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Press release from Marketwire

InnVest REIT Reports Second Quarter Results

Wednesday, August 11, 2010

InnVest REIT Reports Second Quarter Results08:00 EDT Wednesday, August 11, 2010TORONTO, ONTARIO--(Marketwire - Aug. 11, 2010) - InnVest Real Estate Investment Trust ("InnVest" or the "Trust") (TSX:INN.UN) today announced financial results for the three and six months ended June 30, 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 are encouraged by our second quarter results which saw RevPAR improve for the first time in almost two years. Cost savings implemented across our portfolio enabled us to generate healthy margin growth further contributing to improving cash flows during the quarter," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "We remain proactive in addressing upcoming debt maturities as demonstrated by our recent convertible debenture announcement."Second Quarter Highlights -- Revenue per available room ("RevPAR") on a same hotel basis improved 4.3% driven by a 2.0 point improvement in occupancy and 0.9% growth in average daily rates ("ADR"). This marked the first quarterly RevPAR growth in nearly two years; -- Overall, hotel revenues increased 2.4%, or $3.9 million, to $163.0 million; -- Hotel operating margins improved 80 basis points reflecting the revenue growth achieved. Hotel operating income ("HOI") increased 5.3% to $43.6 million; -- InnVest realized net income of $1.3 million compared to a net loss of $4.0 million in 2009; and -- Distributable income and funds from operations ("FFO") both improved modestly. Per unit results for each declined as a result of the higher number of units outstanding in 2010. FINANCIAL HIGHLIGHTS (unaudited) ---------------------------------------------------------------------------- Three months ended June 30 Six months ended June 30 ---------------------------------------------------------------------------- 2010 2009 +/- 2010 2009 +/- ---------------------------------------------------------------------------- Occupancy 62.8% 60.6% 2.2% 56.8% 56.5% 0.3% ---------------------------------------------------------------------------- Average daily rate ("ADR") $118.92 $117.65 $1.27 $115.81 $115.90 ($0.09) ---------------------------------------------------------------------------- Revenue Per Available Room ("RevPAR") $74.64 $71.32 $3.32 $65.73 $65.48 $0.25 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Hotel revenues $162,963 $159,081 $3,882 $288,152 $289,955 ($1,803) ---------------------------------------------------------------------------- Hotel operating income(1) $43,629 $41,433 $2,196 $59,155 $59,746 ($591) ---------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) $1,303 ($4,007) $5,310 ($25,182) ($19,427) ($5,755) ---------------------------------------------------------------------------- Add / (deduct) Depreciation and amortization 23,078 22,739 339 46,318 45,451 867 Future income tax recovery (128) (850) 722 (561) (7,781) 7,220 Non-cash executive and trustee compensation 27 86 (59) 83 172 (89) Net writedown on and sale of assets held for sale - 499 (499) - 499 (499) Writedown of hotel properties - 5,488 (5,488) - 5,488 (5,488) ---------------------------------------------------------------------------- Funds from operations (1)(2) $24,280 $23,955 $325 $20,658 $24,402 ($3,744) ---------------------------------------------------------------------------- Funds from operations per unit - basic $0.275 $0.322 ($0.047) $0.235 $0.328 ($0.093) - diluted $0.264 $0.314 ($0.050) $0.234 $0.327 ($0.093) ---------------------------------------------------------------------------- Amortization of deferred financing costs - - - - 17 (17) Non-cash portion of mortgage interest expense 412 386 26 894 810 84 Reserve for replacement of furniture, fixtures and equipment and capital improvements (6,710) (6,563) (147) (11,864) (11,990) 126 Non-cash portion of convertible debentures interest and accretion 1,096 743 353 1,711 1,527 184 Deferred land lease expense and retail lease income, net 24 2 22 49 4 45 ---------------------------------------------------------------------------- Distributable loss (1) $19,102 $18,523 $579 $11,448 $14,770 ($3,322) ---------------------------------------------------------------------------- Distributable loss per unit (3) - basic $0.216 $0.249 ($0.033) $0.130 $0.198 ($0.068) - diluted $0.206 $0.245 ($0.039) $0.130 $0.198 ($0.068) ---------------------------------------------------------------------------- Distributions per unit (4) $0.1251 $0.1875 ($0.062) $0.2502 $0.3750 ($0.125) ---------------------------------------------------------------------------- (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 hotels that have been classified as discontinued operations or operating leases and hotels that have not been included in operating results for the full periods presented. ---------------------------------------------------------------------------- Three months Six months ended June Variance to ended June Variance to 30, 2010 2009 30, 2010 2009 Occupancy Ontario 61.3% 2.9 pts 55.3% 0.2 pt Quebec 63.9% 3.5 pts 58.2% 1.9 pts Atlantic 62.7% (1.7 pts) 56.0% (0.8 pts) Western 64.2% 0.9 pt 59.8% (1.5 pts) ---------------------------------------------------------------------------- Total 62.9% 2.0 pts 56.9% 0.1 pt ADR Ontario $ 109.73 (0.1%) $ 108.73 (1.1%) Quebec $ 118.24 2.6% $ 112.94 1.7% Atlantic $ 117.66 (1.5%) $ 111.69 (1.2%) Western $ 141.64 3.3% $ 138.42 1.0% ---------------------------------------------------------------------------- Total $ 118.99 0.9% $ 116.11 (0.1%) RevPAR Ontario $ 67.86 4.9% $ 60.08 (0.8%) Quebec $ 75.59 8.7% $ 65.72 5.2% Atlantic $ 73.72 (4.1%) $ 62.53 (2.6%) Western $ 90.94 4.7% $ 82.73 (1.5%) ---------------------------------------------------------------------------- Total $ 74.82 4.3% $ 66.07 0.1% ---------------------------------------------------------------------------- FINANCIAL REVIEW (In thousands of dollars, except per unit amounts, unless otherwise stated)Three months ended June 30, 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 demand from corporate and leisure customers. InnVest had seen a slowing rate of decline in year-over- year RevPAR performance over the previous three quarters. The second quarter of 2010 saw the first positive year-over-year RevPAR for the portfolio since the third quarter of 2008. For the three months ended June 30, 2010, hotel revenues increased by $3.9 million, or 2.4%, to $163.0 million. Over this period, RevPAR on a same-hotel basis increased 4.3% based on a 0.9% improvement in ADR and a 2.0 point increase in overall occupancy.Room revenues for the three months ended June 30, 2010 increased $4.9 million, or 4.0%, to $127.4 million led by strength in the month of June. Regional performance varied based on broader regional factors. The Quebec region saw strength across all markets, notably Montreal given the return of the Grand Prix and good group activity in June which helped offset new supply to the market. Ontario benefitted from the G8 and G20 meetings held in June which saw RevPAR for the Greater Toronto Area improve over 25% during the quarter. Good corporate transient demand and group activity drove results in the Western region with market compression helping to drive rate growth. The Atlantic region saw RevPAR declines following strong group demand in the previous year.For the three months ended June 30, 2010, non-room revenues totalled $35.5 million, down $978 or 2.7% compared to the prior year despite a 2.0 point improvement in occupancy. Typically, non-room revenues are directly impacted