forward-looking statements - innvest hotelsinnvesthotels.com/userfiles/file/inn q109 - all.pdf ·...

first quarter report 2009 1

Letter to unitholdersThe lodging industry continues to experience a slowdown in demand, reflecting broader economic trends and their impact on discretionary spending for travel. Diligent cost controls coupled with efforts to drive room rates throughout the portfolio helped mitigate the impact of reduced occupancies across the portfolio. Looking ahead, we continue to expect 2009 to be a difficult year for the hospitality sector. Our objectives through this period are to solidify our balance sheet liquidity and effectively manage our assets.

First quarter earnings are not reflective of anticipated results for the annual period given the seasonality of operations. The first quarter is typically the weakest earnings period for the Trust.

First quarter operating highlights p Average daily rate growth of 0.8% was offset by a 3.6 point

decline in occupancy driven by the deteriorating economic environment and its impact on discretionary travel demand. As a result, revenue per available room (“RevPAR”) on a same-hotel basis declined 5.5%;

p Overall, hotel revenues declined 6.1%, or $8.2 million, to $127.7 million. The revenue shortfall was somewhat offset by a 3.1% reduction in hotel expenses. Hotel operating income declined $4.8 million to $18.4 million;

p The REIT generated a first quarter net loss of $15.4 million, relatively unchanged from the prior period;

p The Trust maintained a prudent payout ratio of 87.5% on a trailing twelve month basis. Distributable loss and funds from operations both declined in the first quarter of 2009 as compared to 2008 reflecting the impact of lower revenues; and

p Following the end of the first quarter of 2009, the Trust divested one hotel, previously classified as held for sale, for gross proceeds of $4.1 million.

While credit markets appear to be stabilizing, significant uncertainty remains which leads us to maintain a cautious outlook in the near term.

Building on our efforts in 2008, we have adapted our strategy to position the REIT to address the current environment with particular attention to our balance sheet and liquidity. Our priority in 2009 will be to continue to be proactive in our capital management initiatives including efforts to address debt maturities. We are continually seeking opportunities to recycle our capital efficiently and have actively expanded our sales efforts with respect to certain underperforming assets. Having developed and implemented contingency plans throughout the portfolio, we continue to manage our portfolio aggressively to maximize the performance of each hotel.

Historically, the lodging industry performance has been highly correlated with the economy given the largely discretionary nature of leisure and business travel. While Canada cannot escape the impact of the volatile global trends, it remains fundamentally stronger than many other countries, including the U.S., as evidenced by national RevPAR performance over the last several months.

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

Kenneth Gibson President and Chief Executive Officer

May 6, 2009

Q12009 First Quarter Report to Unitholders For the three months ended March 31, 2009.

2 innVest real estate inVestment trust

management’s discussion and analysis

IntroductionInnVest Real Estate Investment Trust (“InnVest”, the “Trust”

or the “REIT”) is an unincorporated open-ended real estate

investment trust governed by the laws of Ontario and a

Declaration of Trust. It is publicly traded and listed on the

Toronto Stock Exchange under the symbol INN.UN. The

following is a discussion of the results of operations and

financial condition of InnVest for the three months ended

March 31, 2009.

The following management’s discussion and analysis (“MD&A”)

should be read in conjunction with the interim unaudited

financial statements and notes contained herein as at and

for the three months ended March 31, 2009. This MD&A

should also be read in conjunction with the REIT’s audited

consolidated financial statements for the year ended

December 31, 2008 and the MD&A for the year ended

December 31, 2008. The financial statements of InnVest are

prepared in accordance with Canadian generally accepted

accounting principles (“GAAP”) and are presented in Canadian

dollars. Monetary data in tabular form and in the text, unless

otherwise indicated, are in thousands of dollars, except for per

unit, average daily rate (“ADR”), and revenue per available

room (“RevPAR”) amounts. This MD&A is dated May 6, 2009.

Certain measures in this MD&A, such as hotel operating

income (“HOI”), funds from operations (“FFO”) and distributable

income, do not have any standardized meaning as prescribed

by GAAP, and therefore are considered non-GAAP measures.

InnVest uses non-GAAP financial measures to assess its

operating performance. Securities regulators require that

entities caution readers that earnings and other measures

adjusted to a basis other than GAAP do not have standardized

meanings and are unlikely to be comparable to similar

measures used by other companies. Please see Non-GAAP

Financial Measures for a discussion of certain non-GAAP

financial measures used by the Trust, including a reconciliation

to GAAP financial measures.

Additional information relating to InnVest, including its Annual

Information Form, can be accessed on the Canadian Securities

Administrators’ System for Electronic Document Analysis and

Retrieval (“SEDAR”) located at www.sedar.com and on the

Trust’s website at www.innvestreit.com.

Forward-looking statementsIn the interest of providing InnVest unitholders and potential

investors with information regarding the Trust, certain

statements contained in this M&DA constitute forward-looking

statements within the meaning of applicable securities laws.

These statements include, but are not limited to, statements

made concerning InnVest’s objectives, its strategies to achieve

those objectives, as well as other statements with respect to

management’s beliefs, plans, estimates and intentions, and

similar statements concerning anticipated future events,

results, circumstances and performance or expectations that

are not historical facts. Forward-looking information typically

contains statements with words such as “outlook”, “objective”,

“may”, “continue”, “anticipate”, “believe”, “expect”, “estimate”,

“plan”, “intend”, “forecast”, “project” or similar expressions

suggesting future outcomes or events. Such forward-looking

statements reflect management’s current beliefs and are based

on information currently available to management.

These forward-looking statements are not guarantees of future

events or performance and, by their nature, are based on

InnVest’s estimates and assumptions, which are subject to

risks and uncertainties, including those described under “Risks

and uncertainties” in this MD&A. Readers are cautioned not to

place undue reliance on forward-looking statements, as there

can be no assurance that the plans, intentions or expectations

upon which they are based will occur. By its nature, InnVest’s

forward-looking information involves numerous assumptions,

inherent risks and uncertainties, which may cause the Trust’s

actual performance and financial results in future periods to

differ materially from any estimates or projections of future

performance or results expressed or implied by such forward-

looking statements. Factors that could cause actual results,

performance, or achievements to differ materially from those

expressed or implied by forward-looking statements include,

but are not limited to, changes in business strategies; general

global economic and business conditions; general global credit

market conditions; the effects of competition and pricing

pressures; industry overcapacity; shifts in market demands;

changes in laws and regulations, including environmental and

regulatory laws; potential increases in maintenance and

operating costs; uncertainties of litigation; labour disputes;

timing of completion of capital or maintenance projects;

currency and interest rate fluctuations; various events which

could disrupt operations; and technological changes.

Although InnVest believes that the expectations represented by

such forward-looking statements are reasonable, there can be

no assurance that such expectations will be consistent with



InnVest REIT holds Canada’s largest hotel portfolio together

with a 50% interest in Choice Hotels Canada Inc., the largest

franchisor of hotels in Canada. InnVest’s portfolio is well

diversified across hotel accommodation categories, brands,

geography and customers.

Hotel real estate ownerAs at March 31, 2009, InnVest’s portfolio comprised

147 hotel properties, with 19,235 rooms, operated under

internationally recognized franchise brands. For the year ended

December 31, 2008, approximately 77% of InnVest’s hotel

revenues were generated from room revenues and 23% from

food and beverage services and other services including

parking, retail operations and telephone use.

InnVest’s hotels are operated by four hotel management

companies, which earn base and incentive fees related

to the revenues and profitability of each hotel. The hotels’

primary operating costs include wages, food costs, utilities,

management fees, and sales and marketing expenses. Other

property level expenses include property taxes, ground rent

for leasehold interests and property insurance. Many of these

property level expenses are relatively fixed and do not

necessarily change in accordance with revenue levels.

InnVest’s hotels are typically located near major thoroughfares

in urban and suburban areas, business centres, government

and manufacturing facilities, universities, airports and tourist

attractions. The hotels have a diverse customer base,

including business travellers, leisure travellers, tours,

associations, and corporate groups.

Business overview

Ontario Quebec Atlantic Western Total

% of

No. of No. of No. of No. of No. of total

No. of guest No. of guest No. of guest No. of guest No. of guest guest

hotels rooms hotels rooms hotels rooms hotels rooms hotels rooms rooms

Comfort Inn 38 3,155 22 1,754 15 1,126 9 745 84 6,780 35.3%

Delta Hotel 2 573 3 1,048 4 1,017 2 689 11 3,327 17.3%

Holiday Inn 14 2,376 – – 1 196 1 152 16 2,724 14.1%

Travelodge 4 552 – – – – 4 896 8 1,448 7.6%

Quality Suites/Inn 4 604 3 396 – – – – 7 1,000 5.2%

Quality Hotel 1 212 2 298 1 160 1 126 5 796 4.1%

Hilton Hotel – – 1 571 1 197 – – 2 768 4.0%

Radisson Hotel/Suites 3 532 1 175 – – – – 4 707 3.7%

Fairmont Hotels & Resorts – – – – – – 2 604 2 604 3.1%

Staybridge Suites 3 342 – – – – – – 3 342 1.8%

Sheraton Suites – – – – – – 1 323 1 323 1.7%

Best Western 1 130 – – – – – – 1 130 0.7%

Hilton Garden Inn 1 120 – – – – – – 1 120 0.6%

Hilton Homewood Suites 1 83 – – – – – – 1 83 0.4%

Independent 1 83 – – – – – – 1 83 0.4%

73 8,762 32 4,242 22 2,696 20 3,535 147 19,235 100.0%

these forward-looking statements. The forward-looking

statements contained in this MD&A are made as of the date

of this MD&A. Except as required by law, InnVest does not

undertake any obligation to publicly update or revise any

forward-looking statements, whether as a result of new

information, future events or otherwise. All forward-looking

statements contained in this MD&A are expressly qualified by

this cautionary statement.



Innvest’s franchise businessGenerating $3.8 million in other business income for the

year ended December 31, 2008 ($493 year-to-date in 2009),

InnVest owns 50% of Choice Hotels Canada Inc. (“CHC”),

which has franchise agreements with over 290 locations

representing over 24,500 guest rooms open and under

development in Canada. The remaining 50% interest is owned

by Choice Hotels International Inc. (“Choice International”),

one of the largest hotel franchise companies in the world.

In addition to strong international brand recognition, Choice

International has a centralized reservation system, sales

and marketing programs and proprietary property

management systems.

In 1993, CHC was granted a 99-year license to franchise all

Choice hotel brands in Canada, including Comfort Inn®, Quality

Suites® and Quality Hotels®. CHC earns franchise revenue

by charging hotel owners a monthly royalty fee based

on a percentage of the revenue generated by the licenced

properties and by selling franchises. InnVest’s proportionate

interest operating results are included in the consolidated

statements of income in other business income.

Office, retail and retirement home businessGenerating $1.8 million in other business income for the

year ended December 31, 2008 ($419 year-to-date in 2009),

InnVest owns office and retail real estate as well as a

retirement home. These real estate interests are adjacent

to owned hotels and were acquired as part of certain hotel

acquisitions. The operating results are included in the

consolidated statements of income in other business income.

51%Limited service

49%Full service

Rooms By Service Category

46%Ontario

22%Quebec

14%Atlantic

18%West

Rooms By Geography

35%Transient

10%Other

18%Group

2008 Room Revenues By Customer

37%Corporate

&Government



InnVest has adapted its strategy in response to the current

economic environment with a near term focus aimed at

preserving the REIT’s balance sheet stability. We believe

efforts to enhance liquidity, combined with our proven ability

to manage assets in difficult times, will differentiate the REIT

in this environment. InnVest employs operating and capital

allocation strategies to position the REIT to ensure the stability

of its balance sheet and to position it to take advantage of

opportunities which may exist.

