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Press release from Marketwire

InnVest REIT Reports Third Quarter Results

Friday, November 12, 2010

InnVest REIT Reports Third Quarter Results08:00 EST Friday, November 12, 2010TORONTO, ONTARIO--(Marketwire - Nov. 12, 2010) - InnVest Real Estate Investment Trust ("InnVest" or the "Trust") (TSX:INN.UN) today announced financial results for the three and nine months ended September 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."The lodging recovery in Canada has been muted with softer group demand in key markets and moderating economic trends limiting top-line results achieved during the quarter. We are encouraged by the gains in occupancy during the quarter and expect ADR growth to follow as demand and confidence improves," commented Kenneth Gibson, InnVest's President and Chief Executive Officer. "With a solid balance sheet and an improving outlook ahead, we are strategically investing in our portfolio to take advantage of market opportunities and position our hotels to benefit from the recovery."Third Quarter HighlightsIssued a $75.0 million 6.0% convertible debenture due in 2017. The proceeds were partially used to redeem the $45.7 million outstanding Series A – 6.25% convertible debentures that were due in April of 2011; Completed the early one-year extension of a mortgage originally scheduled to mature in February 2011. As part of the early refinancing, InnVest repaid $95.0 million of mortgage principal plus yield maintenance and other fees; Revenue per available room, or RevPAR, on a same hotel basis improved 2.0% driven by a 2.8 point improvement in occupancy which offset a 2.1% decline in average daily rate ("ADR"); Overall, hotel revenues were relatively unchanged with reduced food and beverage banquet sales offsetting room revenue gains achieved; Hotel operating income ("HOI") declined $3.2 million or 5.9% with $1.7 million of the decline due to a lease adjustment realized in the prior year and the balance due to costs associated with higher occupancies achieved; and Distributable income and funds from operations each declined reflecting the reduced HOI achieved and higher interest expenses during the quarter. FINANCIAL HIGHLIGHTS (unaudited)(In thousands of dollars except average daily rate, revenue per available room and per unit amounts)Three months ended September 30Nine months ended September 3020102009+/-20102009+/-Occupancy70.7%67.7%3.0%61.4%60.3%1.2%Average daily rate ("ADR")$117.19$119.43($2.24)$116.34$117.24($0.90)Revenue Per Available Room ("RevPAR")$82.89$80.89$2.00$71.48$70.68$0.80Hotel revenues$172,985$172,559$426$461,137$462,514($1,377)Hotel operating income(1)$50,776$53,986($3,210)$109,931$113,732($3,801)Net income (loss) and comprehensive income (loss)$8,555$13,306($4,751)($16,307)($6,121)($10,186)Add / (deduct)Depreciation and amortization24,72522,7781,94771,04368,2292,814Future income tax recovery(1,356)(604)(752)(2,237)(8,385)6,148Non-cash executive and trustee compensation654817147220(73)Net (gain on sale) writedown of assets held for sale(327)-(327)(327)499(826)Writedown of hotel properties-1,250(1,250)-6,738(6,738)SIFT transition expenses510-510510-510Funds from operations (1)(2)$32,172$36,778($4,606)$52,829$61,180($8,351)Funds from operations per unit- basic$0.361$0.493($0.132)$0.598$0.821($0.223)- diluted$0.326$0.458($0.132)$0.578$0.816($0.238)Amortization of deferred financing costs-6(6)-23(23)Non-cash portion of mortgage interest expense6404122281,5341,222312Reserve for replacement of furniture, fixtures and equipment and capital improvements(7,101)(7,113)12(18,965)(19,103)138Non-cash portion of convertible debentures interest and accretion1,1047363682,8152,263552Deferred land lease expense and retail lease income, net2526(1)743044Distributable income (1)$26,840$30,845($4,005)$38,287$45,615($7,328)Distributable loss per unit (3)- basic$0.302$0.414($0.112)$0.433$0.612($0.179)- diluted$0.272$0.383($0.111)$0.420$0.610($0.190)Distributions per unit (4)$0.1251$0.1667($0.042)$0.3753$0.5417($0.166)(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 ended September 30, 2010Variance to 2009Nine months ended September 30, 2010Variance to 2009OccupancyOntario68.6%5.4 pts59.7%1.8 ptsQuebec72.2%0.8 pts62.9%1.6 ptsAtlantic78.8%2.3 pts63.7%0.3 ptsWestern67.8%(0.4 pt)62.5%(1.1 pts)Total70.7%2.8 pts61.5%0.9 ptADROntario$107.01(1.8%)$108.12(1.3%)Quebec$114.49(3.5%)$113.54(0.4%)Atlantic$125.08(0.1%)$117.27(0.6%)Western$137.60(1.3%)$138.120.1%Total$117.19(2.1%)$116.60(0.8%)RevPAROntario$73.386.5%$64.531.8%Quebec$82.65(2.3%)$71.432.1%Atlantic$98.572.9%$74.68(0.2%)Western$93.55(1.8%)$86.31(1.6%)Total$82.892.0%$71.760.8%FINANCIAL REVIEW (In thousands of dollars, except per unit amounts, unless otherwise stated)Three months ended September 30, 2010The hospitality industry is highly correlated to the economy given its impact on discretionary travel demand, including demand from corporate and leisure customers. A soft economic environment began impacting RevPAR performance in mid-2008. An improving economic outlook has contributed to positive year-over-year trends for the past two quarters in 2010. For the three months ended September 30, 2010, hotel revenues increased by 0.2% to $173.0 million. Over this period, RevPAR increased 2.0% with a 2.8 point increase in overall occupancy offsetting a 2.1% ADR decline. Room revenues for the three months ended September 30, 2010 increased $2.1 million, or 1.5%, to $142.6 million. Regional performance varied based on broader regional factors. Ontario realized solid growth this quarter led by the Greater Toronto Area which saw RevPAR growth of over 15%. The Toronto downtown core benefitted from continued positive momentum from the G20 meetings held in June which helped drive demand in surrounding markets. Meeting space renovations at one full service