InnVest 2010 Annual FINAL

8/6/2019 InnVest 2010 Annual FINAL

1/76

the

premier

canadian hotelinvestment

Focused

strategydistinguishing

strengths

a portFolio

diversified

by brand, geography andcustomer base

investingin our properties to

drive results

INNvestinnvest real estate investment trust | www.innvestreit.com annual report 20


2/76

strategicachievements

Improved occupancy

across the portfolIoEarly signs of the hospitalitymarket recovery begantaking shape in 2010, led by

occupancy gains across ourportfolio. We expect pricingimprovement to follow asdemand and confidence inthe sustainability of the

recovery improves.

strengthened

balance sheetCapital managementefforts, including early debtrefinancing and raising new

capital have contributed toreducing our leverage andstrengthening our balancesheet. These initiativesdemonstrate our ability

to access attractivecapital to support ourbusiness strategy.

Invested capItal

to drIve returnsWith an improving outlook,we are strategically investingin our portfolio to take

advantage of marketopportunities and positionour hotels to benefit from anupswing. Internal investmentopportunities are expected

to enhance our hotelscompetitive positions andmaximize bottom line returns.

maIntaIned QualIfyIng

reIt statusWe completed an internalreorganization onDecember 31, 2010 in order

to become a Qualifying REITunder Canadian income taxrules applicable to specifiedinvestment flow-through(SIFT) entities. The

reorganization enablesus to continue to benefitfrom the tax advantagesoffered to REITs.

We are long-term investors in quality hotelreal estate. As patient investors, we look

beyond near-term cyclical fluctuations andfocus on the exciting opportunities ahead.Positive industry fundamentals such asan improving economic outlook, limitednew hotel supply, and an aging population

eager to travel, give us confidence in theprospects for the industry and our portfoliospecifically. As Canadas largest hotel realestate owner, InnVest is ideally positionedto benefit from these promising trends.


3/76

02 competitiveadvantagesGain an understanding of what makes InnVest a

unique investment opportunity.

05 lettertounitholdersA personal look at InnVests business through theeyes of the CEO.

1 1 letterfromthecfoAn introduction to key finance initiatives undertakenduring the year.

12 managementsdiscussion&analysisLearn about the industry and the company including

a comprehensive look at the years results.

43 managementsresponsibilityforconsolidatedfinancialstatements

44 independentauditorsreport

45 consolidatedfinancialstatements

49 notestoconsolidated

financialstatements70 innvestportfolio

72 seniormanagementandboardoftrustees

73 corporateandunitholderinformation

Contents

15

On the cOver:

Th Fmt Pcally load i dowow

calgay, t Faio Palli

i a ladak buildig i i

ioy ad aiu.

04

17 annual report 2010


4/76

Efforts to improve theTrusts balance sheet andfinancial position have beena priority over the past two

years. Early debt refinancingactivities, raising new capitaland adjusting distributionshave enabled InnVest toemerge from the challengingeconomic environment ina strengthened position.

Maximizing financial flexibility through a bolstered

balance sheet and improved access to capital

affords us the ability to seize opportunities to

grow our earnings.

For our existing assets, we are focusedon enhancing our competitive position in

strategic assets and markets through

targeted capital investments in product andbrand upgrades. Additional resources have

also been deployed to intensify our focus

on revenue-generation opportunities.

We expect to see increasing acquisitionopportunities as operating trends in the

industry continue to improve. Our access

to low-cost capital will enable InnVest to

compete for attractive opportunities that

may arise.

strategy strengths

1 diversification

Our portfolio of urban and suburban

hotels is diversified across most major

business markets and is further diversified

by market position, brand and customer base.

We have limited exposure to any one market,

mitigating our risks and stabilizing our

long-term income.

2 scale

InnVest is one of Canadas largest hotel

real estate owners, with 144 hotels located

in every province of Canada. Our size and market

knowledge allow us to maximize operating

efficiencies and benefit from economies of scale

to reduce costs.

Focusedstrategydistinguishing

strengths

Competitive advantages

02 Innvest real estate Investment trust


5/76

ivcww144c.

Regional diversitylimits risk

37% Ontario26%Western22% Quebec15%Atlantic

HOTEL REVENUES BY GEOGRAPHY

Customerdiversity optimizes

occupancy

35% Corporate &Government

32% Transient17% Other16% Group

HOTEL ROOM REVENUES BY CUSTOMER

3 branding

We partner with recognized international

brands which provide name recognition,

central reservation systems, quality standards,

and marketing and customer loyalty programs.

Their services complement our hotels and help

attract demand to our hotels.

4 strategicinvestment

We hold a 50% strategic investment

in Choice Hotels Canada, one of the largest

franchisors of hotels in the country. This strategic

relationship contributes positive net cash flow

to InnVest, enables us to benefit from favourable

franchise terms, and provides us with the

advantages of being a franchisor, including control

over brand standards and future development.

5 experiencedmanagement

The Trust benefits from professional hotel

management with extensive Canadian

and international industry experience. Their

experience and expertise enable us to effectively

manage through market cycles to help maximize

the value of each of our assets.

6 accesstocapital

Given our size, diversification and quality

of assets, we have consistently been

able to access capital to grow our business and

address our capital needs. We have raised

capital and refinanced significant mortgages

in a challenging environment, highlighting the

perceived value of our business and continued

confidence of our partners.

our diversityadvantage

Segment diversificationbroadens

market reach

67% Full service33% Limited service

HOTEL REVENUES BY SERVICE CATEGORY

onTario

, roo hol

quebec

, roo hol

aTlanTic

, roo hol

WesTern

, roo hol

annual report 2010


6/76

Dt bj, Mt



7/76

letterto unitholders

revenues. These investments in our businesswill allow us to capture greater profits as dema

and top-line revenue continue to recover.

improvingtrendsAfter almost two years of declining revenue

per available room (RevPAR), we saw the firs

positive year-over-year RevPAR trends in early

2010. Unlike the precipitous downturn in 2009

which saw this measure decline by 10.7%, the

recovery to date has been slow, with our annua

RevPAR growing a modest 1.2% in 2010. This i

not unexpected given the significant consume

shock in 2009. As Ive seen many times before

the early lodging recovery in 2010 was led by

occupancy gains as people get back on the roaThis will be followed by average daily rate (AD

growth as hoteliers gain confidence to push

prices higher.

Occupancies improved in 2010 but remain

3 points below levels achieved in 2008. Whats

more, ADRs for the Canadian industry remain

below 2008 levels. Each 1% RevPAR improvem

in our portfolio will generate almost $5 million

of revenue. With limited incremental costs

associated with these gains, the operating

leverage for our business is significant.

Ive worked in the lodging industry formore than 30 years and have witnessed

many ups and downs. If theres one thing

Ive learned through my many years

in this business, its to expect change.

These changes can stem from evolving

customer preferences, the economy or the

lending market or regulations, to name a few.

As with any dynamic business, we need to be

flexible, responsive, and prepared for whatever

may come our way.

InnVest was formed less than eight years

ago, but already we have lived through

unprecedented events, including the SARS

pandemic in 2003 and the economic and

credit meltdown of 2008/2009. Each time,our business has been affected, and each

time a recovery has followed.

Difficult times can create opportunities for

those who can recognize and seize them. Indeed,

we have taken this opportunity to re-evaluate our

hotel operations and we have made adjustments

to be more efficient and competitive. In our

portfolio, for example, we have streamlined

processes to reduce headcounts, invested

in technology to improve efficiencies and, most

recently, undertaken extensive sales training

for all hotel executive staff to help maximize

stayingpowerWearecommittedtooWningquality,Well-locatedhotelrealestate

thatWilldrivelong-termreturnstoinvestors.

by Kenneth gibson

President and Chief Executive Officer

o.W4,.

annual report 2010


8/76

If you didnt have to sell during the downturn, why

would you? With cash flows improving, additional

hotel opportunities should start coming to the

market as short-term hotel investors look to

re-allocate their capital. We will continue to look

at quality hotel assets to add to our portfolio.

Well-located assets acquired at attractive entry

prices and which can be aggressively managed

could provide compelling yields.

financialflexibilityAs the past two years have taught us all, we must

maintain a strong balance sheet. This is relevant

in bad times, to provide insurance to weather the

storms. But it is equally relevant in good times,

when having access to capital to take advantage

of new opportunities can provide us with a strong

competitive edge. Our finance team has been

active, raising $250 million of convertible debt

and equity over the past two years, as well as

refinancing more than $340 million in mortgages.