Operating strategyInnVest’s operating focus aims to enhance the performance

of each hotel and improve its RevPAR penetration versus its

competitive set. Internal growth is maximized through the

following operating and strategic principles:

1. Partnering with leading hotel management groups and brands;

2. Implementing yield management and market strategies to

maximize RevPAR;

3. Leveraging InnVest’s size and industry experience to control

costs through operating efficiencies, as well as taking

advantage of buying power and economies of scale; and

4. Investing in the portfolio to drive higher returns and enhance

the value of the assets.

InnVest’s ability to deliver stable cash flow is largely achieved

through its diversification, by location, brand, customer and

market position. Since individual markets can be affected

by local events and economic conditions, geographic

diversification helps limit the impact of such factors on the

overall portfolio. Diversification across customers and brands

allows the Trust to effectively manage its rooms based on

changing demand drivers, thereby optimizing the financial

performance through improved occupancy and ADR.

The manager of all but 15 of InnVest’s hotels is Westmont

Hospitality Canada Ltd (“Westmont”), one of the largest

privately held managers of hotels in the world. The managers

of the REIT’s remaining 15 hotels are Delta Hotels (10),

Fairmont Hotels (3) and Hilton Hotels (2), each an experienced

hotel manager with recognized brands.

Capital allocation strategyIn order to drive the long-term profitability of the portfolio,

InnVest continually evaluates its capital allocation

opportunities. Over the last several years, InnVest has

significantly expanded its portfolio, broadening its market

base and diversifying its risk profile. Following this growth,

the Trust’s current capital allocation efforts are focused

on maximizing the potential of its existing portfolio.

The Trust constantly evaluates its current real estate holdings

to optimize diversification and capitalize on embedded value or

higher return opportunities. From time to time, certain assets

are identified that may not support the Trust’s long term

objectives given limited growth prospects in earnings and value.

In late 2007, InnVest reclassified four assets as held for sale.

Three of these hotels were sold in 2008. The remaining asset

was sold subsequent to the end of the first quarter in 2009.

In accordance with its capital allocation review, InnVest

identified five hotel properties to be held for sale in the

current quarter and wrote down the book value of these hotels

by $29.6 million during the fourth quarter of 2008 based

on expectations of sale proceeds. These hotel properties

contributed minimal hotel operating income of $1.6 million

to the REIT in 2008 and their sale should enable the successful

redeployment of funds into higher yielding opportunities.

Business strategy

Recent developmentsDuring the first quarter of 2009, InnVest successfully extended

two mortgages totalling $13.5 million which were originally

scheduled to mature in February 2010. One mortgage of

$6.9 million was extended to September 30, 2012, while

the second mortgage of $6.6 million was extended to

December 31, 2012 at a weighted average interest rate of

approximately 6.8% compared to the previous rate of 6.2%.

During the first quarter, 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. The hotel properties

are primarily in tertiary markets impacted by the manufacturing

sector decline and which have also been particularly impacted

by new supply in recent years. In aggregate, six assets were

classified as discontinued operations as at March 31, 2009.

Following the end of the first quarter of 2009, InnVest

completed the divestiture of one hotel 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.



First quarter operating highlights

OutlookWhile credit markets appear to be stabilizing, significant

uncertainty remains which leads us to maintain a cautious

outlook in the near term.

Building on our efforts in 2008, we have adapted our strategy

to position the REIT to address the current environment with

particular attention to our balance sheet and liquidity. Our

priority in 2009 will be to continue to be proactive in our

capital management initiatives including efforts to address

debt maturities. We are continually seeking opportunities

to recycle our capital efficiently and have actively expanded

our sales efforts with respect to certain underperforming

assets. Having developed and implemented contingency plans

throughout the portfolio, we continue to manage our portfolio

aggressively to maximize the performance of each hotel.

Historically, the lodging industry performance has been highly

correlated with the economy given the largely discretionary

nature of leisure and business travel. While Canada cannot

escape the impact of the volatile global trends, it remains

fundamentally stronger than many other countries, including

the U.S., as evidenced by national RevPAR performance over

the last several months.

Despite the near term operating environment, with new supply

effectively constrained by the credit markets, InnVest is

positioned for a stronger recovery when demand trends

improve. InnVest’s current portfolio is diversified by geography,

customer and brand. This diversity, combined with our

partnership with experienced hotel operators, contributes to

the resiliency of the portfolio and positions the REIT to

effectively manage through the current economic environment.

p First quarter earnings are not reflective of anticipated results

for the annual period given the seasonality of operations.

The first quarter is typically the weakest earnings period

for the Trust.

p ADR growth of 0.8% was offset by a 3.6 point decline

in occupancy driven by the deteriorating economic

environment and its impact on discretionary travel demand.

As a result, RevPAR on a same-hotel basis declined 5.5%.

This performance exceeds the RevPAR achieved across

the Canadian lodging industry during the quarter;

p Overall, hotel revenues declined 6.1%, or $8.2 million, to

$127.7 million. The revenue shortfall was somewhat offset

by a 3.1% reduction in hotel expenses. Overall, HOI

declined $4.8 million to $18.4 million;

p The REIT generated a first quarter net loss of $15.4 million,

relatively unchanged from the prior period;

p InnVest maintained a prudent payout ratio of 87.5% on a

trailing twelve month basis. Distributable loss and funds

from operations each declined in the first quarter of 2009

as compared to 2008 reflecting the impact of lower

revenues; and

p Following the end of the first quarter of 2009, the Trust

divested one hotel, previously classified as held for sale,

for gross proceeds of $4.1 million.



Hotel operating results comparisonThe REIT has classified 138 of its 144 hotels owned for the

entire current and comparative period as its “Base Portfolio”,

with the remaining six hotels being classified as discontinued

operations. Operating results for three assets acquired or

developed have been excluded since their results were

capitalized during a portion of the periods presented in

accordance with the REIT’s accounting policy.

Hotel revenues Hotel revenues consist primarily of revenue generated from

room occupancy. Non-room revenue from food and beverage

services and other miscellaneous revenue streams associated

with hotel operations such as space leases, vending

commissions, movie rentals, parking and telephone are

also included. For the first quarter of 2009, room revenues

accounted for approximately 77% of total hotel revenues.

Overall hotel portfolioFor the three months ended March 31, 2009, hotel revenues

decreased by $8.2 million, or 6.1%, to $127.7 million. First

quarter results were impacted by the deteriorating economic

environment and its impact on discretionary travel demand.

For the three months ended March 31, 2009, a 0.8% increase

in ADR was offset by a 3.6 point decline in overall occupancy.

The trend of ADR growth offsetting occupancy declines is

consistent with trends experienced through late 2008. Overall,

first quarter RevPAR decreased 5.5%. InnVest’s first quarter

RevPAR performance outperformed results achieved by the

broader Canadian hotel industry. RevPAR trends were

generally consistent across all service categories and brands.

Notably, RevPAR from the 2007 full-service portfolio additions

outperformed the RevPAR achieved across the balance

of the portfolio.

First quarter operating results reviewThree months ended March 31, 2009 2008

Hotel revenues $ 127,701 $ 135,940

Hotel expenses 109,285 112,771

Hotel operating income1 18,416 23,169

Net loss from continuing operations (14,621) (13,697)

Net loss and comprehensive loss (15,420) (15,073)

Funds from operations1 447 3,418

Distributable loss1 (3,753) (272)

Distributions declared2 13,956 20,618

Distributions per unit2 0.1875 0.28125

Per Unit:

Net loss from continuing operations per unit – basic and diluted (0.196) (0.187)

Net loss per unit – basic and diluted (0.207) (0.206)

Funds from operations per unit – basic and diluted 0.006 0.047

Distributable loss per unit3 – basic and diluted (0.050) (0.004)

1. See Non-GAAP Financial Measures.

2. Distributions and distributions per unit include cash distributions and distributions arising from the dividend reinvestment plan.

3. Distributable loss per unit is calculated on a basis consistent with that prescribed by GAAP for calculating net loss per unit.

Occupancy ADR RevPAR

% Variance to 2008 $ Variance to 2008 $ Variance to 2008

Ontario 51.1% (4.1 pts) $ 109.84 0.2% $ 56.11 (7.4%)

Quebec 52.2% (2.8 pts) $ 105.75 0.8% $ 55.21 (4.3%)

Atlantic 49.1% (4.4 pts) $ 104.47 1.3% $ 51.33 (7.0%)

Western 59.2% (2.3 pts) $ 137.03 1.0% $ 81.08 (2.9%)

Total 52.6% (3.6 pts) $ 114.19 0.8% $ 60.11 (5.5%)

Note: On a same-hotel basis, excluding the hotels that have been classified as discontinued operations, and the hotels which have not been included in the full

periods presented.



Room revenuesConsistent with RevPAR performance achieved during

the quarter, overall room revenues for the three months

ended March 31, 2009 decreased $5.8 million, or 5.6%, to

$98.1 million. Each region experienced modest ADR growth

which offset declines in occupancies. The overall declines in

occupancy are more broadly related to economic conditions

beyond the control of the Trust. As was noted in 2008,

Ontario continues to show the weakest performance given

its particular reliance on the manufacturing industry.

Three months ended March 31, 2009

Number of Variance

Room revenue variance hotel rooms $ Variance to 2008

Base Portfolio

Ontario 7,634 $ (3,527) (8.4)%

Quebec 4,080 (1,157) (5.4)%

Atlantic 2,696 (1,090) (8.0)%

West 3,535 (1,078) (4.0)%

Sub-total 17,945 (6,852) (6.6)%

Acquisitions 342 1,047 100.0%

Total 18,287 $ (5,805) (5.6)%

Consistent with broader economic activity and trends noted

through the end of 2008, demand was notably softer in the

first quarter of 2009 for the Ontario region. Ontario, particularly

southern Ontario, is impacted by the challenges experienced

in the manufacturing sector with declining production and job

losses resulting in slowing demand for accommodations.

Overall, first quarter room revenues for the region declined

$3.5 million or 8.4% based on occupancy declines. Almost

all of this decrease was realized in the Greater Toronto Area

and southern Ontario markets such as Burlington, Kitchener

and London.

InnVest’s Base Portfolio of Quebec hotels saw room revenues

decline $1.2 million or 5.4%. Modest rate growth achieved in

the region was offset by occupancy declines. As anticipated,

lower demand was experienced in Quebec City, which

benefitted from year-long festivities associated with the city’s

400th anniversary celebrations in 2008. We expect similar

trends for this city through the balance of 2009. The Montreal

area also experienced declining demand resulting from new

supply coupled with reduced group activity.

First quarter room revenues at InnVest’s Base Portfolio of

Atlantic hotels declined $1.1 million or 8.0%. Occupancies

were impacted by new supply in certain markets as the hotels

focused on maintaining room rate integrity. ADR increased

1.3% for the Atlantic region.

InnVest’s Base Portfolio of Western hotels realized a room

revenue decline of 4.0% or $1.1 million. This decline was

attributable to softness in Edmonton following a strong group

base in the comparative period. Results for the balance of the

region were in line with the prior year.

Non-room revenuesFor the three months ended March 31, 2009, non-room

revenues totalled $29.6 million, down $2.4 million or 7.6%

compared to the prior year. Non-room revenues are directly

impacted by overall occupancy. Lower occupancy results

in the reduced use of ancillary services offered at the hotel.

Hotel expensesIn periods of declining occupancies, the Trust is focused

on managing all costs to minimize the overall impact on

profitability. It should be noted that savings opportunities are

restricted during lower occupancy periods such as the first

quarter, particularly in smaller limited service hotels, given the

minimal infrastructure in place. 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 March 31, 2009

declined $3.5 million or 3.1% 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. Some of these

initiatives, 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 incomeFor the three months ended March 31, 2009, the Trust

generated HOI of $18.4 million, down $4.8 million 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 operating fixed

costs, particularly at lower occupancy levels.



Net lossInnVest realized a net loss from continuing operations of

$14.6 million or a loss of $0.196 per unit basic and diluted.

These results were modestly lower then the loss of

$0.187 per unit basic and diluted in the prior year. The lower

HOI was offset by a higher future income tax recovery and

lower interest costs.