by overall occupancy since higher occupancy results in the increased use of ancillary services offered at our hotels. The decline in second quarter non-room revenues was primarily caused by promotional programs to drive room revenue as well as non-recurring catering events in the prior period.Hotel expenses for the three months ended June 30, 2010 increased $1.7 million or 1.4% when compared to 2009. The increase primarily reflects improved occupancies of 2.0 points during the quarter.Second quarter hotel operating income margins improved 80 basis points to 26.8%, reflecting higher revenues achieved and continued emphasis on cost efficiencies. For the three months ended June 30, 2010, the Trust generated HOI of $43.6 million, up $2.2 million or 5.3% as compared to the prior year.Other income and expenses for the three months ended June 30, 2010 totalled $42.5 million, compared to $45.8 million in 2009. The $3.3 million decrease relates to $5.5 million writedown taken in the prior period which was somewhat offset by a $1.6 million increase in 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 income for the three months ended June 30, 2010 totalled $1.3 million ($0.015 per unit diluted) compared to a net loss of $4.0 million (loss of $0.054 per unit diluted) for the same period in 2009. This variance primarily reflects the $2.2 million improvement in HOI achieved in 2010 and the writedown realized in 2009 which was partially offset by higher interest expenses in 2010. The per unit results also reflects the higher number of units outstanding in 2010 as compared to 2009 given an equity offering in October 2009 and convertible debentures issued in December 2009.For the three months ended June 30, 2010, InnVest generated FFO of $24.3 million ($0.264 per unit diluted) compared to FFO of $24.0 million in the prior period ($0.314 per unit diluted). InnVest generated distributable income of $19.1 million ($0.206 per unit diluted) compared to $18.5 million in the prior year ($0.245 per unit diluted). The declines in per unit results reflect the higher number of units outstanding in 2010.Distributions declared in the three months ended June 30, 2010 totalled $11.1 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 outstanding in 2010. InnVest's payout ratio for the twelve months ended June 30, 2010 was 94.2%. Assuming the current distribution rate and number of units outstanding, this twelve month payout ratio approximates 92.0%.Six months ended June 30, 2010For the six months ended June 30, 2010, hotel revenues decreased by $1.8 million, or 0.6%, to $288.2 million. Softer results in the first quarter were partially offset by improvements experienced in the second quarter.Through the first half of the year, RevPAR was relatively unchanged from the prior year, up 0.1%.Hotel expenses for the six months ended June 30, 2010 decreased $1.2 million or 0.5% when compared to 2009 despite modest improvement in occupancies over the period. The decrease reflects cost containment initiatives implemented over the last several years in response to declining demand.For the six months ended June 30, 2010, hotel operating income margins are relatively unchanged at 20.5% compared to 20.6% in the prior period. Lower revenues achieved were offset by continued productivity efficiencies and other savings generated across the portfolio.For the six months ended June 30, 2010, the Trust generated HOI of $59.2 million, down 1.0% or $591 as compared to the prior year.For the six months ended June 30, 2010, InnVest realized a net loss of $25.2 million (loss of $0.286 per unit diluted) compared to a net loss of $19.4 million (loss of $0.261 per unit diluted) for the same period in 2009. The variance primarily reflects a $7.2 million reduction in future income tax recoveries as compared to the prior period. The per unit results also reflect the higher number of units outstanding in 2010 as compared to 2009.For the six months ended June 30, 2010, InnVest generated FFO of $20.7 million ($0.234 per unit diluted) compared to $24.4 million in the prior period ($0.327 per unit diluted). InnVest generated distributable income of $11.4 million ($0.130 per unit diluted) compared to $14.8 million in the prior year ($0.198 per unit diluted).Distributions declared in the six months ended June 30, 2010 totalled $22.0 million compared to $27.9 million in the prior year reflecting the adjusted level of monthly distributions to $0.0417 per unit beginning in September 2009 (from $0.0625 per unit). This reduction was somewhat offset by the additional units outstanding in 2010.BALANCE SHEET REVIEWAt June 30, 2010, InnVest has cash on hand totalling $78.6 million, of which $3.5 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.The Trust has one 2011 mortgage maturity totaling $264.8 million (secured by seven properties) with a large Canadian institutional lender. This maturity includes two one-year extensions, at InnVest's option, subject to certain minimum thresholds at the time of maturity. Based on current conditions, management estimates that a $94.0 million paydown will be required to exercise its one year extension. The Trust has reflected this amount as a current portion of long term debt on its balance sheet at June 30, 2010. Yield maintenance and other fees are expected to be incurred. This extension will enable the Trust to secure its one-year renewal interest rate on the remaining balance at the then one-year Composite Swap Rate plus 1.85%. The remaining balance will be due February 28, 2012 and includes an additional one-year extension, at the Trust's option, subject to certain minimum thresholds at the time of maturity. Following this extension, InnVest has no significant mortgage maturities until September 2011.InnVest's outstanding Series A debentures of $45.8 million mature in April 2011. Pending closing of the convertible debentures in August 2010, the Trust intends to redeem the Series A debentures (see Recent Developments).During the six months ended June 30, 2010, 1,239,296 units valued at $7.1 million were issued as a result of conversion of Series D - 6.75% Debentures.At June 30, 2010, the Trust's leverage excluding and including convertible debentures was 44.8% and 55.8%, respectively. Assuming the close of its Series E 6.00% Debentures (see Recent Developments), the redemption of Series A 6.25% Debentures and the mortgage paydown on the 2011 maturity, the Trust's pro forma leverage at June 30, 2010 approximates 54.5%.For the six months ended June 30, 2010, capital expenditures totalled $13.8 million compared to the Trust's furniture, fixture and equipment reserve ("FF&E reserve") of $11.9 million. 