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Press release from Marketwire

InnVest REIT Reports First Quarter Results

Friday, May 07, 2010

InnVest REIT Reports First Quarter Results08:01 EDT Friday, May 07, 2010TORONTO, ONTARIO--(Marketwire - May 7, 2010) - InnVest Real Estate Investment Trust ("InnVest" or the "Trust") (TSX:INN.UN) today announced financial results for the three months ended March 31, 2010. Unless otherwise indicated, monetary data is in thousands of dollars, except for per unit, average daily rate ("ADR"), and revenue per available room ("RevPAR") amounts."We continue to see a moderating rate of decline in top-line performance. Notably, RevPAR in March was approximately 1% below the prior year with similar trends experienced in April. We are hopeful that improvements in the broader economy will continue to positively affect the lodging industry and our hotel operating results," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "While we expect that the worst may be behind us, we continue to manage our portfolio conservatively with ongoing emphasis on maximizing profits."First Quarter Highlights -- Revenue per available room ("RevPAR") on a same hotel basis declined 4.7% driven by continued caution in the economic environment and its impact on discretionary travel demand. Occupancy and average daily rates ("ADR") declined 1.7 points and 1.5%, respectively. InnVest did not benefit from the positive travel demand trends of the Olympics during the first quarter given its lack of presence in the Vancouver area; -- Overall, hotel revenues declined 4.2%, or $5.4 million, to $122.3 million; -- Hotel operating margins declined 150 basis points reflecting the RevPAR decline which was somewhat offset by a 2.6% reduction in hotel expenses. Overall, hotel operating income ("HOI") declined $2.6 million to $15.8 million; -- InnVest realized a net loss of $26.5 million compared to a loss of $15.4 million in 2009. This decline largely relates to a $6.5 million reduction in year-over-year future income tax recovery. The prior period recovery reflected provincial tax rate changes which were enacted in March 2009; and -- Distributable loss and funds from operations were both lower reflecting the impact of the lower HOI achieved. The first quarter is traditionally InnVest's lowest earnings period. Given the seasonality of the portfolio, the first quarter is not reflective of anticipated results for the annual period. Revenues are typically higher in the second and third quarters due to business and leisure travel trends as compared to the first and fourth quarters.FINANCIAL HIGHLIGHTS (unaudited) ---------------------------------------------------------------------------- (In thousands of dollars except average daily rate, revenue per available room and per unit amounts) ---------------------------------------------------------------------------- Three months ended March 31 ---------------------------------------------------------------------------- 2010 2009 +/- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Occupancy 50.9% 52.6% (1.6)% ---------------------------------------------------------------------------- Average daily rate ("ADR") $112.34 $114.09 ($1.75) ---------------------------------------------------------------------------- Revenue Per Available Room ("RevPAR") $57.23 $59.98 ($2.75) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Hotel revenues $122,276 $127,701 ($5,425) ---------------------------------------------------------------------------- Hotel operating income(1) $15,810 $18,416 ($2,606) ---------------------------------------------------------------------------- Net loss and comprehensive loss ($26,484) ($15,420) ($11,064) ---------------------------------------------------------------------------- Add / (deduct) Depreciation and amortization 23,240 22,712 528 Future income tax recovery (433) (6,931) 6,498 Non-cash executive and trustee compensation 55 86 (29) Net writedown on and sale of assets held for sale - - - Writedown of hotel properties - - - ---------------------------------------------------------------------------- Funds from operations(1)(2) ($3,622) $447 ($4,067) ---------------------------------------------------------------------------- Funds from operations per unit - basic ($0.041) $0.006 ($0.047) - diluted ($0.041) $0.006 ($0.047) ---------------------------------------------------------------------------- Amortization of deferred financing costs - 17 (17) Non-cash portion of mortgage interest expense 482 424 58 Reserve for replacement of furniture, fixtures and equipment and capital improvements (5,154) (5,427) 273 Non-cash portion of convertible debentures interest and accretion 615 784 (169) Deferred land lease expense and retail lease income, net 25 2 23 ---------------------------------------------------------------------------- Distributable loss(1) ($7,654) ($3,753) ($3,901) ---------------------------------------------------------------------------- Distributable loss per unit(3) - basic ($0.087) ($0.050) ($0.037) - diluted ($0.087) ($0.050) ($0.037) ---------------------------------------------------------------------------- Distributions per unit(4) $0.1251 $0.1875 ($0.062) ---------------------------------------------------------------------------- (1) Hotel operating income, funds from operations and distributable income are non-GAAP measures of earnings and cash flow commonly used by industry analysts. Non-GAAP financial measures do not have a standardized meaning and are unlikely to be comparable to similar measures used by other organizations. (2) For purposes of the calculation of funds from operations, amortization of deferred financing is excluded from depreciation and amortization. (3) Distributable income per unit has been calculated on a basis consistent with that prescribed by GAAP for calculating earnings per unit. (4) Distributions per unit include cash distributions and distributions arising from the Distribution Reinvestment Plan. The operating statistics relating to room revenues are on a same-hotel basis and exclude the hotels that have been classified as discontinued operations and hotels that have not been included in operating results for the full periods presented. For the three months ended March 31, 2010 Occupancy ADR RevPAR Variance Variance % Variance to $ to $ to 2009 2009 2009 Ontario 48.5% (2.6 pts) $107.50 (2.1%) $52.19 (7.0%) Quebec 52.8% 0.6 pts $106.14 0.4% $56.04 1.5% Atlantic 49.2% 0.1 pts $104.00 (0.5%) $51.22 (0.2%) Western 55.3% (3.9 pts) $134.63 (1.8%) $74.43 (8.2%) --------------------------------------------------------- Total 50.9% (1.7 pts) $112.44 (1.5%) $57.27 (4.7%) FINANCIAL REVIEW (In thousands of dollars, except per unit amounts, unless otherwise stated)Three months ended March 31, 2010Since mid-2008, operating results have been impacted by a soft economic environment. The hospitality industry is highly correlated to the economy given its impact on discretionary travel demand, including corporate and leisure customers. InnVest's portfolio has experienced declining RevPAR trends since the fourth quarter of 2008 with a slowing rate of decline over the last three quarters. For the three months ended March 31, 2010, hotel revenues decreased by $5.4 million, or 4.2%, to $122.3 million.For the three months ended March 31, 2010, RevPAR decreased 4.7% based on a 1.5% decrease in ADR and a 1.7 point decline in overall occupancy. RevPAR trends were generally consistent across full- service and limited-service hotels. The prolonged period of occupancy declines has resulted in increasing ADR pressures and ADR discounting, as hotels competed to attract a smaller base of customer demand. As highlighted by regional performance during the quarter, improving occupancy is a key factor in enabling hotels to increase ADR.Consistent with RevPAR trends, room revenues for the three months ended March 31, 2010 decreased $3.9 million, or 