InnVest 2010 Annual FINAL

INNvest
innvest real estate investment trust | www.innvestreit.com annual report 2010
the
premier canadian hotel investment

strategy distinguishing strengths
by brand, geography and customer base Focused
diversified
a portFolio
drive results
in our properties to
investing
We are long-term investors in quality hotel real estate. As patient investors, we look beyond near-term cyclical fluctuations and focus on the exciting opportunities ahead. Positive industry fundamentals such as an improving economic outlook, limited new hotel supply, and an aging population eager to travel, give us confidence in the prospects for the industry and our portfolio specifically. As Canadas largest hotel real estate owner, InnVest is ideally positioned to benefit from these promising trends.
strategic achievements
Improved occupancy across the portfolIo

Early signs of the hospitality market recovery began taking shape in 2010, led by occupancy gains across our portfolio. We expect pricing improvement to follow as demand and confidence in the sustainability of the recovery improves.
strengthened balance sheet

Capital management efforts, including early debt refinancing and raising new capital have contributed to reducing our leverage and strengthening our balance sheet. These initiatives demonstrate our ability to access attractive capital to support our business strategy.
Invested capItal to drIve returns

With an improving outlook, we are strategically investing in our portfolio to take advantage of market opportunities and position our hotels to benefit from an upswing. Internal investment opportunities are expected to enhance our hotels competitive positions and maximize bottom line returns.
maIntaIned QualIfyIng reIt status

We completed an internal reorganization on December 31, 2010 in order to become a Qualifying REIT under Canadian income tax rules applicable to specified investment flow-through (SIFT) entities. The reorganization enables us to continue to benefit from the tax advantages offered to REITs.
Contents
02 competitive advantages
Gain an understanding of what makes InnVest a unique investment opportunity.
05 letter to unitholders
A personal look at InnVests business through the eyes of the CEO.
04
1 1
letter from the cfo

An introduction to key finance initiatives undertaken during the year.
1 2 managements discussion & analysis

Learn about the industry and the company including a comprehensive look at the years results.
43 managements responsibility for consolidated financial statements 44 independent auditors report 45 consolidated financial statements 49 notes to consolidated financial statements 70 innvest portfolio 72 senior management and board of trustees 73 corporate and unitholder information
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On the cOver:
The Fairmont Palliser

centrally located in downtown calgary, the Fairmont Palliser is a landmark building rich in history and architecture.
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annual report 2010
01
Competitive advantages
strategy
strategy
Efforts to improve the Trusts balance sheet and financial position have been a priority over the past two years. Early debt refinancing activities, raising new capital and adjusting distributions have enabled InnVest to emerge from the challenging economic environment in a strengthened position.
Focused
distinguishing
strengths
strengths
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 focused on enhancing our competitive position in strategic assets and markets through targeted capital investments in product and brand upgrades. Additional resources have also been deployed to intensify our focus on revenue-generation opportunities. We expect to see increasing acquisition opportunities 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.
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.
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.
02
Innvest real estate Investment trust
innvest is one of canadas largest hotel real estate owners with 144 hotels diversified across every province in canada.
our diversity advantage

Segment diversification broadens market reach
HOTEL REVENUES BY SERVICE CATEGORY
WesTern 3,535 rooms 20 hotels onTario 8,413 rooms 70 hotels quebec 4,242 rooms 32 hotels aTlanTic 2,696 rooms 22 hotels
67% Full service 33% Limited service
Regional diversity limits risk
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.
HOTEL REVENUES BY GEOGRAPHY
experienced management
37% Ontario 26% Western 22% Quebec 15% Atlantic
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.
strategic investment
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.
access to capital
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.
Customer diversity optimizes occupancy

HOTEL ROOM REVENUES BY CUSTOMER
35% Corporate & Government 32% Transient 17% Other 16% Group
annual report 2010
03
Delta beausejour, Moncton
04
letter to unitholders
We are committed to oWning quality, Well-located hotel real estate that Will drive long-term returns to investors.
staying power
by Kenneth gibson President and Chief Executive Officer
ve worked in the lodging industry for more 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
ours is a pennies business. revenues. These investments in our business With over 4 million rooms will allow us to capture greater profits as demand and top-line revenue continue to recover. sold every year, small changes can drive improving trends significant improvement After almost two years of declining revenue to bottom line results. per available room (RevPAR), we saw the first
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 annual RevPAR growing a modest 1.2% in 2010. This is not unexpected given the significant consumer 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 road. This will be followed by average daily rate (ADR) 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 improvement 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.
annual report 2010
05
letter to unItholders
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.
Holiday inn barrie
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.
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.
>>
re-branding of 16 holiday inn hotels
innVest participated in holiday inns global brand re-launch which involved 16 of our hotels. the brand upgrades include remodeled lobbies, refreshed guest rooms and holiday inns new logo and signage. given its extensive reservation system and brand recognition, holiday inn is one of our best performing brands.
strategy on course
Our 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.
financial flexibility
As 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 $340 million in mortgages. This was no small achievement considering the challenging credit markets during this period. New capital proceeds were used to repay and extend maturities and contributed to a reduction in our overall leverage in 2010. REITs, by their nature, require capital to sustain and grow. We have always been proactive in our capital management efforts, consistently addressing our refinancing needs in advance of maturities. With a staggered maturity schedule and access to reasonably-priced capital, we expect to address all debt maturities in the normal course of business.
06
2010 highlights
HOTEL OPERATING INCOME (1)
($ millions) $200 $150
$118.0 $140.2
$181.9 $141.7
200
$137.3
150
$100 $50 $0 06 07 08 09 10
100
50
(1) Includes continuing and discontinued operations.
FUNDS FROM OPERATIONS

($ millions) $125 $100 $75 $50 $25 $0 Holiday inn calgary Macleod Trail south 06 07 08 09 10
$74.9 $88.0 $72.7
$108.2
125 100
$61.2
75 50 25 0
CAPITAL INVESTED ( 1)
($ millions) $50 $40 $30 $20 $10 $0 06 07 08 09 10
$27.3 $29.0 $25.2
$42.9
50
$39.4
40 30 20 10 0
Holiday inn burlington Hotel & conference centre
Holiday inn Kingston
annual report 2010
07
letter to unItholders
The Fairmont Palliser, calgary
>>
recent renovations continue at the fairmont palliser in calgary
an extensive room renovation program was initiated at the Fairmont Palliser in the fall of 2010. by mid-2011, half of the hotels guest rooms will have been fully renovated including an expansion of the hotels premier Fairmont gold product. the refreshed room product should enable the hotel to improve rates achieved in this important market.
08

With the wind at our back, our entire organization is focused on making prudent capital allocation decisions to increase long-term value and grow cash flows to support distributions to our unitholders.
looking ahead
We 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:
Reduce leverage over time to improve our 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 quality portfolio we own. Our management teams experience and expertise is unsurpassed in this specialized industry. With the wind at our back, our entire organization is focused on making prudent capital allocation decisions to increase long-term value and grow cash flows to support 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
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 their competitive position and market share. Remain poised to take advantage of opportunities to acquire quality hotel real estate in stable markets and to recycle capital from our existing assets.
annual report 2010
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1 1 letter from the cfo 1 2 managements discussion & analysis

