is restricted for replacement of furniture, fixture and equipment and capital improvements. Financial leverage was 47.4% debt to gross asset value (defined as total assets before accumulated depreciation less future income tax liabilities included in assets) excluding convertible debentures and 55.7% including convertible debentures at the end of the year.

Continuing with its strategy of investing in its hotels, InnVest deployed approximately $29.0 million for capital asset improvements during year and committed an additional $2.0 million.

The REIT had unused operating loan availability of $16.8 million at December 31, 2007 and eight hotel properties that remained unencumbered. In the first quarter of 2008, the REIT provided five unencumbered properties as security to increase its operating line from $25 million to $40 million. A further two unencumbered properties were financed, providing proceeds of $40 million, which was used to partially repay the $215 million bridge loan incurred as part of the acquisition of the Legacy Portfolio. The REIT has an unused loan facility of $29.1 million available to fund capital expenditures.

INCOME TAX DEFERRAL PERCENTAGE

In 2006, 40.5% of the distributions made during that year were not taxable to unitholders. For calendar 2007, 40% of unitholder distributions will not be taxable to unitholders.

OUTLOOK

The fundamentals in the hotel industry continue to be favourable, despite concerns over the US economy and the potential spill over into Canada. While varying by market, PKF Consulting Inc. ("PKF"), lodging industry experts, forecasts continued Canadian RevPAR growth in 2008 following solid growth in 2007.

InnVest's geographic, customer and brand diversity ideally positions it to continue to benefit from the favourable conditions in the hospitality industry. While InnVest is expecting RevPAR growth in its overall portfolio, there are certain markets in Ontario and Quebec that will continue to be more negatively impacted by the strength of the Canadian dollar. The decline in US visitation is expected to continue but is being offset by strengthening domestic and international corporate and group travel.

The acquisition of the Legacy Portfolio further expands the REIT's geographic diversity in Western Canada, which continues to experience the strongest growth in the country. The acquisition also enhances InnVest's presence in the upscale segment of the lodging industry. Given that the Legacy acquisition closed late in the third quarter, the contribution on a per unit basis for 2007 was dilutive due to the seasonality inherent in the hotel business. However, the Legacy acquisition is expected to be accretive in 2008.

The benefit of a full year of operations from the recent acquisitions and forecasted RevPAR growth are expected to contribute to improved performance for the Trust in 2008. With no significant debt maturities until 2010 resulting from the financings completed in 2007 and early in 2008, InnVest is well positioned to focus on optimizing the performance of its hotel portfolio.

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 2006 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 148 hotel properties, with 19,381 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 7, 2008 at 11:00 am 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 7th beginning at 1:00 pm through to 11:59 p.m. on March 14th. To access the recording please call (416)-640-1917 and use the reservation number 21259583 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) 2007 2006
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(Restated,
Note 2 and
Note 25)
ASSETS

Current Assets
Cash $ 22,271 $ 4,531
Accounts receivable 28,677 13,354
Prepaid expenses and other assets 9,487 5,569
Assets held for sale (Note 25) 301 407
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60,736 23,861

Restricted cash (Note 4) 2,995 4,693

Hotel properties (Note 5) 1,884,765 1,105,384

Other real estate properties (Note 6) 16,428 16,933

Licence contracts (Note 7) 19,169 20,485

Intangible and deferred assets (Note 8) 55,101 19,984

Assets held for sale (Note 25) 23,085 37,012
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$ 2,062,279 $ 1,228,352
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LIABILITIES

Current Liabilities
Bank indebtedness (Note 10) $ 223,200 $ 3,300
Accounts payable and accrued liabilities 73,682 40,405
Acquisition related liabilities 17,569 957
Distributions payable 6,844 5,161
Current portion of long-term debt (Note 11) 12,725 11,141
Liabilities related to assets held
for sale (Note 25) 610 711
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334,630 61,675

Long-term debt (Note 11) 698,892 476,520

Other long-term obligations (Note 12) 6,692 4,145

Convertible debentures (Note 13) 177,387 126,339

Future income tax liability (Note 14) 225,503 124,759

Long-term liabilities related to assets
held for sale (Note 25) 14,509 17,297

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1,457,613 810,735

Commitments and contingencies (Note 17)

UNITHOLDERS' EQUITY 604,666 417,617
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$ 2,062,279 $ 1,228,352
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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 AND COMPREHENSIVE INCOME

Year Ended Year Ended
(in thousands of dollars, December 31, December 31,
except per unit amounts) 2007 2006
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(Restated
Note 25)