4.0%, to $94.2 million. Regional performance varied based on broader regional factors. Western Canada saw the largest decline in year-over-year performance owing to softness in Calgary and Edmonton which had lower group activity as compared to the prior period along with lower demand from the resource sector generally. Ontario continues to struggle with lower demand across most markets coupled with new supply over the past several years.For the three months ended March 31, 2010, non-room revenues totalled $28.1 million, down $1.5 million or 5.1% compared to the prior year. Non-room revenues are directly impacted by overall occupancy since lower occupancy results in the reduced use of ancillary services offered at our hotels.In light of the declining RevPAR environment since late 2008, the Trust has been focusing on managing all costs to minimize the overall impact on profitability, without impacting the service levels offered to guests. Further savings opportunities are limited given the extent of adjustments already made throughout the portfolio. In addition, 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, 2010 declined $2.8 million or 2.6% when compared to 2009. The decrease reflects reduced occupancies and cost containment initiatives implemented over the past year.Given the overall decline in revenues, first quarter HOI margins declined 150 basis points to 12.9%. First quarter margins are not representative of annual margins achieved for the portfolio given the seasonality of earnings.For the three months ended March 31, 2010, the Trust generated HOI of $15.8 million, down $2.6 million or 14.2% as compared to the prior year. Typically, declining revenues, or revenue growth below inflation, will result in a disproportionate decline in profitability given the considerable amount of fixed operating costs. This is particularly true during the first quarter which is typically the lowest occupancy period of the year.Other income and expenses for the three months ended March 31, 2010 totalled $42.3 million, compared to $40.0 million in 2009. The increase relates to a $1.0 million increase in the non-cash depreciation charge as well as higher interest on mortgages (refinanced a maturing mortgage at a higher rate in the third quarter of 2009) and convertible debentures (InnVest issued a $50.0 million convertible debenture in late 2009).InnVest's net loss for the three months ended March 31, 2010 was $26.5 million, or a loss of $0.302 per unit basic and diluted. This compares to a net loss of $15.4 million, or $0.207 per unit basic and diluted for the same period in 2009. This variance reflects the $2.6 million decline in HOI achieved in 2010, higher interest and depreciation expenses as well as a $6.5 million reduction in future income tax recoveries as compared to the prior period. The reduction in per unit results also reflects the higher number of units outstanding in 2010 as compared to 2009 given an equity offering of 12,658,500 units in October 2009.For the three months ended March 31, 2010, InnVest generated FFO of ($3.6) million ($0.041 per unit diluted) compared to $447 in the prior period ($0.006 per unit diluted). InnVest generated a distributable loss of $7.7 million ($0.087 per unit diluted) compared to a distributable loss of $3.8 million in the prior year ($0.050 per unit diluted). The declines are primarily attributable to the reduction in HOI for the first quarter, higher interest expenses as well as the higher number of units outstanding following an equity offering in October 2009.Distributions declared in the three months ended March 31, 2010 totalled $11.0 million compared to $14.0 million in the prior year. The Trust reduced its monthly distribution to $0.0417 per unit beginning in September 2009 (from $0.0625 per unit). This reduction was somewhat offset by the additional units issued in October 2009. InnVest's payout ratio for the twelve months ended March 31, 2010 was 101.4%. Assuming the current distribution rate and number of units outstanding, this twelve month payout ratio would have approximated 92.0%.BALANCE SHEET REVIEWAt March 31, 2010, InnVest had cash on hand totalling $83.5 million, of which $3.7 million is restricted under the Trust's Declaration of Trust for the replacement of furniture, fixtures, and equipment and for capital improvements. The Trust also has access to an undrawn $40.0 million credit facility.At March 31, 2010, the Trust had a $6.0 million bridge loan secured by a hotel. This bridge loan was extended to March 1, 2011 during the quarter which required a pay-down of $1.0 million.At March 31, 2010, the Trust's leverage excluding and including convertible debentures was 45.1% and 56.5%, respectively. InnVest has mortgages payable of $934.9 million with a weighted average term of 2.9 years and a weighted average interest rate of 5.9%. Approximately 10.2% of the Trust's mortgage debt is at floating rate. The current portion of long-term debt primarily reflects a $264.8 million mortgage maturity in February 2011. This mortgage maturity includes two one-year extensions, at InnVest's option, subject to certain minimum thresholds at the time of maturity. A mortgage paydown is anticipated to exercise the extension option. Management believes that the extension option is a viable option for the Trust and expects to address the current maturity in the normal course of business.Following the end of the quarter, $2.0 million of the Trust's Series D convertible debentures were converted to 359,472 units.For the three months ended March 31, 2010, capital expenditures totalled $6.0 million compared to the Trust's furniture, fixture and equipment reserve ("FF&E reserve") of $5.2 million. Capital expenditures are often scheduled during lower occupancy periods such as the first quarter to minimize the potential displacement of business. As a result, it is not unusual for capital expenditures to exceed the FF&E reserve during this period. The Trust expects its capital investments to be largely funded through its FF&E reserve and restricted cash on hand during the year.INCOME TAX DEFERRAL PERCENTAGEFor 2010, the Trust estimates that the non-taxable portion of the distributions made to unitholders during the year will approximate 60% (2009 - 70%).QUALIFYING REIT PROCESSInnVest is pursuing a reorganization in order to become a Qualifying REIT and not be subject to tax under the Canadian income tax rules applicable to "SIFT" trusts. The reorganization, which would occur under a plan of arrangement, would take effect only upon receiving approval from InnVest's trustees and unitholders, as well as all necessary regulatory approvals.As currently contemplated, under the reorganization InnVest would transfer all of its directly and indirectly held operating assets to a newly-formed taxable entity ("New Entity"). The New Entity (through its subsidiaries) would hold the operating assets, earn revenues from hotel customers and pay rent to InnVest (the owner of the hotels).Each InnVest unitholder would receive one unit of the New Entity for each InnVest unit held. Thereafter, each issued and outstanding InnVest unit would trade together with a unit of the New Entity on a "stapled" basis.Before proceeding with the reorganization, unitholder approval will be sought at InnVest's annual and special meeting to be held June 16, 2010 in Toronto. Detailed information regarding the proposed reorganization will be included in the annual and special meeting materials.OUTLOOKHistorically, the lodging industry performance has been highly correlated with the general economy given the discretionary nature of leisure and business travel. The lodging industry recovery will typically lag an economic recovery until businesses and consumers gain confidence in the sustainability of the recovery. The North American economies are showing signs of improvement. Negative year-over-year operating trends in the lodging sector have been