During the first quarter of 2009, InnVest reclassified five hotels

as discontinued operations. As at March 31, 2009, six assets

were held for sale. For the first quarter of 2009, discontinued

operations generated net losses of $799 compared to $876 in

the prior period. The prior year also includes a $500 writedown

of the book value of assets held for sale.

InnVest’s net loss for the first quarter totaled $15.4 million,

or a loss of $0.207 per unit basic and diluted, relatively

unchanged from the prior year.

Funds from operationsFor the three months ended March 31, 2009, InnVest

generated FFO of $447 ($0.006 per unit) compared to

$3.4 million in the prior period ($0.047 per unit). The decline

is primarily attributable to the $4.8 million reduction in HOI

for the first quarter. See Non-GAAP Financial Measures for

a reconciliation of GAAP net loss to FFO.

Distributable lossFor the three months ended March 31, 2009, InnVest

generated a distributable loss of $3.8 million (loss of

$0.050 per unit) compared to a distributable loss of $272 in

the prior year (loss of $0.004 per unit). The reduction reflects

lower HOI generated during the quarter. See Non-GAAP

Financial Measures for a reconciliation of GAAP net loss to

distributable loss.

Distributions declared during the first quarter of 2009 totalled

$14.0 million compared to $20.6 million in the prior period.

This reflected distributions of $0.1875 per unit (2008 –

$0.28125), reflecting the reduced level of monthly distributions

to $0.0625 per unit beginning in November 2008.


Number of Variance

HOI variance hotel rooms $ Variance to 2008

Base Portfolio

Ontario 7,634 $ (2,653) (26.8)%

Quebec 4,080 (385) (14.9)%

Atlantic 2,696 (822) (59.1)%

West 3,535 (991) (10.7)%

Sub-total 17,945 (4,851) (20.9)%

Acquisitions 342 98 100.0%

Total 18,287 $ (4,753) (20.5)%

Hotel operating income margin analysisGiven the overall decline in revenues, hotel operating income

margins for the three months ended March 31, 2009, declined

to 14.4% as compared to 17.0% in 2008. First quarter margins

are not representative of annual margins achieved for the

portfolio given the seasonality of earnings. The first quarter

is historically the weakest earnings period for the Trust.

Other income and expensesOther income and expenses for the three months ended

March 31, 2009 totalled $40.0 million, down $418 as

compared to 2008. The decline is attributable to lower

overall interest incurred following the refinancing of the Trust’s

$215.0 million bridge loan in March 2008 with mortgage debt.

The REIT has benefitted from declines in overall floating

debt lending rates as compared to the prior year. At

March 31, 2009, approximately 9.7% of the REIT’s

outstanding debt is at floating rates.

Income taxesFor the three months ended March 31, 2009, the REIT

generated a future income tax recovery of $6.9 million,

as compared to $3.5 million in 2008. In addition to ongoing

operations and capital expenditures, the future income tax

recovery realized in the first quarter of 2009 reflects the

provincial SIFT tax rate change which was enacted in

March 2009 along with the impact of the reclassification

of certain assets as held for sale.

For 2009, the REIT estimates that the non-taxable portion of

the distributions made to unitholders during the year will be

approximately 40% (2008 – 44%).



Changes in financial conditionOperating activitiesFor the three months ended March 31, 2009, operating

activities used cash of $2.2 million, up $1.7 million from the

prior year. Lower cash earnings were somewhat offset by a

modest decline in working capital usage during the period

given tight cash management initiatives implemented to

conserve liquidity.

Financing activitiesFinancing activities reflect first quarter cash distributions

of $13.3 million (2008 – $16.7 million), which excludes the

distributions which were satisfied through the Trust’s dividend

reinvestment program (“DRIP”). Distributions declared for the

three months ended March 31, 2009 were $0.1875 per unit

compared to $0.28125 in 2008. In November 2008, the REIT

announced a reduction to its monthly distributions from

$0.09375 per unit to $0.0625 per unit. The Trust purchased

and cancelled 211,500 units for total proceeds of $689 during

the first quarter of 2009 in accordance with its normal course

issuer bid.

At March 31, 2009, the REIT had drawn $20.2 million from

its operating loan to finance the distribution and other capital

needs during the quarter. Given the seasonality of operations,

first quarter distributions are typically financed by drawing on

the Trust’s operating loan.

During the first quarter of 2008, InnVest completed

$390 million in aggregate mortgage financings, at a weighted

average blended interest rate of 5.6%, including new mortgage

debt and early refinancing of existing debt. Net proceeds were

used to repay the $215 million bridge loan incurred as part

of the acquisition of the Legacy Portfolio and to repay

$154.8 million in existing mortgages. InnVest fixed the

interest rates on $370 million of this debt.

During the prior period, the REIT also obtained

$17.3 million in financing to partially fund the acquisition

of one new hotel and the development of a second hotel.

Investing activitiesEach year, InnVest sets aside between 3% and 5% of total

hotel revenues at each hotel and certain amounts required for

hotel acquisitions for replacing furniture, fixtures and

equipment and capital improvements (the “FF&E reserve”).

Capital expenditures for the three months ended March 31,

2009 totalled $6.0 million (2008 – $5.9 million). This compares

to the Trust’s FF&E reserve of $5.4 million for the first quarter

of 2009 (2008 – $5.8 million).

Investing activities for the prior period reflect the acquisition

of a newly built hotel for $17.2 million and the completion

of a hotel under development.

SeasonalityInnVest’s operations are seasonal and as such its results are

not consistent throughout the year. Revenue earned from hotel

operations fluctuates 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 because leisure travel tends to be lower. The results

from operations vary materially from quarter to quarter

because of the seasonal nature of the revenue stream and the

fact that certain costs such as property taxes, insurance,

interest, depreciation and amortization, and corporate and

administrative expenses are fixed, or virtually fixed. Given their

lower relative contribution to results, weakness in the first and

fourth quarters will have a lesser impact on annual earnings.

Quarterly results



For each quarter ended (unaudited) (as reported)

March 31 Dec 31 Sept 30 June 30 March 31 Dec 31 Sept 30 June 30

2009 2008 2008 2008 2008 2007 2007 2007

Occupancy 52.6% 58.0% 72.1% 67.5% 55.9% 60.7% 72.8% 65.2%

ADR $ 114.09 $ 117.86 $ 125.86 $ 122.68 $ 112.89 $ 113.03 $ 105.17 $ 99.27

RevPAR $ 59.98 $ 68.33 $ 90.77 $ 82.84 $ 63.04 $ 68.56 $ 76.53 $ 64.70

Total revenues $ 127,701 $ 162,365 $ 193,832 $ 181,996 $ 140,529 $ 162,316 $ 135,982 $ 109,299

Hotel operating income $ 18,416 $ 36,871 $ 64,576 $ 56,152 $ 23,574 $ 38,130 $ 49,100 $ 33,959

Hotel operating income margin 14.4% 22.7% 33.3% 30.9% 16.8% 23.5% 36.1% 31.1%

Net (loss) income from

continuing operations $ (14,621) $ (28,329) $ 24,519 $ 17,186 $ (14,271) $ 24,510 $ 29,984 $ (113,270)

Distributable(loss) income $ (3,753) $ 13,340 $ 40,598 $ 31,874 $ (272) $ 13,686 $ 34,639 $ 19,892

Distributions $ 13,956 $ 16,277 $ 20,845 $ 20,733 $ 20,618 $ 21,572 $ 17,813 $ 15,793

Net (loss) income from

continuing operations

per unit

– basic $ (0.196) $ (0.381) $ 0.330 $ 0.233 $ (0.195) $ 0.337 $ 0.450 $ (2.023)

– diluted $ (0.196) $ (0.381) $ 0.320 $ 0.233 $ (0.195) $ 0.325 $ 0.420 $ (2.023)

Distributable (loss) income

per unit

– basic $ (0.050) $ 0.179 $ 0.547 $ 0.433 $ (0.004) $ 0.188 $ 0.520 $ 0.355

– diluted $ (0.050) $ 0.179 $ 0.497 $ 0.400 $ (0.004) $ 0.188 $ 0.474 $ 0.334

Trust units outstanding 74,434,338 74,412,317 74,249,239 73,849,170 73,447,668 73,000,694 72,610,235 56,265,058

Weighted average

trust units outstanding 74,439,594 74,373,530 74,222,761 73,647,417 73,234,488 72,795,804 66,566,306 56,002,020

Total assets $ 1,952,900 $ 1,977,104 $ 2,042,387 $ 2,060,807 $ 2,059,716 $ 2,062,279 $ 2,093,834 $ 1,210,338

Total long-term debt $ 938,774 $ 951,276 $ 948,318 $ 940,730 $ 939,582 $ 711,617 $ 728,817 $ 518,129

Liquidity and capital resourcesInnVest has several sources of liquidity including the following:

Cash generated from hotel operations

The REIT’s operations are seasonal with the first quarter

typically being the weakest earnings period given the low level

of business and leisure travel during these months. Over the

year, the REIT anticipates generating HOI sufficient to fund

distributions to unitholders, capital expenditures and debt

service requirements.

Lines of credit

InnVest has a line of credit with a major banking institution to

finance temporary shortfalls in cash resulting from business

seasonality and working capital fluctuations. The credit facility

may also be used to provide short-term financing in the event

of an acquisition of a new hotel.

Issuing additional debt

InnVest also has the ability to raise funds by mortgaging

its properties or by issuing either debt or convertible debt

securities. The Trust typically uses long-term debt financing to

refinance existing debt or to finance an acquisition. The choice

of debt instrument used is dependent on then-current market

conditions. The ability to secure debt financing on reasonable

terms is ultimately dependent on market conditions and

the lender’s determination of InnVest’s creditworthiness.

At March 31, 2009, substantially all of the REIT’s assets

have been pledged as security under debt agreements.



Issuing additional equity securities

InnVest’s listing on the Toronto Stock Exchange gives it the

ability to access, subject to market conditions, additional

equity through the issuance of additional units or other equity

instruments. When issued, additional equity is most often used

to finance an acquisition or repay debt. The REIT is subject to

certain restrictions on the issuance of equity as a result of

changes to the taxation of publicly traded trusts (refer to Risks

and Uncertainties – Proposed Tax Changes to Income Trusts).

Management believes that the REIT’s credit facilities,

cash on hand and expected cash flow from operations,

when combined with the potential to access debt and

equity markets, will allow InnVest to meet all of its

financial commitments.

Cash on hand At March 31, 2009, the REIT has cash on hand totaling

$12.9 million, of which $2.5 million is restricted under the

REIT’s Declaration of Trust for the replacement of furniture,

fixtures, and equipment and for capital improvements.

The REIT invests capital in its portfolio to maintain its

assets, and pursue repositioning opportunities to enhance

its competitive position. Capital expenditures for the three

months ended March 31, 2009 totalled $6.0 million (2008 –

$5.9 million). This compares to the Trust’s FF&E reserve of

$5.4 million for the first quarter of 2009 (2008 – $5.8 million).

Given the seasonality of hotel operations, revenues are

not earned evenly through the year. Conversely, capital

expenditures are typically scheduled during lower occupancy

periods to avoid guest displacement. However, in light of

the current operating environment, non-essential capital

investments during the first quarter of 2009 were limited in

order to meet the Trust’s desire to conserve liquidity. 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 months ended

March 31, 2009 was funded through cash from operations

or the REIT’s operating line.

The following table reconciles the change in restricted cash

during the three months ended March 31, 2009 and the

comparable period:

Three months ended March 31, 2009 2008

Opening balance $ 3,013 $ 2,995

FF&E Reserve 5,427 5,848

Capital expenditures (5,968) (5,919)

Closing balance $ 2,472 $ 2,924

Credit facility/bridge loanInnVest’s operations are seasonal (see Quarterly Results –

Seasonality). The REIT’s credit facility ensures that the

seasonal fluctuation in cash flows will not affect its ability

to operate in the normal course of business. The

Trust has a $40.0 million operating line secured by

14 unencumbered properties.