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%).RECENT DEVELOPMENTSOn July 22, 2010, the Trust announced that it had reached an agreement with a syndicate of underwriters to issue to the public, subject to regulatory approval, on a bought deal basis, $75.0 million aggregate principal amount of 6.00% convertible unsecured subordinated debentures due September 30, 2017 (the "Series E - 6.00% Debentures"). The Series E - 6.00% Debentures are convertible, at the option of the holder, into trust units of InnVest at $8.00 per unit. Closing of the offering is expected to occur on or about August 13, 2010. It is intended that the net proceeds from the offering will be used to redeem the outstanding Series A - 6.25% Debentures due April 15, 2011, to repay other indebtedness and for general trust purposes.QUALIFYING REIT PROCESSInnVest is pursuing a reorganization in order to become a Qualifying REIT under Canadian income tax rules applicable to SIFT trusts. The reorganization, which will occur under a plan of arrangement, was approved by InnVest's unitholders at its annual and special meeting held June 16, 2010. InnVest has also since received approval from the Ontario Superior Court of Justice to proceed with the plan of arrangement. Pending satisfaction of certain closing conditions, including applicable third party consents, it is anticipated that the reorganization will be completed by the end of 2010.Under the reorganization InnVest will transfer all of its directly and indirectly held operating assets to a newly-formed trust (InnVest Operations Trust or "IOT"). IOT (through its subsidiaries) will hold the operating assets, earn revenues from hotel customers and pay rent to InnVest (the owner of the hotels).Each InnVest unitholder will receive one unit of IOT for each InnVest unit held. Thereafter, each issued and outstanding InnVest unit will trade together with a unit of IOT on a "stapled" basis unless the unitholders of InnVest vote in favour of an uncoupling of the stapled units or the REIT's trustees approve an event of bankruptcy or insolvency.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 145 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. InnVest Real Estate Investment Trust ---------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS December 31, (in thousands of dollars) (unaudited) June 30, 2010 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Restated, Note 21) ASSETS Current Assets Cash $ 75,125 $ 101,054 Accounts receivable 27,826 22,591 Prepaid expenses and other assets 16,590 7,962 Asset held for sale (Note 21) 64 33 ---------------------------------------------------------------------------- 119,605 131,640 Restricted cash 3,482 3,815 Hotel properties (Note 3) 1,712,997 1,740,642 Other real estate properties (Note 4) 15,958 15,770 Licence contracts (Note 5) 15,879 16,537 Intangible and other assets (Note 6) 30,638 36,120 Asset held for sale (Note 21) 5,685 5,685 ---------------------------------------------------------------------------- $ 1,904,244 $ 1,950,209 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- LIABILITIES Current Liabilities Bank indebtedness (Note 7) $ 6,000 $ - Accounts payable and accrued liabilities 75,609 65,676 Acquisition related liabilities 1,958 2,034 Distributions payable 3,710 3,649 Current portion of long-term debt (Note 8) 118,436 21,326 Current portion of convertible debentures (Note 10) 45,171 - Liabilities related to asset held for sale (Note 21) 46 54 ---------------------------------------------------------------------------- 250,930 92,739 Long-term debt (Note 8) 816,533 931,685 Other long-term obligations (Note 9) 7,311 6,448 Convertible debentures (Note 10) 175,959 225,918 Future income tax liability (Note 12) 185,869 186,430 ---------------------------------------------------------------------------- 1,436,602 1,443,220 UNITHOLDERS' EQUITY 467,642 506,989 ---------------------------------------------------------------------------- $ 1,904,244 $ 1,950,209 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment Trust ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) Three Three (in thousands of dollars, Months Months Six Months Six Months except per unit amounts) Ended June Ended June Ended June Ended June (unaudited) 30, 2010 30, 2009 30, 2010 30, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Restated, (Restated, Note 21) Note 21) Total revenues (Note 19) $ 165,952 $ 161,795 $ 293,970 $ 295,398 Hotel revenues $ 162,963 $ 159,081 $ 288,152 $ 289,955 ---------------------------------------------------------------------------- Hotel expenses Operating expenses (Note 17) 99,749 98,099 190,914 191,382 Property taxes, rent and insurance 13,545 13,658 27,393 27,773 Management fees (Note 17) 6,040 5,891 10,690 11,054 ---------------------------------------------------------------------------- 119,334 117,648 228,997 230,209 ---------------------------------------------------------------------------- Hotel operating income 43,629 41,433 59,155 59,746 ---------------------------------------------------------------------------- Other (income) and expenses Interest on mortgages and other debt 14,382 13,909 28,834 27,696 Convertible debentures interest and accretion 4,759 3,604 9,079 7,208 Corporate and administrative (Note 17) 1,460 1,551 2,974 2,910 Capital tax 4 52 38 103 Other business income, net (Note 20) (1,106) (1,291) (2,090) (2,203) Other income (78) (216) (179) (221) Depreciation and amortization 23,078 22,739 46,318 45,415 Writedown of hotel properties (Note 3) - 5,488 - 5,488 ---------------------------------------------------------------------------- 42,499 45,836 84,974 86,396 ---------------------------------------------------------------------------- Income (loss) from continuing operations before income tax recovery 1,130 (4,403) (25,819) (26,650) Future income tax recovery (Note 12) (128) (850) (561) (7,781) ---------------------------------------------------------------------------- Income (loss) from continuing operations 1,258 (3,553) (25,258) (18,869) Income (loss) from discontinued operations (Note 21) 45 45 76 (59) Writedown of asset held for sale (Note 21) - (499) - (499) ---------------------------------------------------------------------------- 45 (454) 76 (558) ---------------------------------------------------------------------------- Net income (loss) and comprehensive income (loss) $ 1,303 $ (4,007) $ (25,182) $ (19,427) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Income (loss) from continuing operations, per unit (Note 15) Basic and diluted $ 0.014 $ (0.048) $ (0.287) $ (0.253) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Net income (loss) per unit (Note 15) Basic and diluted $ 0.015 $ (0.054) $ (0.286) $ (0.261) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Income (loss) from discontinued operations, per unit Basic and diluted $ 0.001 $ (0.006) $ 0.001 $ (0.008) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment Trust ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY Cumulative Net (in thousands of Income(Loss) and dollars) Comprehensive Cumulative (unaudited) Income (Loss) Distributions Deficit Units in $ ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance December 31, 2008 $ 134,546 $ (378,164) $ (243,618) $ 768,034 CHANGES DURING THE PERIOD Net loss and comprehensive loss (19,427) - (19,427) - Distributions to unitholders (Note 16) - (27,918) (27,918) - Distribution reinvestment plan units issued (Note 14) - - - 1,349 Units repurchased pursuant to normal course issuer bid (Note 14) - - - (3,467) Conversion of debentures - - - 20 Vested executive compensation - - - 170 Executive and trustee compensation - - - 76 ---------------------------------------------------------------------------- Balance June 30, 2009 $ 115,119 $ (406,082) $ (290,963) $ 766,182 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance December 31, 2009 $ 103,623 $ (429,461) $ (325,838) $ 815,190 CHANGES DURING THE PERIOD Net loss and comprehensive loss (25,182) - (25,182) - Distributions to unitholders (Note 16) - (22,049) (22,049) - Distribution reinvestment plan units issued (Note 14) - - - 1,303 Conversion of debentures - - - 7,064 Vested executive compensation - - - 225 Executive and trustee compensation - - - - ---------------------------------------------------------------------------- Balance June 30, 2010 $ 78,441 $ (451,510) $ (373,069) $ 823,782 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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 - - (19,427) Distributions to unitholders (Note 16) - - (27,918) Distribution