InnVest Real Estate Investment Trust
TSX : INN.UN

InnVest Real Estate Investment Trust

August 07, 2009 08:00 ET

InnVest REIT Reports Second Quarter Results

TORONTO, ONTARIO--(Marketwire - Aug. 7, 2009) - InnVest Real Estate Investment Trust ("InnVest" or the "Trust") (TSX:INN.UN) today announced financial results for the three and six months ended June 30, 2009.

"Our second quarter results reflect the difficult environment for the lodging industry driven by broader economic trends and their impact on discretionary spending for travel. Through this challenging period, our focus remains on maximizing our competitive positioning within our markets, reducing costs and strengthening our balance sheet," commented Kenneth Gibson, InnVest's President and Chief Executive Officer.

Second Quarter Highlights

- Revenue per available room, or RevPAR, on a same hotel basis declined 14.0% driven by the deteriorating economic environment and its impact on discretionary travel demand. Occupancy and average daily rate declined 7.0 points and 4.2%, respectively. InnVest's second quarter performance exceeds the RevPAR achieved across the Canadian lodging industry during the same period;

- Overall, hotel revenues declined 11.9%, or $21.1 million, to $156.0 million;

- Hotel operating margins declined 470 basis points in the second quarter reflecting the weak RevPAR performance offset by a 5.8% reduction in hotel expenses. Overall, hotel operating income declined $14.0 million, or 25.2%, to $41.6 million;

- During the quarter, the Trust divested one hotel, previously classified as held for sale, for gross proceeds of $4.1 million. The Trust also recognized a non-cash impairment charge of $6.0 million based on updated expectations of sale proceeds for the five remaining assets classified as held for sale at June 30, 2009. One hotel was sold following the end of the second quarter;

- The Trust generated a second quarter net loss of $4.0 million compared to net income of $15.5 million in the prior period, and

- InnVest successfully renewed its $40.0 million line of credit for a two year term.



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 June 30 Six months ended June 30
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2009 2008 +/- 2009 2008 +/-
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Occupancy 61.1% 68.1% (7.0)% 56.9% 62.1% (5.3)%
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Average daily rate
("ADR") $118.06 $123.55 ($5.49) $116.24 $118.91 ($2.67)
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Revenue Per Available
Room ("RevPAR") $72.15 $84.11 ($11.96) $66.12 $73.87 ($7.75)
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Hotel revenues $155,978 $177,041($21,063)$283,679 $312,981 ($29,302)
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Hotel operating
income $41,586 $ 55,581($13,995) $60,002 $78,750 ($18,748)
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Net (loss) income and
comprehensive (loss)
income ($4,007) $15,494($19,501)($19,427) $ 421 ($19,848)
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Add / (deduct)
Depreciation and
amortization 22,739 21,722 1,017 45,451 43,078 2,373
Future income tax
recovery (850) (1,237) 387 (7,781) (4,757) (3,024)
Non-cash executive
and trustee
compensation 86 145 (59) 172 300 (128)
Writedown of assets
held for sale 5,987 1,864 4,123 5,987 2,364 3,623
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Funds from
operations(1)(2) $23,955 $37,988($14,033) $24,402 $41,406 ($17,004)
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Funds from operations
per unit(2)
- basic $0.322 $0.516 ($0.194) $0.328 $0.564 ($0.236)
- diluted $0.314 $0.477 ($0.163) $0.327 $0.558 ($0.231)
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Amortization of
deferred financing
costs - 27 (27) 17 1,341 (1,324)
Non-cash portion of
mortgage interest
expense 386 511 (125) 810 769 41
Reserve for replacement
of furniture, fixtures
and equipment and
capital improvements (6,563) (7,492) 929 (11,990) (13,340) 1,350
Non-cash portion of
convertible debentures
interest and accretion 743 832 (89) 1,527 1,410 117
Deferred land lease
expense and retail
lease income, net 2 8 (6) 4 16 (12)
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Distributable
income(2) $18,523 $31,874($13,351) $14,770 $31,602 ($16,832)
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Distributable
income per unit(3)
- basic $0.249 $0.433 ($0.184) $0.198 $ 0.430 ($0.232)
- diluted $0.245 $0.400 ($0.155) $0.198 $ 0.429 ($0.231)
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Distributions per
unit(4) $0.1875 $0.2813 ($0.094) $0.3750 $0.5625 ($0.188)
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(1) For purposes of the calculation of funds from operations, amortization
of deferred financing is excluded from depreciation and amortization.
(2) Hotel operating income, funds from operations and distributable income
are non-GAAP measures of earnings and cash flow commonly used by
industry analysts. Non-GAAP financial measures do not have a
standardized meaning and are unlikely to be comparable to similar
measures used by other organizations.
(3) Distributable income per unit has been calculated on a basis consistent
with that prescribed by GAAP for calculating earnings per unit.
(4) Distributions per unit include cash distributions and distributions
arising from the Distribution Reinvestment Plan.


The operating statistics relating to room revenues are on a same-hotel basis and exclude the hotels that have been classified as discontinued operations and hotels that have not been included in operating results for the full periods
presented.



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Three months ended Variance to Six months ended Variance to
June 30, 2009 2008 June 30, 2009 2008

Occupancy
Ontario 59.3% (7.1 pts) 55.2% (5.6 pts)
Quebec 60.5% (7.9 pts) 56.4% (5.3 pts)
Atlantic 64.4% (5.3 pts) 56.8% (4.8 pts)
Western 63.3% (6.7 pts) 61.3% (4.5 pts)
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Total 61.1% (7.0 pts) 56.9% (5.2 pts)
ADR
Ontario $110.45 (3.1%) $110.17 (1.6%)
Quebec $115.18 (6.3%) $110.83 (3.5%)
Atlantic $119.44 (1.8%) $113.00 (0.5%)
Western $137.12 (5.7%) $137.08 (2.7%)
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Total $118.38 (4.2%) $116.45 (2.1%)
RevPAR
Ontario $65.47 (13.5%) $60.82 (10.7%)
Quebec $69.66 (17.1%) $62.47 (11.9%)
Atlantic $76.88 (9.4%) $64.18 (8.3%)
Western $86.84 (14.8%) $83.98 (9.4%)
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Total $72.35 (14.0%) $66.26 (10.3%)
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FINANCIAL REVIEW (In thousands of dollars, except per unit amounts, unless otherwise stated)

Three months ended June 30, 2009

The second quarter is typically one of the strongest demand periods for the Trust. In 2009, second quarter results continued to be increasingly impacted by the deteriorating economic environment and its impact on discretionary travel demand, including corporate and leisure customer groups. For the three months ended June 30, 2009, hotel revenues decreased by $21.1 million, or 11.9%, to $156.0 million. The timing of the Easter holidays in the second quarter in 2009 (as opposed to the first quarter in 2008) also contributed to the year-over-year decline given lower travel demand around holiday periods.

Second quarter RevPAR decreased 14.0% based on a 4.2% decrease in ADR and a 7.0 point decline in overall occupancy. RevPAR trends were generally consistent across all service categories and brands.

Consistent with RevPAR declines experienced during the quarter, overall room revenues for the three months ended June 30, 2009 decreased $17.3 million, or 12.6%, to $120.1 million. All regions experienced a combination of occupancy and rate declines. A decline in demand during this period has resulted in average daily rate discounting in most markets. We expect this trend to continue until sentiment regarding the economy improves.

For the three months ended June 30, 2009, non-room revenues totaled $35.9 million, down $3.8 million or 9.5% compared to the prior year. Non-room revenues are directly impacted by overall occupancy since lower occupancy results in the reduced use of ancillary services offered at our hotels.

In periods of declining occupancies, the Trust focuses on managing all costs to minimize the overall impact on profitability without impacting the service levels offered to guests. However, many property level expenses, including property taxes, leasehold payments and insurance, are relatively fixed and do not necessarily change in accordance with overall demand levels.