At March 31, 2009, $20.2 million was drawn on the credit

facility. In addition, letters of credit totaling $3.7 million were

drawn against the facility. The operating line bears interest at

the lesser of Canadian bank prime rate plus 0.5% or the

Canadian Bankers’ Acceptance rate plus 1.5%. This line of

credit expires in August 2009. Management anticipates that

the facility will be renewed in the normal course of business.

A $9.0 million bridge loan was scheduled to expire in

March 2009. Following the end of the quarter, management

successfully finalized an extension for $7.0 million of the bridge

through August 2009, bringing the maturity in line with the

REIT’s operating line with the same lender. The $2.0 million

difference was repaid in April 2009.

Mortgages payable and convertible debenturesAt March 31, 2009, InnVest had mortgages payable of

$945.4 million with a weighted average term of 3.5 years

and a weighted average effective interest rate of 5.6%.

Approximately 9.7% of the Trust’s mortgage debt is at floating

rate. In addition, the REIT 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 March 31, 2009, the REIT has

drawn $12.2 million on this facility (December 31, 2008 –

$12.2 million), such amounts being included in mortgages

payable. Remaining capacity under this facility at

March 31, 2009 approximated $23.9 million. In April 2009 an

additional amount of $6.9 million was funded under this facility.

InnVest also has three series of fixed-rate convertible

debentures which mature between 2011 and 2014.

At March 31, 2009, InnVest has $190.7 million

(December 31, 2008 – $190.8 million) in convertible

debentures outstanding.

InnVest’s debt obligations do not provide for any contractual

limitations on cash distributions to its unitholders.



During 2008, the global financial credit markets experienced

significant volatility. In general, the availability of credit has

deteriorated dramatically and credit spreads offered have

widened considerably. While credit spreads have widened, the

underlying bond yields have also decreased such that the

overall cost of debt, if available, remains relatively attractive.

The REIT’s strategy is to improve the performance of its hotels

and complete value-added capital investments as appropriate.

The resulting increased property values then enables the REIT

to obtain additional mortgage proceeds to finance additional

capital improvements or acquisitions. In light of the current

credit environment, the REIT’s near term focus is on preserving

its liquidity to help address future refinancing requirements,

including the potential that future refinancing proceeds are not

sufficient to satisfy mortgage debt maturities.

Adjusted debt to gross book valuesInnVest 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. InnVest

calculates indebtedness in accordance with GAAP excluding

non-interest bearing indebtedness, trade accounts payable,

and any future income tax liability. InnVest calculates gross

asset value as the total book value of assets on the REIT’s

balance sheet, plus the accumulated depreciation and

amortization, less any future income tax liabilities.

At March 31, 2009, the REIT’s leverage excluding

and including convertible debentures was 47.7%

(December 31, 2008 – 47.2%) and 57.0%

(December 31, 2008 – 56.5%), respectively.

Total assets per

Consolidated balance sheet $ 1,952,900

Accumulated depreciation

and amortization 295,696

Future income tax liability (204,046)

Future income tax liability

not included in assets 18,695

Gross asset value $ 2,063,245

Book value of mortgages

and other indebtedness1 $ 984,494 47.7%

Convertible debentures2 190,744 9.3%

Total debt $ 1,175,238 57.0%

1. Adjusted to eliminate financing issuance costs and include long-term debt

related to assets held for sale.

2. Adjusted to face value.

Long-term capital obligationsThe REIT’s long-term capital obligations consist primarily

of fixed-term mortgage financing and unsecured debentures.

The maturity dates for these obligations have been staggered

to lower the overall refinancing risk. The estimated interest

payments on mortgage debt and convertible debentures

include scheduled interest payments on fixed and variable rate

debt outstanding at March 31, 2009. The estimated interest

payment on variable rate mortgages is based on interest rates

prevailing at March 31, 2009.

Considering its overall leverage and demonstrated historical

access to capital markets, InnVest expects that all maturities

will be refinanced or repaid in the normal course of business.

InnVest has no mortgage maturities until mid-2010. In the

first quarter of 2009, the REIT successful extended the term

of two mortgages totalling $13.5 million which were originally

scheduled to mature in February 2010. One mortgage of

$6.9 million was extended to September 30, 2012, while

the second mortgage of $6.6 million was extended to

December 31, 2012 at a weighted average interest rate of

approximately 6.8% compared to the previous rate of 6.2%.

Following this extension, approximately $177.9 million in

mortgage debt with an average interest rate of 5.6% matures

in 2010. This debt represents one maturity with a large

Canadian institutional lender. Forty limited service hotels serve

as collateral on this debt. Mortgage maturities in 2011

approximate $321.5 million with an average interest rate

of 5.5%. This is made up of two separate maturities of

approximately $268.0 million and $53.5 million, both with a

large Canadian institutional lender. The $268.0 million maturity

includes two one-year extensions, at the REIT’s option, subject

to certain minimum thresholds at the time of maturity. In

aggregate, nine full service hotels serve as collateral on the

mortgages which mature in 2011. As at March 31, 2009, these

2010 and 2011 maturities are supported by strong debt

service coverage. InnVest’s outstanding Series A debentures

of $45.8 million also matures in April 2011. The REIT has

approximately $141.7 million of mortgages payable secured

by conduit financing with the relevant maturities in 2014

and beyond.

The REIT has leasehold interests in 13 of its hotels. The

leaseholds require minimum annual average lease payments

and expire between 2017 and 2088. There are also future

rental charges determined as a percentage of revenue that

are not included in the amounts reflected below. Capital

and operating leases primarily relate to equipment and

office leases.

In addition, capital expenditures committed, and yet to be

incurred, at March 31, 2009 approximated $405.



Remainder of 2014 and

2009 2010 2011 2012 2013 thereafter Total

Bank indebtedness – principal 9,000 – – – – – 9,000

Bank indebtedness – interest 94 – – – – – 94

Mortgages payable – principal 8,449 179,240 328,451 23,399 11,355 394,501 945,395

Mortgages payable – interest 41,187 50,229 28,066 25,385 23,956 17,612 186,435

Capital lease – principal 195 203 213 242 225 1,269 2,347

Capital lease – interest 176 239 239 239 239 60 1,192

Convertible debentures –

principal – – 45,764 – 74,980 70,000 190,744

Convertible debentures –

interest 9,408 11,455 10,025 8,595 6,345 4,095 49,923

Long-term land leases 3,670 4,945 4,492 4,492 4,492 89,933 112,024

Operating equipment

and office leases 473 392 172 50 35 – 1,122

72,652 246,703 417,422 62,402 121,627 577,470 1,498,276

Overall, the Trust has no significant current debt maturities,

minimal floating rate debt and appropriate leverage for its real

estate class. The Trust also has access to a credit facility to

fund short term fluctuations in earnings. If necessary, near

term disruptions to operating earnings and cash flow could

be addressed through reductions in discretionary capital

allocation decisions such as capital investments above the

FF&E reserve and/or distributions. Based on the current level

of distributions and current units outstanding, annual

distributions approximate $56 million. The Trust could also

generate liquidity through asset sales. At March 31, 2009,

six assets are classified as held for sale, one of which was

disposed of subsequent to the end of the first quarter of 2009.

As a result, management does not expect the current global

credit market environment to have a material impact on the

Trust’s ability to fund its commitments.

Distributions to unitholdersFor the three months ended March 31, 2009, the REIT

declared distributions of $14.0 million, of which $660,

was distributed in units as part of the DRIP. This represents

distributions declared of $0.1875 per unit, compared to

$0.28125 per unit for the first quarter of 2008. For the

twelve months ended March 31, 2009, InnVest’s payout

ratio was 87.5%, or 75.3% on a cash basis (excluding

the non-cash distributions made through the DRIP). This

payout ratio compares to a 91.7% annual payout for the year

ended December 31, 2008. The improved payout ratio reflects

the reduced level of distributions which offset the weaker hotel

operating environment.

In November 2008, the Trust announced a reduction in its

monthly distribution to $0.0625 per month, or $0.75 per unit

annually. This represented a one third reduction from annual

distributions of $1.125 per unit that had been paid since the

Trust’s inception in 2002. The reduction was implemented

based on the Board of Trustees’ decision to take a prudent

approach to distributions in light of current uncertain economic

conditions. The distribution reduction will enable InnVest to

conserve approximately $28 million annually and will help

enhance the REIT’s balance sheet and liquidity during the

current challenging credit environment. Based on current

market conditions, management expects the current level of

cash distributions to be sustainable. However, the potential

deterioration of business trends could impact future

distributions paid.

Liquidity to fund distributions is generated from cash flow

from operations, cash on hand, available bank operating

lines and by the ability to finance certain unencumbered or

under-leveraged assets. First and fourth quarter distributions

are typically partially funded through bank operating lines

given the seasonality of earnings through the year in contrast

to fixed costs.

Since 2006, the REIT’s annual distributions have been fully

funded by distributable income generated by the Trust.



12 months

ended

March 31, Years ended December 31

2009 2008 2007 2006 2005

Distributable income $ 82,059 $ 85,540 $ 71,995 $ 62,771 $ 48,721

Distributions 71,811 78,473 70,758 59,605 52,884

Distributable income in excess

of (less than) distributions 10,248 7,067 1,237 3,166 (4,163)

Non-cash distributions made

through the DRIP 10,021 13,234 10,606 4,166 3,303

Distributable income in excess

of (less than) cash distributions $ 20,269 $ 20,301 $ 11,843 $ 7,332 $ (860)

Payout ratios:

Total distributions 87.5% 91.7% 98.3% 95.0% 108.5%

Cash distributions (total

distributions minus DRIP) 75.3% 76.3% 83.6% 88.3% 101.8%

The REIT is required to pay distributions of not less than 80%

of the annual distributable income equally on a monthly basis.

Distributions to unitholders are approved by the REIT’s Board

of Trustees. In exercising their discretion to approve the level

of distributions, the Trustees use forecasts prepared by

management and other financial information to determine if

sufficient cash flow will be available to fund distributions. Such

financial information is subject to change due to the nature of

the Canadian hotel industry which can be difficult to predict,

even in the short-run (see Risks and Uncertainties).

Unit informationAt March 31, 2009, a total of 74,434,338 units of the REIT were outstanding. There is only one class of trust units, with each unit

eligible for one vote.

2009 2008

Units outstanding, January 1 74,412,317 73,000,694

Dividend reinvestment plan 202,067 427,230

Executive compensation plan 19,052 16,033

Trustee compensation plan 11,060 3,711

Conversion of debentures 1,342 –

Trust units cancelled pursuant to normal course issuer bid (211,500) –

Units outstanding, March 31 74,434,338 73,447,668

Commencing on November 11, 2008, InnVest initiated a

normal course issuer bid (“NCIB”) to purchase up to 5,924,617

trust units, representing approximately 10% of InnVest’s public

float. The NCIB expires on November 10, 2009. Under the

NCIB, units purchased will be cancelled. InnVest believes that

the market price of its units at certain times may be attractive

and that the purchase of units from time to time would be an

appropriate use of InnVest’s funds.



InnVest issues additional units each month through its DRIP.

Given its desire to conserve liquidity, to date, the REIT has

limited its NCIB purchases to satisfy those units issued

through the DRIP as to minimize their dilutive effect.

During the first quarter of 2009, the Trust purchased and

cancelled 211,500 trust units under the NCIB at an aggregate

cost of $689 (average cost of $3.26 per unit). Subsequent

to March 31, 2009, InnVest purchased and cancelled an

additional 70,000 units at an aggregate cost of $245 (average

cost of $3.49 per unit). In aggregate since implementing the

NCIB, the REIT has acquired 560,000 units at an aggregate

cost of $1.9 million (average cost of $3.34).

A total of $45.8 million of the Series A – 6.25% Debentures

remained outstanding at March 31, 2009. These debentures

are convertible into trust units at a strike price of $12.50,

bear interest at 6.25% per annum payable semi-annually on

April 15 and October 15 of each year and are due April 15, 2011.

At March 31, 2009, the trust units to be issued upon

conversion of the Series A – 6.25% Debentures are 3,661,120.