Total revenues (reference only) (Note 23) $ 505,753 $ 388,191

Hotel revenues $ 495,955 $ 380,470
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Hotel expenses
Operating expenses (Note 21) 297,454 217,768
Property taxes, rent and insurance 41,964 34,353
Management fees (Note 21) 17,729 12,784
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357,147 264,905
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Hotel operating income 138,808 115,565
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Other (income) and expenses
Interest on mortgages and other debt 36,814 28,802
Interest on operating and bridge loans 5,262 638
Convertible debentures interest and accretion 11,047 9,445
Corporate and administrative (Note 21) 6,883 5,384
Capital tax 75 1,523
Other business income, net (Note 24) (5,916) (4,850)
Other income (1,614) (310)
Depreciation and amortization 63,583 50,803
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116,134 91,435
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Income before income tax recovery 22,674 24,130
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Income tax recovery (Note 14)
Current (4) (392)
Future (25,869) (15,473)
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(25,873) (15,865)
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Net income from continuing operations 48,547 39,995
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Loss from discontinued operations (Note 25) (1,003) (399)
Writedown on assets held for sale, net of gain
on sale of assets (Note 25) (6,322) (1,000)
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Net loss from discontinued operations (7,325) (1,399)
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Net income and comprehensive income $ 41,222 $ 38,596
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Net income from continuing operations,
per unit (Note 19)
Basic $ 0.774 $ 0.761
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Diluted $ 0.773 $ 0.760
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Net income per unit (Note 19)
Basic $ 0.657 $ 0.734
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Diluted $ 0.657 $ 0.734
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Net loss from discontinued operations,
per unit
Basic $ (0.117) $ (0.027)
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Diluted $ (0.117) $ (0.027)
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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 Income
and Comp-
rehensive Distri- Units
(in thousands of dollars) Income butions Deficit in $
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Balance December 31, 2005 $ 57,188 $(169,328) $(112,140) $ 464,164

CHANGES DURING THE YEAR

Net income and comprehensive
income 38,596 - 38,596 -
Unit distributions (Note 20) - (59,605) (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
(Note 13) - - - -
Vested executive compensation - - - 152
Executive and trustee
compensation - - - 108
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Balance December 31, 2006 $ 95,784 $(228,933) $(133,149) $ 543,363

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Change in accounting policy
for financial instruments
(Note 2) 917 - 917 -
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Restated balance
December 31, 2006 $ 96,701 $(228,933) $(132,232) $ 543,363
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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
(Note 13) - - - 10,605
Issue of new debentures
(Note 13) - - - -
Issue of new units (Note 18) - - - 192,268
Vested executive compensation - - - 275
Executive and trustee
compensation - - - 258
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Balance December 31, 2007 $ 137,923 $(299,691) $(161,768) $ 757,375
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Executive Holders'
and Trustee Conversion
(in thousands of dollars) Compensation Option Total
--------------------------------------------------------------

Balance December 31, 2005 $ 186 $ 5,588 $ 357,798

CHANGES DURING THE YEAR

Net income and comprehensive
income - - 38,596
Unit distributions (Note 20) - - (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
(Note 13) - 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 $ 416,700
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Change in accounting policy
for financial instruments
(Note 2) - - 917
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Restated balance
December 31, 2006 $ 278 $ 6,208 $ 417,617
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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
(Note 13) - (519) 10,086
Issue of new debentures
(Note 13) - 2,953 2,953
Issue of new units (Note 18) - - 192,268
Vested executive compensation (275) - -
Executive and trustee
compensation 414 - 672

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Balance December 31, 2007 $ 417 $ 8,642 $ 604,666
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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) 2007 2006
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(Restated
Note 25)
OPERATING ACTIVITIES
Net income from continuing operations $ 48,547 $ 39,995
Add (deduct) items not affecting operations
Depreciation and amortization 63,583 50,803
Non-cash portion of interest expense 2,587 -
Future income tax recovery (25,869) (15,473)
Non-cash executive and trustee compensation 672 349
Convertible debentures accretion 887 816
Discontinued operations 392 1,352
Changes in non-cash working capital 11,666 6,578
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102,465 84,420
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FINANCING ACTIVITIES
Repayment of long-term debt (10,204) (8,595)
Proceeds from long-term debt 42,473 62,766
Issue of convertible debentures 66,875 71,896
Issue of new units (net) 191,748 -
Unit distributions (58,469) (54,774)
Increase (decrease) in operating loan 4,900 (3,800)
Proceeds from bridge loan 212,850 -
Discontinued operations repayment of debt (2,788) (322)
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447,385 67,171
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INVESTING ACTIVITIES
Capital expenditures on hotel properties (28,851) (26,936)
Discontinued operations capital expenditures (185) (332)
Hotel under development expenditures (12,128) (342)
Proceeds from sale of discontinued assets,
net of costs (Note 25) 6,400 -
Proceeds from sale of other real estate assets 121 -
Gain on sale of other real estate assets (78) -
Additions to other assets (2,859) 54
Acquisition of hotel properties and other
real estate properties (Note 3) (496,228) (126,983)
Changes in restricted cash 1,698 1,386
Collection of vendor-take-back mortgage - 200
-------------------------------------------------------------------------
(532,110) (152,953)
-------------------------------------------------------------------------

Increase (decrease) in cash during the year 17,740 (1,362)
Cash, beginning of year 4,531 5,893
-------------------------------------------------------------------------
Cash, end of year $ 22,271 $ 4,531
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Supplemental disclosure of cash flow
information:
Cash paid for interest $ 49,760 $ 39,004
Cash paid for income taxes
(including capital tax) $ 216 $ 1,256

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



-------------------------------------------------------------------------

InnVest Real Estate Investment Trust

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 (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, 2007, the REIT owned 148 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 joint ventures, including the
REIT's 50% interest in CHC.