Hotel expenses for the three months ended June 30, 2009 declined $7.1 million or 5.8% when compared to 2008. The decrease reflects reduced occupancies as well as active steps taken by the Trust to manage costs throughout the portfolio in light of the softer economic environment. These initiatives, most of which were implemented in 2008, include hiring freezes and salary freezes throughout most of the portfolio and at the Trust's corporate offices, as well as seeking to maximize value from vendors through pricing concessions. These initiatives should continue to benefit future periods.

Hotel operating income margins declined 470 basis points to 26.7% in the second quarter reflecting weak RevPAR performance which was somewhat offset by continued efficiency improvements across the portfolio. Overall, the Trust generated second quarter hotel operating income of $41.6 million, down $14.0 million or 25.2% as compared to the prior period. Typically, declining revenues, or revenue growth below inflation, will result in a decline in profitability given the considerable amount of fixed operating costs.

Other income and expenses for the three months ended June 30, 2009 totaled $40.2 million, up $1.0 million as compared to 2008. Reduced interest and corporate expenses as well as increased income from other sources were offset by a $1.7 million increase in non-cash depreciation charge as compared to the prior period.

InnVest generated second quarter net income from continuing operations of $2.2 million or $0.030 per unit basic and diluted compared to $0.239 per unit basic and diluted in the prior year. The Trust recognized a non-cash impairment charge of $6.0 during the second quarter of 2009 based on updated expectations of sale proceeds. At June 30, 2009, five hotels (820 rooms) were classified as held for sale. One hotel was sold following the end of the second quarter of 2009.

InnVest generated a second quarter net loss of $4.0 million, or $0.054 per unit basic and diluted compared to net income of $15.5 million, or $0.210 per unit basis and diluted in the prior year.

For the three months ended June 30, 2009, InnVest generated FFO of $24.0 million ($0.314 per unit diluted) compared to $38.0 million in the prior period ($0.477 per unit diluted). Distributable income of $18.5 million ($0.245 per unit diluted) compared to $31.9 million in the prior year ($0.400 per unit diluted). The declines are primarily attributable to the $14.0 million reduction in hotel operating income during the second quarter.

Distributions declared during the second quarter of 2009 totaled $14.0 million, or $0.1875 per unit, compared to $20.7 million, or $0.28125 per unit, in the prior period, reflecting the reduced level of monthly distributions to $0.0625 per unit beginning in November 2008. InnVest's payout ratio for the twelve month period ended June 30, 2009 was 94.5%.

Six months ended June 30, 2009

For the six months ended June 30, 2009, hotel revenues decreased by $29.3 million, or 9.4%, to $283.7 million. To date in 2009, operating results have been impacted by the weak economic environment and its impact on discretionary travel demand.

Overall, year-to-date RevPAR decreased 10.3% based on a 2.1% decrease in ADR and a 5.2 point decline in overall occupancy.

Consistent with RevPAR performance achieved year-to-date, overall room revenues for the six months ended June 30, 2009 decreased $23.1 million, or 9.6%, to $218.2 million. All regions experienced declines in occupancy and rate, with rate discounting becoming prevalent in the second quarter.

For the six months ended June 30, 2009, non-room revenues totaled $65.5 million, down $6.2 million or 8.7% compared to the prior year. Non-room revenues are directly impacted by overall occupancy since lower occupancy results in the reduced use of ancillary services offered at our hotels.

Hotel expenses for the six months ended June 30, 2009 declined $10.6 million or 4.5% when compared to 2008. The decrease reflects reduced occupancies as well as active steps taken by the Trust to manage costs throughout the portfolio in light of the softer economic environment.

Year-to-date, hotel operating income margins declined 400 basis points to 21.2% reflecting weak RevPAR performance which was somewhat offset by continued efficiency improvements across the portfolio. Overall, the Trust generated hotel operating income of $60.0 million, down $18.7 million or 23.8% as compared to the prior period.

For the six months ended June 30, 2009, InnVest realized a net loss from continuing operations of $12.4 million or a loss of $0.167 per unit basic and diluted compared to net income from continuing operations of $0.053 per unit basic and diluted in the prior year. The Trust recognized a non-cash impairment charge of $6.0 million during the second quarter of 2009 based on updated expectations of sale proceeds.

InnVest generated a net loss of $19.4 million, or $0.261 per unit basic and diluted compared to a net income of $421, or $0.006 per unit basic and diluted in the prior year.

For the six months ended June 30, 2009, InnVest generated FFO of $24.4 million ($0.327 per unit diluted) compared to $41.4 million in the prior period ($0.558 per unit diluted). Distributable income over the same period totaled $14.8 million ($0.198 per unit diluted) compared to $31.6 million in the prior year ($0.429 per unit diluted). The reductions primarily reflects lower hotel operating income generated during the period.

Distributions declared during the six months ended June 30, 2009 totaled $27.9 million compared to $41.4 million in the prior period, reflecting the adjusted level of monthly distributions to $0.0625 per unit (from $0.09375 per unit) beginning in November 2008.

BALANCE SHEET REVIEW

At June 30, 2009, the Trust has cash on hand totaling $13.6 million, of which $3.1 million is restricted under InnVest's Declaration of Trust for the replacement of furniture, fixtures, and equipment and for capital improvements.

During the second quarter, InnVest successfully renewed its $40.0 million line of credit for a two year term expiring in August 2011. The operating line is secured by 14 properties. The amount of the operating line is subject to a mortgageability test which is based on the operating results of the secured properties. Given the current credit environment, interest rate spreads were increased by 200 basis points to either Canadian prime rate plus 2.5% or the Canadian Banker's Acceptance rate plus 3.5%. At June 30, 2009, $21.3 million was drawn on the credit facility.

During the second quarter, management extended a short-term bridge loan through August 2009. The extension resulted in a $2.0 million repayment in April 2009. Management anticipates that the bridge loan will be extended in the normal course of business.

At June 30, 2009, the Trust's leverage excluding and including convertible debentures was 47.8% and 57.0%, respectively. At June 30, 2009, InnVest has mortgages payable of $949.6 million with a weighted average term of 3.2 years and a weighted average interest rate of 5.5%. Currently, approximately 9.7% of the Trust's mortgage debt is at floating rate.

In addition, InnVest has access to a loan facility, granted in conjunction with property mortgages, for up to $36.1 million to fund 50% to 100% of capital expenditures incurred at individual hotels. At June 30, 2009, the Trust has drawn $19.1 million on this facility to fund certain capital investments. The remaining capacity under this facility approximates $17.0 million.

Capital expenditures for the three months ended June 30, 2009 totaled $7.3 million compared to the Trust's FF&E reserve of $6.6 million. For the six months ended June 30, 2009, capital expenditures totaled $13.3 million compared to the Trust's FF&E reserve of $12.0 million. The Trust expects its capital investment to be largely funded through its FF&E reserve for the year 2009. Excess capital invested above the FF&E reserve during the three and six months ended June 30, 2009 was funded through cash from operations or the Trust's capital loan facility.

INCOME TAX DEFERRAL PERCENTAGE

Given the performance achieved to date in 2009, the Trust estimates that the non-taxable portion of the distributions made to unitholders during the year will be higher than in the previous year. In 2008, 44% of distributions were non-taxable to unitholders.

RECENT DEVELOPMENTS

On April 1, 2009, InnVest completed the divestiture of one hotel (128 rooms) which had been identified as held for sale since the end of 2007. The transaction was completed for gross proceeds of $4.1 million less closing costs. The sale was partially financed through a two-year $2.7 million vendor take back mortgage, bearing interest at 4.75%.