reinvestment plan units issued (Note 14) - - 1,349 Units repurchased pursuant to normal course issuer bid (Note 14) 2,301 - (1,166) Conversion of debentures - - 20 Vested executive compensation (170) - - Executive and trustee compensation 96 - 172 ---------------------------------------------------------- Balance June 30, 2009 $ 4,899 $ 8,642 $488,760 ---------------------------------------------------------- ---------------------------------------------------------- Balance December 31, 2009 $ 4,995 $ 12,642 $506,989 ---------------------------------------------------------- CHANGES DURING THE PERIOD Net loss and comprehensive loss - - (25,182) Distributions to unitholders (Note 16) - - (22,049) Distribution reinvestment plan units issued (Note 14) - - 1,303 Conversion of debentures - (565) 6,499 Vested executive compensation (225) - - Executive and trustee compensation 82 - 82 ---------------------------------------------------------- Balance June 30, 2010 $ 4,852 $ 12,077 $467,642 ---------------------------------------------------------- ---------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment Trust ---------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Three Months Six Months Six Months (in thousands of Ended June Ended June Ended June Ended June dollars) (unaudited) 30, 2010 30, 2009 30, 2010 30, 2009 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- (Restated, (Restated, Note 21) Note 21) OPERATING ACTIVITIES Income (loss) from continuing operations $ 1,258 $ (3,553) $ (25,258) $ (18,869) Add (deduct) items not affecting operations Depreciation and amortization 23,078 22,739 46,318 45,415 Writedown of hotel properties - 5,488 - 5,488 Non-cash portion of mortgage interest expense 412 386 894 810 Non-cash portion of convertible debentures interest and accretion 1,096 743 1,711 1,527 Future income tax recovery (128) (850) (561) (7,781) Non-cash executive and trustee compensation 27 86 82 172 Discontinued operations (178) (87) 37 (429) Changes in non-cash working capital (7,170) (6,616) (3,881) (10,156) ---------------------------------------------------------------------------- 18,395 18,336 19,342 16,177 ---------------------------------------------------------------------------- FINANCING ACTIVITIES Repayment of long-term debt (10,097) (2,670) (15,036) (5,349) Proceeds from long-term debt 3,100 6,713 3,100 6,713 Units repurchased pursuant to normal course issuer bid (Note 14) - (477) - (1,166) Unit distributions (10,408) (13,269) (20,685) (26,564) Increase in operating loan - 1,100 - 21,300 Repayment of bridge loan - (2,000) (1,000) (2,000) Discontinued operations repayment of debt - (53) - (2,939) ---------------------------------------------------------------------------- (17,405) (10,656) (33,621) (10,005) ---------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures on hotel properties (7,794) (7,312) (13,785) (13,280) Hotel under development expenditures, net - - - (82) Change in intangible and other assets (67) (662) (211) (1,318) Proceeds from lease arrangement 2,013 - 2,013 - Proceeds from sale of discontinued asset, net of costs - 3,675 - 3,675 Vendor-take-back mortgage on sold asset - (2,700) - (2,700) Decrease (increase) in restricted cash 208 (640) 333 (99) ---------------------------------------------------------------------------- (5,640) (7,639) (11,650) (13,804) ---------------------------------------------------------------------------- (Decrease) increase in cash during the period (4,650) 41 (25,929) (7,632) Cash, beginning of period 79,775 10,470 101,054 18,143 ---------------------------------------------------------------------------- Cash, end of period $ 75,125 $ 10,511 $ 75,125 $ 10,511 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Supplemental disclosure of cash flow information: Cash paid for interest $ 17,654 $ 17,387 $ 34,470 $ 33,073 Cash paid for income taxes (including capital tax) $ 23 $ 47 $ 76 $ 123 --------------------------------------------------------------------------- The accompanying notes are an integral part of these consolidated financial statements. ---------------------------------------------------------------------------- InnVest Real Estate Investment Trust NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 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 "INN.UN". As at June 30, 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 on 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 and results of operations 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, Accumulated June 30, 2010 2009 Net Book Cost Depreciation Net Book Value Value ---------------------------------------------------------------------------- (Restated, Note 21) Land $ 185,841 $ - $ 185,841 $ 185,841 Buildings 1,714,647 264,753 $ 1,449,894 1,472,827 Furniture, fixtures and equipment 146,558 69,296 $ 77,262 81,974 ---------------------------------------------------------------------------- $ 2,047,046 $ 334,049 $ 1,712,997 $ 1,740,642 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 4. Other Real Estate PropertiesOther real estate properties include office and retail properties and a retirement residence. December 31, Accumulated June 30, 2010 2009 Net Book Cost Depreciation Net Book Value Value ---------------------------------------------------------------------------- Land $ 1,624 $ - $ 1,624 $ 1,624 Buildings 15,886 1,600 14,286 14,095 Furniture, fixtures and equipment 101 53 48 51 ---------------------------------------------------------------------------- $ 17,611 $ 1,653 $ 15,958 $ 15,770 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 5. Licence Contracts December 31, Accumulated June 30, 2010 2009 Net Book Cost Amortization Net Book Value Value ---------------------------------------------------------------------------- Licence contracts $ 26,320 $ 10,441 $ 15,879 $ 16,537 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the six months ended June 30, 2010, the license contracts were amortized by $658 (June 30, 2009 - $658) 6. Intangible and Other Assets December 31, Accumulated June 30, 2010 2009 Net Book Cost Amortization Net Book Value Value ---------------------------------------------------------------------------- (Restated, Note Intangible Assets: 21) Customer relationships $ 46,227 $ 26,958 $ 19,269 $ 24,154 Tenant relationships 2,640 1,987 653 895 Franchise rights 3,296 1,347 1,949 1,991 Lease origination costs 6,256 1,116 5,140 5,340 Other 1,038 852 186 299 ---------------------------------------------------------------------------- Total Intangible Assets 59,457 32,260 27,197 32,679 Other Assets: Mortgages receivable 3,441 - 3,441 3,441 ---------------------------------------------------------------------------- Total Intangible and Other Assets $ 62,898 $ 32,260 $ 30,638 $ 36,120 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- During the six months ended June 30, 2010, the intangible assets were amortized by $5,692 (June 30, 2009 - $5,662).7. Bank IndebtednessAs at June 30, 2010, the bridge loan amount was $ 6,000 (December 31, 2009 - $7,000 was reclassified as long-term debt). During the six months ended June 30, 2010, the REIT paid down $1,000 as part of the extension of the loan to March 1, 2011. The extension bears interest at Canadian Bankers' Acceptance rate plus 3.5% and requires interest payments only. The REIT has provided a hotel as security. 