hotel in Quebec City contributed to reduced business volumes and a shift to lower rated business during the quarter, offsetting growth in the balance of the Quebec region. Atlantic Canada benefitted from occupancy gains across most major markets. Softer group activity generally across InnVest's western portfolio contributed to occupancy and rate declines during the quarter. For the three months ended September 30, 2010, non-room revenues totalled $30.4 million, down $1.6 or 5.2% compared to the prior year despite a 2.8 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 hotels. During the third quarter however, softer group demand across the portfolio resulted in a decline in banquet revenues. In addition, the prior year benefitted from non-recurring catering activity. Hotel expenses for the three months ended September 30, 2010 increased $3.6 million or 3.1% when compared to 2009. The majority of this increase reflects the benefit of a $1.7 million lease adjustment realized in the prior year. Excluding this amount, hotel expenses would have increased 1.6% during the quarter reflecting costs associated with increased occupancies of 2.8 points. For the three months ended September 30, 2010, the Trust generated HOI of $50.8 million, down $3.2 million or 5.9% as compared to the prior year. Excluding the lease savings realized in the prior period, HOI would have been down 2.9%. Third quarter hotel operating income margins were down 190 basis points to 29.4% reflecting the impact of lower ADR and the prior period's lease savings benefit. Other income and expenses for the three months ended September 30, 2010 increased $2.6 million reflecting a $1.9 million increase in non-cash depreciation charge and a $2.0 million increase in interest expense. Other expenses also include $510 of costs associated with the upcoming SIFT transition. These increased expenses were somewhat offset by a $1.3 million writedown realized in the prior year. Higher interest on convertible debentures reflects the increase in convertible debentures outstanding as compared to the prior period. Interest on mortgages was modestly higher due to increased amortization of debt financing costs following the refinancing of certain mortgages over the past year. The $95.0 million mortgage paydown completed in August of 2010 includes yield maintenance payments related to the early repayment. Yield maintenance costs incurred will be expensed evenly to February 2011, the original maturity date. This will largely offset the incremental interest savings realized from the mortgage reduction. Thereafter, interest savings will be realized reflecting the lower debt outstanding and a reduced interest rate. InnVest's net income for the three months ended September 30, 2010 totalled $8.6 million, or $0.096 per unit diluted. This compares to a net income of $13.3 million, or $0.178 per unit diluted for the same period in 2009. These results primarily reflect the lower HOI and higher interest expenses realized during the quarter along with additional units outstanding in 2010 as compared to 2009 given an equity offering of 12,658,500 units in October 2009 and convertible debentures issued over this period.For the three months ended September 30, 2010, InnVest generated FFO of $32.2 million ($0.326 per unit diluted) compared to $36.8 million in the prior period ($0.458 per unit diluted). InnVest generated distributable income of $26.8 million ($0.272 per unit diluted) compared to $30.8 million in the prior year ($0.383 per unit diluted). Distributions declared in the three months ended September 30, 2010 totalled $11.1 million compared to $12.4 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 September 30, 2010 was 99.8% which largely reflects the negative impact of capital raised over the last year which was only deployed late in the third quarter of 2010. Nine months ended September 30, 2010For the nine months ended September 30, 2010, hotel revenues are relatively unchanged at $461.1 million. Year-to-date, RevPAR increased 0.8% with a 0.9 point increase in overall occupancy offsetting a 0.8% decline in ADR. For the nine months ended September 30, 2010, the Trust generated HOI of $109.9 million, down 3.3% or $3.8 million as compared to the prior year. Hotel operating income margins declined 80 basis points to 23.8% reflecting the lower ADR achieved and the one-time lease saving realized in the prior period. For the nine months ended September 30, 2010, InnVest realized a net loss of $16.6 million, or $0.188 per unit diluted compared to a net loss of $6.1 million, or $0.082 per unit diluted for the same period in 2009. These results primarily reflect the lower HOI achieved over the period along with higher interest expenses and a reduction in future income tax recoveries. These increases were somewhat offset by a writedown in the prior period. The per unit results also reflect the higher number of units outstanding in 2010 as compared to 2009.For the nine months ended September 30, 2010, InnVest generated FFO of $52.8 million or $0.578 per unit diluted. This compares to FFO of $61.2 million in the prior period ($0.816 per unit diluted). For the nine months ended September 30, 2010, InnVest generated distributable income of $38.3 million ($0.420 per unit diluted) compared to $45.6 million in the prior year ($0.610 per unit diluted).BALANCE SHEET REVIEWAt September 30, 2010, InnVest has cash on hand totalling $17.4 million and $40.0 million available under its credit facility. InnVest had mortgages payable of $839.6 million with a weighted average term of 3.1 years and a weighted average interest rate of 6.0%. The Trust has no mortgage maturities until September 2011. In August 2010, the Trust completed the early one-year extension of a mortgage originally scheduled to mature in February 2011. As part of the early