abating. However, expectations are that any recovery will be protracted.The Trust continues to manage its portfolio aggressively to maximize the performance of each hotel. In addition, the Trust is continually seeking opportunities to recycle its capital efficiently and is actively pursuing the sale of certain underperforming non-core assets.The Trust has a strong balance sheet and liquidity position and continues to be proactive in its capital management efforts, including efforts to address its upcoming debt maturities.With new supply effectively constrained by the credit markets and a strong balance sheet, InnVest is well positioned for a recovery when demand trends improve. InnVest's current portfolio is diversified by geography, customer and brand. This diversity, combined with its partnerships with experienced hotel operators, contributes to the resiliency of the portfolio and positions InnVest to effectively benefit from the improving economic environment.FORWARD LOOKING STATEMENTSStatements contained in this press release that are not historical facts are forward-looking statements which involve risk and uncertainties which could cause actual results to differ materially from those expressed in the forward-looking statements. Among the key factors that could cause such differences are real estate investment risks, hotel industry risks and competition. These and other factors are discussed in InnVest's 2009 annual information form which is available at www.sedar.com or www.innvestreit.com. InnVest disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by applicable securities law.TRUST PROFILEInnVest holds Canada's largest hotel portfolio together with an interest in Choice Hotels Canada Inc. the largest franchisor of hotels in Canada. The hotel portfolio currently comprises 144 hotel properties, with approximately 19,000 guest rooms, operated under internationally recognized franchise brands such as Comfort Inn(R), Holiday Inn(R) Quality Suites/Inn(R), Radisson(R), Delta(R), Travelodge(R), Hilton Hotel(R), Staybridge Suites(R), Fairmont Hotels(R), Sheraton Suites(R) and Best Western(R). InnVest's trust units and outstanding convertible debentures trade on the Toronto Stock Exchange under the symbols INN.UN, INN.DB.A, INN.DB.B, INN.DB.C and INN.DB.D, respectively.QUARTERLY CONFERENCE CALLManagement will host a conference call on Friday May 7, 2010 at 11:00 a.m. Eastern time to discuss the performance of InnVest. Investors are invited to access the call by dialing (416) 340-8018 or 1-866-223- 7781. You will be required to identify yourself and the organization on whose behalf you are participating. A recording of this call will be made available May 7th beginning at 1:00 pm through to 11:59 p.m. on May 14th. To access the recording please call (416) 695-5800 and use the reservation number 6214677#. InnVest Real Estate Investment Trust ---------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS March 31, December 31, (in thousands of dollars) (unaudited) 2010 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ASSETS Current Assets Cash $ 79,775 $ 101,054 Accounts receivable 20,376 22,409 Prepaid expenses and other assets 11,920 7,877 Assets held for sale (Note 21) 462 300 ---------------------------------------------------------------------------- 112,533 131,640 Restricted cash 3,690 3,815 Hotel properties (Note 3) 1,702,187 1,715,532 Other real estate properties (Note 4) 15,747 15,770 Licence contracts (Note 5) 16,208 16,537 Intangible and other assets (Note 6) 33,303 36,003 Assets held for sale (Note 21) 30,912 30,912 ---------------------------------------------------------------------------- $ 1,914,580 $ 1,950,209 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- LIABILITIES Current Liabilities Bank indebtedness (Note 7) $ 6,000 $ - Accounts payable and accrued liabilities 70,594 64,922 Acquisition related liabilities 1,973 2,034 Distributions payable 3,655 3,649 Current portion of long-term debt (Note 8) 122,637 21,252 Liabilities related to assets held for sale (Note 21) 852 882 ---------------------------------------------------------------------------- 205,711 92,739 Long-term debt (Note 8) 806,533 919,356 Other long-term obligations (Note 9) 7,592 6,896 Convertible debentures (Note 10) 226,518 225,918 Future income tax liability (Note 12) 185,997 186,430 Long-term liabilities related to assets held for sale (Note 21) 11,937 11,881 ---------------------------------------------------------------------------- 1,444,288 1,443,220 UNITHOLDERS' EQUITY 470,292 506,989 ---------------------------------------------------------------------------- $ 1,914,580 $ 1,950,209 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment Trust ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS Three Three Months Ended Months Ended (in thousands of dollars, except per unit March 31, March 31, amounts) (unaudited) 2010 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Total revenues (Note 19) $ 125,105 $ 130,430 Hotel revenues $ 122,276 $ 127,701 ---------------------------------------------------------------------------- Hotel expenses Operating expenses (Note 17) 88,765 90,835 Property taxes, rent and insurance 13,150 13,394 Management fees (Note 17) 4,551 5,056 ---------------------------------------------------------------------------- 106,466 109,285 ---------------------------------------------------------------------------- Hotel operating income 15,810 18,416 ---------------------------------------------------------------------------- Other (income) and expenses Interest on mortgages and other debt 14,276 13,672 Convertible debentures interest and accretion 4,320 3,604 Corporate and administrative (Note 17) 1,514 1,359 Capital tax 34 51 Other business income, net (Note 20) (984) (912) Other income (101) (5) Depreciation and amortization 23,240 22,199 ---------------------------------------------------------------------------- 42,299 39,968 ---------------------------------------------------------------------------- Loss from continuing operations before income tax recovery (26,489) (21,552) Future income tax recovery (Note 12) (433) (6,931) ---------------------------------------------------------------------------- Loss from continuing operations (26,056) (14,621) ---------------------------------------------------------------------------- Loss from discontinued operations (Note 21) (428) (799) ---------------------------------------------------------------------------- Net loss and comprehensive loss $ (26,484) $ (15,420) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Loss from continuing operations, per unit (Note 15) Basic and diluted $ (0.298) $ (0.196) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net loss per unit (Note 15) Basic and diluted $ (0.302) $ (0.207) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Loss from discontinued operations, per unit Basic and diluted $ (0.004) $ (0.011) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment Trust ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY Cumulative Net Income (in thousands of and dollars) Comprehensive Cumulative Units (unaudited) Income (Loss) Distributions Deficit in $ ---------------------------------------------------------------------------- Balance December 31, 2008 $ 134,546 $ (378,164) $ (243,618) $ 768,034 CHANGES DURING THE PERIOD Net loss and comprehensive loss (15,420) - (15,420) - Distributions to unitholders (Note 16) - (13,956) (13,956) - Distribution reinvestment plan units issued (Note 14) - - - 660 Units repurchased pursuant to normal course issuer bid (Note 14) - - - (2,180) Conversion of debentures - - - 20 Vested executive compensation - - - 170 Executive and trustee compensation - - - 38 ---------------------------------------------------------------------------- Balance March 31, 2009 $ 119,126 $ (392,120) $ (272,994) $ 766,742 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance December 31, 2009 $ 103,623 $ (429,461) $ (325,838) $ 815,190 CHANGES DURING THE PERIOD Net loss and comprehensive loss (26,484) - (26,484) - Distributions to unitholders (Note 16) - (10,959) (10,959) - Distribution reinvestment plan units issued (Note 14) - - - 676 Conversion of debentures - - - 15 Vested executive compensation - - - 225 Executive and trustee compensation - - - - ---------------------------------------------------------------------------- Balance March 31, 2010 $ 77,139 $ (440,420) $ (363,281) $ 816,106 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- InnVest Real Estate Investment Trust ----------------------------------------------------------------- CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY Convertible Debentures (in thousands of Holders' dollars) Contributed Conversion (unaudited) Surplus Option Total ----------------------------------------------------------------- Balance December 31, 2008 $ 2,672 $ 8,642 $ 535,730 CHANGES DURING THE PERIOD Net loss and comprehensive loss - - (15,420) Distributions to unitholders (Note 16) - - (13,956) Distribution reinvestment plan units issued (Note 14) - - 660 Units repurchased pursuant to normal course issuer bid (Note 14) 1,491 - (689) Conversion of debentures - - 20 Vested executive compensation (170) - - Executive and trustee compensation 48 - 86 ----------------------------------------------------------------- Balance March 31, 2009 $ 4,041 $ 8,642 $ 506,431 ----------------------------------------------------------------- ----------------------------------------------------------------- Balance December 31, 2009 $ 4,995 $ 12,642 $ 506,989 CHANGES DURING THE PERIOD Net loss and comprehensive loss - - (26,484) Distributions to unitholders (Note 16) - - (10,959) Distribution reinvestment plan units issued (Note 14) - - 676 Conversion of debentures - - 15 Vested executive compensation (225) - - Executive and trustee compensation 55 - 55 ----------------------------------------------------------------- Balance March 31, 2010 $ 4,825 $ 12,642 $ 470,292 ----------------------------------------------------------------- ----------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment Trust --------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Three Three Months Ended Months Ended (in thousands of dollars) (unaudited) March 31, 2010 March 31, 2009 --------------------------------------------------------------------------- --------------------------------------------------------------------------- OPERATING ACTIVITIES Loss from continuing operations $ (26,056) $ (14,621) Add (deduct) items not affecting operations Depreciation and amortization 23,240 22,199 Non-cash portion of mortgage interest expense 482 424 Non-cash portion of convertible debentures interest and accretion 615 780 Future income tax recovery (433) (6,931) Non-cash executive and trustee compensation 56 86 Discontinued operations (545) (560) Changes in non-cash working capital 3,588 (3,562) --------------------------------------------------------------------------- 947 (2,185) --------------------------------------------------------------------------- FINANCING ACTIVITIES Repayment of long-term debt (4,920) (2,653) Units repurchased pursuant to normal course issuer bid (Note 14) - (689) Unit distributions (10,277) (13,295) Increase in operating loan - 20,200 Repayment of bridge loan (1,000) - Discontinued operations repayment of debt (19) (2,886) --------------------------------------------------------------------------- (16,216) 677 --------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures on hotel properties (5,991) (5,937) Hotel under development expenditures, net - (82) Change in intangible and other assets (144) (656) Decrease in restricted cash 125 541 Discontinued operations capital expenditures - (31) --------------------------------------------------------------------------- (6,010) (6,165) --------------------------------------------------------------------------- Decrease in cash during the period (21,279) (7,673) Cash, beginning of period 101,054 18,143 --------------------------------------------------------------------------- Cash, end of period $ 79,775 $ 10,470 --------------------------------------------------------------------------- --------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid for interest $ 16,816 $ 15,686 Cash paid for income taxes (including capital tax) $ 53 $ 76 The accompanying notes are an integral part of these consolidated financial statements.InnVest Real Estate Investment TrustNOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2010 (all dollar amounts are in thousands, except unit and per unit amounts) (unaudited)1. Basis of PresentationInnVest 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, 2010, the REIT owned 145 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, 2009, 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, 2009.Revenues earned from hotel operations fluctuate throughout the year, with the third quarter being the highest due to the increased level of leisure travel in the summer months, and the first quarter being the lowest as leisure travel tends to be lower at that time of year.2. Significant Accounting PoliciesFuture Accounting ChangesInternational Financial Reporting Standards ("IFRS")The Canadian Accounting Standards Board ("AcSB") confirmed that the adoption of IFRS would be effective for the interim and annual periods beginning on or after January 1, 2011 for Canadian publicly accountable profit-oriented enterprises. IFRS will replace Canadian GAAP for these enterprises. Comparative IFRS information for the previous fiscal year will also have to be reported. These new standards will be effective for the REIT in the first quarter of 2011.The REIT is currently in the process of evaluating the potential impact of IFRS to its consolidated financial statements as part of the REIT's IFRS transition project. This will be an ongoing process as the International Accounting Standards Board ("IASB") and the Canadian AcSB issue new standards and recommendations. The REIT's consolidated financial position as disclosed in the REIT's current Canadian GAAP financial statements are expected to be significantly different when presented in accordance with IFRS.3. Hotel Properties December 31, 2009 Accumulated March 31, 2010 Net Book Cost Depreciation Net Book Value Value ---------------------------------------------------------------------------- Land $ 184,248 $ - $ 184,248 $ 184,248 Buildings 1,681,855 240,396 $ 1,441,459 1,451,740 Furniture, fixtures and equipment 144,361 67,881 $ 76,480 79,544 ---------------------------------------------------------------------------- $ 2,010,464 $ 308,277 $ 1,702,187 $ 1,715,532 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 4. Other Real Estate PropertiesOther real estate properties include office and retail properties and a retirement residence. December 31, Accumulated March 31, 2010 2009 Net Cost Depreciation Net Book Value Book Value ---------------------------------------------------------------------------- Land $ 1,624 $ - $ 1,624 $ 1,624 Buildings 15,565 1,497 14,068 14,095 Furniture, fixtures and equipment 103 48 55 51 ---------------------------------------------------------------------------- $ 17,292 $ 1,545 $ 15,747 $ 15,770 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 5. Licence Contracts December 31, Accumulated March 31, 2010 2009 Net Cost Amortization Net Book Value Book Value ---------------------------------------------------------------------------- Licence contracts $ 26,320 $ 10,112 $ 16,208 $ 16,537 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the three months ended March 31, 2010, the licence contracts were amortized by $329 (March 31, 2009 - $329)6. Intangible and Other Assets March 31, December 31, Accumulated 2010 Net 2009 Net Book Cost Amortization Book Value Value ---------------------------------------------------------------------------- Intangible