12 13 14 16 18 20 22 22 23 26 27 28 31 32 33 35 35 37 39 42 Introduction Forward-looking statements Our business trends in the lodging industry Our strategy Our ability to deliver results Outlook Operating summary 2010 operating results review changes in financial condition Quarterly results and review of fourth quarter performance Liquidity and capital resources Distributions to unitholders Unit information non-GAAP financial measures related party transactions risks and uncertainties critical accounting estimates Future accounting changes controls and procedures
revIew
Financial
43 managements responsibility for consolidated financial statements 44 independent auditors report 45 consolidated financial statements
45 46 47 48 consolidated balance sheets consolidated statements of net income (loss) and comprehensive income (loss) consolidated statements of unitholders equity consolidated statements of cash flows
49 notes to consolidated financial statements
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letter from the Cfo
We have always been proactive in our capital management efforts and have a demonstrated ability to access attractive capital to support our business strategy.
tamara lawson Chief Financial Officer and Corporate Secretary
fforts 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 always been 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 addressing several 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
innvest has raised $250 million of debt and equity over the past two years and refinanced over $340 million in mortgages. We have consistently been able to access capital to grow our business and address our capital needs.
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 trusts (REITs), REITs with hotel operations were not exempted from the changes to the tax legislation taking effect in 2011. As a result, InnVest completed an internal reorganization on December 31, 2010 in order to become a Qualifying REIT. The purpose of the reorganization was to increase unitholder value by adopting a structure that allows InnVest to continue 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 which 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 our cash flows to support distributions to our unitholders.
Tamara Lawson Chief Financial Officer and Corporate Secretary
annual report 2010
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managements disCussion & analysis

introduCtion
InnVest 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,
Fairmont Hotel Macdonald, edmonton
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Innvest reAL estAte Investment trUst
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
as prescribed by GAAP, and therefore are considered non-GAAP measures. InnVest uses non-GAAP financial measures to assess its operating performance. Securities regulators require that entities caution readers that earnings and other measures adjusted to a basis other than GAAP do not have standardized meanings and are unlikely to be comparable to similar measures used by other companies. Please see Non-GAAP Financial Measures for a discussion of certain non-GAAP financial measures used by InnVest, including a reconciliation to GAAP financial measures. Additional information relating to InnVest, including its Annual Information Form, can be accessed on the Canadian Securities Administrators System for Electronic Document Analysis and Retrieval (SEDAR) located at www.sedar.com and on its website at www.innvestreit.com.
forward-looking statements
In the interest of providing InnVest unitholders and potential investors with information regarding InnVest, certain statements contained in this M&DA constitute forwardlooking 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 those described under Risks and uncertainties in this MD&A. Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By its nature, 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
results, performance, or achievements to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, changes in business strategies; general global economic and business conditions; medical concerns relating to travel and/or specific destinations; general global credit market conditions; the effects of competition and pricing pressures; industry overcapacity; shifts in market demands; changes in laws and regulations, including environmental and regulatory laws; potential increases in maintenance and operating costs; uncertainties of litigation; labour disputes; timing of completion of capital or maintenance projects; currency and interest rate fluctuations; various events which could disrupt operations; and technological changes. Although InnVest believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will be consistent with these forward-looking statements. The forward-looking statements contained in this MD&A are made as of the date of this MD&A. Except as required by law, InnVest does not undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement.
AnnUAL rePOrt 2010
13
managements dIscussIon & analysIs
a diVersiFied Canadian hotel investment
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. Other property level expenses include property taxes, ground rent for leasehold interests and property insurance. Many of these property level expenses are relatively fixed and do not necessarily change in accordance with revenue levels. 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.
innvests franchise business

Generating $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 included in the consolidated statements of income in other business income.
InnVest holds one of Canadas largest hotel portfolios together with a 50% interest in Choice Hotels Canada Inc., one of the largest franchisors of hotels in Canada. InnVests portfolio is well diversified across hotel accommodation categories, brands, geography and customers.
our business
hotel real estate oWner

As at December 31, 2010, InnVests portfolio comprised 144 hotel properties operated under internationally recognized 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.
office, retail and retirement home business

Generating $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.
HOTEL REVENUES BY SERVICE CATEGORY

67% Full service 33% Limited service
HOTEL REVENUES BY GEOGRAPHY

37% Ontario 26% Western 22% Quebec 15% Atlantic
HOTEL ROOM REVENUES BY CUSTOMER

35% 32% 17% 16% Corporate & Government Transient Other Group
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successful completion of qualifying reit process

in 2010, the reit completed an internal reorganization in order to become a Qualifying reit under canadian income tax rules applicable to specified investment flow-through entities (siFt). the purpose of the reorganization was to increase unitholder value by adopting a structure that allows the reit to continue to flow through its income to unitholders without being subject to entity-level taxation. the reorganization was completed on december 31, 2010. under the reorganization, the reit transferred all of its directly and indirectly held operating assets to iot, a newly-formed taxable investment trust. Following this transaction, iot holds the operating assets, earns revenues from hotel customers and pays rent to the reit (the owner of the hotels). iot also indirectly holds a 50% interest in choice hotels canada inc. and earns revenues from franchising fees. on december 31, 2010, each reit unitholder received one non-voting iot unit for each reit unit held. each issued and outstanding reit unit now trades together with a non-voting iot unit on a stapled basis on the toronto stock exchange (the tsX) under the symbol inn.un. refer to risks and uncertainties tax changes to income trusts on page 37 for more information on this reorganization. Hilton quebec city
innvest partners with 14 internationally recognized brands. their services complement our hotels and help attract demand to our assets.
Delta Winnipeg
AnnUAL rePOrt 2010
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increasing demand & limited suPPly

Increasing demand and limited supply growth are expected to drive positive operating dynamics for the lodging industry in 2011. We are encouraged by the occupancy recovery realized in 2010 and expect room rates to follow as demand and confidence in the sustainability of a recovery improve.
Holiday inn barrie
trends in the lodging industry
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 the largely 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 industry achieved 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.
demand trends
Demand 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
REVPAR TRENDS FOLLOW CHANGES IN NET DEMAND

8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% 99 00 01 02 03 04 05 06 07 08 09 10F 11P
Net Demand Growth (Demand less Supply) RevPAR Growth
Source: Pannell Kerr Forster Consulting Inc.
REVPAR TRENDS TURNED POSITIVE IN EARLY 2010

10.0% 8
6 4 5.0% 2 0 0% -2 -4 -5.0% -6 -8 -10.0% -10 -12 -15.0% -14

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 2010
10 5 0 -5 -10 -15
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hotels have significant operating leverage in a recovery

the hotel industry has a high level of fixed costs including mortgage interest expense, property taxes, insurance and building maintenance. these costs are largely unrelated to revenues achieved. as a result, declines in revenues will have a considerable impact on overall profitability achieved given the limited opportunity to reduce costs. opportunity exists to recover this decline in profitability as revPar improves. given the high component of fixed costs inherent in our business, additional revenues require marginal increases in costs, thereby enabling disproportionate growth in profitability. occupancies for the industry improved in 2010 but remain 3 points below demand levels achieved in 2008. in addition, adr remains below 2008 levels. each 1% revPar improvement in innVests portfolio generates almost $5 million of hotel room revenue. with limited incremental costs associated with these gains, the operating leverage for the industry is significant.
quality suites Toronto airport
Delta calgary airport
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.
economy leads to increasing corporate profits and wages and encourages increased spending on business and leisure travel. During a period of economic decline, discretionary leisure 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 of the 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.
supply trends
New supply is a significant risk for the lodging industry given its immediate and direct impact on occupancies within a market. One of the main drivers of hotel supply is rising demand and, more importantly, rising ADR. Increasing ADR signals higher profits thereby stimulating potential new construction. Mitigating this trend, supply growth is also affected by higher development and material costs as well 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 reduction 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 been underway prior to the global recession. Supply typically takes several years to open given lengthy financing and development processes. Industry supply growth is forecast 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.
AnnUAL rePOrt 2010
17
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 been initiated 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 its 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 partners 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.
resPonding to our business enVironment