refinancing, InnVest repaid $95.0 million of mortgage principal. The balance of this debt at September 30, 2010 is $172.7 million. This early renewal enables the Trust to secure its one-year extension interest rate beginning February 28, 2011 at the then one-year Composite Swap Rate plus 1.85%. Currently, this rate would approximate 3.4% compared to the existing rate on the mortgage of 5.4%. The mortgage includes one additional one-year extension (to February 28, 2013), at the Trust's option, subject to certain minimum thresholds at the time of maturity. The second renewal term would include the same interest spread, calculated as at February 28, 2012.At September 30, 2010, the Trust's leverage excluding and including convertible debentures was 41.1% and 53.8%, respectively. Subsequent to the third quarter, $4.4 million of the Series D – 6.75% Debentures were converted to units of the Trust.For the nine months ended September 30, 2010, capital expenditures totalled $24.2 million compared to the Trust's furniture, fixture and equipment reserve of $19.0 million. The incremental $5.2 million invested above the reserve reflects the start of a guestroom renovation and meeting space renovation at two full-service hotels as well as investments undertaken to implement a brand re-launch of the Trust's Holiday Inn and Holiday Inn Express hotels. The Trust expects its annual 2010 capital expenditures to approximate $33.0 million.OUTLOOKHistorically, the lodging industry performance has been highly correlated with the general economy given the discretionary nature of leisure and business travel and will typically lag an economic recovery until businesses and consumers gain confidence in the sustainability of the recovery. The Canadian economic recovery has contributed to improving occupancy trends in our portfolio in 2010. We expect this trend to continue with firming occupancies leading to improvements in average daily rate in mid 2011. The Trust continues to manage its portfolio aggressively to maximize the performance of each hotel. Our focus on generating sustainable cost efficiencies over the last two years and constrained new supply should enable the Trust to realize cash flow growth as hotel operating performance continues to 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. 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 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 in June 2010 and court approval was received in July 2010. 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 taxable 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.INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")The Trust intends to revalue its hotel properties at January 1, 2010. The Trust largely finalized its asset valuation process during the third quarter. A significant portion of the portfolio has been subject to external valuation with the remainder being valued by management and validated externally following the same methodology. The fair value of each hotel was determined based upon a direct capitalization method of valuation with consideration given to minimum/maximum price per room values. Capitalization rates and price per room values were established based on individual markets, segments, and where available, recent comparable hotel sales activity. Based on this valuation work, the Trust expects that the impact of the deemed cost election will be a reduction in the carrying value of its opening balance sheet hotel properties as at January 1, 2010 of approximately $200 to $230 million. Offsetting this adjustment will be the elimination of significant future income tax liabilities included in the Trust's hotel properties' asset base following the Trust's conversion to a Qualifying REIT such that the impact of these two changes will be a net reduction in the Trust's equity of approximately $30 to $50 million in 2010.The fair value adjustment upon conversion to IFRS as at January 1, 2010, as well as the elimination of the accumulated depreciation balance will adversely impact the Trust's debt ratio. Although there is no increase in actual debt outstanding, the adjustment will result in an increase to the Trust's reported gross book value leverage. As a result, the Trust expects to amend its Declaration of Trust to address its leverage restrictions. Interest and debt coverage ratios are not expected to be materially impacted. 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®, Holiday Inn® Quality Suites/Inn®, Radisson®, Delta®, Travelodge®, Hilton Hotel®, Staybridge Suites®, Fairmont Hotels®, Sheraton Suites® and Best Western®. InnVest's trust units and outstanding convertible debentures trade on the Toronto Stock Exchange under the symbols INN.UN, INN.DB.B, INN.DB.C, INN.DB.D and INN.DB.E, respectively.InnVest Real Estate Investment TrustCONSOLIDATED BALANCE SHEETS(in thousands of dollars) (unaudited)September 30, 2010December 31, 2009(Restated, Note 21)ASSETSCurrent AssetsCash$13,767$101,054Accounts receivable31,66222,591Prepaid expenses and other assets16,0227,962Asset held for sale (Note 21)-3361,451131,640Restricted cash3,6783,815Hotel properties (Note 3)1,701,8041,740,642Other real estate properties (Note 4)16,02915,770Licence contracts (Note 5)15,55016,537Intangible and other assets (Note 6)28,30536,120Asset held for sale (Note 21)-5,685$1,826,817$1,950,209LIABILITIESCurrent LiabilitiesBank indebtedness (Note 7)$6,000$-Accounts payable and accrued liabilities79,07067,710Distributions payable3,7133,649Current portion of long-term debt (Note 8)78,42921,326Liabilities related to asset held for sale (Note 21)-54167,21292,739Long-term debt (Note 8)754,389931,685Other long-term obligations (Note 9)7,0526,448Convertible debentures (Note 10)244,542225,918Future income tax liability (Note 12)184,513186,4301,357,7081,443,220UNITHOLDERS' EQUITY469,109506,989$1,826,817$1,950,209The