Comprehensive Income

Effective January 1, 2007, the REIT adopted the new Canadian Institute of
Chartered Accountants ("CICA") recommendations under Section 1530 -
Comprehensive Income, wherein comprehensive income includes net earnings
and other comprehensive income ("OCI"), which represents changes in the
unitholders' equity during a period arising from transactions and other
events with non-owner sources. The standard requires prospective
application and, accordingly, comparative amounts for prior periods have
not been restated. For the year ended December 31, 2007, there is no
difference between the REIT's Consolidated Statement of Net Income and
its Statement of Comprehensive 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, hedge effectiveness, conditional asset retirement obligations,
fair value of financial instruments for disclosure purposes, value of
conversion option in convertible debentures and determination of future
income tax liability.

Inventory

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' in the current asset section of the balance sheet.

Hotel Properties

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

Hotel Under Development

The costs of the hotel under development are specifically identifiable
costs incurred in the period before the project is substantially
completed. The capitalized costs include pre-construction costs essential
to the development of the hotel, development costs, construction costs,
chattel costs, real estate taxes and other costs incurred during the
period of development.

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
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.

Intangible and Deferred Assets

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

The lease origination costs, above and below market leases and franchise
rights are amortized over the term of contracts. The customer and tenant
relationships are amortized over five years. The deferred financing fees
are amortized over the term of the bridge loan.

Financial Instruments - Recognition and Measurement

Effective January 1, 2007, the REIT adopted several new CICA
recommendations related to accounting for Financial Instruments,
including Section 3855 - Financial Instruments, Recognition and
Measurement. All 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.
This standard requires a prospective application and, accordingly,
comparative amounts for prior periods have not been restated.

As a result of implementing Section 3855, 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" pursuant to Section 3855, all of which are reflected
on the Consolidated 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; therefore, the deferred
financing costs which were related to these instruments were reclassified
to the appropriate debt on the balance sheet. The amortization of these
costs is included in interest expense in the financial statements in a
manner that yields a constant rate of interest over the life of the
respective financial instrument, for the year ended December 31, 2007. An
adjustment has been made to the opening accumulated comprehensive income
in the amount of $917 to reflect the application of the EIM.

Cash, restricted cash and bank indebtedness have been designated as "held
for trading" and are reflected on the Consolidated Balance Sheet at fair
value. Deferred financing costs related to the credit facility are
included in Intangible and other assets.

In accordance with Section 3855, the REIT conducted a search for embedded
derivatives in all contractual arrangements dated subsequent to
October 31, 2002 and identified certain embedded features that required
separate presentation; however, all embedded features were determined to
have a negligible fair value.

With the introduction of the new standards relating to financial
instruments, the CICA replaced Section 3250 - Surplus with Section 3251 -
Equity, effective January 1, 2007. Section 3251 establishes standards for
the presentation of equity and changes in equity during the reporting
period. Equity is presented as accumulated net income and other
comprehensive income, distributions and total deficit.

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.

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
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.

Accounting Changes

Effective January 1, 2007, the REIT adopted new CICA standard 1506 -
Accounting Changes. The new standard sets out the conditions that must be
met for a change in accounting policies. Also, the standard specifies
that changes in accounting estimates be recognized prospectively in net
income and requires disclosure of the impact of a change in estimate on
the current and future periods. As a result of this new standard, the
REIT has included additional disclosure below addressing the impact of
future accounting policy changes.

Capital Disclosures

On December 1, 2006, the CICA issued Section 1535 - Capital Disclosures
which 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. This new standard will be effective for the REIT
in the first quarter of 2008.

Financial Instruments - Disclosures and Presentation

On December 1, 2006, the CICA issued two new accounting standards:
Section 3862 - Financial Instruments - Disclosures and Section 3863 -
Financial Instruments - Presentation. These new sections replace Section
3861 - Financial Instruments - Disclosure and Presentation. They revise
and enhance disclosure requirements, and carry forward, unchanged,
existing presentation requirements. These new sections place increased
emphasis on disclosure about the nature and extent of risks arising from
financial instruments and how the entity manages those risks. These new
standards will be effective for the REIT in the first quarter of 2008.

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.

The REIT is currently in the process of evaluating the potential impact
of these new standards to the consolidated financial statements.