InnVests strategy has been influenced, in the near term at least, by the recent economic challenges. Progress has been made over the last two years in improving InnVests balance sheet and financial position.
capital allocation strategy

In order to drive the long-term profitability of the portfolio, 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 potential of its existing portfolio by investing capital into internal profit-improving opportunities. InnVest constantly evaluates its current real estate holdings to optimize diversification and capitalize on embedded value or higher return opportunities. From time to time, certain assets are identified that may not support 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 current plans 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
Early debt refinancing activities, raising new capital and reducing distributions have contributed to a strengthened balance sheet. InnVest continues to manage its portfolio aggressively 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.
operating strategy
InnVests 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 2 3 4
18
Partnering with leading hotel management groups and brands; Implementing yield management and market strategies to maximize RevPAR; Leveraging InnVests size and industry experience to control costs through operating efficiencies, as well as taking advantage of buying power and economies of scale; and Investing in the portfolio to drive higher returns and enhance the value of the assets.
capital transactions support our strategy

innVest has consistently demonstrated its ability to access attractive capital to grow its business and fund its capital needs. over the past two years, 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.
in august 2010, innVest issued $75.0 million 6.0% convertible debentures due in 2017. the proceeds were partially used to redeem the series a 6.25% convertible debentures that were due to mature in april 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 plus yield and maintenance and other fees. subsequent to the end of 2010, innVest issued $50.0 million of 5.75% convertible debentures due in 2018 and $25.2 million of equity. Proceeds will be used to fund capital improvements, to fund future acquisitions and for general trust purposes.
staybridge Guelph
over the past year, innvest completed several exciting profit improving projects in key assets and markets. further investments are planned in 2011 to capture greater market share and drive performance.
comfort inn charlottetown
AnnUAL rePOrt 2010
19
Delta london armouries
leVeraging our Competitive strengths

Our efforts through the recovery have been focused on leveraging our locations and brands to improve occupancy in the portfolio and aggressively managing costs. We have undertaken many initiatives in 2010 to help improve our future financial results including capital investments in key assets and organizational enhancements to help drive revenues.
our ability to deliver results
competitive strengths
1 2

diversified operations
Geographic and customer diversity to offset
strategic investment in choice hotels canada
regional and industry cyclicality. Well-diversified by market position and brands.
Strategic 50% investment in Choice Hotels Canada, Contributes positive net cash flow to InnVest, enables
it to benefit from favourable franchise terms and provides the advantages of being a franchisor including control over brand standards and future new development. one of the largest franchisors of hotels in Canada.
scale that counts
One of Canadas largest hotel real estate owners

with 144 hotels representing almost 19,000 guest rooms. Ability to leverage the portfolios size to achieve operating efficiencies and reduce costs.
Led by professional hotel management with extensive Our hotels are managed by four hotel management
Canadian and international industry experience. companies, each bringing unique expertise to the portfolio to effectively manage through market cycles and maximize the value of each of our assets.
experienced hotel management
Partner with recognized international brands which
brands that deliver
bring name recognition, central reservation systems, marketing and customer loyalty programs and quality standards. Individual hotels are complemented by the brand that best suits its market, size, location and customer offerings.
Strong relationships with lenders and investors
access to capital
supported by the quality of our hotels and the size of our portfolio. Demonstrated consistent ability to access capital to grow the business and address capital needs.
20
Key Performance IndIcators

Several key metrics are used to measure the performance of the hotel industry and the relative strength of its participants.
Revenue per available room (RevPAR): RevPAR is defined as the product of the ADR achieved and the average daily occupancy. RevPAR measures room revenues and is a commonly used measure within the hotel industry to evaluate hotel operations. RevPAR changes driven by occupancy have different implications on operating income than do changes driven by ADR. Higher occupancy will generate incremental revenues such as food and beverage but will also result in higher costs relating to providing such services. ADR increases will not generate incremental revenue for ancillary services; however, they also will not result in additional costs and, therefore, ADR increases tend to have a greater impact on profitability. For the year ended December 31, 2010, InnVests RevPAR, on a same-hotel basis, improved 1.2% resulting from a 1.2 point increase in occupancy offsetting a modest 0.7% decrease in ADR. The overall Canadian lodging industry saw a RevPAR improvement of 5.5% over the same period. The industry performance was driven by particular strength in Vancouver following the Winter Olympics, and downtown Toronto following the G20 meetings and robust business activity thereafter. InnVest has limited presence in both of these markets which impacted its relative performance.
Hotel operating income margin: Defined as HOI as a percentage of total revenues, this key performance indicator measures an individual hotels profitability efficiency in relation to top-line revenue. For the year ended December 31, 2010, HOI margins declined 80 basis points to 22.5%. The decline in ADR, coupled with non-recurring expenses, contributed to reduced HOI margins in 2010. Funds from operations (FFO) and distributable income (DI): These indicators measure profitability and cash flow after all internal funding requirements including debt service. DI also considers funding requirements for the capital reserve. FFO and DI for the year ended December 31, 2010 were $61.2 million and $42.2 million, down 15.8% and 18.1% respectively from 2009, reflecting the decline in HOI and increased interest expense given higher debt balances for a portion of the year. Cash flow forecasts: Management constantly monitors its cash flow and cash balances to ensure sufficient liquidity to fund the operating and capital needs of the business with a near and longer term view. At December 31, 2010, InnVest has sufficient liquidity including cash on hand of over $12.8 million and the availability of $32.6 million under its line of credit. Management believes that liquidity on hand, ongoing operating cash flows, new financings announced in early 2011 and its ability to access additional capital in the future will allow InnVest to meet all known financial commitments.
revPar is defined as the product of the adr achieved and the average daily occupancy. revPar measures room revenues and is a commonly used measure within the hotel industry to evaluate hotel operations.
Hotel operating income (HOI): Defined as hotel revenues less hotel expenses, HOI measures property level results before debt service and facilitates comparisons between InnVest and its competitors. For the year ended December 31, 2010, HOI decreased $4.4 million, or 3.1%, to $137.2 million. The modest top line growth achieved was offset by inflationary cost increases and non-recurring expenses.
AnnuAl report 2010
21
managements discussion & analysis
OUTLOOK
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
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.
OPERATING SUMMARY
RevPAR on a same hotel basis improved 1.2% driven by a 1.2 point improvement in occupancy which offset a modest 0.7% decline in ADR; Overall, hotel revenues from continuing operations were relatively 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 inflationary cost increases and non-recurring expenses; InnVest realized net income of $147.5 million compared to 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 each declined 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 including profit-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 in future periods.
HOTEL REVENUES (1)

($ millions) $750 $500 $250 $0
$504.8 $392.0
HOTEL OPERATING INCOME (HOI) (1)

($ millions)
$685.1 $609.8
750
$610.2
$200 $150
$140.2 $118.0
$181.9 $141.7
200 175
$137.3
150 125 100 75
500
$100
250
$50 $0 06 07 08 09 10
50 25
06
07
08
09
10

750 200 175
22
500
150 125 100
Innvest reAl estAte Investment trust
2010 OPERATING RESULTS REVIEW
Year ended December 31
2010
2009
Hotel revenues Hotel operating income (1) Income (loss) from continuing operations Net income (loss) and comprehensive income (loss) Funds from operations(1) Distributable income(1) Distributions declared(2) Per unit diluted: Income (loss) from continuing operations Net income (loss) Funds from operations Distributable income(3) Distributions(2)
609,566 137,150 146,996 147,457 61,186 42,203 44,384 1.487 1.492 0.673 0.469 0.5004
607,139 141,511 (30,788) (30,923) 72,708 51,524 51,297 (0.398) (0.400) 0.939 0.666 0.6668
(1) See Non-GAAP Financial Measures on page 33. (2) Distributions and distributions per unit include cash distributions and distributions arising from the dividend reinvestment plan. (3) Distributable income per unit is calculated on a basis consistent with that prescribed by GAAP for calculating net income per unit.
Hotel oPeratIng results comParIson