accompanying notes are an integral part of these consolidated financial statements.InnVest Real Estate Investment TrustCONSOLIDATED STATEMENTS OF NET INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS)(in thousands of dollars, except per unit amounts) (unaudited)Three Months Ended September 30, 2010Three Months Ended September 30, 2009Nine Months Ended September 30, 2010Nine Months Ended September 30, 2009(Restated, Note 21)(Restated, Note 21)Total revenues (Note 19)$176,914$175,931$470,884$471,329Hotel revenues$172,985$172,559$461,137$462,514Hotel expensesOperating expenses (Note 17)102,252100,607293,166291,989Property taxes, rent and insurance13,54811,66640,94139,439Management fees (Note 17)6,4096,30017,09917,354122,209118,573351,206348,782Hotel operating income50,77653,986109,931113,732Other (income) and expensesInterest on mortgages and other debt14,44714,00043,28141,696Convertible debentures interest and accretion5,1573,62314,23610,831Corporate and administrative (Note 17)1,4061,4004,3804,310Capital tax184556148Other business income, net (Note 20)(1,649)(1,627)(3,739)(3,830)Other income(142)(125)(321)(346)Depreciation and amortization24,72522,78471,04368,199Writedown of hotel properties (Note 3)-1,250-6,73843,96241,350128,936127,746Income (loss) from continuing operations before income tax recovery6,81412,636(19,005)(14,014)Future income tax recovery (Note 12)(1,356)(604)(1,917)(8,385)Income (loss) from continuing operations8,17013,240(17,088)(5,629)Income from discontinued operations (Note 21)58661347Net gain on sale (writedown) of asset held for sale (Note 21)327-327(499)38566461(492)Net income (loss) and comprehensive income (loss)$8,555$13,306$(16,627)$(6,121)Income (loss) from continuing operations, per unit (Note 15)Basic and diluted$0.092$0.177$(0.193)$(0.076)Net income (loss) per unit (Note 15)Basic and diluted$0.096$0.178$(0.188)$(0.082)Income (loss) from discontinued operations, per unitBasic and diluted$0.004$0.001$0.005$(0.006)The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment TrustCONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY(in thousands of dollars) (unaudited)Cumulative Net Income and Comprehensive Income (Loss)Cumulative DistributionsDeficitUnits in $Contributed SurplusConvertible Debentures Holders' Conversion OptionTotal(Note 14)Balance December 31, 2008$134,546$(378,164)$(243,618)$768,034$2,672$8,642$535,730CHANGES DURING THE PERIODNet loss and comprehensive loss(6,121)-(6,121)---(6,121)Distributions to unitholders (Note 16)-(40,357)(40,357)---(40,357)Distribution reinvestment plan unitsissued (Note 14)---2,099--2,099Units repurchased pursuant tonormal course issuer bid (Note 14)---(3,467)2,301-(1,166)Conversion of debentures---20--20Vested executive compensation---170(170)--Executive and trustee compensation---76144-220Balance September 30, 2009$128,425$(418,521)$(290,096)$766,932$4,947$8,642$490,425Balance December 31, 2009$103,623$(429,461)$(325,838)$815,190$4,995$12,642$506,989CHANGES DURING THE PERIODNet loss and comprehensive loss(16,627)-(16,627)---(16,627)Distributions to unitholders (Note 16)-(33,187)(33,187)---(33,187)Redemption and cancellation of debentures2,094-2,094--(2,289)(195)Distribution reinvestment plan unitsissued (Note 14)---1,586--1,586Conversion of debentures---7,216-(570)6,646Issue of debentures-----3,7503,750Vested executive compensation---225(225)--Executive and trustee compensation---38109-147Balance September 30, 2010$89,090$(462,648)$(373,558)$824,255$4,879$13,533$469,109The accompanying notes are an integral part of these consolidated financial statements.InnVest Real Estate Investment TrustCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands of dollars) (unaudited)Three Months Ended September 30, 2010Three Months Ended September 30, 2009Nine Months Ended September 30, 2010Nine Months Ended September 30, 2009(Restated, Note 21)(Restated, Note 21)OPERATING ACTIVITIESIncome (loss) from continuing operations$8,170$13,240$(17,088)$(5,629)Add (deduct) items not affecting operationsDepreciation and amortization24,72522,78471,04368,199Writedown of hotel properties and other assets-1,250-6,738Non-cash portion of mortgage interest expense6404121,5341,222Non-cash portion of convertible debenturesinterest and accretion1,1047362,8152,263Future income tax recovery(1,356)(604)(1,917)(8,385)Non-cash executive and trustee compensation6548147220Changes in non-cash working capital(2,335)3,161(6,216)(6,995)Discontinued operations403207440(222)31,41641,23450,75857,411FINANCING ACTIVITIESRepayment of long-term debt(102,912)(3,311)(117,948)(8,480)Proceeds from long-term debt--3,1006,533Issue of convertible debentures (Note 10)71,688-71,688-Redemption and cancellation of convertible debentures(45,678)-(45,678)-Units repurchased pursuant to normal courseissuer bid (Note 14)---(1,166)Unit distributions(10,851)(13,231)(31,536)(39,795)Decrease in operating loan-(21,300)--Repayment of bridge loan--(1,000)(2,000)Discontinued operations repayment of debt-(1,637)-(4,576)(87,753)(39,479)(121,374)(49,484)INVESTING ACTIVITIESCapital expenditures on hotel properties(10,405)(5,304)(24,190)(18,584)Hotel under development expenditures, net---(82)Change in intangible and other assets(451)(95)(662)(1,413)Deposit on lease arrangement--2,013-Proceeds from sale of discontinued asset, net of costsand mortgages receivable6,0312,4306,0313,405(Increase) decrease in restricted cash(196)(409)137(508)(5,021)(3,378)(16,671)(17,182)Decrease in cash during the period(61,358)(1,623)(87,287)(9,255)Cash, beginning of period75,12510,511101,05418,143Cash, end of period$13,767$8,888$13,767$8,888Supplemental disclosure of cash flow information:Cash paid for interest$18,968$16,060$53,438$49,133Cash paid for income taxes (including capital tax)$-$46$76$169The accompanying notes are an integral part of these consolidated financial statements. InnVest Real Estate Investment TrustNOTES TO CONSOLIDATED FINANCIAL STATEMENTSSeptember 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 September 30, 2010, the REIT owned 144 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 will 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. 