This was no small achievement considering the

challenging credit markets during this period.

New capital proceeds were used to repay and

extend maturities and contributed to a reduction

in our overall leverage in 2010.

REITs, by their nature, require capital to

sustain and grow. We have always been proactive

in our capital management efforts, consistently

addressing our refinancing needs in advance of

maturities. With a staggered maturity schedule

and access to reasonably-priced capital, we

expect to address all debt maturities in the

normal course of business.

Overall, our reported funds from operations

(FFO), the most common measure of a REITs

financial performance, fell to $0.67 per unit in

2010 from $0.94 per unit in 2009. The majority

of this decline reflects the recapitalization of

our balance sheet, with new equity raised this

year and last. Despite the earnings reductions,

we are reassured by the fact that our core

business is improving and our balance sheet

has been strengthened.

strategyoncourseOur strategy has been influenced, in the near

term at least, by the recent economic challenges.

We set aside our pursuit of growth while we

focused on cash flows from our existing asset

base. We spent a great deal of time looking at

our portfolio and seeing how its performance

could be enhanced. We have begun several

exciting profit-improving projects to help our

hotels capture greater market share from their

competitors. By the end of 2011, for example, we

will have invested over $8 million at The Fairmont

Palliser in Calgary to renovate our guest room

product. We are also participating in Holiday Inns

global brand re-launch. Holiday Inn is one of our

best performing brands and we expect positive

returns from a re-energized product.

Somewhat surprisingly, the much-anticipated

fire sale of distressed hotel assets did not

materialize in Canada. This was a sign of the

conservative lending practices and the general

understanding that the market would return.

>>

re-brandingof16holidayinnhotelsiV pp h i

- vv f . t p , f h i . gv xv v ,h i f pf .

Hdy i b

We spent a great deal of time looking at ourportfolio and seeing how its performancecould be enhanced. We have begun severalexciting profit-improving projects to helpour hotels capture greater market sharefrom their competitors.


letter to unItholders


9/76

Hdy i Kgt

2010highlights

$118.0

06

$140.2

07

$181.9

08

$141.7

09

$137.3

10

$200

$150

$100

$50

$0

HOTEL OPERATING INCOME(1)

($ millions)

(1) Includes continuing and discontinued

operations.

Hdy i bgtHt & cf ct

Hdy i cgy Md T sth

$74.9

06

$88.0

07

$108.2

08

$72.7

09

$61.2

10

$125

$100

$75

$50

$25

$0

FUNDS FROM OPERATIONS

($ millions)

$27.3

06

$29.0

07

$42.9

08

$25.2

09

$39.4

10

$50

$40

$30

$20

$1 0

$0

CAPITAL INVESTED (1)

($ millions)

(1) Includes continuing and discontinued

operations.

annual report 2010


10/76

>>

recentrenovationscontinueatthefairmontpalliserincalgarya xv vp t F P f f . b -,f f v f v xp f p F g

p. t f p pv v p k.

Th Fmt P, cgy

Th Fmt P, cgy


letter to unItholders


11/76

Reduce leverage over time to improveour ability to support cyclical variability in

cash flows and keep our debt coverage

ratios strong.

InnVest continues to be the premier

hospitality real estate investment opportunity

in Canada. We should all be proud of the qualit

portfolio we own. Our management teams

experience and expertise is unsurpassed in thi

specialized industry. With the wind at our back

our entire organization is focused on making

prudent capital allocation decisions to increaslong-term value and grow cash flows to suppor

distributions to our unitholders. In closing,

I would like to thank all our partners for your

patience and support.

Kenneth Gibson

President and

Chief Executive Officer

lookingaheadWe have faced many obstacles during the past

two years which have affected our bottom line

results. This has been disappointing to us all.

Unlike other real estate companies, we rent our

assets by the day. This can have negative

implications on the downside, but provides equal,

if not greater, opportunity as demand improves

and we re-price our product every day.

As I look forward, I see many reasons to

be optimistic about the future; favourable

demographics as the population ages and travels;new demand from the important Chinese

market following Canadas gaining of approved

destination status; the low supply outlook

following constrained development lending in

recent years; and improving economic indicators

including growing consumer confidence.

Notwithstanding, dealing with risks and

uncertainties, including the health of our domestic

and global economies, is a part of any business.

As always, we will keep a close eye on micro and

macro environment developments and be ready

to react proactively to what may lay ahead.

With these factors in mind, our priorities

looking forward are quite simple, but if executed

properly, should drive meaningful value. We will: Focus our energies on driving top-line

performance to generate operating leverage.

With occupancies firming in 2010, pricing

power should return to the hotels.

Invest in our assets to enhance theircompetitive position and market share.

Remain poised to take advantage ofopportunities to acquire quality hotel real

estate in stable markets and to recycle

capital from our existing assets.

Th Fmt P, cgy

With the wind at our back, our entireorganization is focused on makingprudent capital allocation decisions toincrease long-term value and growcash flows to support distributions toour unitholders.

annual report 2010


12/76

1 1 letterfromthecfo

12 managementsdiscussion&analysis12 Ioduio

13 Fowad-lookig a

14 Ou bui

16 td i lodgig iduy

18 Ou agy

20 Ou abiliy o dli ul

22 Oulook

22 Opaig uay23 opaig ul iw

26 cag i fiaial odiio

27 Qualy ul ad iw of

fou qua pfoa

28 Liquidiy ad apial ou

31 Diibuio o uiold

32 Ui ifoaio

33 no-GAAP fiaial au

35 rlad pay aaio

35 rik ad uaii

37 ciial aouig ia

39 Fuu aouig ag

42 cool ad podu

43 managementsresponsibilityfor consolidatedfinancialstatements

44 independentauditorsreport

45 consolidatedfinancialstatements45 coolidad bala

46 coolidad a of io (lo)

ad opi io (lo)

47 coolidad a of

uiold quiy

48 coolidad a of a flow

49 notestoconsolidated

financialstatements

FinancialrevIew



13/76

throughout 2011 as new standards and amendments to

existing standards are issued. InnVest will report its first

IFRS financial statements for the first quarter of 2011.

Separately, unlike certain other real estate income tru

(REITs), REITs with hotel operations were not exempted

from the changes to the tax legislation taking effect in 201

As a result, InnVest completed an internal reorganizationon December 31, 2010 in order to become a Qualifying RE

The purpose of the reorganization was to increase unitho

value by adopting a structure that allows InnVest to contin

to flow through the majority of its income to unitholders

without being subject to entity-level taxation.

The reorganization resulted in InnVest transferring all

of its operating assets to a newly formed taxable trust wh

trades together with a regular InnVest unit on a stapled

basis. The reorganization was highly technical but in the

end, has had little, if any, practical effect on unitholders.

Looking forward, we will maintain our focus on making

prudent capital allocation decisions with a view to grow o

cash flows to support distributions to our unitholders.

Tamara Lawson

Chief Financial Officer and Corporate Secretary

efforts to improve the Trusts balance sheet

and financial position have been a priority

over the past two years. Over this period,

we have made significant progress in

strengthening our balance sheet through

early debt refinancing activities, raising

new capital and adjusting distributions. We have alwaysbeen proactive in our capital management efforts and

have a demonstrated ability to access attractive capital

to support our business strategy.

Early signs of the hospitality market recovery began

taking shape in 2010, led by occupancy gains across our

portfolio. To date, the industrys recovery has been slow,

with our annual RevPAR growing a modest 1. 2% in 2010.

Our reported funds from operations (FFO) declined to

$0.673 per diluted unit in 2010 from $0.939 per diluted

unit in 2009. The majority of this decline reflects the

recapitalization of our balance sheet with new equity.

Despite the reduction, we are reassured by the fact that

our core business is improving and our balance sheet

has been strengthened.

Our finance team has been hard at work addressingseveral other important developments taking hold in

2011, including the accounting standards conversion to

International Financial Reporting Standards (IFRS)

and changes to tax legislation affecting trusts.

The accounting change to IFRS will not impact cash

flows generated by our properties, but it will affect InnVests

reported financial position and results of operations.

As more fully explained in the accompanying MD&A, the

biggest change will involve the one-time re-measurement of

our hotel assets given our election to revalue our portfolio.

The IFRS implementation will be an ongoing process

letterfrom the Cfo

tamara lawson

Chief Financial Officer and Corporate Secretary

iv$250w$340

.Ww.