8. Long-term Debt June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- (Restated, Note 21) Mortgages payable $ 940,290 $ 959,158 Less debt issuance costs (5,321) (6,147) ---------------------------------------------------------------------------- Total long-term debt 934,969 953,011 Less current portion (118,436) (21,326) ---------------------------------------------------------------------------- Net long-term debt $ 816,533 $ 931,685 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Substantially all of the REIT's assets have been pledged as security under debt agreements. At June 30, 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 $6,248 (December 31, 2009 - $6,190) and matures at various dates from September 20, 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 June 30, 2010, the REIT qualifies for the maximum amount of $40,000. The amount drawn on the operating line as at June 30, 2010 was $ nil (December 31, 2009 - $ nil).Scheduled repayment of long-term debt is as follows: Regular Due on Amortization Maturity Total ---------------------------------------------------------------------------- Remainder of 2010 $ 13,022 $ 94,000 $ 107,022 2011 23,570 50,876 74,446 2012 24,430 176,323 200,753 2013 15,176 156,373 171,549 2014 7,922 288,474 296,396 2015 and thereafter 4,829 85,295 90,124 ---------------------------------------------------------------------------- $ 88,949 $ 851,341 $ 940,290 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The current portion of long-term debt on the balance sheet is based on the twelve months ending June 30, 2011, whereas the repayment schedule above reflects the fiscal year.The REIT intends to exercise the first of two one-year extension options with one of its major lenders to extend a major facility with a current balance of $270,645, until February 28, 2012, which includes an estimate pay down of $94,000. This extension will enable the REIT to secure its one-year renewal interest rate on the remaining balance at the one-year Composite Swap Rate plus 1.85%, at February 28, 2011.The estimated fair value of the REIT's long-term debt at June 30, 2010 was approximately $913,133 (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 $90,325 (December 31, 2009 - $103,117) of mortgages payable, which are subject to floating interest rates. Annual interest expense will increase by $903 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 June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- (Restated, Note 21) Capital leases $ 1,549 $ 1,549 Other lease obligations 373 319 ---------------------------------------------------------------------------- 1,922 1,868 Less current portion (120) (276) ---------------------------------------------------------------------------- Total lease obligations 1,802 1,592 Pension liability 3,220 3,304 Asset retirement obligation 2,289 1,552 ---------------------------------------------------------------------------- Total other long-term obligations $ 7,311 $ 6,448 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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 June 30, 2010 consists of the following: Non-Union Non- Management Management June 30, Pension Pension 2010 Total December 31, Benefit Benefit Benefit 2009 Total Plans Plans Plans Benefit Plans ---------------------------------------------------------------------------- Accrued benefit obligation $ 4,707 $ 1,403 $ 6,110 $ 5,872 Fair value of plan assets 2,300 1,253 3,553 3,432 ---------------------------------------------------------------------------- Funded status - plan deficit 2,407 150 2,557 2,440 Unamortized net actuarial gain (loss) 769 (106) 663 864 ---------------------------------------------------------------------------- Accrued employee future benefit liability $ 3,176 $ 44 $ 3,220 $ 3,304 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The pension expense for the six months ended June 30, 2010 is $200 (June 30, 2009 - $162).10. Convertible DebenturesThe details of the four series of convertible debentures are outlined in the tables below: Effective Converted Maturity Interest Interest Original to Trust Debenture Date Rate Rate Face Amount Units ---------------------------------------------------------------------------- April 15, Series A 2011 6.25% 7.73% $ 57,500 $ (11,736) May 31, Series B 2013 6.00% 7.53% 75,000 (20) August 1, Series C 2014 5.85% 7.42% 70,000 - March 31, Series D 2016 6.75% 9.41% 50,000 (7,064) ---------------------------------------------------------------------------- $ 252,500 $ (18,820) ---------------------------------------------------------------------------- Less current portion ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Holders' Accretion Face Amount Conversion and Issue June 30, Debenture Outstanding Option Costs 2010 ---------------------------------------------------------------------- Series A $ 45,764 $ (2,289) $ 1,696 $ 45,171 Series B 74,980 (3,400) 306 71,886 Series C 70,000 (2,953) (962) 66,085 Series D 42,936 (3,435) (1,513) 37,988 ---------------------------------------------------------------------- $ 233,680 $ (12,077) $ (473) $ 221,130 ---------------------------------------------------------------------- Less current portion (45,171) ---------------------------------------------------------------------- $ 175,959 ---------------------------------------------------------------------- ---------------------------------------------------------------------- The $45,171 Series A convertible debentures mature on April 15, 2011, therefore are reflected as current portion of convertible debentures on the consolidated balance sheet. Effective Converted Maturity Interest Interest Original to Trust Debenture Date Rate Rate Face Amount Units ---------------------------------------------------------------------------- April 15, Series A 2011 6.25% 7.73% $ 57,500 $ (11,736) May 31, Series B 2013 6.00% 7.53% 75,000 (20) August 1, Series C 2014 5.85% 7.42% 70,000 - March 31, Series D 2016 6.75% 9.41% 50,000 - ---------------------------------------------------------------------------- $ 252,500 $ (11,756) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Holders' Accretion Face Amount Conversion and Issue December Debenture Outstanding Option Costs 31, 2009 --------------------------------------------------------------------- Series A $ 45,764 $ (2,289) $ 1,518 $ 44,993 Series B 74,980 (3,400) (160) 71,420 Series C 70,000 (2,953) (1,367) 65,680 Series D 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 June 30, 2010, is $234,430 (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 June 30, 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 June 30, 2010, the REIT's leverage excluding and including convertible debentures was 44.8% and 55.8%, respectively, calculated as follows: December 31, June 30, 2010 2009 ---------------------------------------------------------------------------- Total assets per consolidated balance sheet $ 1,904,244 $ 1,950,209 Accumulated depreciation and amortization 380,166 345,098 Future income tax liability (185,869) (186,430) Future income tax liability not included in assets 15,868 16,114 ---------------------------------------------------------------------------- Gross asset value $ 2,114,409 $ 2,124,991 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Book value of mortgages and other indebtedness (1) $ 946,290 44.8% $ 958,636 45.1% Convertible debentures (2) 233,680 11.0% 240,744 11.3% ---------------------------------------------------------------------------- $ 1,179,970 55.8% $ 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 Note 12. 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 $8,592 in equity during the six months ended June 30, 2010 (June 30, 2009 - $1,615).