A total of $75.0 million of the Series B – 6.00% Debentures

remained outstanding at March 31, 2009. The Series B –

6.00% Debentures are convertible into trust units at a strike

price of $14.90, bear interest at 6.00% per annum payable

semi-annually on May 31 and November 30 of each year and

are due May 31, 2013. During the quarter, $20 convertible

debentures were converted into 1,342 units. At March 31, 2009,

the trust units to be issued upon conversion of the Series B –

6.00% Debentures total 5,032,215.

A total of $70.0 million of Series C – 5.85% Debentures

remained outstanding at March 31, 2009. These debentures

are convertible into trust units at a strike price of $14.70,

bear interest at 5.85% per annum payable semi-annually

on August 1 and February 1 of each year and are due

August 1, 2014. At March 31, 2009, the trust units to be

issued upon conversion of the Series C – 5.85% Debentures

total 4,761,905.

For each of its Series A, Series B and Series C debentures,

the REIT may elect, from time to time, to satisfy its obligation

to pay interest by delivering trust units. Also, for each of its

Series A, Series B and Series C debentures, the REIT may,

at its option, on not more than 60 days’ and not less than

30 days’ prior notice and subject to applicable regulatory

approval, elect to satisfy its obligation to repay all or any

option of the principal amount of the Series A, Series B and

Series C Debentures that are to be redeemed or that are to

mature, by issuing trust units. The number of trust units to be

issued in respect of each debenture will be determined by

dividing the principal amount by 95% of the volume-weighted

average trading price of the trust units on the Toronto Stock

Exchange for the 20 consecutive trading days ending on the

fifth trading day preceding the date fixed for redemption or

maturity, as the case may be.

At March 31, 2009, there were 81,922 (December 31, 2008 –

71,003) unvested executive units granted under the executive

compensation plan. Units granted vest equally on the third and

fourth anniversary of the effective date of grant.

On October 9, 2008, the REIT adopted a unitholder rights

plan, which expired April 9, 2009. On April 14, 2009,

unitholders of the REIT approved the adoption of the second

amended and restated unitholder rights plan, which will be

in effect for a period 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.

A unitholder right 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.

Non-GAAP financial measuresIncluded in this MD&A are certain non-GAAP financial

measures, which are measures of InnVest’s historical or future

financial performance that are not calculated and presented in

accordance with GAAP. These non-GAAP financial measures

are unlikely to be comparable to similar measures presented

by other entities. The following discussion defines non-GAAP

measures used by InnVest and presents why management

believes they are useful supplemental measures of the

REIT’s performance.

Hotel operating incomeHOI is defined as hotel revenues less hotel expenses. HOI is a

commonly used measure by lodging real estate owners which,

when considered with GAAP measures, gives management a

more complete understanding of property level results before

debt service. It also facilitates comparisons between InnVest

and its competitors. Management believes that HOI is

one of InnVest’s key performance indicators since it helps

management, lenders and investors evaluate the ongoing hotel

profitability. Management believes hotel operating income to

be a meaningful indicator of hotel performance.



HOI has been calculated as follows:


Hotel revenues $ 127,701 $ 135,940

Hotel expenses 109,285 112,771

Hotel operating income $ 18,416 $ 23,169

Funds from operationsFFO is a common measure of performance in the real estate

investment trust industry. The Real Property Association of

Canada (“REALpac”) generally defines FFO as net income

adjusted for extraordinary items, gains or losses on the sale

of assets, provisions for impairment against property values,

capital items and depreciation and amortization relating

to capital items. REALpac adopted the definition of FFO

in order to promote an industry wide measure of REIT

operating performance.

FFO is one measure used by industry analysts and investors

in the determination of the Trust’s valuation, its ability to fund

distributions and its investment return requirements. As

a result, InnVest believes that FFO is a useful supplemental

measure of the Trust’s operating performance for investors.

FFO assumes that the value of real estate investments does

not necessarily decrease on a systematic basis over time, an

assumption inherent in GAAP, and it adjusts for items included

in GAAP net income that do not necessarily provide the best

indicator of operating performance, such as gains or losses

on the sale of, and provisions for impairment against,

hotel properties.

FFO should not be considered a substitute for net income or

cash flow from operating activities determined in accordance

with GAAP. The REIT’s method of calculating FFO may be

different from that of other organizations.

The REIT currently calculates FFO by using net income and

adjusting for:

i) Depreciation, amortization and accretion, excluding

amortization of deferred financing costs,

ii) Future income tax expense or recovery,

iii) Non-cash executive and trustee compensation expense,

and

iv) Non-cash writedown of assets held for sale as well as the

impairment provision on hotel properties.

A reconciliation of GAAP net loss to FFO is as follows:


Net loss $ (15,420) $ (15,073)

Add/(deduct):

Depreciation, amortization

and accretion1 22,712 21,356

Future income tax recovery (6,931) (3,520)

Non-cash executive and

trustee compensation 86 155

Writedown of assets

held for sale – 500

Funds from operations $ 447 $ 3,418

FFO per unit –

basic and diluted $ 0.006 $ 0.047

1. For purposes of calculating FFO, amortization of deferred financing is

excluded from depreciation, amortization and accretion.

Distributable incomeDistributable income is commonly used in the real

estate investment trust industry to measure performance.

Distributable income is intended to approximate cash earnings.

It is defined in the REIT’s Declaration of Trust to mean net

income of the REIT and its consolidated subsidiaries as

reported in its consolidated financial statements adjusted for:

i) Depreciation, amortization and accretion and future income

tax (recovery) expense,

ii) Any gains or losses on the disposition of any real property,

iii) The reserve for replacement of furniture, fixtures and

equipment and capital improvements, and

iv) Any other adjustment determined by the Trustees of the

REIT in their discretion.



Distributable income is one measure used by industry analysts

in the determination of the Trust’s per unit value, the ability

of the Trust to fund distributions and investment returns for

current or potential investors. As outlined in the Declaration of

Trust, the REIT is required to distribute monthly to unitholders

not less than one-twelfth of 80% of the estimated annualized

distributable income of the Trust for the calendar year.

Distributable income is not only used by management and

the Board of Trustees to determine the level of distributions

to unitholders, it also serves as an important measure

for investors in their evaluation of the performance

of management.

In addition, when evaluating acquisition opportunities, the

distributable income to be generated by the asset is reviewed

by management to determine whether a proposed acquisition

will generate an increase in distributable income per unit.

Therefore, distributable income is an important measure for

management as a guideline through which operating and

financial decisions are made and is an integral part of the

investment decision for investors and potential investors.

A reconciliation of GAAP net loss to distributable loss is as follows:


Net loss $ (15,420) $ (15,073)

Add/(deduct):

Depreciation and amortization 22,712 21,356


FF&E Reserve (5,427) (5,848)

Non-cash portion of convertible debenture interest and accretion 784 578

Non-cash portion of mortgage interest expense 424 258

Non-cash executive and trustee compensation 86 155

Writedown of assets held for sale – 500

Amortization of deferred financing costs 17 1,314

Deferred land lease expense and retail lease income, net 2 8

Distributable loss $ (3,753) $ (272)

Distributable loss per unit – basic and diluted $ (0.050) $ (0.004)

The following table reconciles cash flows from operating activities to distributable loss in accordance with Canadian Securities

Administrators Staff Notice 41-201 Income Trusts and Other Indirect Offerings. Management considers distributable cash to be

equivalent to distributable income. The reconciliation has been prepared using reasonable and supportable assumptions which

reflect the REIT’s planned courses of action given management’s judgment about the most probable set of economic conditions.


Reconciliation of cash flow from operating activities to distributable loss

Cash flow from operating activities $ (2,185) $ (461)

Changes in non-cash working capital 3,562 6,152

Miscellaneous, including changes in non-cash working capital – discontinued operations 295 (123)


FF&E reserve (5,427) (5,848)

Distributable loss $ (3,753) $ (272)



Risks and uncertaintiesAll real estate investments are subject to a degree of risk.

The achievement of the REIT’s objectives is, in part, dependent

on successful mitigation of business risks. The following is

a discussion of some, but not all, of the risks which may

influence the REIT’s performance. Readers should also refer

to InnVest’s Annual Information Form, which is available on

SEDAR, for a more detailed discussion of risks.

Operating risksInnVest is subject to the normal operating risks consistent with

hotel ownership. The following is a discussion of key risks and

uncertainties facing the Trust on a day-to-day basis, and the

strategies adopted to mitigate such risks. The REIT has risk

management processes in place as well as restrictions,

limitations and policies placed upon it by its Declaration of

Trust. However, it should not be assumed that the following

discussion is exhaustive or that the strategies adopted to

mitigate these risks will be effective.

The REIT is subject to the operating risks inherent in the

Canadian hotel industry, including:

p Cyclical downturns arising from changes in general and local

economic conditions;

p Competition from other hotels;

p Seasonal fluctuations in hotel operating income generated

throughout the year;

p Changes in wages, prices, energy costs and construction

and maintenance costs that might result from inflation,

government regulation, changes in interest rates or

currency fluctuations;

p Changes in the level of business and commercial travel

and tourism;

p The recurring need for renovation, refurbishment and

improvement of hotel properties;

Related party transactionsFranchise businessInnVest owns 50% of CHC. The other 50% is owned by

Choice Hotels International, which is one of the largest hotel

franchise companies in the world. CHC earns franchise

revenue by charging monthly royalty fees to licenced hotel

owners based on a percentage of the licenced hotels’

revenues, and by selling franchises.

Under the terms of the joint venture agreement between

Choice Hotels International and a subsidiary of the REIT,

InnVest pays a below market royalty fee for its hotels that are

franchised under the Choice Hotel brands. This arrangement

will remain in place for the duration of the joint venture until

2092. Net royalty payments paid to CHC by the REIT for

the three months ended March 31, 2009 totalled $142

(2008 – $138).

Hotel managementOn 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. Westmont is controlled by a minority unitholder of

the REIT. The Agreements have an initial term of 10 years with

two successive five-year renewal terms, subject to the consent

of Westmont and approval by the REIT. In 2008, InnVest

exercised the first five-year extension term on the Agreements,

extending the expiry to July 25, 2017. The Agreements are

subject to non-competitive arrangements for limited service

hotels in Canada. The Agreements provide for the payment

of an annual management fee to Westmont equal to 3.375%

of gross hotel revenue 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 in the three months ended March 31, 2009

(2008 – $ nil).

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. 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 HOI,

subject to an annual minimum fee.

Management and other fees paid to Westmont for the three

months ended March 31, 2009 totalled $4.0 million (2008 –

$4.3 million). These fees represent approximately 65% of total

hotel management and other fees paid by InnVest to the four

hotel management companies with whom it partners.



p Increases in expenses of travel, particularly automotive travel;

p Increase in the supply of accommodations in local markets;

p Availability and pricing of financing for operating or capital

requirements; and

p Other factors, including medical concern relating to

travelling to Canada, acts of terrorism, natural disasters,

extreme weather conditions and labour shortages, work

stoppages or disputes.

The REIT mitigates these risks by having a geographically

diverse portfolio of hotels, associated with recognized hotel

brands. In addition, the portfolio benefits from a diverse

customer mix including corporate, government, leisure, local,

crew, sports and other groups, which limits its reliance on

any one individual travel segment. The REIT currently has

a $40 million operating line to ensure that the seasonal

fluctuation in cash flow will not affect its ability to operate in

the normal course of business. As with all debt financing, the

REIT’s ability to renew its credit facility on similar terms will be

dependent on market conditions at the time and the underlying

performance of the assets pledged as collateral for the facility.

Given its size, InnVest has significant buying power and

negotiates favourable national contracts on a regular basis

for operating supplies and renovation materials. The Trust

also enters into fixed rate utility contracts when

deemed appropriate.