3. Asset Acquisitions

During the first quarter of 2007, the REIT entered into a contract to
purchase three hotels for a combined purchase price of $48,300 plus
transaction costs. The transaction to acquire these new build hotel
properties will close in stages as the construction of each hotel is
completed. The hotels include a Staybridge Suites located in London,
Ontario, a Holiday Inn Express located in North Bay, Ontario and a
Staybridge Suites located in Guelph, Ontario. On July 20 and
September 13, 2007, the REIT completed the purchases of the Staybridge
Suites London and the Holiday Inn Express North Bay ("New-build
Acquisitions"), respectively for $32,537. These transactions were funded
through cash on hand. The Staybridge Suites Guelph is scheduled to close
in the first quarter of 2008 for approximately $16,820 plus transaction
costs.

On July 12, 2007, InnVest, in partnership with Cadbridge Investors LP
("Cadbridge"), a joint venture entity between affiliates of Cadim, a
division of the Caisse de Dépôt et Placement du Québec, and an affiliate
of InnVest's hotel manager, announced a take-over bid for all of the
outstanding units of Legacy Hotels Real Estate Investment Trust
("Legacy") at a price of $12.60 per unit. The take-over bid was effected
by LGY Acquisition LP ("LGY"), a newly-formed limited partnership between
InnVest (through a wholly-owned limited partnership) and Cadbridge, in
which InnVest has an approximate 26% interest with joint control over
LGY. On September 18, 2007, the take-over of the acquisition of 100% of
Legacy's outstanding units was successfully completed. InnVest and
Cadbridge reorganized Legacy's assets such that InnVest became the owner
of nine, and 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 Hotel, Delta Ottawa
Hotel and Suites, Delta Centre-Ville, Delta Beauséjour, Delta Prince
Edward, Delta Barrington and the Delta Halifax (collectively, the "Legacy
Portfolio"). This reorganization was completed on October 31, 2007,
except for the Delta Calgary Airport which completed on November 14,
2007.

During the year ended December 31, 2006, the REIT acquired the Comfort
Inn Leamington, Ontario, the Delta Sherbrooke Hotel and Conference
Centre, Quebec, the Delta Trois Rivieres Hotel and Conference Centre,
Quebec (which also includes a retirement home), the Hilton Garden Inn
Burlington, Ontario, the Homewood Suites Burlington, Ontario, the Hilton
Quebec City, Quebec and the Hilton Saint John, NB.

December December
New-build Legacy 31, 2007 31, 2006
Acquisitions Portfolio Total Total
-------------------------------------------------------------------------
Cash $ - $ - $ - $ 126
Current assets - 24,473 24,473 2,314
Hotel properties 32,180 761,972 794,152 119,640
Other real estate - - - 17,181
Other assets 357 47,109 47,466 9,007
-------------------------------------------------------------------------
32,537 833,554 866,091 148,268
Assumption of existing
long-term debt - (196,674) (196,674) (14,327)
Future income tax
liability - (127,133) (127,133) -
Current liabilities - (26,882) (26,882) (3,079)
Long-term liabilities - (2,493) (2,493) (1,291)
-------------------------------------------------------------------------
$ 32,537 $ 480,372 $ 512,909 $ 129,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The consideration paid,
including transaction
costs, consists of
the following:
Cash $ 32,127 $ - $ 32,127 $ 77,309
Bank indebtedness - 212,850 212,850 -
Units issued - 191,748 191,748 -
Debentures issued - 58,615 58,615 -
Loan payable - - - 2,000
New mortgage debt - - - 49,800
-------------------------------------------------------------------------
32,127 463,213 495,340 129,109
-------------------------------------------------------------------------
Acquisition related
liabilities 410 17,159 17,569 462
-------------------------------------------------------------------------
$ 32,537 $ 480,372 $ 512,909 $ 129,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------

As at December 31, 2007, the REIT is continuing to evaluate the fair
value of the net assets acquired in 2007, and based on this ongoing
evaluation, the purchase price allocation may be adjusted in future
periods.

As at December 31, 2007, there is an account receivable due from
Cadbridge of $1,746 related to the Legacy acquisition. This amount was
received subsequent to year end.

4. Restricted Cash

The restricted cash of $2,995 (2006 - $4,693) is being held by the REIT
to undertake capital refurbishments in accordance with the REIT's
Declaration of Trust.

5. Hotel Properties

December 31,
2007
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------

Land $ 182,960 $ - $ 182,960
Buildings 1,733,197 133,017 1,600,180
Furniture, fixtures and
equipment 120,243 31,088 89,155
-------------------------------------------------------------------------
2,036,400 164,105 1,872,295
Hotel under development 12,470 - 12,470
-------------------------------------------------------------------------
$ 2,048,870 $ 164,105 $ 1,884,765
-------------------------------------------------------------------------
-------------------------------------------------------------------------

December 31,
2006
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------------------------------------
(Restated,
Note 25)

Land $ 91,514 $ - $ 91,514
Buildings 1,056,321 95,857 960,464
Furniture, fixtures and
equipment 109,866 56,802 53,064
-------------------------------------------------------------------------
1,257,701 152,659 1,105,042
Hotel under development 342 - 342
-------------------------------------------------------------------------
$ 1,258,043 $ 152,659 $ 1,105,384
-------------------------------------------------------------------------
-------------------------------------------------------------------------

6. Other Real Estate Properties

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
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 2006.