During the first quarter of 2009, InnVest classified five assets as held for sale. The Trust recognized a non-cash impairment charge of $29.6 million during the fourth quarter of 2008 based on the anticipated fair value of these assets. An additional non-cash impairment charge of $6.0 million was recognized during the second quarter of 2009 based on updated expectations of sale proceeds. Hotel properties held for sale are primarily in markets impacted by the manufacturing sector decline and/or markets which have been particularly impacted by new supply in recent years. In aggregate, five assets (820 rooms) were classified as discontinued operations as at June 30, 2009. Following the end of the second quarter, the Trust closed the sale of one of the hotels (121 rooms), subject to a land lease, for gross proceeds of $3.3 million less closing costs.

During the second quarter of 2009, the Trust purchased and cancelled 125,049 trust units under the normal course issuer bid ("NCIB") at an aggregate cost of $477 (average cost of $3.83 per unit). In aggregate since implementing the NCIB, the Trust has acquired 615,049 units at an aggregate cost of $2.1 million (average cost of $3.42 per unit).

On October 9, 2008, the Trust adopted a unitholder rights plan, which expired on April 9, 2009. On April 14, 2009, InnVest's unitholders approved the adoption of the second amended and restated unitholder rights plan, which will be in effect for a period of up to three years. InnVest did not adopt either of the plans in response to any specific take-over proposal, nor has it been made aware of any such proposal. The unitholder rights plan is intended to ensure that unitholders receive fair treatment in the event of an unsolicited attempt to gain control of InnVest and, in such event, to ensure unitholders receive full value and that the Board of Trustees has time to consider alternatives to maximize unitholder value. The rights will only become exercisable upon the occurrence of certain triggering events, including the acquisition by a person or group of persons of 20% or more of the outstanding units in a transaction not approved by InnVest's board of Trustees.

OUTLOOK

We expect the ongoing economic uncertainty to continue to impact operating performance across the lodging sector in the near term. Historically, the lodging industry performance has been highly correlated with the economy given the discretionary nature of leisure and business travel. Customer bookings remain very last minute in the current business climate. Without greater visibility as to an economic recovery, we remain cautious on the Trust's near term outlook.

Building on our efforts in 2008, we have adapted our strategy to position the Trust to address the current environment with particular attention to our balance sheet and liquidity. Our priority in 2009 continues to be proactive in our capital management initiatives including efforts to address debt maturities. InnVest recently extended its operating line for two years and is in active discussions to secure an early renewal for its 2010 maturity.

We are continually seeking opportunities to recycle our capital efficiently and are actively pursuing the sale of certain underperforming non-core assets. Having developed and implemented contingency plans throughout the portfolio, we continue to manage our portfolio aggressively to maximize the performance of each hotel.

Despite the near term operating environment, with new supply effectively constrained by the credit markets, InnVest is well positioned for a recovery when demand trends improve. InnVest's current portfolio is diversified by geography, customer and brand. This diversity, combined with our partnerships with experienced hotel operators, contributes to the resiliency of the portfolio and positions InnVest to effectively manage through the current economic environment.

FORWARD LOOKING STATEMENTS

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

TRUST PROFILE

InnVest holds Canada's largest hotel portfolio together with an interest in Choice Hotels Canada Inc. the largest franchisor of hotels in Canada. The hotel portfolio currently comprises 145 hotel properties, with aprpoximately 19,000 guest rooms, operated under internationally recognized franchise brands such as Comfort Inn®, Holiday Inn® Quality Suites/Inn®, Radisson®, Delta®, Travelodge®, Hilton Hotel®, Staybridge Suites®, Fairmont Hotels®, Sheraton Suites® and Best Western®. InnVest's trust units and outstanding convertible debentures trade on the Toronto Stock Exchange under the symbols INN.UN, INN.DB.A, INN.DB.B and INN.DB.C, respectively.

QUARTERLY CONFERENCE CALL

Management will host a conference call on Friday August 7, 2009 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing (416) 340-8018 or 1-866-223-7781. 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 August 7th beginning at 1:00 pm through to 11:59 p.m. on August 14th. To access the recording please call (416) 695-5800 or 1-800-408-3053 and use the reservation number 7654550#.



InnVest Real Estate Investment Trust
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CONSOLIDATED BALANCE SHEETS

(in thousands of dollars) (unaudited) June 30, 2009 December 31, 2008
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(Restated, Note 21)

ASSETS

Current Assets
Cash $ 10,511 $ 18,143
Accounts receivable 27,043 27,319
Prepaid expenses and other assets 16,958 8,861
Assets held for sale (Note 21) 744 610
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55,256 54,933

Restricted cash 3,112 3,013

Hotel properties (Note 3) 1,767,759 1,792,828

Other real estate properties (Note 4) 15,906 16,078

Licence contracts (Note 5) 17,195 17,853

Intangible and other assets (Note 6) 40,493 42,165

Assets held for sale (Note 21) 40,084 50,234
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$ 1,939,805 $ 1,977,104
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LIABILITIES

Current Liabilities
Bank indebtedness (Note 7) $ 7,000 $ 9,000
Accounts payable and accrued
liabilities 69,553 71,876
Acquisition related liabilities 2,575 2,561
Distributions payable 4,656 4,651
Current portion of long-term debt
(Note 8) 11,089 10,763
Liabilities related to assets held for
sale (Note 21) 847 1,157
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95,720 100,008

Long-term debt (Note 8) 953,517 930,317

Other long-term obligations (Note 9) 7,090 7,139

Convertible debentures (Note 10) 181,677 180,170

Future income tax liability (Note 12) 203,196 210,977

Long-term liabilities related to
assets held for sale (Note 21) 9,845 12,763
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1,451,045 1,441,374

UNITHOLDERS' EQUITY 488,760 535,730
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$ 1,939,805 $ 1,977,104
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The accompanying notes are an integral part of these consolidated financial
statements.



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

Three Three Six Six
Months Months Months Months
(in thousands of dollars, Ended Ended Ended Ended
except per unit amounts) June 30, June 30, June 30, June 30,
(unaudited) 2009 2008 2009 2008
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(Restated, (Restated,
Note 21) Note 21)

Total revenues (reference
only) (Note 19) $ 158,692 $ 180,109 $ 289,122 $ 318,710

Hotel revenues $ 155,978 $ 177,041 $ 283,679 $ 312,981
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Hotel expenses
Operating expenses (Note 17) 95,718 101,504 186,553 195,330
Property taxes, rent and
insurance 12,888 12,566 26,282 26,022
Management fees (Note 17) 5,786 7,390 10,842 12,879
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114,392 121,460 223,677 234,231
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Hotel operating income 41,586 55,581 60,002 78,750
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Other (income) and expenses
Interest on mortgages and
other debt 13,564 13,669 27,069 25,458
Interest on bank
indebtedness 232 533 399 3,380
Convertible debentures
interest and accretion 3,604 3,561 7,208 7,121
Corporate and administrative
(Note 17) 1,551 1,643 2,910 2,869
Capital tax 52 62 103 101
Other business income, net
(Note 20) (1,291) (1,257) (2,203) (2,250)
Other income (216) (49) (221) (121)
Depreciation and
amortization 22,739 21,068 44,938 43,058
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40,235 39,230 80,203 79,616
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Income (loss) before income
tax recovery 1,351 16,351 (20,201) (866)