Assets: Customer relationships $ 48,738 $ 26,975 $ 21,763 $ 24,154 Tenant relationships 2,576 1,864 $ 712 833 Franchise rights 3,244 1,288 $ 1,956 1,936 Lease origination costs 6,256 1,064 $ 5,192 5,340 Other 1,039 800 $ 239 299 ---------------------------------------------------------------------------- Total Intangible Assets 61,853 31,991 29,862 32,562 Other Assets: Mortgages receivable 3,441 - $ 3,441 3,441 ---------------------------------------------------------------------------- Total Intangible and Other Assets $ 65,294 $ 31,991 $ 33,303 $ 36,003 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the three months ended March 31, 2010, the intangible assets were amortized by $2,844 (March 31, 2009 - $2,810).7. Bank IndebtednessAs at March 31, 2010, the bridge loan amount was $6,000 (December 31, 2009 - $7,000 was reclassified as long-term debt). Upon the extension of the loan to March 1, 2011 during the three months ended March 31, 2010 the REIT paid down $1,000. The extension bears interest at Canadian Bankers' Acceptance rate plus 3.5% and requires interest payments only. The REIT has provided an unencumbered hotel as security.8. Long-term Debt March 31, 2010 December 31, 2009 ---------------------------------------------------------------------------- Mortgages payable $ 934,919 $ 946,755 Less debt issuance costs (5,749) (6,147) ---------------------------------------------------------------------------- Total long-term debt 929,170 940,608 Less current portion (284,554) (21,252) ---------------------------------------------------------------------------- Net long-term debt $ 644,616 $ 919,356 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Substantially all of the REIT's assets have been pledged as security under debt agreements. At March 31, 2010, long- term debt had a weighted average interest rate of 5.9 % (December 31, 2009 - 5.9%) and a weighted average effective interest rate of 6.1% (December 31, 2009 - 6.1%). The long-term debt is repayable in average monthly payments of principal and interest totalling $6,151 (December 31, 2009 - $6,190) per month, and matures at various dates from February 28, 2011 to March 21, 2018.The REIT has a $40,000 operating line that is a term facility which bears interest at either, Canadian bank prime rate plus 2.5% or Canadian Bankers' Acceptance rate plus 3.5%. It is secured by 14 properties and is due August 31, 2011. The amount of the operating line is subject to a mortgageability test which is based on the operating results of the secured properties, calculated quarterly on a trailing-four-quarters basis. Based on the operating results of the secured properties for the four quarters ended March 31, 2010, the REIT qualifies for the maximum amount of $40,000. The amount drawn on the operating line as at March 31, 2010 was $ nil (December 31, 2009 - $ nil).Scheduled repayment of long-term debt is as follows: Regular Amortization Due on Maturity Total ---------------------------------------------------------------------------- Remainder of 2010 $ 15,407 $ - $ 15,407 2011 16,950 315,682 332,632 2012 18,060 172,644 190,704 2013 14,257 - 14,257 2014 8,032 283,764 291,796 2015 and thereafter 4,828 85,295 90,123 ---------------------------------------------------------------------------- $ 77,534 $ 857,385 $ 934,919 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The current portion of long-term debt on the balance sheet is based on the twelve months ending March 31, 2011, whereas the repayment schedule above reflects the fiscal year. The REIT has the option to extend $264,806 of its mortgages due February 28, 2011 for two one-year terms, subject to certain minimum thresholds at the time of maturity.The estimated fair value of the REIT's long-term debt at March 31, 2010 was approximately $900,988 (December 31, 2009 - $912,912). This estimate was determined by discounting expected cash flows at interest rates that reflect current market conditions for debt with similar terms, maturities and risk.Long-term debt includes $95,822 (December 31, 2009 - $103,117) of mortgages payable, which are subject to floating interest rates. Annual interest expense will increase by $958 for every 1% increase in the base Bankers' Acceptance rate.Interest expense on mortgages and other debt, interest on operating and bridge loans, and convertible debentures interest are considered operating items in the statements of cash flows.9. Other Long-term Obligations March 31, 2010 December 31, 2009 ---------------------------------------------------------------------------- Capital leases $ 1,549 $ 1,549 Other lease obligations 794 767 ---------------------------------------------------------------------------- 2,343 2,316 Less current portion (276) (276) ---------------------------------------------------------------------------- Total lease obligations 2,067 2,040 Pension liability 3,265 3,304 Asset retirement obligation 2,260 1,552 ---------------------------------------------------------------------------- Total other long-term obligations $ 7,592 $ 6,896 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Defined Benefit Pension PlansThe defined benefit pension plans are for certain hotels in the REIT. The most recent actuarial valuation with respect to the funding of the REIT's pension plans was prepared on December 31, 2008.The pension plan liability as at March 31, 2010 consists of the following: Non-Union Non- Management Management March 31, Pension Pension 2010 December 31, Benefit Benefit Benefit 2009 Total Plans Plans Plans Benefit Plans ---------------------------------------------------------------------------- Accrued benefit obligation $ 4,617 $ 1,375 $ 5,992 $ 5,872 Fair value of plan assets 2,319 1,256 3,575 3,432 ---------------------------------------------------------------------------- Funded status - plan deficit 2,298 119 2,417 2,440 Unamortized net actuarial gain (loss) 872 (24) 848 864 ---------------------------------------------------------------------------- Accrued employee future benefit liability $ 3,170 $ 95 $ 3,265 $ 3,304 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The pension expense for the three months ended March 31, 2010 is $147 (March 31, 2009 - $98).10. Convertible DebenturesThe details of the four series of convertible debentures are outlined in the tables below: Effective Original Converted Maturity Interest Interest Face to Trust Debenture Date Rate Rate Amount Units Series A April 15, 2011 6.25% 7.73% $ 57,500 $ (11,736) Series B May 31, 2013 6.00% 7.53% 75,000 (20) Series C August 1, 2014 5.85% 7.42% 70,000 - Series D March 31, 2016 6.75% 9.41% 50,000 (15) --------------------------------------------------------------------------- $ 252,500 $ (11,771) --------------------------------------------------------------------------- --------------------------------------------------------------------------- Face Holders' Accretion Maturity Amount Conversion and Issue March 31, Debenture Date Outstanding Option Costs 2010 Series A April 15, 2011 $ 45,764 $ (2,289) $ 1,517 $ 44,992 Series B May 31, 2013 74,980 (3,400) 71 71,651 Series C August 1, 2014 70,000 (2,953) (1,166) 65,881 Series D March 31, 2016 49,985 (4,000) (1,991) 43,994 ---------------------------------------------------------------------------- $ 240,729 $ (12,642) $ (1,569) $ 226,518 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Effective Original Converted Interest Interest Face to Trust Debenture Maturity Date Rate Rate Amount Units ------------------------------------------------------------------------- Series A April 15, 2011 6.25% 7.73% $ 57,500 $ (11,736) Series B May 31, 2013 6.00% 7.53% 75,000 (20) Series C August 1, 2014 5.85% 7.42% 70,000 - Series D March 31, 2016 6.75% 9.41% 50,000 - ------------------------------------------------------------------------- $ 252,500 $ (11,756) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Holders' Accretion December Face Amount Conversion