For purposes of discussion of operating results within the MD&A, 141 of the 144 hotels have been classified as the Base Portfolio. Operating results for two assets acquired or developed have been excluded since their results were capitalized during a portion of the periods presented in accordance with InnVests accounting policy. One hotel has been excluded from continuing operations for the comparative periods given that it is now classified as an operating lease.
Hotel revenues
Hotel revenues consist primarily of revenue generated from room occupancy. Non-room revenue from food and beverage services and other miscellaneous revenue streams associated with hotel operations such as space leases, vending commissions, movie rentals, parking and telephone are also included. In 2010, room revenues accounted for approximately 78% of total hotel revenues (2009 77%).
overall hotel portfolio

the hospitality industry is highly correlated to the economy given its impact on discretionary travel demand, including demand from corporate and leisure customers.
The 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. Following two years of declining trends, year-over-year RevPAR trends turned positive, albeit modestly, early in 2010.
variance to 2009 Q1 Q2 Q3 Q4 2010
Occupancy ADR RevPAR
(1.7 pts) (1.5%) (4.7%)
2.0 pts 0.9% 4.3%
2.8 pts (2.1%) 2.0%
1.8 pts (0.2%) 3.0%
1.2 pts (0.7%) 1.2%
Note: On a same-hotel basis for each reporting period.
For the year ended December 31, 2010, hotel revenues were up 0.4%, to $609.6 million. Softer results in the first quarter were offset by improvements through the balance of the year. For the year, RevPAR increased 1.2% with a 1.2 point increase in overall occupancy offsetting a 0.7% decline in ADR. Strength was driven by gains in the Ontario and Quebec regions.
occupancy variance to 2009 ADr variance to 2009 revpAr variance to 2009
Ontario Quebec Atlantic Western Total
58.8% 61.0% 61.0% 61.1% 60.1%
2.5 pts 1.3 pts 0.1 pts (1.2 pts) 1.2 pts
$ $ $ $ $
107.43 113.67 115.65 137.62 115.98
(1.4%) 0.1% (0.2%) 0.2% (0.7%)
$ $ $ $ $
63.17 69.39 70.52 84.13 69.68
2.9% 2.4% (0.1%) (1.7%) 1.2%
Note: On a same-hotel basis, excluding one hotel which is classified as an operating lease and two hotels whose operating performance have not been included in the full periods presented.
AnnuAl report 2010
23
2010 OPERATING RESULTS REVIEW

(cONT.)
room revenues
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
Year ended December 31, 2010 number of hotel rooms variance to 2009 variance to 2009
non-room revenues
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-todate 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.
Base Portfolio Ontario Quebec Atlantic Western Sub-total Other Total
8,005 4,242 2,696 3,535 18,478 408 18,886
5,232 2,522 (46) (1,919) 5,789 (137)
2.9% 2.4% (0.1%) (1.7%) 1.2% (2.2%) 1.2%
Hotel exPenses
InnVest continually focuses on managing all costs to maximize overall profitability without impacting the service levels 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.
5,652
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.
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 the second 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 Newfoundland 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.
Hotel oPeratIng Income

Growth 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 inflationary cost 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.
24
HOI variance
Year ended December 31, 2010 number of hotel rooms variance to 2009 variance to 2009
net Income (loss)

Discontinued operations reflect one hotel which was expropriated in the third quarter of 2010 resulting in a gain 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 unit diluted for the same period in 2009. Excluding the effect of 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 in 2009. The $17.1 million variance primarily reflects lower HOI achieved over the period combined with higher interest expenses following capital financing transactions during the year. The decline in per unit results also reflects the higher number of units outstanding in 2010 as compared to 2009 given an equity offering of 12,658,500 units in October 2009 and the convertible debentures issued in December 2009 and August 2010.
Base Portfolio Ontario Quebec Atlantic Western Sub-total Other Total
8,005 4,242 2,696 3,535 18,478 408 18,886
1,350 80 (1,521) (4,660) (4,751) 390
2.9% 0.3% (7.3%) (10.1%) (3.4%) 39.6% (3.1%)
(4,361)
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.
otHer Income and exPenses

Other 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 depreciation and 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.
funds from oPeratIons