Future income tax recovery
(Note 12) (850) (1,237) (7,781) (4,757)
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Income (loss) from
continuing operations 2,201 17,588 (12,420) 3,891
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Loss from discontinued
operations (Note 21) (221) (230) (1,020) (1,106)
Writedown of assets held for
sale (Note 21) (5,987) (1,864) (5,987) (2,364)
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(6,208) (2,094) (7,007) (3,470)
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Net (loss) income and
comprehensive (loss) income $ (4,007) $ 15,494 $ (19,427) $ 421
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Income (loss) from
continuing operations, per
unit (Note 15)
Basic and diluted $ 0.030 $ 0.239 $ (0.167) $ 0.053
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Net (loss) income per unit
(Note 15)
Basic and diluted $ (0.054) $ 0.210 $ (0.261) $ 0.006
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Loss (income) from
discontinued operations, per
unit
Basic and diluted $ (0.084) $ 0.029 $ (0.094) $ (0.047)
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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
(Loss) and
(in thousands of Comprehensive
dollars) (unaudited) Income (Loss) Distributions Deficit Units in $
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Balance December 31,
2007 $ 137,923 $ (299,691) $ (161,768) $ 757,375

CHANGES DURING THE
PERIOD

Net income and
comprehensive income 421 - 421 -
Unit distributions
(Note 16) - (41,351) (41,351) -
Distribution
reinvestment plan
units issued - - - 7,626
Vested executive
compensation - - - 151
Executive and trustee
compensation - - - 76

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Balance June 30, 2008 $ 138,344 $ (341,042) $ (202,698) $ 765,228
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Balance December 31,
2008 $ 134,546 $ (378,164) $ (243,618) $ 768,034

CHANGES DURING THE
PERIOD

Net loss and
comprehensive loss (19,427) - (19,427) -
Unit distributions
(Note 16) - (27,918) (27,918) -
Distribution
reinvestment plan
units issued - - - 1,349
Units repurchased
pursuant to normal
course issuer bid
(Note 14) - - - (3,467)
Conversion of
debentures - - - 20
Vested executive
compensation - - - 170
Executive and trustee
compensation - - - 76

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Balance June 30, 2009 $ 115,119 $ (406,082) $ (290,963) $ 766,182
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Holders'
(in thousands of Contributed Executive Conversion
dollars) (unaudited) Surplus Compensation Option Total
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Balance December 31,
2007 $ - $ 417 $ 8,642 $ 604,666

CHANGES DURING THE
PERIOD

Net income and
comprehensive income - - - 421
Unit distributions
(Note 16) - - - (41,351)
Distribution
reinvestment plan
units issued - - - 7,626
Vested executive
compensation - (151) - -
Executive and trustee
compensation - 234 - 310

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Balance June 30, 2008 $ - $ 500 $ 8,642 $ 571,672
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Balance December 31,
2008 $ 1,938 $ 734 $ 8,642 $ 535,730

CHANGES DURING THE
PERIOD

Net loss and
comprehensive loss - - - (19,427)
Unit distributions
(Note 16) - - - (27,918)
Distribution
reinvestment plan
units issued - - - 1,349
Units repurchased
pursuant to normal
course issuer bid
(Note 14) 2,301 - - (1,166)
Conversion of
debentures - - - 20
Vested executive
compensation - (170) - -
Executive and trustee
compensation - 96 - 172

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Balance June 30, 2009 $ 4,239 $ 660 $ 8,642 $ 488,760
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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

Three Three Six Six
Months Months Months Months
Ended Ended Ended Ended
(in thousands of dollars) June 30, June 30, June 30, June 30,
(unaudited) 2009 2008 2009 2008
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(Restated, (Restated,
Note 21) Note 21)

OPERATING ACTIVITIES
Income (loss) from
continuing operations $ 2,201 $ 17,588 $ (12,420) $ 3,891

Add (deduct) items not
affecting operations
Depreciation and
amortization 22,739 21,068 44,938 43,058
Non-cash portion of interest
expense 844 1,055 1,758 1,604
Future income tax recovery (850) (1,237) (7,781) (4,757)
Non-cash executive and
trustee compensation 86 155 172 310
Convertible debentures
accretion 289 288 579 575
Discontinued operations (353) 206 (913) 133
Changes in non-cash working
capital (6,646) (11,716) (10,208) (17,868)
----------------------------------------------------------------------------
18,310 27,407 16,125 26,946
----------------------------------------------------------------------------

FINANCING ACTIVITIES
Repayment of long-term debt (2,644) (2,233) (5,297) (159,461)
Proceeds from long-term debt 6,713 2,462 6,713 389,948
Units repurchased pursuant
to normal course
issuer bid (Note 14) (477) - (1,166) -
Unit distributions (13,269) (16,942) (26,564) (33,645)
Increase in operating line 1,100 2,282 21,300 17,882
Proceeds from bridge loan - 3 - 8,910
Repayment of bridge loan (2,000) - (2,000) (215,000)
Discontinued operations
repayment of debt (53) (13) (2,939) (114)
----------------------------------------------------------------------------
(10,630) (14,441) (9,953) 8,520
----------------------------------------------------------------------------

INVESTING ACTIVITIES
Capital expenditures on
hotel properties (7,312) (12,356) (13,249) (18,199)
Discontinued operations
capital expenditures (11) (331) (42) (407)
Hotel under development
expenditures, net - (1,434) (82) (5,252)
Proceeds from sale of
discontinued asset, net of
costs 3,675 - 3,675 -
Vendor-take-back Mortgage on
sold asset (2,700) - (2,700) -
Change in intangible and
other assets (651) 154 (1,307) (277)
Acquisition of hotel
property - (127) - (17,302)
(Increase) decrease in
restricted cash (640) 195 (99) 266
----------------------------------------------------------------------------
(7,639) (13,899) (13,804) (41,171)
----------------------------------------------------------------------------

Increase (decrease) in cash
during the period 41 (933) (7,632) (5,705)
Cash, beginning of period 10,470 17,499 18,143 22,271
----------------------------------------------------------------------------
Cash, end of period $ 10,511 $ 16,566 $ 10,511 $ 16,566
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Supplemental disclosure of
cash flow information:
Cash paid for interest $ 17,387 $ 18,250 $ 33,073 $ 33,073
Cash paid for income taxes
(including capital tax) $ 47 $ 41 $ 123 $ 109

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

InnVest Real Estate Investment Trust
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009 (all dollar amounts are in thousands, except unit and per unit
amounts) (unaudited)


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 June 30, 2009, the REIT owned 146 Canadian hotels operated under international brands and has a 50% interest in Choice Hotels Canada Inc. ("CHC").

The accompanying unaudited interim consolidated financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The accounting principles used in these financial statements are consistent with those used in the annual consolidated financial statements for the year ended December 31, 2008, except as disclosed in Note 2. These financial statements do not include all the information and disclosure required by GAAP for annual financial statements, and should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2008.

Revenues earned from hotel operations fluctuate throughout the year, with the third quarter being the highest due to the increased level of leisure travel in the summer months, and the first quarter being the lowest as leisure travel tends to be lower at that time of year.

2. Change in Significant Accounting Policies

Goodwill and intangible assets

Effective January 1, 2009, the REIT adopted the Canadian Institute of Chartered Accountants ("CICA") Section 3064 - Goodwill and Intangible Assets. The standard was applied retrospectively. This new standard has no material impact to the REIT.

3. Hotel Properties



Accumulated June 30, 2009 December 31, 2008
Cost Depreciation Net Book Value Net Book Value
----------------------------------------------------------------------------
(Restated, Note 21)

Land $ 184,248 $ - $ 184,248 $ 184,248
Buildings 1,695,916 199,434 1,496,482 1,517,708
Furniture,
fixtures
and
equipment 149,189 62,160 87,029 90,872
----------------------------------------------------------------------------
$ 2,029,353 $261,594 $1,767,759 $1,792,828
----------------------------------------------------------------------------
----------------------------------------------------------------------------


As at March 31, 2009, the two hotels accounted for as development properties with a combined net book value of $35,302 (December 31, 2008 - $35,352) became operating properties in accordance with the REIT's accounting policy for newly built hotels acquired or developed and as such were subject to depreciation. Capitalized net operating losses during 2009 were $82 (December 31, 2008 - $ 838). These losses include mortgage interest capitalized of $87 (year ended December 31, 2008 - $1,009).