We have always been proactive inour capital management efforts andhave a demonstrated ability to accessattractive capital to support ourbusiness strategy.

annual report 2010


14/76

managementsdisCussion & analysis

introduCtionInnVest Real Estate Investment Trust (the REIT) is an

unincorporated open-ended real estate investment trust

which owns a portfolio of 144 hotels across Canada

representing approximately 19,000 guest rooms operated

under internationally recognized brands. The REIT leases

its hotels to InnVest Operations Trust (IOT), an

unincorporated open-ended taxable investment trust.

IOT directly and indirectly holds all of the hotel operating

assets, earns revenues from hotel customers and pays

rent to the REIT. IOT also indirectly holds a 50% interest

in Choice Hotels Canada Inc., one of the largest franchisors

of hotels in Canada, and earns revenues from franchising

fees. The REIT and IOT are collectively referred to in

this managements discussion and analysis (MD&A)

as InnVest.

On December 31, 2010, InnVest completed an internal

reorganization pursuant to a Plan of Arrangement

as described in InnVests information circular dated

May 13, 2010. The reorganization resulted in each issued

and outstanding unit of the REIT trading together with a

non-voting unit of IOT as a Stapled Unit on the Toronto

Stock Exchange under the symbol INN.UN. InnVest

and IOT are both governed by the laws of Ontario and

a Declaration of Trust.

The following MD&A is intended to assist readers in

understanding InnVest, its history, business environment,

strategies, performance and risk factors and includes

a discussion of the results of operations and financial

condition of InnVest for the year ended December 31, 2010,

Fmt Ht Mdd, edmt

12 Innvest reAL estAte Investment trUst


15/76

forward-lookingstatements

with a comparison to the results of operations of InnVest

for the year ended December 31, 2009. The MD&A should

be read in conjunction with the audited consolidated

financial statements of InnVest and the notes thereto as at,

and for the years ended, December 31, 2010 and 2009. The

consolidated financial statements of InnVest include the

financial statements of the REIT and IOT.

The financial statements of InnVest are prepared in

accordance with Canadian generally accepted accounting

principles (GAAP) and are presented in Canadian dollars.

Monetary data in tabular form and in the text, unless

otherwise indicated, are in thousands of dollars, except for

per unit, average daily rate (ADR), and revenue per

available room (RevPAR) amounts. This MD&A is dated

March 16, 2011.

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

income (HOI), funds from operations (FFO) and

distributable income, do not have any standardized meaning

In the interest of providing InnVest unitholders and potential

investors with information regarding InnVest, certain

statements contained in this M&DA constitute forward-

looking statements within the meaning of applicable

securities laws. These statements include, but are not limited

to, statements made concerning InnVests objectives, its

strategies to achieve those objectives, as well as other

statements with respect to managements beliefs, plans,

estimates and intentions, and similar statements concerning

anticipated future events, results, circumstances and

performance or expectations that are not historical facts.

Forward-looking information typically contains statements

with words such as outlook, objective, may, continue,

anticipate, believe, expect, estimate, plan, intend,

forecast, project or similar expressions suggesting future

outcomes or events. Such forward-looking statements

reflect managements current beliefs and are based on

information currently available to management.

These forward-looking statements are not guarantees

of future events or performance and, by their nature,

are based on InnVests estimates and assumptions, which

are subject to risks and uncertainties, including thosedescribed under Risks and uncertainties in this MD&A.

Readers are cautioned not to place undue reliance on

forward-looking statements, as there can be no assurance

that the plans, intentions or expectations upon which they

are based will occur. By its nature, InnVests forward-looking

information involves numerous assumptions, inherent

risks and uncertainties, which may cause InnVests actual

performance and financial results in future periods to

differ materially from any estimates or projections of future

performance or results expressed or implied by such

forward-looking statements. Factors that could cause actual

as prescribed by GA AP, and therefore are considered

non-GAAP measures. InnVest uses non-GAAP financial

measures to assess its operating performance. Securitie

regulators require that entities caution readers that

earnings and other measures adjusted to a basis other th

GAAP do not have standardized meanings and are unlike

to be comparable to similar measures used by other

companies. Please see Non-GAAP Financial Measures

for a discussion of certain non-GAAP financial measures

used by InnVest, including a reconciliation to GAAP

financial measures.

Additional information relating to InnVest, including its

Annual Information Form, can be accessed on the Canad

Securities Administrators System for Electronic Docume

Analysis and Retrieval (SEDAR) located at www.sedar.c

and on its website at w ww.innvestreit.com.

results, performance, or achievements to differ materiall

from those expressed or implied by forward-looking

statements include, but are not limited to, changes in

business strategies; general global economic and busines

conditions; medical concerns relating to travel and/or

specific destinations; general global credit market

conditions; the effects of competition and pricing pressu

industry overcapacity; shifts in market demands; change

in laws and regulations, including environmental and

regulatory laws; potential increases in maintenance and

operating costs; uncertainties of litigation; labour dispute

timing of completion of capital or maintenance projects;

currency and interest rate fluctuations; various events wh

could disrupt operations; and technological changes.

Although InnVest believes that the expectations represen

by such forward-looking statements are reasonable,

there can be no assurance that such expectations will be

consistent with these forward-looking statements. The

forward-looking statements contained in this MD&A are

made as of the date of this MD&A. Except as required by

InnVest does not under take any obligation to publicly upd

or revise any forward-looking statements, whether as aresult of new information, future events or other wise.

All forward-looking statements contained in this MD&A

are expressly qualified by this cautionary statement.

AnnUAL rePOrt


16/76

hotelrealestateoWnerAs at December 31, 2010, InnVests portfolio comprised

144 hotel properties operated under internationallyrecognized franchise brands. The portfolio is evenly divided

between full-service and limited service hotels based on

number of rooms. Full-service hotels however, generate

higher revenues per room given higher ADRs charged and

greater ancillary services sold. As a result, full-service hotels

in the portfolio accounted for approximately 67% of total

hotel revenues during the year. Of total revenues earned,

approximately 78% were generated from room revenues

and 22% from food and beverage services and other

services including meeting space rental, parking, retail

operations and telephone use.

InnVests hotels are operated by four hotel management

companies which earn base and incentive fees related to

the revenues and profitability of each hotel. The hotels

primary operating costs include wages, food costs, utilities,

management fees and sales and marketing expenses. Otherproperty level expenses include property taxes, ground

rent for leasehold interests and property insurance. Many

of these property level expenses are relatively fixed and do

not necessarily change in accordance with revenue levels.

InnVests hotels are typically located near major

thoroughfares in urban and suburban areas, business

centres, government and manufacturing facilities,

universities, airports and tourist attractions. The hotels have

a diverse customer base, including business travellers,

leisure travellers, tours, associations and corporate groups.

innvestsfranchisebusinessGenerating $3.5 million in 2010 (2009 $3.4 million),

InnVest owns 50% of Choice Hotels Canada Inc. (CHC),which has franchise agreements with over 290 locations

in Canada. The remaining 50% interest is owned by

Choice Hotels International Inc. (Choice International),

one of the largest hotel franchise companies in the world.

In addition to strong international brand recognition,

Choice International has a centralized reservation system,

sales and marketing programs and proprietary property

management systems.

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

all Choice hotel brands in Canada, including Comfort Inn,

Quality Suites and Quality Hotels. CHC earns franchise

revenue by charging hotel owners a monthly royalty fee

based on a percentage of the revenue generated by the

licenced properties and by selling franchises. InnVests

proportionate interest in operating results are includedin the consolidated statements of income in other

business income.

office,retailandretirementhomebusinessGenerating $1.8 million in 2010 (2009 $1.8 million),

InnVest owns office and retail real estate as well as a

retirement home. These real estate interests are adjacent

to owned hotels and were acquired as part of certain

hotel acquisitions. The operating results are included in

the consolidated statements of net income (loss) and

comprehensive income (loss), in other business income.

our

business

67% Full service33% Limited service

HOTEL REVENUES BY SERVICE CATEGORY HOTEL ROOM REVENUES BY CUSTOMER

35% Corporate & Government32% Transient17% Other16% Group

HOTEL REVENUES BY GEOGRAPHY

37%Ontario26%Western22% Quebec15% Atlantic

a diVersiFiedCanadianhotelinvestmentInnVest holds one of Canadas largest hotel portfoliostogether with a 50% interest in Choice Hotels Canada Inc.,one of the largest franchisors of hotels in Canada. InnVestsportfolio is well diversified across hotel accommodationcategories, brands, geography and customers.


managements dIscussIon & analysIs


17/76


18/76

The lodging industrys performance is largely influenced

by the balance between supply and demand, which itself is

impacted by the performance of the economy given thelargely discretionary nature of travel spending. A net increase

in demand (where new demand outpaces new supply

added to the market) will result in higher occupancies.