3. Hotel PropertiesCostAccumulated DepreciationSeptember 30, 2010 Net Book ValueDecember 31, 2009 Net Book Value(Restated, Note 21)Land$185,777$-$185,777$185,841Buildings1,719,290279,1701,440,1201,472,827Furniture, fixtures and equipment149,84973,94275,90781,974$2,054,916$353,112$1,701,804$1,740,6424. Other Real Estate PropertiesOther real estate properties include office and retail properties and a retirement residence.CostAccumulated DepreciationSeptember 30, 2010 Net Book ValueDecember 31, 2009 Net Book ValueLand$1,624$-$1,624$1,624Buildings16,0641,71414,35014,095Furniture, fixtures and equipment112575551$17,800$1,771$16,029$15,7705. Licence ContractsCostAccumulated AmortizationSeptember 30, 2010 Net Book ValueDecember 31, 2009 Net Book ValueLicence contracts$26,320$10,770$15,550$16,537During the nine months ended September 30, 2010, the licence contracts were amortized by $987 (September 30, 2009 - $987) 6. Intangible and Other AssetsCostAccumulated AmortizationSeptember 30, 2010 Net Book ValueDecember 31, 2009 Net Book ValueIntangible Assets:(Restated, Note 21)Customer relationships$46,133$29,184$16,949$24,154Tenant relationships2,5812,111470895Franchise rights3,8071,5362,2711,991Lease origination costs6,2561,2175,0395,340Other1,038903135299Total Intangible Assets59,81534,95124,86432,679Other Assets:Mortgages receivable3,441-3,4413,441Total Intangible and Other Assets$63,256$34,951$28,305$36,120During the nine months ended September 30, 2010, the intangible assets were amortized by $8,477 (September 30, 2009 - $8,519).7. Bank IndebtednessAs at September 30, 2010, the bridge loan amount was $ 6,000 (December 31, 2009 - $7,000 was reclassified as long-term debt). During the nine months ended September 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 DebtSeptember 30, 2010December 31, 2009(Restated, Note 21)Mortgages payable$839,590$959,158Less debt issuance costs(6,772)(6,147)Total long-term debt832,818953,011Less current portion(78,429)(21,326)Net long-term debt$754,389$931,685Substantially all of the REIT's assets have been pledged as security under debt agreements. At September 30, 2010, long-term debt had a weighted average interest rate of 6.0% (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 $6,209 (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 13 properties and is due August 31, 2012. 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 September 30, 2010, the REIT qualifies for the maximum amount of $40,000. The amount drawn on the operating line as at September 30, 2010 was $ nil (December 31, 2009 - $ nil).Scheduled repayment of long-term debt is as follows:Regular AmortizationDue on MaturityTotalRemainder of 2010$6,635$-$6,635201128,99950,87679,875201225,500176,445201,945201315,143149,473164,61620147,922288,474296,3962015 and thereafter4,82985,29490,123$89,028$750,562$839,590The current portion of long-term debt on the balance sheet is based on the twelve months ending September 30, 2011, whereas the repayment schedule above reflects the fiscal year. During the quarter, the REIT exercised the first of two one-year extension options with one of its major lenders to extend a major facility to February 28, 2012. As part of the refinancing, the REIT repaid $95,000 of the mortgage principal plus yield maintenance and other fees. This extension enabled 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 balance of this debt at September 30, 2010 is $172,743.The estimated fair value of the REIT's long-term debt at September 30, 2010 was approximately $872,765 (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 $83,391 (December 31, 2009 - $103,117) of mortgages payable, which are subject to floating interest rates. Annual interest expense will increase by $834 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 ObligationsSeptember 30, 2010December 31, 2009(Restated, Note 21)Capital leases$1,428$1,549Other lease obligations2703191,6981,868Less current portion(129)(276)Total lease obligations1,5691,592Pension liability3,1713,304Asset retirement obligation2,3121,552Total other long-term obligations$7,052$6,448Defined Benefit Pension PlansThe defined benefit pension plans are for specific employees of certain hotels in the REIT and are closed plans. 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 September 30, 2010 consists of the following: Management Pension Benefit PlansNon-Union Non-Management Pension Benefit PlansSeptember 30, 2010 Benefit PlansDecember 31, 2009 Total Benefit PlansAccrued benefit obligation$4,810$1,404$6,214$5,872Fair value of plan assets2,4481,3413,7893,432Funded status - plan deficit2,362632,4252,440Unamortized net actuarial gain (loss)815(69)746864Accrued employee future benefit liability (asset)$3,177$(6)$3,171$3,304The pension expense for the three and nine months ended September 30, 2010 is $66 and $266, respectively (September 30, 2009 - $76 and $238, respectively).10. Convertible DebenturesThe details of the four series of convertible debentures at September 30, 2010 are outlined in the table below:DebentureMaturity DateInterest RateEffective Interest RateOriginal Face AmountConverted to Trust UnitsFace Amount OutstandingHolders' Conversion OptionAccretion and Issue CostsSeptember 30, 2010Series BMay 31, 20136.00%7.53%$75,000$(20)$74,980$(3,400)$547$72,127Series CAugust 1, 20145.85%7.42%70,000-70,000(2,953)(754)66,293Series DMarch 31, 20166.75%9.41%50,000(7,130)42,870(3,430)(1,348)38,092Series ESeptember 30, 20176.00%7.75%75,000-75,000(3,750)(3,220)68,030$270,000$(7,150)$262,850$(13,533)$(4,775)$244,542The