4. Other Real Estate Properties

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



Accumulated June 30, 2009 December 31, 2008
Cost Depreciation Net Book Value Net Book Value
----------------------------------------------------------------------------

Land $ 1,624 $ - $ 1,624 $ 1,624
Buildings 15,443 1,199 14,244 14,412
Furniture,
fixtures
and
equipment 76 38 38 42
----------------------------------------------------------------------------
$17,143 $1,237 $15,906 $16,078
----------------------------------------------------------------------------
----------------------------------------------------------------------------


5. Licence Contracts



Accumulated June 30, 2009 December 31, 2008
Cost Amortization Net Book Value Net Book Value
----------------------------------------------------------------------------
Licence
contracts $ 26,320 $ 9,125 $ 17,195 $ 17,853
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the six months ended June 30, 2009, the license contracts were amortized by $658 (June 30, 2008 - $658).

6. Intangible and Other Assets



Accumulated June 30, 2009 December 31, 2008
Cost Amortization Net Book Value Net Book Value
----------------------------------------------------------------------------
(Restated, Note 21)
Customer
relation-
ships $ 48,794 $ 19,767 $ 29,027 $ 33,918
Tenant
relation
-ships 2,607 1,572 1,035 1,270
Franchise
rights 3,021 1,242 1,779 716
Lease
origination
costs 6,256 707 5,549 5,741
Other 1,047 644 403 503
----------------------------------------------------------------------------
Total
intangible
assets 61,725 23,932 37,793 42,148
Vendor
-take
-back
mortgage
(Note 21) 2,700 - 2,700 -
Deferred
financing
costs
related
to bridge
loan - - - 17
----------------------------------------------------------------------------
$ 64,425 $ 23,932 $ 40,493 $ 42,165
----------------------------------------------------------------------------
----------------------------------------------------------------------------


During the six months ended June 30, 2009, the intangible assets were amortized by $5,662 (June 30, 2008 - $5,265) and the deferred financing costs related to the bridge loans were amortized by $17 (June 30, 2008 - $1,341).

On April 1, 2009, as part of the sale of an Ontario hotel property held for sale since 2007, the REIT gave a vendor-take-back mortgage of $2,700 with 4.75% interest only payable monthly in arrears, for a two year term. This vendor-take-back mortgage is secured by a mortgage on the property.

7. Bank Indebtedness

Proceeds of $9,000 from a bridge loan were received on March 19, 2008, for 365 days, whereby the REIT provided an unencumbered hotel as security. During the six months ended June 30, 2009, this loan was extended to August 31, 2009 and included a pay-down of $2,000, made on April 7, 2009. As at June 30, 2009, the bridge loan amounted to $7,000 (December 31, 2008 - $9,000). The extension bears interest at Canadian Bankers' Acceptance rate plus 3.5% and requires interest payments only.

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

8. Long-term Debt



June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
(Restated, Note 21)
Mortgages payable $ 949,623 $ 948,064
Operating line 21,300 -
----------------------------------------------------------------------------
970,923 948,064
Less debt issuance costs (6,317) (6,984)
----------------------------------------------------------------------------
Total long-term debt 964,606 941,080
Less current portion (11,089) (10,763)
----------------------------------------------------------------------------
Net long-term debt $ 953,517 $ 930,317
----------------------------------------------------------------------------


Substantially all of the REIT's assets have been pledged as security under debt agreements. At June 30, 2009, long-term debt had a weighted average interest rate of 5.5% (December 31, 2008 - 5.7%) and a weighted average effective interest rate of 5.6% (December 31, 2008 - 5.8%). The long-term debt is repayable in average monthly payments of principal and interest totalling $5,332 (December 31, 2008 - $5,483) per month, and matures at various dates from July 25, 2010 to March 21, 2018.

The REIT has a $40,000 operating line that is a term facility which bears interest at either Canadian bank prime rate plus 2.5% or Canadian Bankers' Acceptance rate plus 3.5%. It is secured by 14 properties and is due August 31, 2011. The amount of the operating line is subject to a mortgageability test which is based on the operating results of the secured properties, calculated quarterly on a trailing-four-quarters basis. Based on the operating results of the secured properties for the four quarters ended June 30, 2009, the REIT qualifies for the maximum amount of $40,000.

Scheduled repayment of long-term debt is as follows:



Scheduled
Repayments Due on Maturity Total
----------------------------------------------------------------------------

2009 (remainder of the year) $ 5,799 $ - $ 5,799
2010 9,406 169,820 179,226
2011 9,593 347,046 356,639
2012 11,012 12,387 23,399
2013 11,355 - 11,355
2014 and thereafter 10,613 383,892 394,505
----------------------------------------------------------------------------
$ 57,778 $ 913,145 $ 970,923
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The current portion of long-term debt on the balance sheet is based on the twelve months ending June 30, 2010, whereas the repayment schedule above reflects the fiscal year.

The estimated fair value of the REIT's long-term debt at June 30, 2009 was approximately $931,676 (December 31, 2008 - $933,784). 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 $113,016 (December 31, 2008 - $92,129) of mortgages payable, which are subject to floating interest rates. Annual interest expense will increase by $1,130 for every 1% increase in the base Bankers' Acceptance rate.

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

The REIT has access to a loan facility, granted in conjunction with property mortgages, of up to $17,016 available to fund 50% to 100% of capital expenditures incurred at individual hotels. During the six months ended June 30, 2009, the REIT has drawn $6,888 on this facility (December 31, 2008 - $12,196).

9. Other Long-term Obligations



June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
(Restated, Note 21)
Capital leases $ 1,662 $ 1,662
Other lease obligations 712 658
----------------------------------------------------------------------------
2,374 2,320
Less current portion (322) (195)
----------------------------------------------------------------------------
Total lease obligations 2,052 2,125
Pension liability 3,516 3,522
Asset retirement obligation 1,522 1,492
----------------------------------------------------------------------------
Total other long-term obligations $ 7,090 $ 7,139
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Defined Benefit Pension Plans

The defined benefit pension plans were assumed pursuant to the acquisition of certain hotels in 2006 and 2007. The most recent actuarial valuation with respect to the funding of the REIT's pension plans was prepared on June 30, 2009.

The pension plan liability as at June 30, 2009 consist of the following:



Non-Union
Non-
Management Management June 30, 2009 December 31, 2008
Pension Pension Total Total
Benefit Plans Benefit Plans Benefit Plans Benefit Plans
----------------------------------------------------------------------------
Accrued
benefit
obligation $ 4,516 $ 1,047 $ 5,563 $ 5,513
Fair value
of plan
assets 2,207 1,049 3,256 3,263
----------------------------------------------------------------------------
Funded
status -
plan deficit 2,309 (2) 2,307 2,250
Unamortized
net actuarial
gain 885 324 1,209 1,272
----------------------------------------------------------------------------
Accrued
employee
future
benefit
liability $ 3,194 $ 322 $ 3,516 $ 3,522
----------------------------------------------------------------------------
----------------------------------------------------------------------------


The pension expense for the six months ended June 30, 2009 is $162 (June 30, 2008 - $424).

10. 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 (20)
Series C August 1, 2014 5.85% 7.42% 70,000 -
----------------------------------------------------------------------------
$ 202,500 $ (11,756)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Face Holders'
Amount Conversion Transaction June 30,
Debenture Outstanding Option Accretion Costs 2009
----------------------------------------------------------------------------
Series A $ 45,764 $ (2,289) $ 1,536 $ 217 $ 45,228
Series B 74,980 (3,400) 1,480 (1,955) 71,105
Series C 70,000 (2,953) 779 (2,482) 65,344
----------------------------------------------------------------------------
$ 190,744 $ (8,642) $ 3,795 $ (4,220) $181,677
----------------------------------------------------------------------------
----------------------------------------------------------------------------



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


The fair value of the REIT's convertible debentures based on their trading prices on the Toronto Stock Exchange at June 30, 2009 is $146,588 (December 31, 2008 - $102,108).