Higher occupancies create demand compression, providing

properties with the opportunity to increase their ADR.

Conversely, lower demand forces hotels to aggressively

pursue guests, which can lead to ADR declines as hotels

compete to attract customers. As demonstrated in the chart

below, RevPAR performance tends to disproportionately

follow trends in net demand as changes in occupancies are

compounded by ADR movements.

Demand growth outpaced new supply in 2010 resulting in

an improvement in overall hotel occupancies. This followed

two years of declining occupancy trends. The industryachieved modest ADR growth during 2010, led by growth

in the Vancouver area (Winter Olympics) and downtown

Toronto (G20 meetings). Expectations are that the growth

in demand will exceed supply additions again in 2011,

leading to continued improvement in RevPAR.

demandtrendsDemand within the lodging industry historically has a high

correlation with the economy and will typically lag an

economic recovery until businesses and consumers gain

confidence in the sustainability of the recovery. A strong

010099 02 03 04 05 06 07 08 09 10F 11P

Source: Pannell Kerr Forster Consulting Inc.

RevPAR GrowthNet Demand Growth (Demand less Supply)

REVPAR TRENDS FOLLOW CHANGES IN NET DEMAND

8%

6%

4%

2%

-2%

-6%

-10%

-14%

-12%

-8%

-4%

0%

REVPAR TRENDS TURNED POSITIVE IN EARLY 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2008 2009 2010

10.0%

5.0%

-5.0%

-15.0%

-10.0%

0%

trends in

the lodgingindustry

increasingdemand&

limited suPPlyIncreasing demand and limited supply growth areexpected to drive positive operating dynamics for thelodging industry in2011. We are encouraged by theoccupancy recovery realized in2010 and expect roomrates to follow as demand and confidence in thesustainability of a recovery improve.

Hdy i b




19/76

economy leads to increasing corporate profits and wages

and encourages increased spending on business and le isure

travel. During a period of economic decline, discretionaryleisure spending, such as travel, tends to be reduced.

Similarly, business travel volumes tend to be reduced

along with dampened corporate profits.

Demand for a specific hotel can be influenced by the

physical quality of the hotel, its location in relation to market

specific drivers, its brand affiliation and sales efforts at

the local, regional and national levels. InnVests hotels are

typically located in convenient locations, are well-maintained

and affiliated with recognized brands, enabling them to

attract their fair share of demand to the market.

Demand can also be influenced by market-specific

drivers. In 2010 for example, the Canadian industry was

disproportionately impacted by market-based events

including the Winter Olympics in Vancouver, the return ofthe Grand Prix in Montreal and the G20 meetings held in

Toronto. With limited hotels in the surrounding Vancouver

area and downtown Toronto (each up over 17% in 2010),

InnVest did not achieve the same RevPAR growth as

experienced by the industry overall. For the year, InnVests

RevPAR improved 1.2% after declining 10.7% in 2009.

This compares to the Canadian industry RevPAR growth

of 5.5% in 2010 following a 12.3% decline in 2009.

The prolonged period of demand softness over the prior

two years resulted in increasing ADR pressures as hotels

competed to attract a smaller base of customer demand.

supplytrendsNew supply is a significant risk for the lodging industry

given its immediate and direct impact on occupancies wia market. One of the main drivers of hotel supply is rising

demand and, more importantly, rising ADR. Increasing A

signals higher profits thereby stimulating potential new

construction. Mitigating this trend, supply growth is also

affected by higher development and material costs as we

as the availability and cost of development financing.

One of the positive results of the difficult credit market

environment over the past two years has been the reduct

in new hotel development given the unavailability of

financing for such activity. In addition, the challenging

economic environment has negatively impacted profits

achieved by the industry, thereby limiting the appetite for

new hotel development.

Canadian hotel supply grew 1.8% in 2009 and 1.4% 2010

largely reflecting the completion of projects which had be

underway prior to the global recession. Supply typically

takes several years to open given lengthy financing and

development processes. Industry supply growth is foreca

at approximately 1.5% for 2011 and should remain low for

the next several years given limited financing availability

over the last two years. In comparison, the industry is

projecting demand to improve 2.5% in 2011. The excess

demand growth above new supply will drive incremental

occupancy to existing hotels.

t

wadr.

hotelshavesignificantoperatingleverageinarecovery

t v f fx xp, pp x, . t v v. a , v v p vpf v v pp .

opp x v pf rvPar pv. gv p f fx , vq , pp pf.

op f pv p v v .

i , adr v. e% rvPar pv iV pf $ f v. w , p v f f.

Dt cgy apt

qty st Tt apt

AnnUAL rePOrt


20/76

Early debt refinancing activities, raising new capital and

reducing distributions have contributed to a strengthened

balance sheet. InnVest continues to manage its portfolioaggressively with emphasis on cost efficiencies and

maximizing the performance and cash flow of each of its

hotels. Management continues to prioritize its internal

growth prospects and expects to see increasing acquisition

opportunities as operating trends in the industry continue

to improve. InnVest is focused on making prudent capital

allocation decisions to increase long-term value and grow

cash flows to support distributions to our unitholders.

operatingstrategyInnVests operating focus aims to enhance the performance

of each hotel and improve its RevPAR penetration versus its

competitive set. Internal growth is maximized through the

following operating and strategic principles:

1 Partnering with leading hotel management groupsand brands;2 Implementing yield management and marketstrategies to maximize RevPAR;3 Leveraging InnVests size and industry experience tocontrol costs through operating efficiencies, as well as

taking advantage of buying power and economies of

scale; and

4 Investing in the portfolio to drive higher returns andenhance the value of the assets.

Notable activities in 2010 included an extensive sales

training program implemented across the limited service

portfolio aimed at engaging each hotels executive staff

in the sales and marketing of their property. Several

profit-improving capital investment projects have also beeninitiated to help our hotels capture greater market share

from their competitors.

InnVests diversification by location, brand, customer

and market position is a core component of i ts operating

strategy. Since individual markets can be affected by local

events and economic conditions, geographic diversification

helps limit the impact of such factors on the overall portfolio.

Diversification across customers and brands allows InnVest

to effectively manage its rooms based on changing demand

drivers, thereby optimizing the financial performance

through improved occupancy and ADR.

Our hotels are managed by four hotel management

companies, each bringing unique expertise to the portfolio.

Westmont Hospitality Canada Limited (Westmont),a division of one of the largest privately held managers

of hotels in the world, manages the majority of InnVests

hotels (128 hotels). InnVest also par tners with other

third party managers including Delta Hotels (10 hotels),

Fairmont Hotels (3 hotels) and Hilton Hotels (2 hotels),

each an experienced hotel manager with recognized brands.

One hotel is classified as an operating lease.

capitalallocationstrategyIn order to drive the long-term profitability of the por tfolio,

InnVest continually evaluates its capital allocation

opportunities. Following its inception, InnVest expanded

its portfolio, broadening its market base and diversifying

its risk profile. In recent years, InnVests capital allocation

efforts have been focused on maximizing the potentialof its existing portfolio by investing capital into internal

profit-improving opportunities.

InnVest constantly evaluates i ts current real estate holdings

to optimize diversification and capitalize on embedded

value or higher return opportunities. From time to time,

certain assets are identified that may not support its

long term objectives given limited growth prospects in

earnings and value.

InnVests ability to recycle capital through hotel sales has

been impacted by constrained financing availability

which has limited the pool of buyers and proceeds offered.

Financing conditions are expected to continue to ease as

the industry and hotel cash flows improve enabling buyer

and seller expectations to converge. InnVest has no currentplans to dispose of hotel assets and will re-examine its

efforts to recycle capital as the hotel transaction market

improves. During 2010, one asset (100 rooms) was

expropriated for net proceeds of $6.0 million.

our

strategy

resPonding toour businessenVironmentInnVests strategy has been influenced, in the near termat least, by the recent economic challenges. Progresshas been made over the last two years in improvingInnVests balance sheet and financial position.