and Issue 31, Debenture Maturity Date Outstanding Option Costs 2009 ---------------------------------------------------------------------------- Series A April 15, 2011 $ 45,764 $ (2,289) $ 1,518 $ 44,993 Series B May 31, 2013 74,980 (3,400) (160) 71,420 Series C August 1, 2014 70,000 (2,953) (1,367) 65,680 Series D March 31, 2016 50,000 (4,000) (2,175) 43,825 ---------------------------------------------------------------------------- $ 240,744 $ (12,642) $ (2,184) $ 225,918 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The fair value of the REIT's convertible debentures, estimated based on the market rates for convertible debentures as at March 31, 2010, is $246,443 (December 31, 2009 - $234,445).11. Capital ManagementThe 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, 2010, 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, 2010, the REIT's leverage excluding and including convertible debentures was 45.1% and 56.5%; respectively, calculated as follows: December 31, March 31, 2010 2009 ---------------------------------------------------------------------------- Total assets per consolidated balance sheet $ 1,914,580 $ 1,950,209 Accumulated depreciation and amortization 366,741 345,098 Future income tax liability (185,997) (186,430) Future income tax liability not included in assets 15,991 16,114 ---------------------------------------------------------------------------- Gross asset value $ 2,111,315 $ 2,124,991 ---------------------------------------------------------------------------- Book value of mortgages and other indebtedness (1) $ 952,856 45.1%$ 958,636 45.1% Convertible debentures (2) 240,729 11.4% 240,744 11.3% ---------------------------------------------- ----------------------------- $ 1,193,585 56.5%$ 1,199,380 56.4% ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (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 Note12. The REIT can issue, on a cumulative basis, a total of approximately $143,000 in equity annually in each of 2008, 2009 and 2010 and maintain its relief from taxation to the end of 2010. The REIT issued $916 in equity during the three months ended March 31, 2010 (March 31, 2009 - $888).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 12 months consolidated earnings before interest, taxes, depreciation and amortization ("EBITDA") to consolidated interest expense of not less than 2.0 times (actual being 2.1 times at March 31, 2010 and 2.2 times at December 31, 2009); b. Trailing 12 months consolidated EBITDA to consolidated debt service of not less than 1.5 times (actual being 1.8 times at March 31, 2010 and 1.9 times at December 31, 2009); and c. Unitholders' Equity of not less than $300,000 (actual being $470,292 at March 31, 2010 and $506,989 at December 31, 2009). 12. Income Taxes and Future Income Tax LiabilityInnVest 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 (see Note 16).Under the Canadian income tax rules applicable to "SIFT" trusts, most publicly traded income funds will be taxed on their income commencing in 2011 in a similar manner to Canadian public corporations. In order to not be subject to tax under these SIFT rules, InnVest must qualify continuously as a Real Estate Investment Trust for Canadian income tax purposes (a "Qualifying REIT") from the beginning of 2011 onwards. If InnVest does not become a Qualifying REIT by then, the level of cash distributions to unitholders may be adversely affected.InnVest is pursuing a reorganization in order to become a Qualifying REIT. The reorganization, which would occur under a plan of arrangement, would take effect only upon receiving approval from InnVest's trustees and unitholders, as well as all necessary regulatory approvals, including conditional approval from the Toronto Stock Exchange.As currently contemplated, under the reorganization InnVest would transfer all of its directly and indirectly held operating assets to a newly formed taxable entity (the "New Entity"). The New Entity (through its subsidiaries) would hold the operating assets, earn revenues from hotel customers and pay rent to InnVest (who would continue to be the owner of the hotels). Each InnVest unitholder would receive one unit of the New Entity for each InnVest unit held. Thereafter, each issued and outstanding InnVest unit would trade together with a unit of the New Entity on a "stapled" basis.13. Financial InstrumentsRisk 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 RiskThe time period over which management is spreading debt maturities implies an average term to maturity of approximately three 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, 2010, the REIT's floating rate debt balance of $95,822 (December 31, 2009 - $103,117) is approximately 10.2% (December 2009 - 10.9%) of total long-term debt.Credit RiskCredit 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, 2010 are $20,376 (December 31, 2009 - $22,409). 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, 2010 is $440 or 2.2% (December 31, 2009 - $505 or 2.3%) of total receivables. The amount credited in the operating income for the three months ended March 31, 2010 is $33, due to amounts provided for, which were subsequently collected (March 31, 2009 - $100). Accounts receivable amounts outstanding for over 90 days, which have not been provided for, total $34 at March 31, 2010 (December 31, 2009 - $106).Mortgages receivable are secured by mortgages on the assets sold.Liquidity RiskLiquidity 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. There is also a risk that bank lenders will not refinance the operating and bridge loan facilities on terms and conditions acceptable to the REIT or on any terms at all.Estimated maturities of the REIT's financial liabilities are: Remainder of 2010 2011 2012 2013 ---------------------------------------------------------------------------- Mortgage payable - principal (1) $ 15,407 $ 332,632 $ 190,704 $ 14,257 Mortgage payable - interest (3) 41,436 40,723 34,502 21,682 Convertible debentures - principal - 45,764 - 74,980 Convertible debentures - interest 11,094 13,398 11,968 9,718 Bridge loan 169 6,038 ---------------------------------------------------------------------------- Total (4) $ 68,106 $ 438,555 $ 237,174 $ 120,637 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Contractual 2015 and Cash flows 2014 Thereafter (2) ------------------------------------------------------------------------ Mortgage payable - principal (1) $ 291,796 $ 90,123 $ 934,919 Mortgage payable - interest (3) 10,900 5,115 154,358 Convertible debentures - principal 70,000 49,985 240,729 Convertible debentures - interest 7,469 5,063 58,710 Bridge loan 6,207 ------------------------------------------------------------------------ Total (4) $ 380,165 $ 150,286 $ 1,394,923 ------------------------------------------------------------------------ ------------------------------------------------------------------------ (1) Principal includes regular amortization and repayments. (2) Contractual cash flows include principal and interest payments and ignore extension options available to the REIT. (3) Interest amounts for floating rate debt is based on interest rates prevailing at March 31, 2010. (4) Current liabilities satisfied in the normal course of business are not included in the table above. Fair ValuesThe fair values of the REIT's financial assets and liabilities, representing net working capital, approximate their recorded values at March 31, 2010 and December 31, 2009 due to their short-term nature.The fair value of the REIT's long-term debt is less than the carrying value by approximately $33,931 at March 31, 2010 (December 31, 2009 - $33,843) 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 greater than the carrying value by approximately $7,283 at March 31, 2010 (December 31, 2009 - $4,115 less than the carrying value). The fair value of convertible debentures has been estimated based on the market rates for convertible