11. Capital Management

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

At June 30, 2009, InnVest's primary contractual obligations consisted of long-term mortgage obligations and convertible debentures. InnVest is not permitted to exceed certain financial leverage amounts under the terms of the Declaration of Trust. The REIT is permitted to hold indebtedness excluding convertible debentures up to a level of 50% of gross asset value. Further, the REIT is permitted to have indebtedness and convertible debentures up to a level of 60% of gross asset value. The Declaration of Trust also governs that individual property mortgages, or mortgages on a pool of properties, cannot exceed 75% of the fair value of the underlying property. InnVest calculates indebtedness in accordance with GAAP excluding non-interest bearing indebtedness, trade accounts payable, and any future income tax liability. InnVest calculates gross asset value as the total book value of assets on the REIT's balance sheet, plus accumulated depreciation and amortization, less future income tax liabilities.

At June 30, 2009, the REIT's leverage excluding and including convertible debentures was 47.8% and 57.0%; respectively, calculated as follows:



June 30, 2009 December 31, 2008
----------------------------------------------------------------------------
Total assets per consolidated balance sheet $ 1,939,805 $ 1,977,104

Accumulated depreciation and amortization 312,809 269,331
Future income tax liability (203,196) (210,977)
Future income tax liability not included
in assets 16,365 18,834
----------------------------------------------------------------------------
Gross asset value $ 2,065,783 $ 2,054,292
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Book value of mortgages and
other indebtedness(1) $ 987,768 47.8% $ 970,071 47.2%
Convertible debentures(2) 190,744 9.2% 190,764 9.3%
----------------------------------------------------------------------------
$ 1,178,512 57.0% $1,160,835 56.5%
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Adjusted to eliminate financing issuance costs and include long-term
debt related to assets held for sale.
(2) Adjusted to face value.


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

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

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

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

The REIT is in compliance with these guidelines.

The REIT is also subject to certain restrictions on the issuance of equity as discussed in Note 12. The REIT can issue on a cumulative basis a total of approximately $143,000 in equity annually in each of 2009 and 2010 and maintain its relief from taxation to the end of 2010. The REIT issued $1,615 in equity during the six months ended June 30, 2009 (June 30, 2008 - $7,853).

As outlined in the Declaration of Trust, the REIT is required to distribute monthly to unitholders not less than one-twelfth of eighty percent (80%) of distributable income of the REIT for the calendar year (see Note 16).

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

(a) Trailing twelve months consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to consolidated interest expense of not less than 2.0 times (actual being 2.4 times at June 30, 2009 and 2.7 times at December 31, 2008);

(b) Trailing twelve months consolidated EBITDA to consolidated debt service of not less than 1.5 times (actual being 2.1 times at June 30, 2009 and 2.3 times at December 31, 2008); and

(c) Unitholders' Equity of not less than $300,000 (actual being $488,760 at June 30, 2009 and $535,730 at December 31, 2008).

12. Income Taxes and Future Income Tax Liability

The REIT currently qualifies as a Mutual Fund Trust for income tax purposes. As required by its Declaration of Trust, the REIT intends to distribute all taxable income to its unitholders and to deduct these distributions for income tax purposes (see Note 16).

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

The Bill may adversely affect the level of cash distribution to unitholders commencing in 2011 if the REIT does not become a Qualifying REIT by then. Management is reviewing whether it is feasible to reorganize the REIT so that non-qualifying operations and assets are transferred under a plan of arrangement to a taxable entity that is held by the REIT unitholders, and that the REIT hotels, which continue to be owned by the REIT, are leased by it to the taxable entity.

It is not possible at this preliminary juncture to provide any assurances that any such reorganization or a similar reorganization can or will be implemented before 2011, or that any such reorganization, if implemented, would not result in material costs or other adverse consequences to the REIT and its unitholders.

13. 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 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 June 30, 2009, the REIT's floating rate debt balance of $113,016 (December 31, 2008 - $92,129) is approximately 11.6% of total long-term debt.

Credit Risk

Credit risk relates to the possibility that hotel guests, either individual or corporate, do not pay the amounts owed to the REIT. The REIT mitigates this risk by limiting its exposure to customers allowed to pay by invoice after check out ("direct bill"). Accounts receivable as at June 30, 2009 is $27,043 (December 31, 2008 - $27,319). InnVest reviews accounts receivable and the allowance for doubtful accounts is adjusted for any balances which are determined by management to be uncollectable. This provision adjustment is expensed in the hotel operating income. The allowance as at June 30, 2009 is $510 or 1.9% (December 31, 2008 - $805 or 2.9%) of total receivables. The amount credited in the operating income for the six months ended June 30, 2009 is $132, due to amounts provided for, which were subsequently collected (total included in hotel expense for the six months ended June 30, 2008 - $15).

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 an excessive amount of debt maturing in any one year. There is also a risk that bank lenders will not refinance the operating credit facility on terms and conditions acceptable to the REIT or on any terms at all.

Estimated maturities of REIT's financial liabilities for the next 24 months are:



Remainder of Six months ending Contractual
2009 2010 June 30, 2011 Cash flows(1)
----------------------------------------------------------------------------
Mortgage payable
- principal $ 5,799 $179,226 $ 279,790 $ 464,815
Mortgage payable
- interest(2) 27,505 50,229 14,033 91,767
Convertible debentures
- principal - - 45,764 45,764
Convertible debentures
- interest 5,728 11,455 5,084 22,267
Bridge loan - principal 7,000 - - 7,000
Bridge loan - interest 44 - - 44
----------------------------------------------------------------------------
Total $ 46,076 $240,910 $ 344,671 $ 631,657
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Contractual cash flows include principal and interest payments for the
next 24 months and ignore extensions options available to the REIT.
(2) Interest amounts for floating rate debt is based on interest rates
prevailing at June 30, 2009.
(3) Current liabilities satisfied in the normal course of business are not
included in the table above.


Fair Values

The fair values of the REIT's financial assets and liabilities, representing net working capital, approximate their recorded values at June 30, 2009 and December 31, 2008 due to their short-term nature.

The fair value of the REIT's long-term debt is less than the carrying value by approximately $39,247 at June 30, 2009 (December 31, 2008 - $24,476) due to changes in interest rates since the dates on which the individual mortgages were arranged. The fair value of long-term debt has been estimated based on the current market rates for mortgages with similar terms and conditions.

The fair value of the REIT's convertible debentures is less than the carrying value by approximately $35,089 at June 30, 2009 (December 31, 2008 - $78,062). The fair value of convertible debentures has been estimated based on the market rates for convertible debentures, as at June 30, 2009 and December 31, 2008.

Letters of Credit

As at June 30, 2009, the REIT has letters of credit totalling $3,693 (December 31, 2008 - $3,693) held on behalf of security deposits for various utility companies and liquor licences, and additional security for the pension liabilities.

14. Unitholders' Equity

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



Units Amount
----------------------------------------------------------------------------
Balance at December 31, 2008 74,412,317 $768,034
Units issued under distribution reinvestment plan 378,000 1,349
Units repurchased pursuant to normal course issuer bid (336,549) (3,467)
Units issued on conversion of debentures 1,342 20
Units issued for vested executive compensation plan 19,052 170
Units issued under trustee compensation plan 23,293 76
----------------------------------------------------------------------------
Balance at June 30, 2009 74,497,455 $766,182
----------------------------------------------------------------------------

Units Amount
----------------------------------------------------------------------------
Balance at December 31, 2007 73,000,694 $757,375
Units issued under distribution reinvestment plan 824,893 7,626
Units issued for vested executive compensation plan 16,033 151
Units issued under trustee compensation plan 7,550 76
----------------------------------------------------------------------------
Balance at June 30, 2008 73,849,170 $765,228
----------------------------------------------------------------------------


Pursuant to the REIT's normal course issuance bid (the "Bid"), the REIT purchased and cancelled 336,549 units (December 31, 2008 - 278,500 units) at an average price of $3.46 per unit (December 31, 2008 - $3.36 per unit). The REIT recognized $2,301 of contributed surplus (December 31, 2008 - $1,938) upon the cancellation of these units. Purchases under the Bid commenced on November 11, 2008 and will terminate on November 10, 2009.