For the year ended December 31, 2010, InnVest generated FFO of $61.2 million or $0.673 per unit diluted. This compares to FFO of $72.7 million in the prior period ($0.939 per unit diluted). The decline is primarily attributable to the reduction in HOI and higher interest expenses incurred. The 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 FFO.
dIstrIbutable Income
For the year ended December 31, 2010, InnVest generated distributable income of $42.2 million ($0.469 per unit diluted) compared to $51.5 million in the prior year ($0.666 per unit diluted). The decline is primarily attributable to the reduction in HOI and higher interest expenses incurred. The 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, 2010 totalled $44.4 million compared to $51.3 million in the prior year. InnVest reduced its monthly distribution to $0.0417 per unit beginning in September 2009 (from $0.0625 per unit). This reduction was somewhat offset by distributions associated with additional units outstanding in 2010.
Income taxes
For 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 rate change 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%).
AnnuAl report 2010
25
cHANGES IN FINANcIAL cONDITION
oPeratIng actIvItIes
For the year ended December 31, 2010, cash generated by operating activities declined $3.4 million to $71.3 million reflecting the $4.4 million decline in HOI achieved during the period.
InvestIng actIvItIes
Each year, InnVest sets aside between 3% and 5% of total hotel revenues at each hotel to replace furniture, fixtures and equipment and to fund capital improvements (the FF&E reserve). Capital expenditures during the year totalled $39.4 million (2009 $25.3 million) compared to the FF&E reserve of $25.1 million (2009 $25.1 million). The incremental $14.3 million invested above the reserve reflects the acceleration of a number of profit-improving projects. These included guest room renovations at The Fairmont Palliser in Calgary as well as the completion of meeting space renovations and the beginning of room renovations at the Hilton Quebec City. In addition, investments included the brand re-launch of InnVests Holiday Inn and Holiday Inn Express hotels in keeping with the respective brands global brand initiatives. Several of these projects will be completed in 2011. Investing activities reflect net proceeds of $6.0 million following the expropriation of one hotel during the third quarter of 2010. The prior period included the sale of two hotels for net proceeds of $6.6 million, less vendor-takeback mortgages of $3.4 million. During the second quarter of 2010, InnVest entered into an operating lease arrangement with a third party for one of its hotels. As part of the arrangement, InnVest received $2.0 million in cash proceeds.
fInancIng actIvItIes
Financing activities reflect net proceeds of $71.7 million from the convertible debentures issued in August 2010 (gross proceeds of $75.0 million) and the subsequent redemption of the $45.7 million of outstanding Series A 6.25% Debentures in September 2010. Financing activities also reflect the regular payment of principal amortization on mortgages during the year as well as the repayment of $95.0 million of mortgage principal plus yield maintenance and other fees in late August 2010 which was funded by cash on hand. Annual cash distributions totalled $42.6 million (2009 $49.5 million) which excludes the distributions which were satisfied through InnVests dividend reinvestment program (DRIP). Total distributions declared during the year ended December 31, 2010 were $0.5004 per unit (2009 $0.6668). In September 2009, InnVest reduced its monthly distributions from $0.0625 per unit to $0.0417 per unit (see Distribution to Unitholders). The reduction in distributions per unit was somewhat offset by the higher number of units outstanding in 2010 as a result of the issuance of units by InnVest in October 2009 and the conversion of debentures to units in 2010. InnVest drew $7.2 million from its line of credit during the fourth quarter of 2010. During the first quarter of 2010, InnVest repaid $1.0 million of a bridge loan following a one-year extension of the loan. InnVest had also paid down $2.0 million in this bridge loan in the prior period.
each year, Innvest sets aside between 3% and 5% of total hotel revenues at each hotel to replace furniture, fixtures and equipment and to fund capital improvements (the ff&e reserve).
26
QUARTERLY RESULTS AND REVIEW OF FOURTH QUARTER PERFORMANcE
seasonalIty
InnVests operations are seasonal and as such its results are not consistent throughout the year. Revenue earned from hotel operations fluctuates throughout the year, with the third quarter being the highest due to the increased level of leisure travel in the summer months and the first quarter being the lowest because leisure travel tends to be lower. The results from operations vary materially from quarter to quarter because of the seasonal nature of the revenue stream and the fact that certain costs such as property taxes, insurance, interest, depreciation and amortization, and corporate and administrative expenses are fixed or virtually fixed.
Quarter ended (unaudited) (as reported) Dec 31 2010 Sep 30 2010 Jun 30 2010 Mar 31 2010
Dec 31 2009 Quarter ended (unaudited) (as reported) sep 30 2009 Jun 30 2009 mar 31 2009
Occupancy ADR RevPAR
$ $
55.9% 113.79 $ 63.58 $
70.7% 117.19 $ 82.89 $
62.8% 118.92 $ 74.64 $
50.9% 112.34 $ 57.23 $
54.2% 114.35 $ 61.95 $
68.3% 119.97 $ 81.90 $
61.1% 118.06 $ 72.15 $
52.6% 114.09 59.98
the results from operations vary materially from quarter to quarter because of the seasonal nature of the revenue stream and the fact that certain costs such as property taxes, insurance, interest, depreciation and amortization, and corporate and administrative expenses are fixed, or virtually fixed.
Hotel revenues Hotel operating income Hotel operating income margin Income (loss) from continuing operations FFO Distributable income (loss) Distributions declared Per unit diluted: Income (loss) from continuing operations FFO Distributable income (loss) Trust units outstanding Weighted average trust units outstanding Total assets Total long-term debt
$ 148,429 $ 172,985 $ 162,963 $ 122,276 $ 141,668 $ 169,134 $ 155,978 $ 127,701 $ 27,219 $ 50,776 $ 43,629 $ 15,810 $ 28,005 $ 53,921 $ 41,586 $ 18,416 18.3% 29.4% 26.8% 12.9% 19.8% 31.9% 26.7% 14.4%
$ 164,084 $ $ 8,357 $ $ $ 3,916 $ 11,197 $
8,170 $ 32,172 $ 26,840 $ 11,138 $
1,303 $ 24,280 $ 19,102 $ 11,090 $
(26,056) $ (3,622) $ (7,654) $ 10,959 $
(19,973) $ 11,528 $ 5,909 $ 10,940 $
14,539 $ 36,778 $ 30,845 $ 12,439 $
2,201 $ 23,955 $ 18,523 $ 13,962 $
(14,621) 447 (3,753) 13,956
$ $ $
1.459 $ 0.093 $ 0.044 $
0.092 $ 0.326 $ 0.272 $
0.014 $ 0.264 $ 0.206 $
(0.298) $ (0.041) $ (0.087) $
(0.234) $ 0.131 $ 0.069 $
0.195 $ 0.458 $ 0.383 $
0.030 $ 0.314 $ 0.245 $
(0.196) 0.006 (0.050)
89,474,691 89,046,308 88,975,426 87,639,949 87,498,354 74,694,784 74,497,455 74,434,338 89,556,904 89,017,278 88,430,620 87,577,502 85,500,095 74,593,620 74,451,452 74,439,594 $1,800,033 $1,826,817 $1,904,244 $1,914,580 $ 1,950,209 $1,919,175 $1,939,805 $1,952,900 $ 840,930 $ 832,818 $ 934,969 $ 929,170 $ 940,608 $ 940,443 $ 943,306 $ 938,774
The fourth quarter of 2010 contributed distributable income of $3.9 million (2009 $5.9 million) and FFO of $8.4 million (2009 $11.5 million). A 3.0% improvement in RevPAR during the fourth quarter was offset by higher operating costs as well as increased interest expense over the period. Increases in operating costs related to the 1.8 point increase in occupancies (a 3.3% increase from the prior period) along with higher bonuses paid as compared to the prior year. Operating costs also reflect approximately $1.3 million of non-recurring costs incurred to implement a sales and marketing training program
across the limited service portfolio as well as severance costs associated with changes to certain hotel management positions. These investments are expected to contribute to improved operating results in future periods. In addition, earnings during the quarter were negatively affected by approximately $1.1 million of displacement in two hotels due to room renovations undertaken. RevPAR trends have consistently improved through the last three quarters of 2010, albeit showing modest increases led by occupancy gains.
AnnuAl report 2010
27
QUARTERLY RESULTS AND REVIEW OF FOURTH QUARTER PERFORMANcE

(cONT.)
Operating highlights for the fourth quarter include:
RevPAR increased 3.0% led by a 1.8 point improvement in occupancy which offset a modest 0.2% decline in ADR; HOI was down 2.0% to $27.2 million. The HOI decline reflects 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 million and $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.
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.
LIQUIDITY AND cAPITAL RESOURcES
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
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 Hand
At 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.
28
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:
2010
2009
Opening balance FF&E reserve Transferred from operating cash Capital expenditures Closing balance
3,815 25,081 14,376 (39,441)
3,013 25,085 997 (25,280)
3,831
3,815
at 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%.
credIt facIlIty/brIdge loan

InnVests 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 credit facility. 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 further extended to mature March 1, 2012.
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 spreads are wider than spreads previously achieved, the underlying bond yields have also decreased such that the overall cost of debt, if available, remains relatively attractive. During the third quarter of 2010, InnVest successfully 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 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 3.51% compared to the prior rate on the mortgage of 5.4%. The reduced rate on the remaining mortgage balance will result 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 be based on the one-year Composite Swap Rate plus 1.85%, calculated as at February 28, 2012.
adjusted debt to gross booK values

InnVest is not permitted to exceed certain financial leverage 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 asset value (60% including convertible debentures). InnVest calculates indebtedness in accordance with GAAP excluding non-interest bearing indebtedness, trade accounts payable 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, less any future income tax liabilities. InnVest expects to amend its Declaration of Trust in the first quarter of 2011 to address 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 Future Accounting Changes IFRS for a complete discussion).
mortgages Payable and convertIble debentures

At 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%. Approximately 11.4% of InnVests mortgage debt is at floating rate. InnVest also has four series of fixed-rate convertible debentures which mature between 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.
AnnuAl report 2010
29
LIQUIDITY AND cAPITAL RESOURcES

(cONT.)
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
long-term caPItal oblIgatIons