7. Licence Contracts

December 31,
2007
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------

Licence contracts $ 26,320 $ 7,151 $ 19,169
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

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

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

8. Intangible and Deferred Assets

December 31,
2007
Accumulated Net Book
Cost Amortization Value
-------------------------------------------------------------------------

Deferred financing related to
credit facility (Note 2) $ 2,150 $ 836 $ 1,314
Intangible assets 61,547 7,760 53,787
-------------------------------------------------------------------------
$ 63,697 $ 8,596 $ 55,101
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

Deferred financing $ 16,563 $ 7,708 $ 8,855
Intangible assets 13,399 2,270 11,129
-------------------------------------------------------------------------
$ 29,962 $ 9,978 $ 19,984
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In accordance with the new CICA recommendations related to accounting for
Financial Instruments, including Section 3855 - Financial Instruments and
Measurement, the unamortized balance of deferred financing costs related
to long-term debt and convertible debentures were reallocated as a
reduction to long-term debt and convertible debentures, effective
January 1, 2007.

Intangible assets 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.

During the year ended December 31, 2007, the intangible assets were
amortized by $5,490 and the deferred financing related to the credit
facility was amortized by $836.

9. Joint Ventures

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

December 31, December 31,
2007 2006
-------------------------------------------------------------------------
Current assets $ 3,853 $ 4,467
Fixed assets 4,092 4,121
Current liabilities 3,023 2,740
Long-term liabilities 5,444 5,371
Revenues 6,552 5,935
Expenses 3,145 3,091
Net income 3,407 2,844
Cash flow from:
Operating activities 4,155 3,683
Financing activities (3,886) (3,534)
Investing activities (126) (43)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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, 2007, the REIT had drawn $8,200 on this facility
(December 31, 2006 - $3,300).

The REIT entered into a $215,000 bridge loan facility as part of the
closing for the acquisition of the Legacy Portfolio. It is secured by
five properties, is due June 13, 2008 and bears interest at Canadian
Bankers' Acceptance rate plus 2.75% (see Note 26).

11. Long-term Debt

December 31, December 31,
2007 2006
-------------------------------------------------------------------------
(Restated,
Note 25)

Mortgages payable $ 715,699 $ 487,661
Less debt issuance costs (4,082) -
-------------------------------------------------------------------------
Total long-term debt 711,617 487,661
Less current portion (12,725) (11,141)
-------------------------------------------------------------------------
Net long-term debt $ 698,892 $ 476,520
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Substantially all of the REIT's assets have been pledged as security
under debt agreements. At December 31, 2007, long-term debt had a
weighted average interest rate of 6.4% (2006 - 6.5%) and a weighted
average effective interest rate of 6.5%. The long-term debt is repayable
in average monthly payments of principal and interest totalling $4,805
(2006 - $3,495) per month, and matures at various dates from June 1, 2009
to September 11, 2017.

Scheduled repayment of long-term debt is as follows:

2008 $ 12,725
2009 54,011
2010 101,049
2011 126,379
2012 75,743
2013 and thereafter 345,792
-------------------------------------------------------------------------
$ 715,699
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The estimated fair value of the REIT's long-term debt at December 31,
2007 was approximately $717,463 (2006 - $492,133). 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 $79,777 (2006 - $69,305) of mortgages payable,
which are subject to floating interest rates. Interest expense will
increase by $798 for every 1% increase in the base Bankers' Acceptance
rate.

In the second quarter, the REIT completed an early extension of $147,665
of mortgage debt that was to have matured on July 26, 2008, fixing the
interest rate on $130,000 at 5.8% for a blended interest rate of 6.1% per
annum for a period of seven years, and maintained floating rate debt of
$17,665 which, at current rates, bears interest at approximately 6.7% per
annum. As part of this early extension, the REIT increased its fixed-rate
proceeds by $25,924 which was used to repay the operating loan balance
and to fund potential acquisitions.

During the third quarter, the REIT raised new debt on the Staybridge
Suites London of $8,300 at an interest rate of 6.4% for a ten year term
and $7,100 of new debt on the Holiday Inn Express North Bay at an
interest rate of 6.0% for a ten year term.

As part of the Legacy acquisition, the REIT assumed $193,959 of long-term
debt with a weighted average interest rate of 7.1%, a weighted average
effective interest rate of 7.1% and an average term to maturity of
4.8 years (See Note 26).