InnVest is governed by its Declaration of Trust which is

intended to mitigate risks through financial and operating

management restrictions, limitations and policies such as:

p Eligible investments are restricted primarily to hotels

in Canada;

p Investing in raw land for development and engaging in

the development and construction of new real property

other than property adjacent to an existing owned hotel is

prohibited. In the first quarter of 2008, InnVest completed

the development of one hotel which is adjacent to an

existing owned hotel;

p Individual property mortgages, or mortgages on a pool

of properties, cannot exceed 75% of the value of the

underlying property;

p Debt is limited to 50% of gross asset value before

convertible debentures and 60% including

convertible debentures;

p 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;

p The REIT is required to pay annual distributions of not

less than 80% of the annual distributable income, payable

equally on a monthly basis;

p Related party transactions require the approval of two-thirds

of the independent trustees, and any transfers of real

property between related parties requires an independent

appraisal; and

p Any material change to the Master Hotel Management

Agreement requires two-thirds approval of the

independent trustees.

Liquidity risksInnVest utilizes cash flow from operations and credit

facilities to support operating requirements, to fund capital

expenditures, to make acquisitions and to pay distributions

to unitholders. Each year, InnVest sets aside between 3% and

5% of total hotel revenues at each hotel and certain amounts

required for hotel acquisitions for replacing furniture, fixtures

and equipment and capital improvements. Capital

expenditures for the three months ended March 31, 2009

totalled $6.0 million (2008 – $5.9 million). This compares to the

Trust’s FF&E reserve of $5.4 million for the first quarter of 2009

(2008 – $5.8 million). Given the seasonality of hotel operations,

revenues are not earned evenly through the year. Conversely,

capital expenditures are typically scheduled during lower

occupancy periods to avoid guest displacement. However,

in light of the current operating environment, non-essential

capital investments during the first quarter of 2009 have been

limited in order to meet the Trust’s desire to conserve liquidity.

The Trust expects its capital investment to be largely funded

through its FF&E reserve for the year 2009.

The REIT is required to fund capital improvements above

the reserve, or the acquisitions of hotels, principally by issuing

additional units or incurring additional indebtedness. Access to

capital markets for additional unit financings and the availability

of additional borrowing will depend on prevailing market

conditions and the acceptability of the terms offered. In

addition, the Declaration of Trust prohibits the REIT from

incurring or assuming any indebtedness if it would result

in its financial leverage exceeding 50% (60% including

convertible debentures).

The REIT is subject to the risks associated with debt financing,

including the risk that cash flow from operations will be

insufficient to meet required payments of principal and interest,

the risk that existing debt will not be refinanced or that terms

of such refinancings will not be favourable to the REIT.

Similarly, there can be no assurance that the REIT will be able

to complete additional unit financings or borrow additional

funds on terms acceptable to it, or at all. If the REIT were

unable to secure additional funding for acquisitions,

refinancings or capital improvements, it would be required

to curtail these activities, which could have a material adverse

effect on its results of operations and financial condition.



Furthermore, if the REIT were in need of capital, it could

be required to liquidate one or more investments in hotel

properties at times which may not permit the realization of the

maximum return on such investments or could be required to

agree to additional financing on unfavourable terms. The REIT

attempts to mitigate these potential risks by developing

relationships with its lenders, by seeking out new

sources of capital and by staggering the maturities of

its long-term debt.

Interest rate risksThe REIT’s operations are impacted by interest rates as

interest expense represents a significant cost in the ownership

of hotel real estate investments. As at March 31, 2009, the

REIT has approximately $984.5 million of indebtedness

excluding the convertible debentures, representing a financial

leverage ratio of approximately 47.7% and approximately

$1.2 billion of indebtedness including the convertible

debentures, representing a financial leverage ratio of

approximately 57.0%. At March 31, 2009, total indebtedness

excluding convertible debentures had a 3.5 year weighted

average term to maturity bearing a weighted average interest

rate of 5.6% and a weighted average effective interest rate

of 5.7%. Should such amounts be refinanced upon maturity

at an aggregate interest rate differential of 100 basis points,

the REIT’s operations would be impacted by approximately

$9.8 million annually.

The REIT seeks to reduce its interest rate risk by staggering

the maturities of long-term debt and limiting the use of floating

rate debt so as to minimize exposure to interest rate

fluctuations. At March 31, 2009, 9.7% of the REIT’s aggregate

long-term debt was at floating interest rates.

Proposed tax changes to income trustsInnVest 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 existing 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”. Based on the guidelines, InnVest can issue,

on a cumulative basis, a total of approximately $143 million

in equity annually in each of 2008 through 2010 and maintain

its relief from taxation to the end of 2010. For the year ended

December 31, 2008, the REIT issued $13.5 million in equity,

primarily resulting from the issuance of units through the DRIP

as well as executive and trustee equity compensation. For the

three months ended March 31, 2009, the REIT issued $775

in equity.

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, as is presently

constituted, will be subject to tax starting January 1, 2011.

The Bill may adversely affect the level of cash distributions

to unitholders commencing in 2011 if InnVest does not

become a Qualifying REIT by then. Management is reviewing

various options to address this change including, among

others, 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 the InnVest hotels, which will 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.

Critical accounting estimatesThe REIT’s unaudited consolidated financial statements for

the three months ended March 31, 2009 were prepared in

accordance with GAAP. The significant accounting policies

used in the preparation of the interim consolidated financial

statements are consistent with those reported in the audited

consolidated financial statements for the year ended

December 31, 2008. GAAP requires management to make

estimates and assumptions concerning 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 revenue and expenses during the reporting period.

Management uses its judgment and knowledge from past

experience as a basis for estimates and other assumptions

required in the preparation of the financial statements.

Management’s estimates and assumptions are evaluated and



updated on a regular basis taking into account current market

conditions. The actual results for the REIT may materially

differ, if management were to use different estimates

and assumptions.

The REIT’s MD&A for the year ended December 31, 2008

contains a discussion of InnVest’s significant accounting

policies most affected by estimates and judgments used in

the preparation of its financial statements, being its accounting

policies relating to the expected life of hotel properties, the

allocation of purchase prices for acquired hotels, the valuation

of hotel properties, the fair value of mortgages and debentures

payable, defined benefit pension plans, income taxes and

other real estate properties. Management has determined that

at March 31, 2009, there is no change to its assessment of its

significant accounting policies most affected by estimates and

judgments as detailed in the MD&A for the year ended

December 31, 2008.

Changes in significant accounting policiesThe accounting policies followed in the preparation of the

accompanying financial statements are consistent with those

as set out in the audited financial statements for the year

ended December 31, 2008, except as follows:

Goodwill and intangible assetsEffective January 1, 2009, the REIT adopted the Canadian

Institute of Chartered Accountants (“CICA”) Section 3064 –

Goodwill and Intangible Assets. Section 3064 replaces

Handbook Section 3062 – Goodwill and Other Intangible

Assets and Handbook Section 3450 – Research and

Development Costs. Section 3064 establishes standards for

the recognition, measurement and disclosure of goodwill and

intangible assets. There was no material impact of this

standard to the REIT.

Future accounting changesThe following are upcoming accounting changes to

Canadian GAAP that will have an impact on InnVest’s

financial statements.

International financial reporting standardsIn early 2008, the Canadian Accounting Standards Board

confirmed January 1, 2011 as the date IFRS will replace

current Canadian standards and interpretations as Canadian

GAAP for publicly accountable enterprises. The transition date

of January 1, 2011 will require the restatement for comparative

purposes of amounts reported by the REIT for the year ending

December 31, 2010. The REIT will convert to these new

standards according to the timetable set with these rules.

InnVest has established an implementation team comprised

of members of senior management to facilitate the conversion

to IFRS. This implementation team continues to develop a

comprehensive conversion plan to convert its consolidated

financial statements to IFRS as required. The conversion plan

will address matters including changes in accounting policies,

the restatement of comparative periods, organizational and

internal control, the modification of existing systems and the

training and awareness of staff, in addition to other related

business matters. The evaluation of the potential impact

of IFRS on InnVest’s consolidated financial statements will be

an ongoing process as new standards and recommendations

are issued leading up to the implementation date.

InnVest has identified IFRS versus Canadian GAAP differences

and various policy choices available under IFRS, but continues

to assess the implications of such differences and policy

choices for its financial reporting. The main differences

identified to date relate to the accounting for the Trust’s hotel

properties, the impairment testing thereof, and accounting for

joint ventures and business combinations. As appropriate, the

Trust’s internal controls and system requirements will be

adapted based on any changes in policies implemented.

To date, the Trust has not arrived at any definitive conclusion

regarding its election options for key standards under IFRS.



While not expected to impact the determination of cash flow

from operations, changing from current Canadian GAAP to

IFRS may materially affect InnVest’s reported financial position

and results of operations. At this preliminary stage, the

REIT cannot quantify the impact of the IFRS changeover

on its financial reporting.

Business combinationsIn January 2009, the CICA issued new accounting standards

concerning Section 1582 – Business Combinations,

Section 1602 – Non-controlling Interests and Section 1601 –

Consolidated Financial Statements, which are based on the

International Accounting Standards Board’s (“IASB”)

International Financial Reporting Standard 3 – Business

Combinations. The new standards replace the existing

guidance on business combinations and consolidated financial

statements. The objective of the new standards is to

harmonize Canadian accounting for business combinations

with international and U.S. accounting standards. The

new standards are to be applied prospectively to business

combinations for which the acquisition date is on or after the

beginning of the first annual reporting period beginning on

or after January 1, 2011, with earlier application permitted.

Assets and liabilities that arose from business combinations

whose acquisition dates preceded the application of the new

standards shall not be adjusted upon application of these new

standards. The Non-controlling Interests standard shall be

applied retrospectively except for certain items.

The REIT is assessing whether it will apply the new accounting

standards at the beginning of its 2011 fiscal year or elect to

early adopt the new accounting standards at the beginning

of its 2010 fiscal year in order to minimize the amount of

restatement when the REIT adopts IFRS. The impact of the

new standards on the Trust’s results of operations, financial

position and disclosures will be assessed as part of the REIT’s

IFRS transition project.

Controls and procedures At March 31, 2009, the Chief Executive Officer and Chief

Financial Officer of the Trust, along with the assistance of

senior management, have designed disclosure controls and

procedures to provide reasonable assurance that material

information relating to InnVest is made known to the CEO

and CFO, and have designed internal controls over financial

reporting to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial

statements in accordance with GAAP. There were no changes

in the Trust’s internal controls over financial reporting that

occurred during the interim period ended March 31, 2009

that have significantly affected, or are reasonably likely

to significantly affect, the Trust’s internal controls over

financial reporting.


consolidated financial statements

Consolidated balance sheets(in thousands of dollars) (unaudited) March 31, 2009 December 31, 2008

(Restated, Note 21)

ASSETS

Current assets

Cash $ 10,470 $ 18,143

Accounts receivable 23,902 27,319

Prepaid expenses and other assets 12,090 8,861

Assets held for sale (Note 21) 818 610

47,280 54,933

Restricted cash 2,472 3,013

Hotel properties (Note 3) 1,779,908 1,792,828

Other real estate properties (Note 4) 15,987 16,078

Licence contracts (Note 5) 17,524 17,853

Intangible and deferred assets (Note 6) 39,988 42,165

Assets held for sale (Note 21) 49,741 50,234

$ 1,952,900 $ 1,977,104

LIABILITIES

Current liabilities

Bank indebtedness (Note 7) $ 29,200 $ 9,000

Accounts payable and accrued liabilities 68,386 71,876

Acquisition related liabilities 2,332 2,561

Distributions payable 4,652 4,651

Current portion of long-term debt (Note 8) 11,215 10,763

Liabilities related to assets held for sale (Note 21) 1,052 1,157

116,837 100,008

Long-term debt (Note 8) 927,559 930,317

Other long-term obligations (Note 9) 7,199 7,139

Convertible debentures (Note 10) 180,929 180,170

Future income tax liability (Note 12) 204,046 210,977

Long-term liabilities related to assets held for sale (Note 21) 9,899 12,763

1,446,469 1,441,374

UNITHOLDERS’ EQUITY 506,431 535,730

$ 1,952,900 $ 1,977,104

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



Consolidated statements of net loss and comprehensive loss Three months ended Three months ended