InnVests 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.
Total assets per consolidated balance sheet Accumulated depreciation and amortization Future income tax liability Gross asset value Book value of mortgages and other indebtedness(1) Convertible debentures(2) Total debt
$ 1,800,033 414,482 (2,537) $ 2,211,978 $ 847,229 258,454 $ 1,105,683 38.3% 11.7% 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.
Innvests 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 following table summarizes InnVests contractual obligations as at December 31, 2010.
2011 2012 2013 2014 2015 2016 and thereafter total
Bridge loan principal interest Operating line of credit principal interest Mortgages payable principal interest Capital lease principal interest Convertible debentures principal interest Long-term land leases Operating equipment and office leases Capital expenditures commitment
1,750 246 396 81,058 46,944 189 239 15,692 4,802 172 9,716
4,250 33 7,200 264 201,776 42,534 199 239 15,692 4,802 50
163,892 22,613 217 239 74,980 13,067 4,802 35
297,181 10,751 229 59 70,000 9,486 4,826
72,900 3,335 243 7,097 4,826
17,223 1,779 622 113,474 8,524 83,225
6,000 279 7,200 660 834,030 127,956 1,699 776 258,454 69,558 107,283 257 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.
30
DISTRIBUTIONS TO UNITHOLDERS
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.
2010
2009
2008
2007
2006
Distributable income Distributions Distributable income (less than) in excess of distributions Non-cash distributions made through the DRIP Distributable income (less than) in excess of cash distributions Payout ratios: Total distributions Cash distributions (total distributions minus DRIP)
42,203 44,384 (2,181) 1,688
51,524 51,297 227 2,756
85,540 78,473 7,067 13,234
71,995 70,758 1,237 10,606
62,771 59,605 3,166 4,166
distributions to unitholders are approved by Innvests board of trustees. each month, Innvest may distribute such percentage of its estimated distributable income as the trustees determine in their discretion.
(493) 105.2% 101.2%
2,983 99.6% 94.2%
20,301 91.7% 76.3%
11,843 98.3% 83.6%
7,332 95.0% 88.3%
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 such percentage of its estimated distributable income as the Trustees determine in their discretion. In exercising their discretion to approve the level of distributions, the Trustees use forecasts prepared by management and other financial information to determine if sufficient cash flow will be available to fund distributions. Such financial information is subject to change due to the nature of the Canadian hotel industry which can be difficult to predict, even in the short-run (see Risks and Uncertainties).
AnnuAl report 2010
31
UNIT INFORMATION
As part of the internal reorganization completed on December 31, 2010, the REIT distributed one IOT non-voting unit to unitholders for each one REIT unit held on December 31, 2010. Effective January 1, 2011 each issued and outstanding REIT unit trades together with an IOT non-voting unit on a stapled basis on the TSX. The REIT, through a subsidiary, holds all of the voting units of IOT. At March 16, 2011, a total of 93,327,986 units of each of the REIT and IOT were outstanding. During the years ended December 31, 2010 and 2009, the Trust issued units as follows:
2010
2009
Units outstanding, January 1 Units issued Conversion of debentures Dividend reinvestment plan Executive compensation plan Trustee compensation plan Units cancelled pursuant to internal reorganization Units cancelled pursuant to normal course issuer bid Units outstanding, December 31
87,498,354 2,028,980 276,361 22,215 11,650 (362,869) 89,474,691
74,412,317 12,658,500 1,342 720,399 19,052 23,293 (336,549) 87,498,354
InnVest had normal course issuer bids (NCIBs) to repurchase a limited number of its units and convertible debentures which expired on November 15, 2010. In 2010, 13,268 units were purchased under the NCIBs all of which were transferred to the Trustees in satisfaction of a portion of their annual retainer fee. The following table summarizes the number of units issuable based on the convertible debentures outstanding as at December 31, 2010.
Debenture maturity date strike price Balance outstanding units to be issued upon conversion
Series B 6.00% Series C 5.85% Series D 6.75% Series E 6.00%
may 31, 2013 August 1, 2014 march 31, 2016 september 30, 2017
$ $ $ $
14.90 14.70 5.70 8.00
$ $ $ $
74,980 70,000 38,474 75,000
5,032,214 4,761,904 6,749,824 9,375,000
On September 15, 2010, InnVest redeemed the remaining $45.7 million of its Series A 6.25% Debentures. The Series A 6.25% Debentures were scheduled to mature on April 15, 2011. During the year ended December 31, 2010, 2,028,980 units valued at $11.6 million were issued as a result of conversions of Series A 6.25% Debentures and Series D 6.75% Debentures. Subsequent to the end of the year, an additional $1.2 million of the Series D 6.75% Debentures were converted into 203,682 units of InnVest. Subsequent to the end of the year, InnVest announced an agreement to raise $50.0 million in Series F 5.75% stapled convertible debentures and $25.2 million in equity at a price of $7.00 per unit. The Series F debentures are due March 30, 2018 and are convertible, at the option of the holder, into units of InnVest at $9.45 per unit. This transaction is expected to close on or about March 15, 2011.
For each series of debentures, InnVest may elect, from time to time, to satisfy its obligation to pay interest by delivering units. Also, for each of its debentures, InnVest may, at its option, on not more than 60 days and not less than 30 days prior notice and subject to applicable regulatory approval, elect to satisfy its obligation to repay all or any portion of the principal amount of the debentures that are to be redeemed or that are to mature by issuing units. The number of units to be issued in respect of each debenture will be determined by dividing the principal amount by 95% of the volumeweighted average trading price of the units on the Toronto Stock Exchange for the 20 consecutive trading days ending on the fifth trading day preceding the date fixed for redemption or maturity, as the case may be. At December 31, 2010, there were 106,869 (December 31, 2009 92,580) unvested executive units granted under the executive compensation plan. Units granted vest equally on the third and fourth anniversary of the effective date of grant.
32
NON-GAAP FINANcIAL MEASURES
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.
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 expense; 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:
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 of property level results before debt service.
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 of property 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:
2010
2009
2010
2009
Hotel revenues Hotel expenses Hotel operating income
$ $
609,566 472,416 137,150
$ $
607,139 465,628 141,511
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 impairment against, hotel properties.
Net income (loss) Add/(deduct): Depreciation and amortization(1) Future income tax recovery Net (gain) writedown on, and sale of, assets held for sale Writedown of hotel properties SIFT transition expenses Non-cash executive and trustee compensation FFO FFO per unit: Basic Weighted average units Diluted Weighted average units
$ 147,457
(30,923)
94,678 (189,497)
91,195 (24,547)
(327) 5,907 2,756 212 $ 61,186

$
226 36,489 268 72,708
$ 0.690 88,652,017 $ 0.673 100,079,570
$ 0.941 77,269,226 $ 0.939 81,016,119
(1) For purposes of calculating FFO, amortization of deferred financing costs is excluded from depreciation and amortization.
AnnuAl report 2010
33
NON-GAAP FINANcIAL MEASURES

(cONT.)
dIstrIbutable Income
Distributable 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;
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 is an 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:
distributable income is commonly used in the real estate investment trust industry to measure performance. distributable income is intended to approximate cash earnings.
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:
2010
2009
Net income (loss) Add/(deduct): Depreciation and amortization Future income tax recovery FF&E reserve Non-cash portion of convertible debenture interest and accretion Non-cash portion of mortgage interest expense Non-cash executive and trustee compensation Net (gain) writedown on, and sale of, assets held for sale Writedown of hotel properties SIFT transition expenses Other Distributable income (DI) DI per unit: Basic Weighted average units Diluted Weighted average units
$ 147,457
(30,923)
94,678 (189,497) (25,081)
91,195 (24,547) (25,085)
3,791
2,142
2010
2009
2,209 212
1,680 268
Cash flow from operating activities Changes in non-cash working capital Other FF&E reserve Distributable income
71,317 (6,581) 2,548 (25,081)
74,721 (401) 2,289 (25,085)
(327) 5,907 2,756 98 $ 42,203