12. Other Long-term Obligations

December 31, December 31,
2007 2006
-------------------------------------------------------------------------
(Restated,
Note 25)

Capital lease $ 1,767 $ 1,861
Other lease obligations 360 299
-------------------------------------------------------------------------

2,127 2,160
Less current portion (165) (207)
-------------------------------------------------------------------------
Total lease obligations 1,962 1,953
-------------------------------------------------------------------------
Pension liability 3,294 1,212
Asset retirement obligation 1,436 980
-------------------------------------------------------------------------
Total other long-term obligations $ 6,692 $ 4,145
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Defined Benefit Pension Plans

The defined benefit pension plans were assumed pursuant to the
acquisition of certain hotels in 2006 and the Legacy Portfolio in the
third quarter of 2007. The most recent actuarial valuation with respect
to the funding of the REIT's pension plans was prepared on December 31,
2007. The pension plan assets as at December 31, 2007 consist of the
following:

Non-Union
Non- December 31, December 31,
Management Management 2007 2006
Pension Pension Total Total
Benefit Benefit Benefit Benefit
Plans Plans Plans Plans
-------------------------------------------------------------------------

Accrued benefit
obligation $ 5,616 $ 1,292 $ 6,908 $ 3,873
Fair value of plan
assets 2,410 1,204 3,614 2,661
-------------------------------------------------------------------------
Funded status -
plan deficit 3,206 88 3,294 1,212
Unamortized net
actuarial (loss) gain (114) 363 249 167
-------------------------------------------------------------------------

Accrued employee future
benefit liability $ 3,092 $ 451 $ 3,543 $ 1,379
-------------------------------------------------------------------------
-------------------------------------------------------------------------

13. 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, 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
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Original Converted
Interest Face to Trust Face Amount
Debenture Maturity Date Rate Amount Units Outstanding
-------------------------------------------------------------------------
Series A April 15, 2011 6.25% $ 57,500 $ (1,351) $ 56,149
Series B May 31, 2013 6.00% 75,000 - 75,000
-------------------------------------------------------------------------
$ 132,500 $ (1,351) $ 131,149
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Holders'
Conversion December
Debenture Options Accretion 31, 2006
-------------------------------------------------
Series A $ (2,808) $ 1,096 $ 54,437
Series B (3,400) 302 71,902
-------------------------------------------------
$ (6,208) $ 1,398 $ 126,339
-------------------------------------------------
-------------------------------------------------

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, 2007, 830,800 units (2006 - 91,280 units) were issued as a
result of conversions of debentures at a price of $12.50 per unit.

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, 2007, $519 (2006 - $57) 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 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.

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 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.

The fair value of the REIT's convertible debentures at December 31, 2007
is $180,917 (2006 - $136,946).

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,
2007 2006
-------------------------------------------------------------------------
Hotel properties $ 221,763 $ 121,275
Licence contracts 4,392 3,380
Financing costs and other assets (652) 104
-------------------------------------------------------------------------
$ 225,503 $ 124,759
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The provision for income taxes is summarized as follows:

Year Ended Year Ended
December 31, December 31,
2007 2006
-------------------------------------------------------------------------
Income before income tax (recovery) expense $ 22,674 $ 24,130
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Income tax based on a combined Federal
and Provincial income tax rate of 36%
(2006 - 36%) $ 8,163 $ 8,687
Income tax effect of statutory rate
adjustment (22,239) (11,575)
Tax effect of income attributable
to unitholders (9,135) (12,459)
Effects of the reorganization
in the first quarter (115,431) -
Effects of the enactment of the Bill
in the second quarter 122,626 -
Effects of on going operations and
capital expenditures (9,857) -
Recovery of income tax paid - (518)
-------------------------------------------------------------------------
Income tax recovery $ (25,873) $ (15,865)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In December 2007, the federal general corporate income tax rate
reductions were enacted. The federal corporate income tax rate reductions
were as follows: 19.5% effective January 1, 2008; 19% effective
January 1, 2009; 18% effective January 1, 2010; 16.5% effective
January 1, 2011; and 15% effective January 1, 2012. Since the majority of
InnVest's temporary differences are expected to reverse in 2012 and
onward, a future income tax recovery of $22,239 relating to these federal
rate reductions was recognized in the consolidated statement of net
income.

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.

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, InnVest 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 InnVest does not become a Qualifying
REIT by then. Management is reviewing whether it is feasible to
reorganize InnVest so that non-qualifying operations and assets are
transferred under a plan of arrangement to a taxable entity that is held
by InnVest unitholders, and that the InnVest 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
InnVest and its unitholders.

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. 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, 2007 the REIT's floating rate of debt balance of $79,777
(2006 - $69,305) is less than 15% 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
direct bill.

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.

Fair Values

The fair values of the REIT's financial assets and liabilities,
representing net working capital approximate their recorded values at
December 31, 2007 and 2006 due to their short-term nature.

The fair value of the REIT's long-term debt exceeds the carrying value by
approximately $5,846 at December 31, 2007 (2006 - fair value exceeded
carrying value by approximately $4,472) 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 exceeds the carrying
value by approximately $3,530 at December 31, 2007 (2006 - fair value
exceeded carrying value by approximately $10,607). The fair value of
convertible debentures has been estimated based on the market rates for
convertible debentures as at December 31, 2007 and 2006.