(in thousands of dollars, except per unit amounts) (unaudited) March 31, 2009 March 31, 2008

(Restated, Note 21)

Total revenues (reference only) (Note 19) $ 130,430 $ 138,601

Hotel revenues $ 127,701 $ 135,940

Hotel expenses

Operating expenses (Note 17) 90,835 93,826

Property taxes, rent and insurance 13,394 13,456

Management fees (Note 17) 5,056 5,489

109,285 112,771

Hotel operating income 18,416 23,169

Other (income) and expenses

Interest on mortgages and other debt 13,505 11,789

Interest on operating and bridge loans 167 2,847

Convertible debentures interest and accretion 3,604 3,560

Corporate and administrative (Note 17) 1,359 1,226

Capital tax 51 39

Other business income, net (Note 20) (912) (993)

Other income (5) (72)


39,968 40,386

Loss before income tax recovery (21,552) (17,217)

Future income tax recovery (Note 12) (6,931) (3,520)

Loss from continuing operations (14,621) (13,697)

Loss from discontinued operations (Note 21) (799) (876)

Writedown of asset held for sale (Note 21) – (500)

(799) (1,376)

Net loss and comprehensive loss $ (15,420) $ (15,073)

Loss from continuing operations, per unit (Note 15)

Basic and diluted $ (0.196) $ (0.187)

Net loss per unit (Note 15)


Loss from discontinued operations, per unit





Consolidated statements of unitholders’ equity Net income (loss) and Holders’

(in thousands of dollars) comprehensive Contributed Executive conversion

(unaudited) income (loss) Distributions Deficit Units in $ surplus compensation option Total

Balance December 31, 2007 $ 137,923 $ (299,691) $ (161,768) $ 757,375 $ – $ 417 $ 8,642 $ 604,666

CHANGES DURING THE PERIOD

Net loss and comprehensive loss (15,073) – (15,073) – – – – (15,073)

Unit distributions (Note 16) – (20,618) (20,618) – – – – (20,618)

Distribution reinvestment

plan units issued – – – 3,873 – – – 3,873

Vested executive compensation – – – 151 – (151) – –

Executive and

trustee compensation – – – 38 – 117 – 155

Balance March 31, 2008 $ 122,850 $ (320,309) $ (197,459) $ 761,437 $ – $ 383 $ 8,642 $ 573,003

Balance December 31, 2008 $134,546 $ (378,164) $ (243,618) $ 768,034 $ 1,938 $ 734 $ 8,642 $ 535,730

CHANGES DURING THE PERIOD

Net loss and

comprehensive loss (15,420) – (15,420) – – – – (15,420)

Unit distributions (Note 16) – (13,956) (13,956) – – – – (13,956)

Distribution reinvestment

plan units issued – – – 660 – – – 660

Units repurchased pursuant

to normal course

issuer bid (Note 14) – – – (2,180) 1,491 – – (689)

Conversion of debentures – – – 20 – – – 20

Vested executive compensation – – – 170 – (170) – –

Executive and

trustee compensation – – – 38 – 48 – 86

Balance March 31, 2009 $ 119,126 $ (392,120) $ (272,994) $ 766,742 $ 3,429 $ 612 $ 8,642 $ 506,431




Consolidated statements of cash flows Three months ended Three months ended

(in thousands of dollars) (unaudited) March 31, 2009 March 31, 2008

(Restated, Note 21)

OPERATING ACTIVITIES

Loss from continuing operations $ (14,621) $ (13,697)

Add (deduct) items not affecting operations


Non-cash portion of interest expense 914 549



Convertible debentures accretion 290 287

Discontinued operations (560) (73)

Changes in non-cash working capital (3,562) (6,152)

(2,185) (461)

FINANCING ACTIVITIES

Repayment of long-term debt (2,653) (157,228)

Proceeds from long-term debt – 387,486

Units repurchased pursuant to normal course issuer bid (Note 14) (689) –

Unit distributions (13,295) (16,703)

Increase in operating loan 20,200 15,600

Proceeds from bridge loan – 8,907

Repayment of bridge loan – (215,000)

Discontinued operations repayment of debt (2,886) (101)

677 22,961

INVESTING ACTIVITIES

Capital expenditures on hotel properties (5,937) (5,843)

Discontinued operations capital expenditures (31) (76)

Hotel under development expenditures (82) (3,818)

Change in intangible and deferred assets (656) (431)

Acquisition of hotel property – (17,175)

Decrease in restricted cash 541 71

(6,165) (27,272)

Decrease in cash during the period (7,673) (4,772)

Cash, beginning of period 18,143 22,271

Cash, end of period $ 10,470 $ 17,499

Supplemental disclosure of cash flow information:

Cash paid for interest $ 15,686 $ 14,823

Cash paid for income taxes (including capital tax) $ 76 $ 68



notes to consolidated financial statements

Notes to consolidated financial statementsMarch 31, 2009 (all dollar amounts are in thousands, except unit and per unit amounts) (unaudited)

Note 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 March 31, 2009, the REIT owned 147 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.

Note 2 Change in significant accounting policies

Goodwill and intangible assetsEffective 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.

Note 3 Hotel properties

Accumulated March 31, 2009 December 31, 2008

Cost depreciation net book value net book value

(Restated, Note 21)

Land $ 184,248 $ – $ 184,248 $ 184,248

Buildings 1,691,837 185,741 1,506,096 1,517,708

Furniture, fixtures and equipment 145,979 56,415 89,564 90,872

$ 2,022,064 $ 242,156 $ 1,779,908 $ 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) no longer meet the criteria under the REIT’s accounting policy for newly built hotels acquired or

developed and as such are now considered operating hotel properties subject to depreciation. Capitalized net operating losses

for the three months ended March 31, 2009 were $82 (December 31, 2008 – $ 838). These losses include mortgage interest

capitalized of $87 (year ended December 31, 2008 – $1,009).



Note 4 Other real estate properties

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


Cost depreciation net book value net book value

Land $ 1,624 $ – $ 1,624 $ 1,624

Buildings 15,425 1,102 $ 14,323 14,412

Furniture, fixtures and equipment 73 33 $ 40 42

$ 17,122 $ 1,135 $ 15,987 $ 16,078

Note 5 Licence contracts


Cost amortization net book value net book value

Licence contracts $ 26,320 $ 8,796 $ 17,524 $ 17,853

During the three months ended March 31, 2009, the licence contracts were amortized by $329 (March 31, 2008 – $329).

Note 6 Intangible and deferred assets


Cost amortization net book value net book value

(Restated, Note 21)

Customer relationships $ 48,794 $ 17,226 $ 31,568 $ 33,918

Tenant relationships 2,595 1,446 $ 1,149 1,270

Franchise rights 2,375 1,107 $ 1,268 716

Lease origination costs 6,256 707 $ 5,549 5,741

Other 1,046 592 $ 454 503

Total intangible assets 61,066 21,078 39,988 42,148

Deferred financing costs related

to bridge loan – – – 17

$ 61,066 $ 21,078 $ 39,988 $ 42,165

During the three months ended March 31, 2009, the intangible assets were amortized by $2,810 (March 31, 2008 – $2,470) and

the deferred financing costs related to the bridge loans were amortized by $17 (March 31, 2008 – $1,314).



Note 7 Bank indebtedness

The REIT has a $40,000 operating line that bears interest at the Canadian bank prime rate plus 0.5%. It is secured by 14 properties

and is due August 1, 2009.

Proceeds of $9,000 from a bridge loan were received on March 19, 2008, for 365 days, whereby the REIT provided an additional

unencumbered hotel as security. This loan was extended to August 1, 2009 during the quarter, which included a pay-down of

$2,000, made on April 7, 2009. 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 bank credit facility on terms and conditions acceptable to the REIT or on

any terms at all.

March 31, 2009 December 31, 2008

Operating line $ 20,200 $ –

Bridge loan 9,000 9,000

$ 29,200 $ 9,000

Note 8 Long-term debt


(Restated, Note 21)

Mortgages payable $ 945,395 $ 948,064

Less debt issuance costs (6,621) (6,984)

Total long-term debt 938,774 941,080

Less current portion (11,215) (10,763)

Net long-term debt $ 927,559 $ 930,317

Substantially all of the REIT’s assets have been pledged as security under debt agreements. At March 31, 2009, long-term debt

had a weighted average interest rate of 5.6% (December 31, 2008 – 5.7%) and a weighted average effective interest rate of 5.7%

(December 31, 2008 – 5.8%). The long-term debt is repayable in average monthly payments of principal and interest totalling

$5,235 (December 31, 2008 – $5,483) per month, and matures at various dates from July 25, 2010 to March 21, 2018.

Scheduled repayment of long-term debt is as follows:

Scheduled repayments Due on maturity Total

2009 (remainder of the year) $ 8,449 $ – $ 8,449

2010 9,492 169,748 179,240

2011 9,593 318,858 328,451

2012 11,012 12,387 23,399

2013 11,355 – 11,355

2014 and thereafter 10,613 383,888 394,501

$ 60,514 $ 884,881 $ 945,395

The current portion of long-term debt on the balance sheet is based on the twelve months ending March 31, 2010, whereas the

repayment schedule above reflects the fiscal year.

The estimated fair value of the REIT’s long-term debt at March 31, 2009 was approximately $913,219 (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 $91,937 (December 31, 2008 – $92,129) of mortgages payable, which are subject to floating interest

rates. Annual interest expense will increase by $919 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 $23,904 available to fund 50%

to 100% of capital expenditures incurred at individual hotels. During the quarter ended March 31, 2009, the REIT has drawn

$nil on this facility (December 31, 2008 – $12,196). Subsequent to March 31, 2009, the REIT drew an additional $6,888 from

this facility, in the ordinary course of business.

Note 9 Other long-term obligations


(Restated, Note 21)

Capital leases $ 1,662 $ 1,662

Other lease obligations 685 658

2,347 2,320

Less current portion (195) (195)

Total lease obligations 2,152 2,125

Pension liability 3,539 3,522

Asset retirement obligation 1,508 1,492

Total other long-term obligations $ 7,199 $ 7,139

Defined benefit pension plansThe 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 March 31, 2009.

The pension plan assets as at March 31, 2009 consist of the following:

Non-union

Management non-management

pension pension March 31, 2009 December 31, 2008

benefit plans benefit plans total benefit plans total benefit plans

Accrued benefit obligation $ 4,598 $ 1,034 $ 5,632 $ 5,513

Fair value of plan assets 2,197 944 3,141 3,263

Funded status - plan deficit 2,401 90 2,491 2,250

Unamortized net actuarial gain 786 262 1,048 1,272

Accrued employee future

benefit liability $ 3,187 $ 352 $ 3,539 $ 3,522

The pension expense for the three months ended March 31, 2009 is $98 (March 31, 2008 – $337).



Note 10 Convertible debentures

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

Effective Original Converted Face Holders’ Interest interest face to trust amount conversion Transaction March 31, Debenture Maturity date rate rate amount units outstanding option Accretion costs 2009

Series A April 15, 2011 6.25% 7.73% $ 57,500 $ (11,736) $ 45,764 $ (2,289) $ 1,467 $ (56) $ 44,886

Series B May 31, 2013 6.00% 7.53% 75,000 (20) 74,980 (3,400) 1,361 (2,058) 70,883

Series C August 1, 2014 5.85% 7.42% 70,000 – 70,000 (2,953) 678 (2,565) 65,160

$ 202,500 $ (11,756) $ 190,744 $ (8,642) $ 3,506 $ (4,679) $ 180,929

Effective Original Converted Face Holders’ Interest interest face to trust amount conversion Transaction December 31, Debenture Maturity date rate rate amount units outstanding option Accretion costs 2008

Series A April 15, 2011 6.25% 7.73% $ 57,500 $ (11,736) $ 45,764 $ (2,289) $ 1,398 $ (333) $ 44,540

Series B May 31, 2013 6.00% 7.53% 75,000 – 75,000 (3,400) 1,241 (2,173) 70,668

Series C August 1, 2014 5.85% 7.42% 70,000 – 70,000 (2,953) 577 (2,662) 64,962

$ 202,500 $ (11,736) $ 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

March 31, 2009 is $102,745 (December 31, 2008 – $102,108).