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 June 30, 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 1.6 times at June 30, 2010 and 1.9 times at December 31, 2009); and (c) Unitholders' Equity of not less than $300,000 (actual being $467,642 at June 30, 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. Under the Canadian income tax rules applicable to specified investment flow-through ("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 will occur under a plan of arrangement (the "Arrangement"), was approved by InnVest's unitholders at its annual and special meeting held June 16, 2010. On June 30, 2010, InnVest applied for approval from the Ontario Superior Court of Justice to proceed with the plan of arrangement. Court approval was received July 22, 2010.Under the reorganization, InnVest will transfer all of its directly and indirectly held operating assets to a newly formed unit trust (InnVest Operations Trust, or "IOT") . IOT (through its subsidiaries) will hold the operating assets, earn revenues from hotel customers and pay rent to InnVest (the owner of the hotels). Each InnVest unitholder will receive one unit of IOT for each InnVest unit held. Thereafter, each issued and outstanding InnVest unit will trade together with a unit of IOT on a "stapled" basis unless the unitholders of InnVest vote in favour of an uncoupling of the stapled units or the REIT's trustees approve an event of bankruptcy or insolvency of InnVest, IOT and/or their respective subsidiaries.The completion of the proposed reorganization remains subject to certain conditions. These conditions may not be satisfied, or may not be satisfied on terms satisfactory to InnVest, in which case the proposed Arrangement could be modified, restructured or terminated. In addition, the Trustees may, in their sole discretion, decide not to proceed with the Arrangement.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 June 30, 2010, the REIT's floating rate debt balance of $90,325 (December 31, 2009 - $103,117) is approximately 9.6% (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 June 30, 2010 are $27,826 (December 31, 2009 - $22,591). InnVest reviews accounts receivable and the allowance for doubtful accounts is adjusted for any balances which are determined by management to be uncollectable. This provision adjustment is expensed in the hotel operating income. The allowance as at June 30, 2010 is $438 or 1.6% (December 31, 2009 - $505 or 2.3%) of total receivables. The bad debt expense included in hotel expenses for the six months ended June 30, 2010 is $4 (June 30, 2009 - $132 was credited in the operating income, due to amounts provided for which were subsequently collected). Accounts receivable amounts outstanding for over 90 days, which have not been provided for, total $8 at June 30, 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) $ 107,022 $ 74,446 $ 200,753 $ 171,549 Mortgage payable - interest (3) 25,838 46,437 42,418 22,640 Bridge loan - principal - 6,000 - - Bridge loan - interest 113 38 - - Convertible debentures - principal - 45,764 - 74,980 Convertible debentures - interest 7,176 12,207 11,492 9,243 ---------------------------------------------------------------------------- Total (4) $ 140,149 $ 184,892 $ 254,663 $ 278,412 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Contractual 2015 and Cash flows 2014 Thereafter (2) -------------------------------------------------------------------- Mortgage payable - principal (1) $ 296,396 $ 90,124 $ 940,290 Mortgage payable - interest (3) 10,751 5,115 153,199 Bridge loan - principal - - 6,000 Bridge loan - interest - - 151 Convertible debentures - principal 70,000 42,936 233,680 Convertible debentures - interest 6,993 5,063 52,174 -------------------------------------------------------------------- Total (4) $ 384,140 $ 143,238 $ 1,385,494 -------------------------------------------------------------------- -------------------------------------------------------------------- (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 June 30, 2010. (4) Current liabilities expected to be 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 June 30, 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 $27,157 at June 30, 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 $1,223 at June 30, 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 June 30, 2010 and December 31, 2009.The fair value hierarchy of financial instruments measured at fair value on the balance sheet is as follows: June 30, 2010 December 31, 2009 ---------------------------------------------------------------------------- Financial Assets: Level 1 Level 1 Cash and restricted cash $ 78,607 $ 104,869 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The REIT has no Level 2, nor Level 3 inputs.Letters of CreditAs at June 30, 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, 2009 87,498,354 $ 815,190 Units issued under distribution reinvestment plan 215,561 1,303 Units issued on conversion of debentures 1,239,296 7,064 Units issued for vested executive compensation plan 22,215 225 ---------------------------------------------------------------------------- Balance at June 30, 2010 88,975,426 $ 823,782 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Balance at December 31, 2008 74,412,317 $ 768,034 Units issued under distribution reinvestment plan 378,000 1,349 Units repurchased pursuant to normal course issuer bid (336,549) (3,467) Units issued on conversion of debentures 1,342 20 Units issued for vested executive compensation plan 19,052 170 Units issued under trustee compensation plan 23,293 76 ---------------------------------------------------------------------------- Balance at June 30, 2009 74,497,455 $ 766,182 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Pursuant to the REIT's normal course issuer bid (the "Bid"), the REIT purchased 13,268 units at an average price of $5.91 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 and during the second quarter of 2010 this reserve was increased by 250,000 units. The balance in this reserve account at June 30, 2010 is 250,375 units. Under the Trustee Compensation Plan, 13,268 units were awarded and purchased under the Bid during the six months ended June 30, 2010 (June 30, 2009 - 23,293 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 June 30, 2010 is 745,766 units. A unit granted through the plan entitles the holder to receive, on the vesting date, the then current fair market value of the unit plus the value of the cash distributions that would have been paid on the unit if it had been issued on the date of grant assuming the reinvestment of the distribution into REIT units. The payment will be satisfied through the issuance of units.The following table summarizes the status of the executive compensation plan at June 30, 2010, excluding granted units which have fully vested: Unvested Units Accumulated Total Executive units from Distributions Units ---------------------------------------------------------------------------- 2007 - granted 15,000 8,323 23,323 2008 - granted 20,455 9,132 29,587 2009 - granted 25,500 6,262 31,762 2010 - granted 28,500 1,093 29,593 Units vested 2010 (7,500) (3,921) (11,421) ---------------------------------------------------------------------------- 81,955 20,889 102,844 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The Board of Trustees approved the granting of 28,500 units during the six months ended June 30, 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 June 30, 2010 June 30, 2009 ---------------------------------------------------------------------------- Weighted Weighted Average Average Units Units ---------------------------------------------------------------------------- (Restated, Note 21) Income (loss) from continuing operations - basic $ 1,258 88,430,620 $ (3,553) 74,451,452 Dilutive effect of executive compensation plan - 101,860 - 84,010 ---------------------------------------------------------------------------- Income (loss) from continuing operations - diluted $ 1,258 88,532,480 $ (3,553) 74,535,462 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six Months Ended June Six Months Ended June 30, 2010 30, 2009 ---------------------------------------------------------------------------- Weighted Weighted Average Average Units Units ---------------------------------------------------------------------------- (Restated, Note 21) Loss from continuing operations - basic $(25,258) 88,006,418 $ (18,869) 74,445,556 Dilutive effect of executive compensation plan - 98,125 - 81,821 ---------------------------------------------------------------------------- Loss from continuing operations - diluted $(25,258) 88,104,543 $ (18,869) 74,527,377 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three Months Ended Three Months Ended June 30, 2010 June 30, 2009 ---------------------------------------------------------------------------- Weighted Weighted Average Average Units Units ---------------------------------------------------------------------------- (Restated, Note 21) Net income (loss) - basic $ 1,303 88,430,620 $ (4,007) 74,451,452 Dilutive effect of executive compensation plan - 101,860 - 84,010 ---------------------------------------------------------------------------- Net income (loss) - diluted $ 1,303 88,532,480 $ (4,007) 74,535,462 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six Months Ended Six Months Ended June 30, 2010 June 30, 2009 ---------------------------------------------------------------------------- Weighted Weighted Average Average Units Units ---------------------------------------------------------------------------- (Restated, Note 21) Net loss - basic $(25,182) 88,006,418 $ (19,427) 74,445,556 Dilutive effect of executive compensation plan - 98,125 - 81,821 ---------------------------------------------------------------------------- Net loss - diluted $(25,182) 88,104,543 $ (19,427) 74,527,377 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The impact of the debentures has been excluded from the per unit calculations above because 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. Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, 2010 2009 2010 2009 ---------------------------------------------------------------------------- Net income (loss) $ 1,303 $ (4,007) $(25,182) $(19,427) ---------------------------------------------------------------------------- Add (deduct) Depreciation and amortization 23,078 22,739 46,318 45,468 Future income tax recovery (128) (850) (561) (7,781) Non-cash portion of mortgage interest expense 412 386 894 810 Non-cash portion of convertible debentures interest and accretion 1,096 743 1,711 1,527 Reserve for replacement of furniture, fixtures, equipment, capital improvements (6,710) (6,563) (11,864) (11,990) Writedown of hotel properties - 5,488 - 5,488 Writedown of assets held for sale - 499 - 499 Non-cash executive and trustee compensation 27 86 83 172 Deferred land lease expense and retail lease income, net 24 2 49 4 ---------------------------------------------------------------------------- 17,799 22,530 36,630 34,197 ---------------------------------------------------------------------------- Distributable income $ 19,102 $ 18,523 $ 11,448 $ 14,770 ---------------------------------------------------------------------------- Distributions paid or payable 11,090 13,962 22,049 27,918 ---------------------------------------------------------------------------- Distributions (less than) in excess of distributable income $ (8,012) $ (4,561) $ 10,601 $ 13,148 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 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 current term expires July 25, 2017 and the Agreements include an additional renewal term for a five-year extension, subject to the consent of Westmont and approval of the REIT. 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 also paid termination fees of $96 during the six months ended June 30, 2010 (June 30, 2009 - $63).In addition to the base management fee and incentive fee, Westmont is entitled to fees based on a percentage of the cost of purchasing certain goods and supplies and certain construction costs and capital expenditures, fees for accounting services, reasonable out-of-pocket costs and expenses (other than general and administrative expenses or overhead costs except as otherwise provided in the Administrative Services Agreement) and project management and general contractor service fees related to hotel renovations managed by Westmont.Also, for certain hotels owned by InnVest and not managed by Westmont, Westmont is entitled to an asset management fee based on a fixed percentage of the purchase price of the hotel or a fixed percentage of hotel operating income, after the reserve for replacement of furniture, fixtures and equipment and capital improvements, subject to an annual minimum fee.During the three and six months ended June 30, 2010 and 2009, the fees charged to the REIT pursuant to the Agreements were as follows: Three Three Six Six Months Months Months Months Ended Ended Ended Ended June 30, June 30, June 30 June 30, 2010 2009 2010 2009 ---------------------------------------------------------------------------- Fees from continuing operations: Management fees $ 3,037 $ 2,950 $ 5,399 $ 5,464 Asset management fees (included in management fee expense) 507 507 1,015 1,012 Accounting services (included in hotel operating expenses) 590 558 1,180 1,115 Administrative services (included in corporate and administrative expenses) 113 112 226 229 Project management and general contractor services (capitalized to hotel properties) 243 171 392 381 Fees from discontinued operations 110 125 123 211 ---------------------------------------------------------------------------- $ 4,600 $ 4,423 $ 8,335 $ 8,412 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- In addition, salaries of REIT employees paid by Westmont and reimbursed by the REIT were $217 for the six months ended June 30, 2010 (June 30, 2009 - $187). Included in accounts payable and accrued liabilities are amounts owed to Westmont at June 30, 2010 totalling $1,589 (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 and six months ended June 30, 2010, total management fees paid to Hilton were $315 and $539, respectively (June 30, 2009 - $308 and $520, respectively).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 and six months ended June 30, 2010, total management fees paid to Delta were $1,231 and $2,133, respectively (June 30, 2009 - $1,246 and $2,262, respectively).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 and six months ended June 30, 2010, total base management and incentive management fees paid for these properties were $951 and $1,604, respectively (June 30, 2009 - $878 and $1,809, respectively).