$
226 36,489 79 51,524
42,203
51,524
$ 0.476 88,652,017 $ 0.469 100,079,570
$ 0.667 77,269,226 $ 0.666 77,354,999
34
RELATED PARTY TRANSAcTIONS
Hotel management
On July 26, 2002, InnVest entered into a management agreement for hotel management and accounting services and an administrative services agreement (the Agreements) with Westmont. Westmont is controlled by a minority unitholder of InnVest. The current term of the Agreements expires June 25, 2017 and includes an additional renewal term for a five year extension, subject to the consent of Westmont and approval by InnVest. The Agreements are subject to non-compete arrangements for limited service hotels in Canada. The Agreements provide for the payment of an annual management fee to Westmont equal to 3.375% of gross hotel revenue during the term of the Agreements, including renewal periods. In addition, Westmont may receive an annual incentive fee if InnVest achieves distributable income in excess of $1.25 per unit. No management incentive fees have been paid under the Agreements.
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 to hotel renovations managed by Westmont. Also, for certain hotels owned by InnVest and not managed by Westmont, Westmont is entitled to an asset management fee based on a fixed percentage of the purchase price of the hotel or a fixed percentage of HOI, subject to an annual minimum fee. Total management and other fees paid to Westmont for the year 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.
RISKS AND UNcERTAINTIES
All real estate investments are subject to a degree of risk. The achievement of InnVests objectives is, in part, dependent on successful mitigation of business risks. The following is a discussion of some, but not all, of the risks which may influence InnVests performance. Readers should also refer to InnVests Annual Information Form, which is available on SEDAR, for a more detailed discussion of risks.
Changes in wages, prices, energy costs and construction and maintenance costs that might result from inflation, government regulation, changes in interest rates or currency fluctuations; Changes in the level of business, commercial and tourism travel; Increase in the supply of accommodations in local markets; and Availability and pricing of financing for operating or capital requirements.
oPeratIng rIsKs
InnVest is subject to the normal operating risks inherent in hotel ownership. The following is a discussion of the key risks and uncertainties faced by InnVest on a day-to-day basis, and the strategies adopted to mitigate such risks. InnVest has risk management processes in place, as well as restrictions, limitations and policies placed upon it by its Declaration of Trust. However, it should not be assumed that the following discussion is exhaustive or that the strategies adopted to mitigate these risks will be effective. InnVest is subject to the operating risks inherent in the Canadian hotel industry, including:
all real estate investments are subject to a degree of risk. the achievement of Innvests objectives is, in part, dependent on successful mitigation of business risks.
Cyclical downturns arising from changes in economic conditions; Competition from other hotels; Seasonal fluctuations in hotel operating income generated throughout the year;
InnVest mitigates these risks by having a geographically diverse portfolio of hotels, associated with recognized hotel brands. In addition, the portfolio benefits from a diverse customer mix including corporate, government, leisure, local, crew, sports and other groups, which limits its reliance on any one individual travel segment. InnVest also has a $40.0 million operating line to ensure that the seasonal fluctuation in cash flow will not affect its ability to operate in the normal course of business. At December 31, 2010, InnVest qualifies to draw up to $39.8 million of the operating line. As with all debt financing, InnVests ability to renew its credit facility on similar terms will be dependent on market conditions at the time and the underlying performance of the assets pledged as collateral for the facility.
AnnuAl report 2010
35
RISKS AND UNcERTAINTIES

(cONT.)
Given its size, InnVest has significant buying power and negotiates favourable national contracts on a regular basis for operating supplies and renovation materials. InnVest is governed by its Declaration of Trust which is intended to mitigate risks through financial and operating management restrictions, limitations and policies such as:
Eligible investments are restricted primarily to hotels in Canada; Investing in raw land for development and engaging in the development and construction of new real property other than property adjacent to an existing owned hotel is prohibited; Individual property mortgages, or mortgages on a pool of properties, cannot exceed 75% of the value of the underlying property; Debt is currently limited to 50% of gross asset value before convertible debentures and 60% including convertible debentures. InnVest expects to amend its Declaration of Trust in the first quarter of 2011 to address its leverage restrictions in light of upcoming changes resulting from the conversion to IFRS (see Future Accounting Changes International Financial Reporting Standards); 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; Related party transactions require the approval of two-thirds of the independent Trustees and any transfers of real property between related parties requires an independent appraisal; and Any material change to the Master Hotel Management Agreement requires two-thirds approval of the independent Trustees.
Innvest is governed by its declaration of trust which is intended to mitigate risks through financial and operating management restrictions, limitations and policies.
InnVest is required to fund capital improvements above the reserve or the acquisitions of hotels principally by issuing additional units or incurring additional indebtedness. Access to capital markets for additional unit financings and the availability of additional borrowing will depend on prevailing market conditions and the acceptability of the terms offered. In addition, the Declaration of Trust prohibits InnVest from incurring or assuming any indebtedness if it would result in its financial leverage exceeding 50% (60% including convertible debentures). InnVest expects to amend its Declaration of Trust in the first quarter of 2011 to address its leverage restrictions in light of upcoming changes resulting from the conversion to IFRS (see Future Accounting Changes International Financial Reporting Standards). InnVest is subject to the risks associated with debt financing, including the risk that cash flow from operations will be insufficient to meet required payments of principal and interest, the risk that existing debt will not be refinanced or that terms of such refinancing will not be favourable to InnVest. Similarly, there can be no assurance that InnVest will be able to complete additional unit financings or borrow additional funds on terms acceptable to it, or at all. If InnVest were unable to secure additional funding for acquisitions, refinancing or capital improvements, it would be required to curtail these activities, which could have a material adverse effect on its results of operations and financial condition. Were this to occur, the amount of monthly cash distributions could be negatively affected. Furthermore, if InnVest were in need of capital, it could be required to liquidate one or more investments in hotel properties at times which may not permit the realization of the maximum return on such investments or could be required to agree to additional financing on unfavourable terms. InnVest attempts to mitigate these potential risks by developing relationships with its lenders, by seeking out new sources of capital and by staggering the maturities of its long-term debt. Over the past two years, InnVest has raised $250.0 million of capital in the public market and successfully refinanced all debt maturities.
lIquIdIty rIsKs
InnVest utilizes cash flow from operations and credit facilities to support operating requirements, to fund capital expenditures, to make acquisitions and to pay distributions to unitholders. Each year, InnVest sets aside between 3% and 5% of total hotel revenue for each hotel and certain amounts required for hotel acquisitions for replacing furniture, fixtures and equipment and capital improvements. In 2010, InnVest invested $39.4 million in capital expenditures which compares to its FF&E reserve of $25.1 million. Investments undertaken above the reserve reflect profit-improving guest room and meeting space renovations at two full service hotels as well as a brand relaunch program and re-licensing property improvement plans at a number of hotels.
Interest rate rIsKs

InnVests operations are impacted by interest rates as interest expense represents a significant cost in the ownership of hotel real estate investments. As at December 31, 2010, InnVest has approximately $847.2 million of indebtedness excluding the convertible debentures, representing a financial leverage ratio of approximately 38.3% and approximately $1.1 billion of indebtedness including the convertible debentures, representing a financial leverage ratio of approximately 50.0%.
36
on december 31, 2010, the reIt completed a reorganization in order to become a qualifying reIt.
At December 31, 2010, total mortgages payable of $834.0 million had a 2.8 year weighted average term to maturity and bore a weighted average interest rate of 6.0%. Should mortgage indebtedness be refinanced upon maturity at an aggregate interest rate differential of 100 basis points, InnVests operations would be impacted by approximately $8.3 million annually. InnVest seeks to reduce its interest rate risk by staggering the maturities of long-term debt and limiting the use of floating rate debt so as to minimize exposure to interest rate fluctuations. InnVest has no mortgage debt maturity until September 2011. At December 31, 2010, 11.4% of InnVests aggregate long-term debt was at floating interest rates. A 100 basis point change in floating interest rates would result in interest expense variance of approximately $964 annually.
On December 31, 2010, the REIT completed a reorganization in order to become a Qualifying REIT. Under the reorganization, the REIT transferred all of its directly and indirectly held operating assets and its indirect 50% interest in Choice Canada to IOT. IOT is not a Qualifying REIT and will be taxed in a manner similar to a corporation under the SIFT Legislation. However, it is expected that revenue earned by the REIT, consisting primarily of rent received from IOT, will not be taxed at the REIT level if the REIT distributes all of its distributable income. No advance income tax ruling was sought from the Canada Revenue Agency (CRA) that the reorganization will accomplish its objective of the REIT becoming a Qualifying REIT, and there is a risk that the CRA could challenge this result. Furthermore, the requirements for the Qualifying REIT exception to the SIFT Legislation (the REIT Exception) must be satisfied throughout the taxation year and the SIFT Legislation does not provide any grace periods for the correction of temporary breaches. There also can be no assurance that the Tax Act will not be amended to restrict or eliminate access by the REIT to the REIT Exception. Given these considerations, there is a risk that the REIT will not qualify under the REIT Exception for one or more of its taxation years after 2010. Were this to occur, the amount of monthly cash distributions on the REIT Units (and therefore the aggregate distributions on the stapled units) could be negatively affected.
tax cHanges to Income trusts