debentures, as at March 31, 2010 and December 31, 2009.The fair value hierarchy of financial instruments measured at fair value on the balance sheet is as follows: March 31, 2010 December 31, 2009 ---------------------------------------------------------------------------- Financial Assets: Level 1 Level 1 Cash and restricted cash $ 83,465 $ 104,869 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The REIT has no Level 2, nor Level 3 inputs.Letters of CreditAs at March 31, 2010, the REIT has letters of credit totalling $3,603 (December 31, 2009 - $3,603) held on behalf of security deposits for various utility companies and liquor licences, and additional security for the pension liabilities.14. Unitholders' EquityThe REIT is authorized to issue an unlimited number of units, each of which represents an equal undivided beneficial interest in any distributions from the REIT. All units are of the same class with equal rights and privileges. Per the Declaration of Trust, units cannot be issued from treasury unless the trustees consider it not to be dilutive to ensuing annual distributions of distributable income to existing unitholders. Units Amount ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance at December 31, 2008 74,412,317 $ 768,034 Units issued under distribution reinvestment plan 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 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance at December 31, 2009 87,498,354 $ 815,190 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Units issued under distribution reinvestment plan 116,749 676 Units issued on conversion of debentures 2,631 15 Units issued for vested executive compensation plan 22,215 225 ---------------------------------------------------------------------------- Balance at March 31, 2010 87,639,949 $ 816,106 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Pursuant to the REIT's normal course issuance bid (the "Bid"), the REIT purchased 7,039 at an average price of $5.77 per unit. These units were transferred to the trustees of the REIT in satisfaction of a portion of their annual retainer fee. The REIT recognized $ nil contributed surplus as these units were not cancelled. The Bid will terminate on November 15, 2010.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 had set aside 100,000 units in reserve for this purpose. Under the Trustee Compensation Plan, 7,039 units were awarded and purchased under the Bid during the three months ended March 31, 2010 (March 31, 2009 - 11,060 units were issued from the reserve).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, 2010 is 747,737 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, 2010, excluding granted units which have fully vested: Unvested Units Accumulated Total Executive units from Distributions Units ---------------------------------------------------------------------------- 2007 - granted 15,000 8,094 23,094 2008 - granted 20,455 8,565 29,020 2009 - granted 25,500 5,653 31,153 2010 - granted 28,500 526 29,026 Units vested 2010 (7,500) (3,921) (11,421) ---------------------------------------------------------------------------- 81,955 18,917 100,872 ---------------------------------------------------------------------------- The Board of Trustees approved the granting of 28,500 units during the three months ended March 31, 2010. All granted units vest equally on the third and fourth anniversaries of the effective date of grant.Distribution Reinvestment Plan ("DRIP")The REIT has a DRIP whereby eligible Canadian unitholders may elect to have their distributions of income from the REIT automatically reinvested in additional units.15. Per Unit Information Three Months Ended Three Months Ended March 31, March 31, 2010 2009 ---------------------------------------------------------------------------- Weighted Weighted Average Average Units Units ---------------------------------------------------------------------------- Loss from continuing operations - basic $ (26,056) 87,577,502 $ (14,621) 74,439,594 Dilutive effect of executive compensation plan - 94,348 - 79,679 ---------------------------------------------------------------------------- Loss from continuing operations - diluted $ (26,056) 87,671,850 $ (14,621) 74,519,273 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Three Months Ended Ended March 31, March 31, 2010 2009 ---------------------------------------------------------------------------- Weighted Weighted Average Average Units Units ---------------------------------------------------------------------------- Net loss - basic $ (26,484) 87,577,502 $ (15,420) 74,439,594 Dilutive effect of executive compensation plan - 94,348 - 79,679 ---------------------------------------------------------------------------- Net loss - diluted $ (26,484) 87,671,850 $ (15,420) 74,519,273 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The impact of the debentures has been excluded from the per unit calculations above because the impact of the conversions would not be dilutive.16. Distributions to UnitholdersDistributions to unitholders are computed based on distributable income as defined by the Declaration of Trust.Distributable income is a measure of cash flow that is not defined under Canadian GAAP and, accordingly, may not be comparable to similar measures used by other issuers.Distributable income is defined as net income in accordance with Canadian GAAP, subject to certain adjustments as set out in the Declaration of Trust, including adding back depreciation and amortization, amortization of fair value debt adjustment and future income tax (recovery) expense, excluding any gains or losses on the disposition of real property and future income taxes, deducting the amount calculated, at 3% to 5% of hotel revenues, for the reserve for the replacement of furniture, fixtures and equipment and capital improvements, the accretion on convertible debentures that is included in the computation of net income, and making any other adjustments determined by the trustees of the REIT in their discretion. As outlined in the Declaration of Trust, the REIT is required to distribute monthly to unitholders not less than one-twelfth of eighty percent (80%) of distributable income of the REIT for the calendar year. Three Months Three Months Ended Ended March 31, March 31, 2010 2009 ---------------------------------------------------------------------------- Net loss $ (26,484) $ (15,420) ---------------------------------------------------------------------------- Add (deduct) Depreciation and amortization 23,240 22,729 Future income tax recovery (433) (6,931) Non-cash portion of mortgage interest expense 482 424 Non-cash portion of convertible debentures interest and accretion 615 784 Reserve for replacement of furniture, fixtures, equipment, capital improvements (5,154) (5,427) Non-cash executive and trustee compensation 55 86 Deferred land lease expense and retail lease income, net 25 2 --------------------------------------------------------------------------- 18,830 11,667 ---------------------------------------------------------------------------- Distributable loss (7,654) (3,753) ---------------------------------------------------------------------------- Distributions Required under the Declaration of Trust - - Discretionary 10,959 13,956 --------------------------------------------------------------------------- Distributions paid or payable 10,959 13,956 ---------------------------------------------------------------------------- Distributions in excess of distributable loss $ 18,613 $ 17,709 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 17. Management AgreementsWestmont 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 15 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 12 months revenues. The REIT did not record nor pay any termination fees during the three months ended March 31, 2010 and 2009.In addition to the base management fee and incentive fee, Westmont is entitled