Trustee Compensation Plan

The members of the Board of Trustees receive 50% of their annual retainer in units (based on the then current market price of the units). The REIT had set aside 100,000 units in reserve for this purpose and during the second quarter this reserve was increased by 250,000 units. The balance in this reserve account at June 30, 2009 is 250,375 units. Under the Trustee Compensation Plan, 23,293 units were issued during the six months ended June 30, 2009 (six months ended June 30, 2008 - 7,550 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 June 30, 2009 is 785,069 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 June 30, 2009, excluding granted units which have fully vested:



Unvested Units Accumulated Total
Executive units from Distributions Units
----------------------------------------------------------------------------
January 1, 2006 - granted 12,968 6,060 19,028
January 1, 2007 - granted 15,000 6,158 21,158
January 1, 2008 - granted 20,455 5,910 26,365
January 1, 2009 - granted 25,500 2,734 28,234
Units vested 2009 (6,484) (2,546) (9,030)
----------------------------------------------------------------------------
67,439 18,316 85,755
----------------------------------------------------------------------------


In March 2009, the Board of Trustees approved the granting of 25,500 units effective as of January 1, 2009. 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.

15. Per Unit Information



Three Months Ended Three Months Ended
June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
----------------------------------------------------------------------------
(Restated,
Note 21)
Income from continuing
operations - basic $ 2,201 74,451,452 $ 17,588 73,647,417
Dilutive effect of
executive compensation plan - 84,010 - 63,826
----------------------------------------------------------------------------
Income from continuing
operations - diluted $ 2,201 74,535,462 $ 17,588 73,711,243
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Six Months Ended Six Months Ended
June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
----------------------------------------------------------------------------
(Loss) income from
continuing
operations - basic $(12,420) 74,445,556 $ 3,891 73,440,150
Dilutive effect of executive
compensation plan - 81,821 - 62,888
----------------------------------------------------------------------------
(Loss) income from
continuing operations
- diluted $(12,420) 74,527,377 $ 3,891 73,503,038
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three Months Ended Three Months Ended
June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
----------------------------------------------------------------------------
Net (loss) income $(4,007) 74,451,452 $15,494 73,647,417
Dilutive effect of
executive compensation plan - 84,010 - 63,826
----------------------------------------------------------------------------
Net (loss) income $(4,007) 74,535,462 $15,494 73,711,243
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Six Months Ended Six Months Ended
June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Weighted Weighted
Average Units Average Units
----------------------------------------------------------------------------
Net (loss) income $(19,427) 74,445,556 $ 421 73,440,150
Dilutive effect of
executive compensation
plan - 81,821 - 62,888
----------------------------------------------------------------------------
Net (loss) income $(19,427) 74,527,377 $ 421 73,503,038
----------------------------------------------------------------------------
----------------------------------------------------------------------------


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.

16. 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 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 3% to 5% of hotel revenues, for the reserve for the replacement of furniture, fixtures and equipment and capital improvements, the accretion on convertible debentures that is included in the computation of net income, and making any other adjustments determined by the trustees of the REIT in their discretion. As outlined in the Declaration of Trust, the REIT is required to distribute monthly to unitholders not less than one-twelfth of eighty percent (80%) of distributable income of the REIT for the calendar year.

First and second quarter distributions are typically funded through cash on hand and the bank operating line given the seasonality of earnings through the year in contrast to fixed costs.



Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Net (loss) income $ (4,007) $ 15,494 $ (19,427) $ 421
----------------------------------------------------------------------------
Add (deduct)
Depreciation
and amortization 22,739 21,749 45,468 44,419
Future income
tax recovery (850) (1,237) (7,781) (4,757)
Non-cash portion
of mortgage
interest expense 386 511 810 769
Non-cash portion
of convertible
debebtures
interest and
accretion 743 832 1,527 1,410
Reserve for
replacement of
furniture,
fixtures,
equipment,
capital
improvements (6,563) (7,492) (11,990) (13,340)
Write down of
assets held
for sale 5,987 1,864 5,987 2,364
Non-cash executive
and trustee
compensation 86 145 172 300
Deferred land
lease expense
and retail
retail lease
income, net 2 8 4 16
----------------------------------------------------------------------------
22,530 16,380 34,197 31,181
----------------------------------------------------------------------------
Distributable income 18,523 31,874 14,770 31,602
Distributions
Required under
the Declaration
of Trust 14,818 25,499 11,816 25,282
Discretionary (856) (4,766) 16,102 16,069
----------------------------------------------------------------------------
Distributions
paid or payable 13,962 20,733 27,918 41,351
Distributions
(less than) in
excess of
distributable income $ (4,561) $ (11,141) $ 13,148 $ 9,749
----------------------------------------------------------------------------
----------------------------------------------------------------------------


17. 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 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 ten years with two successive five-year renewal terms, subject to the consent of Westmont and approval of the REIT. On September 15, 2008, the REIT exercised the first five-year extension term on the Agreements, extending the expiration to July 25, 2017. The REIT's independent trustees approved the extension following a review by third party hospitality consulting firms based in Canada. The Agreements provide for the payment of an annual management fee to Westmont in an amount equal to 3.375% of gross revenues during the term of the Agreements, including renewal periods. In addition, Westmont may receive an annual incentive fee if the REIT achieves distributable income in excess of $1.25 per unit. No management incentive fees were paid during the periods presented.

Accounting fees are calculated based on a fixed charge per room which increases by the Consumer Price Index change annually. For assets sold which are managed by Westmont, the REIT pays a termination fee equal to the fees paid based on trailing twelve months revenues. The REIT owes $63 in termination fees as at June 30, 2009.

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

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

During the three and six months ended June 30, 2009 and 2008, the fees charged to the REIT pursuant to the Agreements were as follows:



Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Fees from continuing
operations:
Management fees $ 2,845 $ 3,312 $ 5,253 $ 5,870
Asset management
fees (included in
management
fee expense) 507 583 1,012 1,233
Accounting services
(included in hotel
operating expenses) 558 569 1,115 1,101
Administrative
services (included
in corporate and
administrative
expenses) 112 111 229 206
Project management
and general
contractor services
(capitalized to
hotel properties) 171 224 381 333
Fees from
discontinued
operations 230 184 422 521
----------------------------------------------------------------------------
$ 4,423 $ 4,983 $ 8,412 $ 9,264
----------------------------------------------------------------------------
----------------------------------------------------------------------------


In addition, salaries of REIT employees paid by Westmont and reimbursed by the REIT were $187 (June 30, 2008 - $98). Included in accounts payable and accrued liabilities are amounts owed to Westmont at June 30, 2009 totalling $1,584 (December 31, 2008 - $1,484).

Other Management Agreements

The REIT entered into management agreements with Hilton Canada Co. ("Hilton") to manage the two Hilton hotels acquired in 2006. The agreements provide for the payment of an annual management fee to Hilton in an amount equal to 2.5% until December 31, 2008 and then 3.0% of gross revenues during the balance of the term of the agreements. The agreements mature on December 31, 2026. For the three and six months ended June 30, 2009, total management fees paid to Hilton were $308 and $520 respectively (June 30, 2008 - $288 and $484 respectively).