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 leases to minimum annual
payments as follows:

Land and
Equipment Building
Leases Leases Total
-------------------------------------------------------------------------

2008 $ 813 $ 4,787 $ 5,600
2009 643 4,790 5,433
2010 392 4,862 5,254
2011 172 4,409 4,581
2012 50 4,409 4,459
2013 and thereafter 35 92,329 92,364
-------------------------------------------------------------------------
$ 2,105 $ 115,586 $ 117,691
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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, 2007, the REIT has letters of credit totaling $3,378,
held on behalf of security deposits for various utility companies and
liquor licences and additional security for the new assumed Legacy
portfolio 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.

Units Amount
-------------------------------------------------------------------------
Balance as 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
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 20,139 275
Units issued under trustee compensation plan 21,659 258
-------------------------------------------------------------------------
Balance at December 31, 2007 73,000,694 $ 757,375
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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, 2007 is 39,419 units. Under the
Trustee Compensation Plan, 21,659 units were issued during the year ended
December 31, 2007 (2006 - 7,848 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, 2007 is 849,338
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, 2007, excluding granted units which have fully
vested:

Units
Unvested Accumulated
Executive from Total
units Distributions Units
-------------------------------------------------------------------------
January 1, 2004 - granted 10,218 3,990 14,208
January 1, 2005 - granted 13,118 4,099 17,217
January 1, 2006 - granted 12,968 2,546 15,514
January 1, 2007 - granted 15,000 1,416 16,416
January 1, 2007 - units vested (5,109) (1,675) (6,784)
-------------------------------------------------------------------------
46,195 10,376 56,571
-------------------------------------------------------------------------
-------------------------------------------------------------------------

On March 30, 2007, the Board of Trustees approved the granting of
15,000 units effective as of January 1, 2007. 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. Unitholders who so elect will receive a further
bonus distribution of units equal in value to 3% of each distribution
that was reinvested.

19. Per Unit Information

Year Ended Year Ended
December 31, 2007 December 31, 2006
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Units Units
-------------------------------------------------------------------------
(Restated,
Note 24)
Net income from continuing
operations - basic $ 48,547 62,714,239 $ 39,995 52,558,268
Dilutive effect of executive
compensation plan - 54,749 - 54,430
-------------------------------------------------------------------------
Net income from continuing
operations - diluted $ 48,547 62,768,988 $ 39,995 52,612,698
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Year Ended Year Ended
December 31, 2007 December 31, 2006
-------------------------------------------------------------------------
Weighted Weighted
Average Average
Units Units
-------------------------------------------------------------------------
Net income - basic $ 41,222 62,714,239 $ 38,596 52,558,268
Dilutive effect of executive
compensation plan - 54,749 - 54,430
-------------------------------------------------------------------------
Net income - diluted $ 41,222 62,768,988 $ 38,596 52,612,698
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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% 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 31, December 31,
2007 2006
-------------------------------------------------------------------------
Net income $ 41,222 $ 38,596
-------------------------------------------------------------------------
Add (deduct)
Depreciation and amortization 64,990 52,548
Future income tax recovery (25,869) (15,473)
Non-cash portion of interest expense 2,587 -
Reserve for replacement of furniture,
fixtures and equipment and
capital improvements (20,371) (15,682)
Writedown of assets held for sale,
net of gain on sale of assets 6,322 1,000
Convertible debenture accretion 887 816
Corporate reorganization costs 1,514 506
Non-cash executive and trustee compensation 672 349
Deferred land lease expense and
retail lease income, net 41 111
-------------------------------------------------------------------------
30,773 24,175
-------------------------------------------------------------------------
Distributable income 71,995 62,771
Distributions
Required under the Declaration of Trust 57,596 50,217
Discretionary 13,162 9,388
-------------------------------------------------------------------------
Distributions paid or payable 70,758 59,605
-------------------------------------------------------------------------
Distributions less than distributable income $ 1,237 $ 3,166
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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. 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, 2007 and 2006, the fees charged to
the REIT pursuant to the Agreements were as follows:

2007 2006
-------------------------------------------------------------------------
Fees from continuing operations:
Management fees $ 12,521 $ 12,171
Asset management fees (included in
hotel operating expenses) 370 89
Accounting services (included in
hotel operating expenses) 2,226 2,164
Administrative services (included in
corporate and administrative expenses) 440 551
Project management and general contractor
services (capitalized to hotel properties) 621 539
Fees from discontinued operations 476 506
-------------------------------------------------------------------------
$ 16,654 $ 16,020
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In addition, salaries of REIT employees paid by Westmont and reimbursed
by the REIT were $192 (2006 - $189). Included in accounts payable and
accrued liabilities are amounts outstanding at December 31, 2007
totalling $1,137 (2006 - $1,076).