to fees based on a percentage of the cost of purchasing certain goods and supplies and certain construction costs and capital expenditures, fees for accounting services, reasonable out-of-pocket costs and expenses (other than general and administrative expenses or overhead costs except as otherwise provided in the Administrative Services Agreement) and project management and general contractor service fees related to hotel renovations managed by Westmont.Also, for certain hotels owned by InnVest and not managed by Westmont, Westmont is entitled to an asset management fee based on a fixed percentage of the purchase price of the hotel or a fixed percentage of hotel operating income, after the reserve for replacement of furniture, fixtures and equipment and capital improvements, subject to an annual minimum fee.During the three months ended March 31, 2010 and 2009, the fees charged to the REIT pursuant to the Agreements were as follows: March 31, March 31, 2010 2009 ---------------------------------------------------------------------------- Fees from continuing operations: Management fees $ 2,263 $ 2,407 Asset management fees (included in management fee expense) 508 505 Accounting services (included in hotel operating expenses) 565 557 Administrative services (included in corporate and administrative expenses) 113 117 Project management and general contractor services (capitalized to hotel properties) 149 210 Fees from discontinued operations 137 192 ---------------------------------------------------------------------------- $ 3,735 $ 3,988 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- In addition, salaries of REIT employees paid by Westmont and reimbursed by the REIT were $56 (March 31, 2009 - $108). Included in accounts payable and accrued liabilities are amounts owed to Westmont at March 31, 2010 totalling $1,334 (December 31, 2009 - $1,193).Other Management AgreementsHilton Canada Co. ("Hilton") manages two Hilton hotel properties for the REIT. The hotel management agreements provide for the payment of an annual management fee to Hilton in an amount equal to 3.0% of gross revenues until the agreements mature on December 31, 2026. For the three months ended March 31, 2010, total management fees paid to Hilton were $224 (March 31, 2009 - $212).Delta Hotels Limited ("Delta") manages 10 Delta hotel properties for the REIT. The hotel management agreements provide for the payment of an annual management fee to Delta in an amount of 2% 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 from December 31, 2010 to December 31, 2047. For the three months ended March 31, 2010, total management fees paid to Delta were $902 (March 31, 2009 - $1,016).Fairmont Hotels and Resorts ("Fairmont") manages three hotel properties for the REIT. The hotel management agreements provide for the payment of a base management fee and an incentive management fee to Fairmont. The base management fee is equal to 3% of total hotel revenues. The incentive management fees are calculated based on net operating income from hotel operations plus amortization less the capital replacement reserve, in excess of a threshold. The agreements mature from December 31, 2023 to December 31, 2047. For the three months ended March 31, 2010, total base management and incentive management fees paid for these properties were $653 (March 31, 2009 - $930).Fairmont may also receive a portfolio incentive fee for which two Fairmont properties and four Delta properties participate. The 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. There were no portfolio fees for the three months ended March 31, 2010 and 2009.18. Segmented Financial InformationThe REIT operates hotel properties throughout Canada. Information related to these properties by geographic segment is presented below. The REIT primarily evaluates operating performance based on hotel operating income. All key financing, investing and capital allocation decisions are centrally managed. Western Ontario Quebec Atlantic Total ---------------------------------------------------------------------------- Three months ended March 31, 2010 Hotel revenues $ 33,605 $ 45,259 $ 26,752 $ 16,660 $ 122,276 Hotel expenses 26,565 39,990 24,129 $ 15,782 106,466 ---------------------------------------------------------------------------- Hotel operating income $ 7,040 $ 5,269 $ 2,623 $ 878 $ 15,810 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended March 31, 2009 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 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures on hotel properties, Three months ended March 31, 2010 $ 1,609 $ 2,680 $ 1,317 $ 385 $ 5,991 Three months ended March 31, 2009 $ 1,708 $ 2,165 $ 1,558 $ 506 $ 5,937 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Hotel properties March 31, 2010 $ 492,879 $ 593,298 $ 389,351 $ 226,659 $ 1,702,187 December 31, 2009 $ 497,252 $ 598,166 $ 391,360 $ 228,754 $ 1,715,532 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 19. Total Revenues Three Three Months Months Ended Ended March 31, March 31, 2010 2009 ---------------------------------------------------------------------------- Hotel revenues $ 122,276 $ 127,701 Other business income (Note 20) 2,829 2,729 ---------------------------------------------------------------------------- $ 125,105 $ 130,430 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 20. Other Business Income Three Three Months Months Ended Ended Franchise Retail/ Retirement March 31, March 31, Business Office Residence 2010 2009 ---------------------------------------------------------------------------- Revenues $ 1,775 $ 799 $ 255 $ 2,829 $ 2,729 Expenses 1,300 352 193 $ 1,845 1,817 ---------------------------------------------------------------------------- Other business income, net $ 475 $ 447 $ 62 $ 984 $ 912 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Other business income includes franchise business income, which is InnVest's 50% share of CHC's operations, and the income from the other real estate properties.21. Assets Held for Sale and Discontinued OperationsAssets held for sale at March 31, 2010 include three Ontario hotels and one in Quebec An Ontario property is to be expropriated and the other hotels meet the criteria under CICA Section 3475 - Disposal of Long-lived Assets and Discontinued Operations. These assets are expected to sell within one year and have been written down to their realizable values.The operating results of these four hotels are presented as discontinued operations for the three months ended March 31, 2010 (five hotels for the three months ended March 31, 2009).Discontinued operations for the three months ended March 31, 2010 and 2009 are as follows: March 31, 2010 March 31, 2009 ---------------------------------------------------------------------------- Hotel revenues $ 3,169 $ 4,351 ---------------------------------------------------------------------------- Hotel expenses Operating expenses 2,565 3,288 Property taxes, rent and insurance 748 1,009 Management fees 108 147 ---------------------------------------------------------------------------- 3,421 4,444 ---------------------------------------------------------------------------- Hotel operating loss (252) (93) ---------------------------------------------------------------------------- Interest on mortgages 176 176 Depreciation and amortization - 530 ---------------------------------------------------------------------------- 176 706 ---------------------------------------------------------------------------- Net loss from discontinued operations (428) (799) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- FOR FURTHER INFORMATION PLEASE CONTACT: InnVest Real Estate Investment Trust Kenneth D. Gibson President and Chief Executive Officer (905) 206-7100 (905) 206-7114 (FAX) or InnVest Real Estate Investment Trust Tamara L. Lawson Chief Financial Officer and Corporate Secretary (905) 206-7100 (905) 206-7114 (FAX) www.innvestreit.com