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 three and six months ended June 30, 2009, total management fees paid to Delta were $155 and $273 respectively (June 30, 2008 - $141 and $266 respectively).

With the acquisition of the Legacy Portfolio in September 2007, InnVest assumed the existing hotel management agreements with Fairmont Hotels and Resorts ("Fairmont") or Delta for each of the Legacy Portfolio hotels. The agreements provide for the payment of a base management fee and an incentive management fee to either Fairmont or Delta. The REIT also assumed a portfolio incentive fee in which 11 of the 25 hotels of Legacy Hotels Real Estate Investment Trust participated, of which six are now owned or leased by InnVest. The base management fee is equal to 3% of total hotel revenues for nine of the hotels and 2% of total hotel revenues for the remaining two hotels. The agreements mature from December 31, 2010 to December 31, 2047. The incentive management fees and portfolio incentive fees are calculated based on net operating income from hotel operations plus amortization less the capital replacement reserve, in excess of a threshold. For the three and six months ended June 30, 2009, total management fees paid for the Legacy Portfolio were $1,969 and $3,798 respectively (June 30, 2008 - $3,160 and $5,135 respectively).

18. Segmented Financial Information

The REIT operates hotel properties throughout Canada. Information related to these properties by geographic segment is presented below. The REIT primarily evaluates operating performance based on hotel operating income. All key financing, investing and capital allocation decisions are centrally managed. The comparatives have been restated to exclude discontinued operations and assets held for sale at June 30, 2009.



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

Three months ended June 30, 2009
Hotel revenues $ 39,949 $ 56,954 $ 33,567 $ 25,508 $155,978
Hotel expenses 28,029 42,025 25,756 18,582 114,392
----------------------------------------------------------------------------
Hotel operating income $ 11,920 $ 14,929 $ 7,811 $ 6,926 $ 41,586
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Three months ended June 30, 2008 (Restated, Note 21)
Hotel revenues $ 46,980 $ 63,333 $ 39,604 $ 27,124 $177,041
Hotel expenses 31,394 43,850 26,723 19,493 121,460
----------------------------------------------------------------------------
Hotel operating income $ 15,586 $ 19,483 $ 12,881 $ 7,631 $ 55,581
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Six months ended June 30, 2009
Hotel revenues $ 76,475 $104,999 $ 60,054 $ 42,151 $283,679
Hotel expenses 56,258 82,724 50,040 34,655 223,677
----------------------------------------------------------------------------
Hotel operating income $ 20,217 $ 22,275 $ 10,014 $ 7,496 $ 60,002
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Six months ended June 30, 2008 (Restated, Note 21)
Hotel revenues $ 85,590 $114,701 $ 67,541 $ 45,149 $312,981
Hotel expenses 60,716 85,317 52,225 35,973 234,231
----------------------------------------------------------------------------
Hotel operating income $ 24,874 $ 29,384 $ 15,316 $ 9,176 $ 78,750
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Capital expenditures
on hotel properties,
Three months ended
June 30, 2009 $ 3,659 $ 2,026 $ 795 $ 832 $ 7,312
Three months ended
June 30, 2008 $ 2,750 $ 3,052 $ 4,570 $ 1,984 $ 12,356
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Capital expenditures
on hotel properties,
Six months ended
June 30, 2009 $ 5,367 $ 4,191 $ 2,353 $ 1,338 $ 13,249
Six months ended
June 30, 2008 $ 3,163 $ 4,919 $ 5,920 $ 4,197 $ 18,199
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Hotel properties
June 30, 2009 $505,304 $629,072 $393,634 $239,749 $1,767,759
December 31, 2008
(Restated, Note 21) $512,032 $637,791 $406,931 $236,074 $1,792,828
----------------------------------------------------------------------------
----------------------------------------------------------------------------



19. Total Revenues

Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
----------------------------------------------------------------------------

Hotel revenues $ 155,978 $ 177,041 $ 283,679 $ 312,981
Other business
income (Note 20) 2,714 3,068 5,443 5,729
----------------------------------------------------------------------------
$ 158,692 $ 180,109 $ 289,122 $ 318,710
----------------------------------------------------------------------------
----------------------------------------------------------------------------



20. Other Business Income

Three Three
Franchise Retail/ Retirement Months Ended Months Ended
Business Office Residence June 30, 2009 June 30, 2008
----------------------------------------------------------------------------

Revenues $ 1,737 $ 706 $ 271 $ 2,714 $ 3,068
Expenses 979 284 160 1,423 1,811
----------------------------------------------------------------------------
Other business
income, net $ 758 $ 422 $ 111 $ 1,291 $ 1,257
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Six Six
Franchise Retail/ Retirement Months Ended Months Ended
Business Office Residence June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Revenues $ 3,530 $ 1,366 $ 547 $ 5,443 $ 5,729
Expenses 2,279 616 345 3,240 3,479
----------------------------------------------------------------------------
Other business
income, net $ 1,251 $ 750 $ 202 $ 2,203 $ 2,250
----------------------------------------------------------------------------
----------------------------------------------------------------------------


Other business income includes franchise business income, which is InnVest's 50% share of CHC's operations, and the income from the other real estate properties.

21. Assets Held for Sale and Discontinued Operations

Five hotel properties, four in Ontario and one in Quebec, were reclassified as assets held for sale in the first quarter of 2009. The operating results of these five hotels are presented as discontinued operations for the three and six months ended June 30, 2009 and 2008. The prior year comparative balances have been restated to reflect these operations as discontinued operations. During the second quarter, the REIT took an additional write-down of $5,987 on these assets. Subsequent to June 30, 2009, the REIT sold one Ontario hotel that was held for sale for $3,300.

Three Ontario hotel properties and one Quebec hotel property were reclassified as assets held for sale on December 18, 2007 and are included in the discontinued operations for the three and six months ended June 30, 2008. All but one Ontario hotel were sold during the year ended December 31, 2008. On April 1, 2009, the REIT sold the remaining Ontario hotel property held for sale since 2007, for $4,100 less closing costs. No gain or loss was recorded upon sale as the asset was written down to its realizable value. As part of this transaction, the REIT gave a vendor-take-back mortgage of $2,700 (see Note 6).

Discontinued operations for the three and six months ended June 30, 2009 and 2008 are as follows:



Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2009 June 30, 2008 June 30, 2009 June 30, 2008
----------------------------------------------------------------------------
Hotel revenues $ 3,854 $ 7,109 $ 8,205 $ 13,416
----------------------------------------------------------------------------
Hotel expenses
Operating expenses 2,843 4,652 6,131 9,214
Property taxes,
rent and insurance 965 1,265 1,974 2,479
Management fees 130 239 277 452
----------------------------------------------------------------------------
3,938 6,156 8,382 12,145
----------------------------------------------------------------------------
Hotel operating
(loss) income (84) 953 (177) 1,271
Interest on mortgages 137 502 313 1,016
Depreciation and
amortization - 681 530 1,361
----------------------------------------------------------------------------
137 1,183 843 2,377
----------------------------------------------------------------------------
Loss from
discontinued
operations (221) (230) (1,020) (1,106)
Writedown of assets
held for sale (5,987) (1,864) (5,987) (2,364)
----------------------------------------------------------------------------
Net loss from
discontinued
operations $ (6,208) $ (2,094) $(7,007) $ (3,470)
----------------------------------------------------------------------------
----------------------------------------------------------------------------



Contact Information

  • InnVest Real Estate Investment Trust
    Kenneth D. Gibson
    President and Chief Executive Officer
    (905) 206-7100
    (905) 206-7114 (FAX)
    or
    InnVest Real Estate Investment Trust
    Tamara L. Lawson
    Chief Financial Officer and Corporate Secretary
    (905) 206-7100
    (905) 206-7114 (FAX)
    www.innvestreit.com