21/76

cmft i chtttw

capitaltransactionssupport

ourstrategyiV v p f p. ov p , v p f f v, pv v f f f p.

i a , iV $. .% v . t p

p s a .% v ap .

i a , t p - x f F . a p f f, iV p$. f ppp f.

sq f ,iV $. f .%v $. f q.

P f ppv, f fq f pp.

stydg Gph

o,ivj.

f2011.

AnnUAL rePOrt


22/76

1 d Geographic and customer diversity to offsetregional and industry cyclicality.

Well-diversified by market position and brands.

2 s One of Canadas largest hotel real estate ownerswith 144 hotels representing almost 19,000

guest rooms.

Ability to leverage the por tfolios size to achieveoperating efficiencies and reduce costs.

3 b Partner with recognized international brands whichbring name recognition, central reservation systems,

marketing and customer loyalty programs and

quality standards.

Individual hotels are complemented by the brandthat best suits its market, size, location and

customer offerings.

competitivestrengths

schc Strategic 50% investment in Choice Hotels Canada,one of the largest franchisors of hotels in Canada.

Contributes positive net cash flow to InnVest, enablesit to benefit from favourable franchise terms and

provides the advantages of being a franchisor

including control over brand standards and future

new development.

5 e Led by professional hotel management with extensiveCanadian and international industry experience.

Our hotels are managed by four hotel managementcompanies, each bringing unique expertise to the

portfolio to effectively manage through market cycles

and maximize the value of each of our assets.

6 a Strong relationships with lenders and investorssupported by the quality of our hotels and the size

of our portfolio.

Demonstrated consistent ability to access capital togrow the business and address capital needs.

leVeraging ourCompetitivestrengthsOur efforts through the recovery have been focusedon leveraging our locations and brands to improveoccupancy in the portfolio and aggressively managingcosts. We have undertaken many initiatives in 2010to help improve our future financial results includingcapital investments in key assets and organizationalenhancements to help drive revenues.

our ability

to deliverresults

Dt ld am




23/76


24/76

expenditures in 2011. These investments are expected

to enable our hotels to increase their rates charged. An

enhanced product, coupled with improving demand and

constrained new supply should enable InnVest to realize

cash flow growth as hotel operating performance improves.

InnVests 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.

Historically, 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.

We intend to selectively invest in a number of our

full-service and limited-service hotels in 2011 to improve

their competitive positioning and operating performance.

We expect to invest approximately $50 million in capital

OUTLOOK

OPERATINGSUMMARY

RevPAR on a same hotel basis improved 1.2% driven bya 1.2 point improvement in occupancy which offset a

modest 0.7% decline in ADR;

Overall, hotel revenues from continuing operations wererelatively unchanged, up 0.4% or $2.4 million, with room

revenue gains offsetting reduced food and beverage

banquet sales;

HOI declined $4.4 million or 3.1% reflecting inflationarycost increases and non-recurring expenses;

InnVest realized net income of $147.5 million comparedto a net loss of $30.9 million in 2009. InnVest recognized

a $189.5 million future income tax recovery as a result of

its internal reorganization at the end of 2010. Excluding

this adjustment, InnVest would have realized a net loss

of $42.0 million;

Distributable income and funds from operations eachdeclined reflecting the reduced HOI achieved and higher

interest expenses. Proceeds raised through debt

issuances over the year resulted in higher average debt

balances prior to the deployment of funds late in the

third quarter; and

$39.4 million was invested in the portfolio includingprofit-improving projects in strategic assets and

markets. These investments, most of which were

undertaken in the second half of 2010, are expected

to contribute to improved hotel performance infuture periods.

$118.0

06

$140.2

07

$181.9

08

$141.7

09

$137.3

10

$200

$150

$100

$50

$0

HOTEL OPERATING INCOME (HOI)(1)

($ millions)

(1) Includes continuing and discontinued operations.

$392.0

06

$504.8

07

$685.1

08

$609.8

09

$610.2

10

$750

$500

$250

$0

HOTEL REVENUES(1)

($ millions)

(1) Includes continuing and discontinued operations.

22 InnvestreAlestAteInvestmenttrust

managements discussion & analysis


25/76


26/76

n- For the year ended December 31, 2010, non-room revenues

totalled $133.6 million, down $3.2 million or 2.4% compared

to the prior year despite modest improvements in year-to-

date 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. The annual decline in non-room revenues resulted

from a decline in banqueting revenues during the second

and third quarters given reduced group demand as well as

non-recurring catering events from the prior period.

Hotel exPensesInnVest continually focuses on managing all costs to

maximize overall profitability without impacting the servicelevels offered to guests. It should be noted that savings

opportunities are restricted during lower occupancy

periods, such as the first and fourth quarters, particularly

in smaller limited service hotels, given the minimal

infrastructure in place. In addition, many property level

expenses, including property taxes, leasehold payments

and insurance, are relatively fixed and do not necessarily

change in accordance with overall demand levels.

Hotel expenses for the year ended December 31, 2010

increased $6.8 million or 1.5% when compared to 2009.

This increase reflects incremental costs associated with the

1.2 point improvement in occupancies and inflationary cost

increases generally. Expenses also reflect non-recurring

operating restructuring charges and the implementation of a

new sales training program in late 2010. These non-recurring

initiatives are expected to contribute to improved operating

performance in the coming years. The year-over-year

variance also reflects the benefit of a $1.7 million lease

adjustment realized in the prior year.

Hotel oPeratIng IncomeGrowth in 2010 was focused on driving demand and

occupancy to the portfolio as opposed to ADR growth.

Reduced ADR, combined with non-recurring operating

expenses, contributed to an 80 basis point decline in

hotel operating income margins to 22.5%.

For the year ended December 31, 2010, InnVest generated

HOI of $137.2 million, down 3.1% or $4.4 million as

compared to the prior year. The decline reflects inflationarycost increases and non-recurring expenses which offset

the modest top line growth achieved. Regional results

are reflective of the RevPAR achieved, and its impact on

profitability over the period given the considerable amount

of fixed operating costs in the business. The HOI variance

for the western region also reflects the $1.7 million lease

adjustment which benefitted the prior year.

r Room revenues for the year ended December 31, 2010

increased 1.2%, or $5.7 million, to $476.0 million with

strength through the last three quarters offsetting softness

in the first quarter of 2010. Regional performance varied

based on broader regional factors.

Room revenue variance Ya dd Dcb 31, 2010

nb f vaiac vaiac h 2009 2009

Base Portfolio

Ontario 8,005 $ 5,232 2.9%

Quebec 4,242 2,522 2.4%

Atlantic 2,696 (46) (0.1%)

Western 3,535 (1,919) (1.7%)

Sub-total 18,478 5,789 1.2%

Other 408 (137) (2.2%)

Total 18,886 $ 5,652 1.2%

The Ontario region led growth this year with room revenue

increasing 2.9% based on occupancy improvements across

most markets. This growth was led by the Greater Toronto

Area (GTA) which experienced RevPAR growth of over 12%

for the year. The Toronto downtown core benefitted from

the G20 meetings held in June which helped drive demand

in surrounding GTA markets.

The Quebec region realized a 2.4% increase in room revenue

with growth realized across all markets. The Montreal

market benefitted from the return of the Grand Prix in thesecond quarter and improving group activity in Montreal

generally. Displacement due to meeting space and

guest room renovations at the Hilton Quebec City through

the second half of the year negatively affected annual

performance. Meeting space renovations at this hotel

were completed in the third quarter. The room renovation

program is scheduled for completion in the second

quarter of 2011.

Room revenue in the Atlantic region is largely unchanged

year-over-year. Growth in New foundland was offset by

declines in Prince Edward Island following strong group

business in the prior year.

InnVests Base Portfolio of Western hotels realized a room

revenue decrease of 1.7% driven by occupancy declines.Lower group activity has been experienced in key markets

as compared to the prior year given typical group

rotational calendars. This has been somewhat offset by

improving corporate transient demand. Room renovations

at The Fairmont Palliser in Calgary also contributed to

displaced business volumes through the second half of

the year. RevPAR at this hotel was down almost 6% for

the year. Room renovations at the hotel are expected to

be completed early in the second quarter of 2011.

2010OPERATINGRESULTS REVIEW(cONT.)

r h d 31,2010 i 1.2%, $5.7 ii, $476.0 ii ihh hh h

h i i h i 2010.