The REIT paid Westmont an Acquisition Fee of $6,518 as part of the
acquisition of the Legacy Portfolio.

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% of gross revenues during the term of the
agreements. The agreements mature on December 31, 2026. For the year
ended December 31, 2007, total management fees paid to Hilton were $1,123
(2006 - $222).

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, 2007, total
management fees paid to Delta were $633 (2006 - $397).

With the acquisition of the Legacy Portfolio, 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. Legacy was also
subject to a portfolio incentive fee on 11 of its 25 hotels, of which six
are now owned or leased by InnVest. The base management fee is equal to
3% of total revenues from the hotel for nine of the hotels and 2% of
total revenues for the remaining two hotels. The agreements mature from
December 31, 2010 to December 31, 2047. The 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
period ended from September 18, 2007 to December 31, 2007, total
management fees paid for the Legacy Portfolio were $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 for discontinued
operations and assets held for sale at December 31, 2007.

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

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
-------------------------------------------------------------------------
Hotel operating
income $ 26,196 $ 63,632 $ 31,285 $ 17,695 $ 138,808
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Year ended
December 31, 2006
Hotel revenues $ 39,044 $ 225,436 $ 77,689 $ 38,301 $ 380,470
Hotel expenses 25,213 160,859 53,870 24,963 264,905
-------------------------------------------------------------------------
Hotel operating
income $ 13,831 $ 64,577 $ 23,819 $ 13,338 $ 115,565
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Capital expenditures
on hotel properties
Year ended
December 31,
2007 $ 3,712 $ 15,201 $ 5,601 $ 4,337 $ 28,851
Year ended
December 31,
2006 $ 1,269 $ 20,918 $ 2,446 $ 2,303 $ 26,936
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Hotel properties
December 31, 2007 $ 525,322 $ 690,284 $ 430,570 $ 238,589 $1,884,765
December 31, 2006 $ 73,233 $ 681,290 $ 266,140 $ 116,067 $1,136,730
-------------------------------------------------------------------------
-------------------------------------------------------------------------

23. Total Revenues

Year Ended Year Ended
December 31, December 31,
2007 2006
-------------------------------------------------------------------------

Hotel revenues $ 495,955 $ 380,470

Other business revenues (Note 24) 9,798 7,721

-------------------------------------------------------------------------
$ 505,753 $ 388,191
-------------------------------------------------------------------------
-------------------------------------------------------------------------

24. Other Business Income

Total
Year Ended
Franchise Retail/ Retirement December 31,
Business Office Residence 2007
-------------------------------------------------------------------------

Revenues $ 5,907 $ 2,801 $ 1,090 $ 9,798

Expenses 2,078 1,123 681 3,882
-------------------------------------------------------------------------
Other business
income, net $ 3,829 $ 1,678 $ 409 $ 5,916
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Total
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
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 in 2006.

25. 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.

On March 30, 2007, the REIT sold the 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, the Ontario hotel property 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. The operations for these two hotels are included in
discontinued operations as summarized below.

On December 18, 2007 the REIT reclassified three Ontario hotel properties
and one Quebec hotel property to assets held for sale. The 2006 balance
sheet has been restated to show these hotels in "Assets held for sale".
The operations for these four hotels are included in discontinued
operations as summarized below and the comparatives have been restated.

Discontinued operations for the years ended December 31, 2007 and 2006
are as follows:

2007 2006
-------------------------------------------------------------------------
Restated
-------------------------------------------------------------------------

-------------------------------------------------------------------------
Hotel revenues $ 8,846 $ 11,549
-------------------------------------------------------------------------

Hotel expenses
Operating expenses 5,936 7,317
Property taxes, rent and insurance 1,257 1,382
Management fees 299 390
-------------------------------------------------------------------------
7,492 9,089
-------------------------------------------------------------------------
Hotel operating income 1,354 2,460
-------------------------------------------------------------------------
Interest on mortgages 950 1,114
Depreciation and amortization 1,407 1,745
-------------------------------------------------------------------------
2,357 2,859
-------------------------------------------------------------------------
Loss from discontinued operations (1,003) (399)

Gain on sale of assets held for sale 833 -
Write down of assets held for sale (7,155) (1,000)
-------------------------------------------------------------------------
(6,322) (1,000)
-------------------------------------------------------------------------

Net loss from discontinued operations $ (7,325) $ (1,399)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

26. Subsequent Events

In the first quarter of 2008, the REIT provided five unencumbered
properties as security to increase its operating line from $25,000 to
$40,000. A further two unencumbered properties were financed, providing
proceeds of $40,000, which was used to partially repay the $215,000
bridge loan incurred as part of the acquisition of the Legacy Portfolio.

InnVest secured an additional $350,000 of mortgage financing on 10 of the
11 hotels acquired in the Legacy transaction. Proceeds were used to repay
the balance of the $215,000 bridge loan and certain of the existing
mortgages. 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%.

Contact Information

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

    or

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