details of the four series of convertible debentures at December 31, 2009 are outlined in the table below:DebentureMaturity DateInterest RateEffective Interest RateOriginal Face AmountConverted to Trust UnitsFace Amount OutstandingHolders' Conversion OptionAccretion and Issue CostsDecember 31, 2009Series AApril 15, 20116.25%7.73%$57,500$(11,736)$45,764$(2,289)$1,518$44,993Series BMay 31, 20136.00%7.53%75,000(20)74,980(3,400)(160)71,420Series CAugust 1, 20145.85%7.42%70,000-70,000(2,953)(1,367)65,680Series DMarch 31, 20166.75%9.41%50,000-50,000(4,000)(2,175)43,825$252,500$(11,756)$240,744$(12,642)$(2,184)$225,918On August 6, 2010, the REIT announced the closing on a bought deal basis of $75,000, 6.00% convertible unsecured subordinated debentures ("Series E – 6.00% Debentures"). These debentures are convertible into InnVest units at a conversion price of $8.00 per unit, bear interest at 6.00% per annum payable semi-annually on March 31 and September 30 of each year and will mature September 30, 2017. The InnVest units to be issued upon conversion of the Series E – 6.00% Debentures are 9,375,000. Each $1 principal amount is convertible at the option of the holder into 125 units. The Series E – 6.00% Debentures are not redeemable prior to September 30, 2013. The proceeds, net of costs, were $71,688.On or after September 30, 2013 and prior to September 30, 2015, the Series E – 6.00% Debentures may be redeemed by the REIT, in whole or in part, on not less than 30 days prior notice, at a redemption price equal to the principal amount thereof plus accrued and unpaid interest, provided that the volume-weighted average trading price of the units on the TSX for the 20 consecutive trading days ending on the fifth trading day preceding the date on which the notice of the redemption is given, is not less than 125% of the conversion price. On or after September 30, 2015 and prior to September 30, 2017, the Series E – 6.00% Debentures may be redeemed by the REIT in whole or in part, at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. The holder conversion option was valued separately from the convertible debentures at $3,750. The holder conversion option is being accreted to the liability component over the term of the Series E – 6.00% Debentures using the effective Interest method ("EIM").On September 15, 2010, the Series A 6.25% convertible debentures, with a maturity date of April 15, 2011 and face amount outstanding of $45,678 were redeemed and cancelled. Using a portion of the funds raised via the Series E – 6.00% Debentures, $46,875 was paid for principal and interest owing. Recording this transaction based on relative fair values of the liability and equity resulted in a $2,094 credit to retained earnings.The fair value of the REIT's convertible debentures, estimated based on the market rates for convertible debentures as at September 30, 2010, is $277,522 (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 September 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 September 30, 2010, the REIT's leverage excluding and including convertible debentures was 41.1% and 53.8%, respectively, calculated as follows: September 30, 2010December 31, 2009Total assets per consolidated balance sheet$1,826,817$1,950,209Accumulated depreciation and amortization400,604345,098Future income tax liability(184,513)(186,430)Future income tax liability not included in assets15,74516,114Gross asset value$2,058,653$2,124,991Book value of mortgages and other indebtedness (1)$845,59041.1%$958,63645.1%Convertible debentures (2)262,85012.7%240,74411.3%$1,108,44053.8%$1,199,38056.4%(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 $9,064 in equity during the nine months ended September 30, 2010 (September 30, 2009 - $2,365). 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 2.0 times at September 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 1.5 times at September 30, 2010 and 1.9 times at December 31, 2009); and (c)Unitholders' Equity of not less than $300,000 (actual being $469,109 at September 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. Court approval for the arrangement 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 September 30, 2010, the REIT's floating rate debt balance of $83,391 (December 31, 2009 - $103,117) is approximately 9.9% (December 2009 – 10.9%) of total long-term debt, excluding convertible debentures. 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 September 30, 2010 are $31,662 (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 September 30, 2010 is $468 or 1.5% (December 31, 2009 - $505 or 2.3%) of total receivables. The bad debt expense included in hotel expenses for the nine months ended September 30, 2010 is $145 (September 30, 2009 - $114 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 $204 at September 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 cash 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 201020112012201320142015 and ThereafterContractual Cash flows (2)Mortgage payable - principal (1)$6,635$79,875$201,945$164,616$296,396$90,123$839,590Mortgage payable - interest (3)12,35246,90042,40122,61310,7515,115140,132Bridge loan - principal-6,000----6,000Bridge loan - interest5638----94Convertible debentures - principal---74,98070,000117,870262,850Convertible debentures - interest2,24915,98815,98813,73811,48918,56378,015Total (4)$21,292$148,801$260,334$275,947$388,636$231,671$1,326,681(1)Principal includes regular amortization and repayments.(2)Contractual cash flows include principal and interest payments and include extension options available to the REIT.