27/76

net Income (loss)Discontinued operations reflect one hotel which was

expropriated in the third quarter of 2010 resulting in a gai

on sale of $327. InnVest recorded a non-cash impairment

charge of $226 during the prior period. At December 31,

2010, no hotels remain classified as held for sale.

For the year ended December 31, 2010, InnVest recorded

net income of $147.5 million, or $1.492 per unit diluted

compared to a net loss of $30.9 million, or $0.400 per un

diluted for the same period in 2009. Excluding the effect

non-cash future income tax recoveries and hotel property

writedowns in the two years, InnVest realized a net loss of

$36.1 million in 2010 compared to a loss of $19.0 million i

2009. The $17.1 million variance primarily reflects lower

HOI achieved over the period combined with higher intere

expenses following capital financing transactions during t

year. The decline in per unit results also reflects the highe

number of units outstanding in 2010 as compared to 200

given an equity offering of 12,658,500 units in October

2009 and the convertible debentures issued in Decembe

2009 and August 2010.

funds from oPeratIonsFor the year ended December 31, 2010, InnVest generate

FFO of $61.2 million or $0.673 per unit diluted. This

compares to FFO of $72.7 million in the prior period ($0.9

per unit diluted). The decline is primarily attributable to th

reduction in HOI and higher interest expenses incurred. T

decline in per unit results also reflects the higher number

units and convertible debentures outstanding in 2010. Se

Non-GAAP Financial Measures for a reconciliation of

GAAP net income to FFO.

dIstrIbutable IncomeFor the year ended December 31, 2010, InnVest generate

distributable income of $42.2 million ($0.469 per unit

diluted) compared to $51.5 million in the prior year ($0.6

per unit diluted). The decline is primarily attributable to th

reduction in HOI and higher interest expenses incurred. T

decline in per unit results also reflects the higher number

of units and convertible debentures outstanding in 2010.

See Non-GAAP Financial Measures for a reconciliation

of GAAP net income to distributable income.

Distributions declared in the year ended December 31, 20totalled $44.4 million compared to $51.3 million in the pr

year. InnVest reduced its monthly distribution to $0.0417

per unit beginning in September 2009 (from $0.0625 pe

unit). This reduction was somewhat offset by distribution

associated with additional units outstanding in 2010.

HOI variance Ya dd Dcb 31, 2010

nb f vaiac vaiac h 2009 2009

Base Portfolio

Ontario 8,005 $ 1,350 2.9%

Quebec 4,242 80 0.3%

Atlantic 2,696 (1,521) (7.3%)

Western 3,535 (4,660) (10.1%)

Sub-total 18,478 (4,751) (3.4%)

Other 408 390 39.6%

Total 18,886 $ (4,361) (3.1%)

otHer Income and exPensesOther income and expenses for the year ended December 31,2010 were down $17.2 million to $179.7 million. The variance

primarily reflects a non-cash $5.9 million impairment

provision for one hotel taken in 2010 compared to a

$36.5 million impairment taken in the prior year. The 2010

charge was taken on one leasehold hotel which may not

renew its existing licence agreement. Excluding the

writedowns, other income and expenses would have been up

$13.4 million relating to a $5.6 million increase in convertible

debentures interest and accretion (in aggregate, InnVest

issued $125.0 million and redeemed $45.7 million in

convertible debentures) and a $1.6 million increase in

interest on mortgages (refinanced a maturing mortgage

at a higher rate in the third quarter of 2009). InnVest also

experienced a $3.5 million increase in non-cash depreciationand amortization over the period. Corporate and

administrative expenses were up $2.4 million reflecting

non-recurring costs associated with InnVests internal

reorganization completed at the end of 2010 as well as

incremental costs associated with the preparation for

the upcoming change to IFRS accounting standards.

Income taxesFor the year ended December 31, 2010, InnVest generated a

future income tax recovery of $189.5 million as compared to

$24.5 million in 2009. The future income tax recovery in

2010 primarily reflects the elimination of net future income

tax liabilities previously recognized following InnVests

reorganization to a stapled REIT. The future income tax

recovery realized in 2009 reflects the provincial SIFT tax ratechange which was enacted in March 2009 along with the

reclassification of certain assets as held for sale in that year.

For 2010, 67 % of the $44.4 million distributions made to

unitholders will not be taxable to unitholders (2009 70%).

th i i 2010 pii h iii i iiii piiz iIv izi p reIt.

AnnuAlreport


28/76


29/76


30/76

The fourth quarter of 2010 reflects the completion of

InnVest internal reorganization on December 31, 2010.

The reorganization resulted in a non-cash future income

tax recovery of $187.6 million. Fourth quarter results also

include a non-cash $5.9 million impairment provision for

one hotel property compared to a $29.8 million impairment

taken in the prior year. Excluding these non-cash items,

InnVest realized a net loss of $17.6 million in the fourth

quarter of 2010 compared to a loss of $11.2 million in 2009.

The variance reflects higher interest expenses as well as

corporate costs incurred to complete the reorganization.

the issuance of additional units or other equity instruments.

When issued, additional equity is most often used to finance

acquisitions or repay debt. InnVest issued $75.0 million

of convertible debentures during the third quarter of 2010

which was partially used to satisfy the early redemption of

a $45.7 million convertible debenture which was due in April

of 2011. During the first quarter of 2011, InnVest announced

the issuance of $50.0 million of convertible debentures and

$25.2 million of equity.

Management believes that InnVests credit facilities, cash

on hand and expected cash flow from operations, when

combined with the potential to sell assets or access debt

and equity markets, will allow InnVest to meet all its financial

commitments. If necessary, near term disruptions to

operating earnings and cash flow could be addressed

through reductions in discretionary capital allocation

decisions such as capital investments above the FF&E

reserve and/or distributions.

casH on HandAt December 31, 2010, InnVest has cash on hand totalling

$12.8 million, of which $3.8 million is restricted under its

Declaration of Trust for the replacement of furniture,

fixtures, and equipment and for capital improvements.

Each year, InnVest sets aside an FF&E reserve totaling

between 3% and 5% of total hotel revenue. Capital

expenditures totaling $39.4 million in 2010 were largely

funded through the FF&E reserve of $25.1 million.

Incremental capital above the FF&E reserve was funded

with cash on hand or available credit facilities.

Operating highlights for the fourth quarter include:

RevPAR increased 3.0% led by a 1.8 point improvementin occupancy which offset a modest 0.2% decline in ADR;

HOI was down 2.0% to $27.2 million. The HOI declinereflects higher operating costs associated with the

occupancy improvement, displacement due to hotel

renovations as well as non-recurring costs associated

with management training and severances. HOI margin

declined to 18.3% compared to 19.2% in 2009;

FFO and distributable income were down $3.2 millionand $2.0 million, respectively, reflecting the lower HOI

achieved as well as higher interest expense given higher

convertible debenture debt balances outstanding

during the quarter.

InnVest has several sources of liquidity including

the following:

Cash generated from hotel operations: InnVests

operations are seasonal with the second and third quarters

typically being the strongest earning periods, given the

higher level of business and leisure travel during these

months. In 2010, InnVest generated HOI of $137.2 million

which is used primarily to fund distributions to unitholders,

capital expenditures and debt service requirements.

Line of credit: InnVest has a line of credit of up to

$40.0 million with a major banking institution to finance

temporary shortfalls in cash resulting from business

seasonality and working capital fluctuations. The credit

facility may also be used to provide short-term financing in

the event of the acquisition of a new hotel. At December 31,

2010, $7.2 million was drawn on InnVests line of credit.

Issuing additional debt: InnVest also has the ability to

raise funds by mortgaging its properties or by issuing either

debt or convertible debt securities. InnVest typically uses

long-term debt financing to refinance existing debt or to

finance an acquisition. The choice of debt instrument

used is dependent on then-current market conditions.

The ability to secure debt financing on reasonable terms

is ultimately dependent on market conditions and the

lenders determination of InnVests creditworthiness.

At December 31, 2010, substantially all of InnVests assets

have been pledged as security under debt agreements.

Issuing additional equity securities: InnVests listing on

The Toronto Stock Exchange gives it the ability to access,

subject to market conditions, additional equity through

QUARTERLYRESULTS ANDREVIEW OFFOURTH QUARTERPERFORMANcE(cONT.)