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 incentive fees for the three and six months ended June 30, 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 June 30, 2010 Hotel revenues $ 41,171 $ 60,822 $ 36,715 $ 24,255 $ 162,963 Hotel expenses 28,821 44,986 27,488 18,039 119,334 ---------------------------------------------------------------------------- Hotel operating income $ 12,350 $ 15,836 $ 9,227 $ 6,216 $ 43,629 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Three months ended June 30, 2009 (Restated, Note 21) Hotel revenues $ 39,949 $ 59,017 $ 34,607 $ 25,508 $ 159,081 Hotel expenses 28,029 44,366 26,671 18,582 117,648 ---------------------------------------------------------------------------- Hotel operating income $ 11,920 $ 14,651 $ 7,936 $ 6,926 $ 41,433 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30, 2010 Hotel revenues $ 74,776 $ 108,249 $ 64,212 $ 40,915 $ 288,152 Hotel expenses 55,386 87,311 52,479 33,821 228,997 ---------------------------------------------------------------------------- Hotel operating income $ 19,390 $ 20,938 $ 11,733 $ 7,094 $ 59,155 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six months ended June 30, 2009 (Restated, Note 21) Hotel revenues $ 76,475 $ 109,342 $ 61,987 $ 42,151 $ 289,955 Hotel expenses 56,258 87,478 51,818 34,655 230,209 ---------------------------------------------------------------------------- Hotel operating income $ 20,217 $ 21,864 $ 10,169 $ 7,496 $ 59,746 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures on hotel properties, Three months ended June 30, 2010 $ 843 $ 1,991 $ 1,487 $ 3,473 $ 7,794 Three months ended June 30, 2009 $ 3,659 $ 2,026 $ 795 $ 832 $ 7,312 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Capital expenditures on hotel properties, Six months ended June 30, 2010 $ 2,452 $ 4,671 $ 4,790 $ 1,872 $ 13,785 Six months ended June 30, 2009 (Restated, Note 21) $ 5,367 $ 4,216 $ 2,359 $ 1,338 $ 13,280 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Hotel properties June 30, 2010 $ 487,751 $ 604,108 $ 395,706 $ 225,432 $ 1,712,997 December 31, 2009 (Restated, Note 21) $ 497,252 $ 616,306 $ 398,330 $ 228,754 $ 1,740,642 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 19. Total Revenues Three Months Three Months Six Months Six Months Ended June Ended June Ended June Ended June 30, 2010 30, 2009 30, 2010 30, 2009 ---------------------------------------------------------------------------- (Restated, (Restated, Note 21) Note 21) Hotel revenues $ 162,963 $ 159,081 $ 288,152 $ 289,955 Other business income 2,989 2,714 5,818 5,443 ---------------------------------------------------------------------------- $ 165,952 $ 161,795 $ 293,970 $ 295,398 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 20. Other Business IncomeOther 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. Three Months Three Months Franchise Retail/ Retirement Ended June Ended June Business Office Residence 30, 2010 30, 2009 ---------------------------------------------------------------------------- Revenues $ 2,105 $ 637 $ 247 $ 2,989 $ 2,714 Expenses 1,425 259 199 $ 1,883 1,423 ---------------------------------------------------------------------------- Other business income, net $ 680 $ 378 $ 48 $ 1,106 $ 1,291 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Six Months Six Months Franchise Retail/ Retirement Ended June Ended June Business Office Residence 30, 2010 30, 2009 ---------------------------------------------------------------------------- Revenues $ 3,880 $ 1,436 $ 502 $ 5,818 $ 5,443 Expenses 2,725 611 392 $ 3,728 3,240 ---------------------------------------------------------------------------- Other business income, net $ 1,155 $ 825 $ 110 $ 2,090 $ 2,203 ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 21. Asset Held for Sale and Discontinued OperationsThe asset held for sale is an Ontario property which was expropriated subsequent to June 30, 2010. The operating results of this hotel are presented as discontinued operations for the three and six months ended June 30, 2010 and 2009. The three and six months ended June 30, 2009 also includes two Ontario hotels sold subsequently in 2009.Discontinued operations for the three and six months ended June 30, 2010 and 2009 are as follows: Three Three Months Months Six Months Six Months Ended June Ended June Ended June Ended June 30, 2010 30, 2009 30, 2010 30, 2009 ---------------------------------------------------------------------------- Hotel revenues $ 297 $ 752 $ 553 $1,929 ---------------------------------------------------------------------------- Hotel expenses Operating expenses 192 464 358 1,302 Property taxes, rent and insurance 50 195 100 483 Management fees 10 25 19 65 ---------------------------------------------------------------------------- 252 684 477 1,850 ---------------------------------------------------------------------------- Hotel operating income 45 68 76 79 ---------------------------------------------------------------------------- Interest on mortgages - 23 - 85 Depreciation and amortization - - - 53 ---------------------------------------------------------------------------- - 23 - 138 Income (loss) from discontinued operations 45 45 76 (59) Writedown of asset held for sale - (499) - (499) ---------------------------------------------------------------------------- Net income (loss) from discontinued operations $ 45 $ (454) $ 76 $ (558) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- The discontinued operations for the three and six months ended June 30, 2009 have been restated due to the reclassification of three hotels. One Ontario hotel has become an operating lease hotel. Another Ontario hotel and one Quebec hotel were reclassified from Assets held for sale as they no longer meet the criteria under CICA Section 3475 - Disposal of Long-lived Assets and Discontinued Operations. Their realizable value of $23,097 has been reclassified to Hotel properties effective June 30, 2010 and will begin to be amortized starting in the third quarter, as these assets are not expected to sell.The REIT repaid debt totaling $4,201 relating to the Ontario hotel which is now an operating lease hotel. The balance of Long-term liabilities related to assets held for sale, for these assets, was reclassified in the amount of $8,184 to Long-term debt and a $448 credit to Other long-term obligations.The following table summarizes the effect on the consolidated statements of net income (loss) for the three and six months ended June 30, 2010 and 2009, due to the reclassification: Three Three Months Months Six Months Six Months Ended June Ended June Ended June Ended June 30, 2010 30, 2009 30, 2010 30, 2009 ---------------------------------------------------------------------------- Hotel revenues $ 2,968 $ 3,103 $ 5,881 $ 6,276 ---------------------------------------------------------------------------- Hotel expenses Operating expenses 2,085 2,381 4,484 4,829 Property taxes, rent and insurance 651 770 1,349 1,491 Management fees 100 105 199 212 ---------------------------------------------------------------------------- 2,836 3,256 6,032 6,532 ---------------------------------------------------------------------------- Hotel operating income (loss) 132 (153) (151) (256) ---------------------------------------------------------------------------- Interest on mortgages 141 113 317 228 Depreciation and amortization - - - 477 Write down of hotel properties - 5,488 - 5,488 ---------------------------------------------------------------------------- 141 5,601 317 6,193 ---------------------------------------------------------------------------- Net loss from continuing operations $ (9) $(5,754) $ (468) $(6,449) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- 22. Subsequent EventOn July 22, 2010, the REIT announced a public offering, subject to regulatory approval, on a bought deal basis, of $75,000 aggregate principal amount of 6% convertible unsecured subordinated debentures due September 30, 2017 (the "Debentures"). The Debentures are convertible, at the option of the holder, into InnVest units at $8.00 per unit. The offering is expected to close in August 2010.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