(3)Interest amounts for floating rate debt is based on interest rates prevailing at September 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 approximate their recorded values at September 30, 2010 and December 31, 2009 due to their short-term nature.The fair value of the REIT's long-term debt is greater than the carrying value by approximately $33,175 at September 30, 2010 (December 31, 2009 - $33,843 less than the carrying value) 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 $19,447 at September 30, 2010 (December 31, 2009 – $4,115 less than the carrying value). The fair value of convertible debentures is based on the market rates for convertible debentures, as at September 30, 2010 and December 31, 2009.The fair value hierarchy of financial instruments measured at fair value on the balance sheet is as follows:September 30, 2010December 31, 2009Financial Assets:Level 1Level 1Cash and restricted cash$17,445$104,869The REIT has no Level 2 or Level 3 inputs.Letters of CreditAs at September 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.UnitsAmountBalance at December 31, 200987,498,354$815,190Units issued under distribution reinvestment plan261,6261,586Units issued on conversion of debentures1,257,7547,216Units issued for vested executive compensation plan22,215225Units issued under trustee compensation plan6,35938Balance at September 30, 201089,046,308$824,255Balance at December 31, 200874,412,317$768,034Units issued under distribution reinvestment plan575,3292,099Units repurchased pursuant to normal course issuer bid(336,549)(3,467)Units issued on conversion of debentures1,34220Units issued for vested executive compensation plan19,052170Units issued under trustee compensation plan23,29376Balance at September 30, 200974,694,784$766,932Pursuant 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 during the nine months ending September 30, 2010. 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 September 30, 2010 is 244,016 units. Under the Trustee Compensation Plan, 19,627 units were awarded, 13,268 purchased under the Bid and 6,359 issued from the reserve, during the nine months ended September 30, 2010 (September 30, 2009 – 32,716 units were awarded; 23,293 units issued from the reserve and 9,423 units were bought under the Bid).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 September 30, 2010 is 743,723 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 September 30, 2010, excluding granted units which have fully vested:Unvested Executive unitsUnits Accumulated from DistributionsTotal Units2007 - granted15,0008,55923,5592008 - granted20,4559,71930,1742009 - granted25,5006,89332,3932010 - granted28,5001,68130,181Units vested 2010(7,500)(3,921)(11,421)81,95522,931104,886The Board of Trustees approved the granting of 28,500 units during the first quarter of 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 InformationThree Months Ended September 30, 2010Three Months Ended September 30, 2009Weighted Average UnitsWeighted Average Units(Restated, Note 21)Income from continuing operations - basic$8,17089,017,278$13,24074,593,620Dilutive effect of executive compensation plan-103,919-87,926Income from continuing operations - diluted$8,17089,121,197$13,24074,681,546Nine Months Ended September 30, 2010Nine Months Ended September 30, 2009Weighted Average UnitsWeighted Average Units(Restated, Note 21)Loss from continuing operations - basic$(17,088)88,347,074$(5,629)74,495,453Dilutive effect of executive compensation plan-100,077-83,878Loss from continuing operations - diluted$(17,088)88,447,151$(5,629)74,579,331Three Months Ended September 30, 2010Three Months Ended September 30, 2009Weighted Average UnitsWeighted Average Units(Restated, Note 21)Net income - basic$8,55589,017,278$13,30674,593,620Dilutive effect of executive compensation plan-103,919-87,926Net income - diluted$8,55589,121,197$13,30674,681,546Nine Months Ended September 30, 2010Nine Months Ended September 30, 2009Weighted Average UnitsWeighted Average Units(Restated, Note 21)Net loss - basic$(16,627)88,347,074$(6,121)74,495,453Dilutive effect of executive compensation plan-100,077-83,878Net loss - diluted$(16,627)88,447,151$(6,121)74,579,331The 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 Months Ended September 30, 2010Three Months Ended September 30, 2009Nine Months Ended September 30, 2010Nine Months Ended September 30, 2009Net income (loss)$8,555$13,306$(16,627)$(6,121)Add (deduct)Depreciation and amortization24,72522,78471,04368,252Future income tax recovery(1,356)(604)(1,917)(8,385)Non-cash portion of mortgage interest expense6404121,5341,222Non-cash portion of convertible debentures interest and accretion1,1047362,8152,263Reserve for replacement of furniture, fixtures, equipment, capital improvements(7,101)(7,113)(18,965)(19,103)Writedown of hotel properties-1,250-6,738(Gain on sale) writedown of assets held for sale(327)-(327)499SIFT transition expenses510-510-Non-cash executive and trustee compensation6548147220Deferred land lease expense and retail lease income, net2526743018,28517,53954,91451,736Distributable income$26,840$30,845$38,287$45,615Distributions paid or payable11,13812,43933,18740,357Distributions less than distributable income$(15,702)$(18,406)$(5,100)$(5,258)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 recorded termination fees of $135 during the nine months ended September 30, 2010 (September 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 nine months ended September 30, 2010 and 2009, the fees charged to the REIT pursuant to the Agreements were as follows:Three Months Ended September 30, 2010Three Months Ended September 30, 2009Nine Months Ended September 30, 2010Nine Months Ended September 30, 2009(Restated, Note 21)(Restated, Note 21)Fees from continuing operations:Management fees$3,450$3,380$8,850$8,844Asset management fees (included in management fee expense)4955061,5101,518Accounting services (included in hotel operating expenses)5835571,7631,672Administrative services (included in corporate and administrative expenses)113112339341Project