LIQUIDITYAND cAPITALRESOURcES




31/76

The global financial credit markets have experienced

significant volatility since August 2008. As a result, the

availability of credit for hotel lending has deteriorated and

credit spreads offered have widened. While credit spread

are wider than spreads previously achieved, the underlyin

bond yields have also decreased such that the overall cos

of debt, if available, remains relatively attractive. During t

third quarter of 2010, InnVest successfully completed the

early one-year extension of a mortgage originally schedu

to mature in February 2011. As part of the early refinancin

InnVest repaid $95.0 million of mortgage principal plus

yield maintenance and other fees funded by cash on hand

This early renewal enabled InnVest to secure its one-year

extension interest rate on the remaining principal of

$174.2 million beginning February 28, 2011 at a rate of 3.5compared to the prior rate on the mortgage of 5.4%. The

reduced rate on the remaining mortgage balance will resu

in annual interest savings of approximately $3.3 million

beginning in March 2011. The mortgage includes one

additional one-year extension (to February 28, 2013), at

InnVests option, subject to certain minimum thresholds

at the time of maturity. The second renewal term would b

based on the one-year Composite Swap Rate plus 1.85%

calculated as at February 28, 2012.

adjusted debt to gross booK valuesInnVest is not permitted to exceed certain financial levera

amounts under the terms of the Declaration of Trust.

InnVest is permitted to hold indebtedness, excluding

convertible debentures, up to a level of 50% of gross assevalue (60% including convertible debentures). InnVest

calculates indebtedness in accordance with GAAP exclud

non-interest bearing indebtedness, trade accounts payab

and any future income tax liability. Gross asset value is

calculated as the total book value of assets on its balance

sheet plus accumulated depreciation and amortization, le

any future income tax liabilities. InnVest expects to amen

its Declaration of Trust in the first quarter of 2011 to addre

these leverage restrictions in light of the impact of the

upcoming accounting change to International Financial

Reporting Standards which will result in the reduction of

the book value of assets as well as the elimination of

accumulated depreciation and amortization (Refer to Fut

Accounting Changes IFRS for a complete discussion).

The following chart shows the changes in the restricted

FF&E reserve cash balance for the year ended December 31,

2010, along with the comparable period:

Ya dd Dcb 31

2010 2009

Opening balance $ 3,815 $ 3,013

FF&E reserve 25,081 25,085

Transferred from

operating cash 14,376 997

Capital expenditures (39,441) (25,280)

Closing balance $ 3,831 $ 3,815

credIt facIlIty/brIdge loanInnVests operations are seasonal (see Quarterly Results).InnVests credit facility ensures that the seasonal fluctuation

in cash flows will not affect its ability to operate in the normal

course of business.

InnVest has a $40.0 million line of credit secured by 13

unencumbered assets. The credit facility expires in August

2012. The amount of the operating line is subject to a

mortgageability test which is based on the operating results

of the secured properties. Interest rates are based on the

lesser of (i) Canadian prime rate plus 2.5% and (ii) the

Canadian Bankers Acceptance rate plus 3.5%. Based on

the operating results of the secured properties for the four

quarters ended December 31, 2010, InnVest qualifies for

$39.8 million of availability under the line of credit. At

December 31, 2010, $7.2 million was drawn on the creditfacility. Letters of credit totalling $3.6 million (December 31,

2009 $3.6 million) were drawn against the facility.

InnVest also has a bridge loan secured by one hotel. The

bridge loan bears interest at the Canadian Bankers

Acceptance rate plus 3.5% and requires interest payments

only. In March 2010, this bridge loan was extended to March

1, 2011 and included a pay-down of $1.0 million to an

outstanding balance of $6.0 million (December 31, 2009

$7.0 million). In February 2011, the bridge loan was fur ther

extended to mature March 1, 2012.

mortgages Payable and convertIble debenturesAt December 31, 2010, InnVest had mortgages payable of

$834.0 million with a weighted average term of 2.8 years

and a weighted average interest rate of 6.0%. Approximately11.4% of InnVests mortgage debt is at floating rate.

InnVest also has four series of fixed-rate convertible

debentures which mature bet ween 2013 and 2017.

At December 31, 2010, InnVest has $258.5 million in

convertible debentures outstanding (December 31, 2009

$240.7 million). In the first quarter of 2011, InnVest

announced the issuance of an additional $50.0 million

of convertible debentures due in 2018.

a d 31, 2010,

Iv h p $834.0 iiih ih 2.8 ih i 6.0%.

AnnuAlreport


32/76

LIQUIDITYAND cAPITALRESOURcES(cONT.)

long-term caPItal oblIgatIonsInnVests long-term capital obligations consist primarily of

fixed-term mortgage financing and unsecured debentures.

The maturity dates for these obligations have been

staggered to lower the overall refinancing risk. The estimated

interest payments on mortgage debt and convertible

debentures include scheduled interest payments on fixed

and variable rate debt outstanding at December 31, 2010.

The estimated interest payments on variable rate mortgages

are based on interest rates prevailing at December 31, 2010.

Considering its overall leverage and demonstrated access

to capital markets, InnVest expects that all maturities will

be refinanced or repaid in the normal course of business.

InnVest has one $50.9 million mortgage maturing in 2011

secured by two full service hotels.

As at December 31, 2010, InnVest has approximately

$134.7 million of mortgages secured by conduit financing

maturing in 2014 and 2015.

InnVest has leasehold interests in 12 of its hotels. The

leaseholds require minimum annual lease payments

and the leases expire between 2016 and 2088. There are

also future rental charges determined as a percentage of

revenue that are not included in the amounts reflected

below. Capital and operating leases primarily relate to

equipment and office leases.

At December 31, 2010, InnVests leverage excluding

and including convertible debentures was 38.3%

(December 31, 2009 45.1%) and 50.0% (December 31,

2009 56.4%), respectively.

December 31, 2010

Total assets per consolidated

balance sheet $1,800,033

Accumulated depreciation

and amortization 414,482

Future income tax liability (2,537)

Gross asset value $2,211,978

Book value of mortgages

and other indebtedness(1) $ 847,229 38.3%

Convertible debentures(2) 258,454 11.7%

Total debt $1,105,683 50.0%

(1) Adjusted to eliminate financing issuance costs and include

long-term debt related to assets held for sale.

(2) Adjusted to face value.

The following table summarizes InnVests contractual obligations as at December 31, 2010.

2016 ad 2011 2012 2013 2014 2015 haf ta

Bridge loan

principal $ 1,750 $ 4,250 $ $ $ $ $ 6,000

interest 246 33 279

Operating line of credit

principal 7,200 7,200

interest 396 264 660

Mortgages payable

principal 81,058 201,776 163,892 297,181 72,900 17,223 834,030

interest 46,944 42,534 22,613 10,751 3,335 1,779 127,956

Capital lease

principal 189 199 217 229 243 622 1,699

interest 239 239 239 59 776

Convertible debentures

principal 74,980 70,000 113,474 258,454

interest 15,692 15,692 13,067 9,486 7,097 8,524 69,558

Long-term land leases 4,802 4,802 4,802 4,826 4,826 83,225 107,283

Operating equipment

and office leases 172 50 35 257

Capital expenditures

commitment 9,716 9,716

$ 161,204 $ 277,039 $ 279,845 $ 392,532 $ 88,401 $ 224,847 $1,423,868

Given available liquidity, access to capital and improving economic and operating trends, management expects to be able to

fund all commitments in the normal course of business.

Iv -pi ii ipii i- ii .th i h iih h ii ik.




33/76

For the year ended December 31, 2010, distributions of $44.4 million were declared, of which $1.7 million was distributed

in units as part of the DRIP. This represents annual distributions declared of $0.5004 per unit (2009 $0.6668 per unit).

For the year, InnVests payout ratio was 105.2% or 101.2% on a cash basis (excluding the non-cash distributions made

through the DRIP). The payout ratio reflects the negative impact of capital raised in December 2009 which was deployed

late in the third quarter of 2010 to repay indebtedness.

Ya dd Dcb

2010 2009 2008 2007 20

Distributable income $ 42,203 $ 51,524 $ 85,540 $ 71,995 $ 62,7

Distributions 44,384 51,297 78,473 70,758 59,6

Distributable income (less than)

in excess of distributions (2,181) 227 7,067 1,237 3,1

Non-cash distributions made

through the DRIP 1,688 2,756 13,234 10,606 4,1

Distributable income (less than)in excess of cash distributions $ (493) $ 2,983 $ 20,301 $ 11,843 $ 7,3

Payout ratios:

Total distributions 105.2% 99.6% 91.7% 98.3% 95.0

Cash distributions (total

distributions minus DRIP) 101.2% 94.2% 76.3% 83.6% 88.3

DISTRIBUTIONS TOUNITHOLDERS

Based on current market conditions, management expects

the current level of cash distributions to be sustainable.