Note 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 March 31, 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 March 31, 2009, the REIT’s leverage excluding and including convertible debentures was 47.7% and 57.0% respectively,

calculated as follows:


Total assets per consolidated

balance sheet $ 1,952,900 $ 1,977,104

Accumulated depreciation

and amortization 295,696 269,331

Future income tax liability (204,046) (210,977)

Future income tax liability not

included in assets 18,695 18,834

Gross asset value $ 2,063,245 $ 2,054,292

Book value of mortgages

and other indebtedness1 $ 984,494 47.7% $ 970,071 47.2%

Convertible debentures2 190,744 9.3% 190,764 9.3%

$ 1,175,238 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 $888 in equity during the three months ended March 31, 2009

(March 31, 2008 – $4,063).

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 2.6 times at March 31, 2009 and 2.7 times at

December 31, 2008, respectively);

(b) Trailing twelve months consolidated EBITDA to consolidated debt service of not less than 1.5 times (actual being

2.3 times at March 31, 2009 and 2.3 times at December 31, 2008); and

(c) Unitholders’ Equity of not less than $300,000 (actual being $506,431 at March 31, 2009 and $535,730 at

December 31, 2008, respectively).



Note 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.

Note 13 Financial instruments

Risk managementIn 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 March 31, 2009, the REIT’s floating rate debt balance of $91,937 (December 31, 2008 – $92,129) is approximately 9.7%

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 March 31, 2009 is $23,902 (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 March 31, 2009 is $623 or 2.6%

(December 31, 2008 – $805 or 2.9%) of total receivables. The amount credited in the operating income for the three months

ended March 31, 2009 is $100, due to amounts provided for, which were subsequently collected (March 31, 2008 – $49).

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 the REIT’s financial liablities for the next 24 months:

Remainder Three months ending Contractual

of 2009 2010 March 31, 2011 Cash flows1

Mortgage payable – principal $ 8,449 $ 179,240 $ 269,899 $ 457,588

Mortgage payable – interest2 41,187 50,229 9,665 101,081

Convertible debentures – interest 9,408 11,455 2,047 22,910

Bank loans – principal 9,000 – – 9,000

Bank loans – interest 94 – – 94

Total $ 68,138 $ 240,924 $ 281,611 $ 590,673

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 March 31, 2009.

Fair valuesThe fair values of the REIT’s financial assets and liabilities, representing net working capital, approximate their recorded values

at March 31, 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 $32,176 at March 31, 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 $78,184 at March 31, 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 March 31, 2009 and December 31, 2008.

Letters of creditAs at March 31, 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.



Note 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, 2007 73,000,694 $ 757,375

Units issued under distribution reinvestment plan 427,230 3,873

Units issued for vested executive compensation plan 16,033 151

Units issued under trustee compensation plan 3,711 38

Balance at March 31, 2008 73,447,668 $ 761,437

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

Units issued under distribution reinvestment plan 202,067 660

Units repurchased pursuant to normal course issuer bid (211,500) (2,180)

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 11,060 38

Balance at March 31, 2009 74,434,338 $ 766,742

Pursuant to the REIT’s normal course issuance bid (the “Bid”), the REIT purchased and cancelled 211,500 units

(December 31, 2008 – 278,500 units) at an average price of $3.26 per unit (December 31, 2008 – $3.36 per unit). The REIT

recognized $1,491 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 planThe 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 March 31, 2009

is 12,608 units. Under the Trustee Compensation Plan, 11,060 units were issued during the three months ended March 31, 2009

(three months ended March 31, 2008 – 3,711 units).

Executive compensation planThe 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 March 31, 2009 is 788,902 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 March 31, 2009, excluding granted units which

have fully vested:

Unvested Units accumulated

executive units from distributions Total units

January 1, 2006 – granted 12,968 5,613 18,581

January 1, 2007 – granted 15,000 5,213 20,213

January 1, 2008 – granted 20,455 4,731 25,186

January 1, 2009 – granted 25,500 1,472 26,972

Units vested 2009 (6,484) (2,546) (9,030)

67,439 14,483 81,922

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.

Note 15 Per unit information

Three months ended Three months ended

March 31, 2009 March 31, 2008

Weighted average units Weighted average units

(Restated, Note 21)

Loss from

continuing operations – basic $ (14,621) 74,439,594 $ (13,697) 73,234,488

Dilutive effect of executive

compensation plan – 79,679 – 61,950

Loss from

continuing operations – diluted $ (14,621) 74,519,273 $ (13,697) 73,296,438


March 31, 2009 March 31, 2008

Weighted average units Weighted average units

Net loss – basic $ (15,420) 74,439,594 $ (15,073) 73,234,488

Dilutive effect of

executive compensation plan – 79,679 – 61,950

Net loss – diluted $ (15,420) 74,519,273 $ (15,073) 73,296,438

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.



Note 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 4% to 5% of hotel revenues, for the reserve for the replacement of furniture, fixtures and

equipment and capital improvements, the accretion on convertible debentures that is included in the computation of net income,

and making any other adjustments determined by the trustees of the REIT in their discretion. As outlined in the Declaration of

Trust, the REIT is required to distribute monthly to unitholders not less than one-twelfth of eighty percent (80%) of distributable

income of the REIT for the calendar year.

First 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.


March 31, 2009 March 31, 2008

Net loss $ (15,420) $ (15,073)

Add (deduct)



Non-cash portion of mortgage interest expense 424 258

Non-cash portion of convertible debentures interest and accretion 784 578

Reserve for replacement of furniture, fixtures and equipment

and capital improvements (5,427) (5,848)




11,667 14,801

Distributable loss (3,753) (272)

Distributions

Required under the Declaration of Trust – –

Discretionary 13,956 20,618

Distributions paid or payable 13,956 20,618

Distributions in excess of distributable loss $ 17,709 $ 20,890



Note 17 Management agreements

Westmont Hospitality Canada LimitedOn 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. No termination fees were paid in the three months ended March 31, 2009 and 2008.

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 months ended March 31, 2009 and 2008, the fees charged to the REIT pursuant to the Agreements were

as follows:

March 31, 2009 March 31, 2008

(Restated, Note 21)

Fees from continuing operations:

Management fees $ 2,407 $ 2,558

Asset management fees (included in management fee expense) 505 650

Accounting services (included in hotel operating expenses) 557 532

Administrative services (included in corporate and administrative expenses) 117 95

Project management and general contractor services

(capitalized to hotel properties) 210 109

Fees from discontinued operations 192 338

$ 3,988 $ 4,282

In addition, salaries of REIT employees paid by Westmont and reimbursed by the REIT were $108 (March 31, 2008 – $36).

Included in accounts payable and accrued liabilities are amounts owed to Westmont at March 31, 2009 totalling $1,324

(December 31, 2008 – $1,484).



Other management agreementsThe 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 months ended March 31, 2009, total management fees paid to Hilton were

$212 (March 31, 2008 – $196).

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 months ended March 31, 2009, total management fees paid to Delta were $118 (March 31, 2008 – $125).

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 months ended March 31, 2009,

total management fees paid for the Legacy Portfolio were $1,829 (March 31, 2008 – $1,975).

Note 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 March 31, 2009.

Western Ontario Quebec Atlantic Total


Hotel revenues $ 36,525 $ 48,046 $ 26,487 $ 16,643 $ 127,701

Hotel expenses 28,228 40,699 24,285 16,073 109,285

Hotel operating income $ 8,297 $ 7,347 $ 2,202 $ 570 $ 18,416

Three months ended March 31, 2008 (Restated, Note 21)

Hotel revenues $ 38,610 $ 51,368 $ 27,937 $ 18,025 $ 135,940

Hotel expenses 29,323 41,465 25,350 16,633 112,771

Hotel operating income $ 9,287 $ 9,903 $ 2,587 $ 1,392 $ 23,169

Capital expenditures on hotel properties

Three months ended March 31, 2009 $ 1,708 $ 2,165 $ 1,558 $ 506 $ 5,937

Three months ended March 31, 2008 (Restated, Note 21) $ 413 $ 1,866 $ 1,351 $ 2,213 $ 5,843

Hotel properties

March 31, 2009 $ 507,389 $ 634,455 $ 395,285 $ 242,779 $ 1,779,908

December 31, 2008 (Restated, Note 21) $ 512,032 $ 637,791 $ 406,931 $ 236,074 $ 1,792,828



Note 19 Total revenues


March 31, 2009 March 31, 2008

(Restated, Note 21)

Hotel revenues $ 127,701 $ 135,940

Other business income (Note 20) 2,729 2,661

$ 130,430 $ 138,601

Note 20 Other business income

Three months Three months

Franchise Retail/ Retirement ended ended

business office residence March 31, 2009 March 31, 2008

Revenues $ 1,793 $ 660 $ 276 $ 2,729 $ 2,661

Expenses 1,300 332 185 1,817 1,668

Other business income, net $ 493 $ 328 $ 91 $ 912 $ 993

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.

Note 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 during the three months ended

March 31, 2009. These five hotels are included in the discontinued operations for the three months ended March 31, 2009 and

the three months ended March 31, 2008 have been restated to reflect these operations as discontinued operations.

Three Ontario hotel properties and one Quebec hotel property which were reclassified as assets held for sale on

December 18, 2007, are included in the discontinued operations for the three months ended March 31, 2008. All but one Ontario

hotel were sold during the year ended December 31, 2008. Subsequent to March 31, 2009, the REIT sold an Ontario hotel

property that was held for sale for $4,100.



Discontinued operations for the three months ended March 31, 2009 and 2008 are as follows:

2009 2008

(Restated)

Hotel revenues $ 4,351 $ 6,307

Hotel expenses

Operating expenses 3,288 4,562

Property taxes, rent and insurance 1,009 1,214

Management fees 147 213

4,444 5,989

Hotel operating (loss) income (93) 318

Interest on mortgages 176 514

Depreciation and amortization 530 680

706 1,194

Loss from discontinued operations (799) (876)


Net loss from discontinued operations $ (799) $ (1,376)

Corporate and unitholder information

Reservations

Corporate office5090 Explorer Drive

Suite 700

Mississauga, Ontario

L4W 4T9

Toll: 1-877-209-3429

Phone: 905-206-7100

Fax: 905-206-7114

Website: www.innvestreit.com

Stock exchange listingThe Toronto Stock Exchange

Trading Symbol: INN.UN

Convertible Debentures: INN.DB.A, INN.DB.B, INN.DB.C

Best Western

Comfort Inn, Quality Inn

Delta Hotels

Fairmont Hotels & Resorts

Hilton Garden Inn

Hilton Hotels

Holiday Inn, Holiday Inn Select, Holiday Inn Express

Homewood Suites Hotels

Radisson

Sheraton Hotels & Resorts

Staybridge Suites Hotels

Travelodge

Registrar and transfer agentInquiries regarding change of address, registered

holdings, transfers and duplicate mailings should

be directed to the following:

Computershare Trust Company of Canada

100 University Avenue

11th floor

Toronto, Ontario

Phone: 1-800-564-6253

Fax: 1-866-249-7775

Investor relationsEmail: [email protected]

Distribution reinvestment planUnitholders may acquire units by reinvesting cash distributions

without paying brokerage commissions or administrative

charges. For general information concerning the Distribution

Reinvestment Plan or for a change of address, please contact

the registrar and transfer agent.

1-800-780-7234

1-800-424-6423

1-888-890-3222

1-800-257-7544

1-877-STAY-HGI (1-877-782-9444)

1-800-HILTONS (1-800-445-8667)

1-888-HOLIDAY (1-888-465-4329)

1-800-CALL-HOME (1-800-225-5466)

1-888-201-1718

1-800-325-3535

1-877-660-8550

1-800-578-7878

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