management and general contractor services (capitalized to hotel properties)274126666507Fees from discontinued operations4550168261$4,960$4,731$13,296$13,143In addition, salaries of REIT employees paid by Westmont and reimbursed by the REIT were $52 and $269 for the three and nine months ended September 30, 2010, respectively (September 30, 2009 - $51 and $238, respectively). Included in accounts payable and accrued liabilities are amounts owed to Westmont at September 30, 2010 totalling $1,645 (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 nine months ended September 30, 2010, total management fees paid to Hilton were $311 and $850, respectively (September 30, 2009 - $335 and $855, 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. Delta can qualify for an incentive management fee of 0.5% of total revenues from the hotel if the hotel's annual gross operating profit is greater than the budgeted gross operating profit, for the two hotels purchased by the REIT in 2006. The incentive management fees for the other eight hotels 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, 2010 to December 31, 2047. For the three and nine months ended September 30, 2010, total management fees paid to Delta were $1,245 and $3,378, respectively (September 30, 2009 - $1,167 and $3,429, 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 nine months ended September 30, 2010, total base management and incentive management fees paid for these properties were $908 and $2,512, respectively (September 30, 2009 - $916 and $2,725, 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 nine months ended September 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. WesternOntarioQuebecAtlanticTotalThree months ended September 30, 2010Hotel revenues$40,802$64,073$38,049$30,061$172,985Hotel expenses28,50246,47727,45519,775122,209Hotel operating income$12,300$17,596$10,594$10,286$50,776Three months ended September 30, 2009(Restated, Note 21)Hotel revenues$41,545$61,491$38,954$30,569$172,559Hotel expenses26,20245,14127,12020,110118,573Hotel operating income$15,343$16,350$11,834$10,459$53,986Nine months ended September 30, 2010Hotel revenues$115,578$172,323$102,261$70,975$461,137Hotel expenses83,888133,79179,93253,595351,206Hotel operating income$31,690$38,532$22,329$17,380$109,931Nine months ended September 30, 2009(Restated, Note 21)Hotel revenues$118,020$170,832$100,941$72,721$462,514Hotel expenses82,460132,62378,93454,765348,782Hotel operating income$35,560$38,209$22,007$17,956$113,732Capital expenditures on hotel properties,Three months ended September 30, 2010$2,610$3,820$2,779$1,196$10,405Three months ended,September 30, 2009 (Restated, Note 21)$1,630$2,317$471$886$5,304Capital expenditures on hotel properties,Nine months ended September 30, 2010$5,062$8,491$7,569$3,068$24,190Nine months ended,September 30, 2009 (Restated, Note 21)$6,997$6,532$2,831$2,224$18,584Hotel propertiesSeptember 30, 2010$484,354$599,467$394,174$223,809$1,701,804December 31, 2009 (Restated, Note 21)$497,252$616,306$398,330$228,754$1,740,64219. Total RevenuesThree Months Ended September 30, 2010Three Months Ended September 30, 2009Nine Months Ended September 30, 2010Nine Months Ended September 30, 2009(Restated, Note 21)(Restated, Note 21)Hotel revenues$172,985$172,559$461,137$462,514Other business income3,9293,3729,7478,815$176,914$175,931$470,884$471,32920. 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. Franchise BusinessRetail/ OfficeRetirement ResidenceThree Months Ended September 30, 2010Three Months Ended September 30, 2009Revenues$3,055$625$249$3,929$3,372Expenses1,806291183$2,2801,745Other business income, net$1,249$334$66$1,649$1,627Franchise BusinessRetail/ OfficeRetirement ResidenceNine Months Ended September 30, 2010Nine Months Ended September 30, 2009Revenues$6,935$2,061$751$9,747$8,815Expenses4,531902575$6,0084,985Other business income, net$2,404$1,159$176$3,739$3,83021. Asset Held for Sale and Discontinued OperationsThe asset held for sale is an Ontario property which was expropriated in July 2010 for net proceeds of $6,031. The operating results of this hotel are presented as discontinued operations for the three and nine months ended September 30, 2010 and 2009. The three and nine months ended September 30, 2009 also includes two Ontario hotels sold subsequently in 2009. Discontinued operations for the three and nine months ended September 30, 2010 and 2009 are as follows:Three Months Ended September 30 2010Three Months Ended September 30 2009Nine Months Ended September 30 2010Nine Months Ended September 30 2009Hotel revenues$37$441$590$2,370Hotel expensesOperating expenses142863721,589Property taxes, rent and insurance(36)6664548Management fees1152080(21)3674562,217Hotel operating income5874134153Interest on mortgages-8-93Depreciation and amortization---53-8-146Income from discontinued operations58661347Gain on sale of asset327-327-Writedown of asset held for sale---(499)Net income (loss) from discontinued operations$385$66$461$(492)The discontinued operations for the three and nine months ended September 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. The realizable value of these two assets of $23,097 was reclassified to Hotel properties effective June 30, 2010 as these assets were not expected to sell. The assets were amortized starting in the third quarter of 2010. 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 the other two assets, was reclassified in the amount of $8,184 to Long-term debt and a $448 credit to Other long-term obligations.FOR FURTHER INFORMATION PLEASE CONTACT: Kenneth D. GibsonInnVest Real Estate Investment TrustPresident and Chief Executive Officer(905) 206-7100(905) 206-7114 (FAX)ORTamara L. LawsonInnVest Real Estate Investment TrustChief Financial Officer and Corporate Secretary(905) 206-7100(905) 206-7114 (FAX)www.innvestreit.com