However, if there were a deterioration in business trends,

future distributions could be impacted.

Liquidity to fund distributions is generated from cash flow

from operations, cash on hand, available bank operating

lines and by the ability to finance certain unencumbered or

under-leveraged assets. First and fourth quarter distributions

are typically partially funded through cash on hand or

InnVests credit facility given the seasonality of earnings in

contrast to costs which are fixed through the year.

Distributions to unitholders are approved by InnVests

Board of Trustees. Each month, InnVest may distribute su

percentage of its estimated distributable income as the

Trustees determine in their discretion. In exercising their

discretion to approve the level of distributions, the Truste

use forecasts prepared by management and other financ

information to determine if sufficient cash flow will be

available to fund distributions. Such financial informationis subject to change due to the nature of the Canadian

hotel industry which can be difficult to predict, even in

the short-run (see Risks and Uncertainties).

diii

ih pp Iv b t. eh h,Iv iih p ii iii h ti i hiii.

AnnuAlreport


34/76


35/76

FFO should not be considered a substitute for net income

or cash flow from operating activities determined in

accordance with GAAP. InnVests method of calculating

FFO may be different from that of other organizations.

InnVest currently calculates FFO by using net income and

adjusting for:

i) Depreciation, amortization and accretion, excluding

amortization of deferred financing costs;

ii) Future income tax expense or recovery;

iii) Non-cash executive and trustee compensation expen

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

the impairment provision on hotel properties; and

v) Non-recurring costs that may impact cash flow.

A reconciliation of GAAP net income (loss) to FFO is

as follows:

Ya dd Dcb

2010 20

Net income (loss) $ 147,457 $ (30,9

Add/(deduct):

Depreciation and

amortization(1) 94,678 91,1

Future income tax recovery (189,497) (24,5

Net (gain) writedown on,

and sale of,

assets held for sale (327) 2

Writedown ofhotel properties 5,907 36,4

SIFT transition expenses 2,756

Non-cash executive and

trustee compensation 212 2

FFO $ 61,186 $ 72,7

FFO per unit:

Basic $ 0.690 $ 0.9

Weighted average units 88,652,017 77,269,2

Diluted $ 0.673 $ 0.9


(1) For purposes of calculating FFO, amortization of deferred

financing costs is excluded from depreciation and amortization

Included in this MD&A are certain non-GAAP financial

measures, which are measures of InnVests historical or

future financial performance that are not calculated and

presented in accordance with GAAP. These non-GAAP

financial measures are unlikely to be comparable to similar

measures presented by other entities. The following

discussion defines non-GAAP measures used by InnVest

and presents why management believes they are useful

supplemental measures of InnVests performance.

Hotel oPeratIng Income (HoI)HOI is defined as hotel revenues less hotel expenses.

HOI is a commonly used measure by lodging real estate

owners which, when considered with GAAP measures,

gives management a more complete understanding ofproperty level results before debt service. It also facilitates

comparisons between InnVest and its competitors.

Management believes that HOI is one of InnVests key

performance indicators since it helps management, lenders

and investors evaluate the ongoing hotel profitability.

Management believes hotel operating income to be a

meaningful indicator of hotel performance.

HOI has been calculated as follows:

Ya dd Dcb 31

2010 2009

Hotel revenues $ 609,566 $ 607,139

Hotel expenses 472,416 465,628

Hotel operating income $ 137,150 $ 141,511

funds from oPeratIons (ffo)FFO is a common measure of performance in the real

estate investment trust industry. FFO is one measure used

by industry analysts and investors in the determination of

InnVests valuation, its ability to fund distributions and

investors investment return requirements. As a result,

InnVest believes that FFO is a useful supplemental measure

of its operating performance for investors. FFO assumes

that the value of real estate investments does not necessarily

decrease on a systematic basis over time, an assumption

inherent in GAAP, and it adjusts for items included in

GAAP net income that do not necessarily provide the

best indicator of operating performance, such as gains

or losses on the sale of, and provisions for impairmentagainst, hotel properties.

NON-GAAPFINANcIALMEASURES

HoI i i h

hp. HoI i i hih, hi ih gaaP, i p i pp i.

AnnuAlreport


36/76

Distributable income is one measure used by industry

analysts in the determination of InnVests per unit value,

its ability to fund distributions and investment returns

for current or potential investors. Distributable income is

also used by management and the Board of Trustees to

determine the level of distributions to unitholders and

also serves as an important measure for investors in their

evaluation of the performance of management.

In addition, when evaluating acquisition opportunities,

the distributable income to be generated by the asset is

reviewed by management to determine whether a proposed

acquisition will generate an increase in distributable

income per unit. Therefore, distributable income is an

important measure for management as a guideline through

which operating and financial decisions are made and isan integral part of the investment decision for investors

and potential investors.

The following table reconciles cash flows from operating

activities to distributable income in accordance with

Canadian Securities Administrators Staff Notice 41-201

Income Trusts and Other Indirect Offerings. Management

considers distributable cash to be equivalent to

distributable income. The reconciliation has been prepared

using reasonable and supportable assumptions which

reflect InnVests planned courses of action given

managements judgment about the most probable set

of economic conditions.

The reconciliation of cash flow from operating activities to

distributable income is as follows:

Ya dd Dcb 31

2010 2009

Cash flow from

operating activities $ 71,317 $ 74,721

Changes in non-cash

working capital (6,581) (401)

Other 2,548 2,289

FF&E reserve (25,081) (25,085)

Distributable income $ 42,203 $ 51,524

dIstrIbutable IncomeDistributable income is commonly used in the real estate

investment trust industry to measure performance.

Distributable income is intended to approximate cash

earnings. It is defined in InnVests Declaration of Trust

to mean net income of InnVest and its consolidated

subsidiaries as reported in its consolidated financial

statements adjusted for:

i) Depreciation, amortization and accretion and future

income tax (recovery) expense;

ii) Any gains or losses on the disposition of any

real property;

iii) The reserve for replacement of furniture, fixtures and

equipment and capital improvements; and

iv) Any other adjustment determined by the Trustees in

their discretion.

A reconciliation of GAAP net income (loss) to distributable

income is as follows:

Ya dd Dcb 31

2010 2009

Net income (loss) $ 147,457 $ (30,923)

Add/(deduct):

Depreciation and

amortization 94,678 91,195

Future income tax recovery (189,497) (24,547)

FF&E reserve (25,081) (25,085)

Non-cash portion of

convertible debenture

interest and accretion 3,791 2,142

Non-cash portion

of mortgage

interest expense 2,209 1,680

Non-cash executive and

trustee compensation 212 268

Net (gain) writedown on,

and sale of, assets

held for sale (327) 226

Writedown of

hotel properties 5,907 36,489

SIFT transition expenses 2,756

Other 98 79

Distributable income (DI) $ 42,203 $ 51,524

DI per unit:

Basic $ 0.476 $ 0.667


Diluted $ 0.469 $ 0.666


NON-GAAPFINANcIALMEASURES(cONT.)

dii i i i h i i p.dii i ii ppih i.




37/76

In addition to the base management fee and incentive fee

Westmont is entitled to reasonable fees based on a

percentage of the cost of purchasing certain goods and

supplies and certain construction costs and capital

expenditures, fees for accounting services, reasonable

out-of-pocket costs and expenses, other than general and

administrative expenses or overhead costs except as

otherwise provided in the Agreements, and project

management and general contractor service fees related

hotel renovations managed by Westmont. Also, for certa

hotels owned by InnVest and not managed by Westmont,

Westmont is entitled to an asset management fee based

a fixed percentage of the purchase price of the hotel or a

fixed percentage of HOI, subject to an annual minimum fe

Total management and other fees paid to Westmont for tyear ended December 31, 2010 were $17.5 million (2009

$17.2 million). These fees represent approximately 66%

(2009 64%) of total hotel management and other fees

paid by InnVest to the four hotel management companies

with which it partners.

Hotel managementOn July 26, 2002, InnVest entered into a management

agreement for hotel management and accounting

services and an administrative services agreement

(the Agreements) with Westmo

Documents

InnVest 2010 Annual FINAL