Under Canadian income tax rules applicable to SIFT trusts (the SIFT Legislation), 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 the SIFT Legislation, the REIT must continuously be a Qualifying REIT from the beginning of 2011 onwards.
cRITIcAL AccOUNTING ESTIMATES
A description of InnVests significant accounting policies is summarized in Note 2 to the consolidated financial statements. GAAP requires management to make estimates and assumptions concerning the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting period. Management uses its judgment and knowledge from past experience as a basis for estimates and other assumptions required in the preparation of the financial statements. Managements estimates and assumptions are evaluated and updated on a regular basis taking into account current market conditions. The actual results may materially differ, if management were to use different estimates and assumptions. The following accounting estimates are what management considers the most critical in the preparation of InnVests consolidated financial statements.
Hotel ProPertIes
Hotel properties consisting of land, buildings and furniture, fixtures and equipment represent the vast majority of InnVests assets. Depreciable assets within hotel properties represent the vast majority of the assets and the depreciation method and estimates of useful life selected could have a material impact on InnVests operating results. InnVest depreciates these assets using the straight-line method over their estimated economic or useful lives, which are estimated at up to 40 years for buildings, up to seven years for building renovations, and up to seven years for furniture and fixtures. The estimate of the economic or useful lives of hotel properties would not affect reported FFO and distributable income since these non-GAAP measures excluding non-cash depreciation charges based on the assumption that the value of real estate investments does not necessarily decrease on a systematic basis over time.
AnnuAl report 2010
37
cRITIcAL AccOUNTING ESTIMATES

(cONT.)
allocatIon of PurcHase PrIce for acquIred Hotels

InnVest has accounted for acquired hotels using the purchase method of accounting. Accordingly, management undertook a process of identifying all tangible and intangible assets acquired and has made an allocation based on their fair value at the time of the acquisition.
valuatIon of Hotel ProPertIes

GAAP requires that long-lived assets be written down to fair value at such time that it is determined that they have been impaired. In order to determine if any of the hotel properties have been impaired, future cash flows over the estimated useful life are forecast for each hotel using its most recent performance and expected trends in each specific market, including new or expected new hotel supply, as well as local and macroeconomic conditions. These undiscounted cash flows are aggregated and compared to the net book value of each hotel. Impairment in value will be recorded if the aggregate undiscounted cash flows are less than the net book value for a specific hotel. Properties held for sale are stated at the lesser of cost and net realizable value. In addition, certain assets which do not meet the criteria to be classified as held for sale may be stated at the lower of cost and net realizable value based on InnVests intention not to hold the assets through their useful life. In assessing net realizable value, estimates of future cash flow, capitalization rates and the effect of other factors, including current market conditions and the likely ownership period, could vary and result in a significant difference in the assessment of impairment. In late 2008 and throughout 2009, market conditions and anticipated future trends resulted in reduced cash flow estimates for certain hotels in the portfolio. In 2009, InnVest recognized a non-cash impairment charge of $36.5 million for hotel properties following an extensive market-by-market review of future operating expectations across the entire portfolio triggered by long-term holding expectations for certain assets. In 2010, a $5.9 million non-cash impairment charge was taken on one additional leasehold asset which may not renew its existing licence agreement.
Changing credit market conditions, including movements in interest rates and credit spreads, may impact underlying estimates and, in turn, the fair value of debt instruments. At December 31, 2010, the fair value of InnVests long-term debt is greater than its carrying value by approximately $25.5 million. The fair value of InnVests convertible debentures is greater than its carrying value by $10.5 million. These increases in value are due to changes in interest rates for similar debt instruments since their origination.
defIned benefIt PensIon Plans

InnVest maintains defined benefit pension plans for the benefit of management employees and non-union nonmanagement employees of certain hotels acquired in 2006 and 2007. In aggregate, these defined pension plans include approximately 100 employees. These plans are closed to new entrants. The cost of pensions and other retirement benefits is actuarially determined using the projected benefit method pro rated on service and managements best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs as at the date of its actuarial valuation. Changes in estimates about plan investment performance, as impacted by current market conditions, may impact future pension costs.
otHer real estate ProPertIes

Office and retail properties include land, buildings and improvements. These are stated at cost less accumulated depreciation. Depreciation on the buildings is provided on a straight-line basis over their estimated useful life not to exceed 40 years. The retirement residence includes land, buildings and chattels. The building and chattels are stated at cost less accumulated depreciation. Depreciation on the buildings is provided on a straight-line basis over their estimated useful life not to exceed 40 years. Chattels are depreciated on a straight-line basis not to exceed seven years.
faIr value of mortgages and debentures Payable

Management determines and discloses the fair value of InnVests mortgages and debentures payable. In determining the fair value, management uses internally developed models to discount future payments based upon a current market rate for debt instruments with similar terms and risks. The selection of the applicable market rate is based on management experience in obtaining similar financing as well as current credit market conditions.
38
FUTURE AccOUNTING cHANGES
InternatIonal fInancIal rePortIng standards (Ifrs)

In early 2008, the Canadian Accounting Standards Board (the AcSB) confirmed January 1, 2011 as the date on which IFRS will replace current Canadian standards and interpretations as Canadian GAAP for publicly accountable enterprises. The transition date of January 1, 2011 will require the restatement for comparative purposes of amounts reported by InnVest for the year ended December 31, 2010. InnVest will convert to these new standards according to the timetable set by the AcSB. As such, InnVest will report is first IFRS financial statements for the first quarter of 2011. InnVest has established an implementation team comprised of members of senior management to facilitate the conversion to IFRS. This team is in the process of finalizing the implementation of the conversion plan to convert InnVests consolidated financial statements to IFRS as required. The conversion plan addresses certain matters including changes in accounting policies, the restatement of comparative periods, organizational and internal control, the modification of existing systems and the training and awareness of staff, in addition to the impact on other related business matters. The International Accounting Standards Board is currently in the process of amending several IFRS accounting standards that will be applicable to InnVest including, but not limited to, standards relating to leases and joint ventures. The evaluation of the potential impact of IFRS on InnVests consolidated financial statements will be an ongoing process as new standards and amendments to existing standards are issued. While the adoption of IFRS will not have an impact on the determination of cash flow from operations, InnVest does expect it to affect its reported financial position and results of operations as further described below. InnVest expects that conversion to IFRS will adversely impact its debt ratio given the deemed value adjustment at conversion, as described below, and the elimination of accumulated depreciation as at January 1, 2010. Although there is no increase in actual debt outstanding, the adjustment will result in an increase to the reported gross book value leverage. As a result, InnVest expects to amend its Declaration of Trust to address its leverage restrictions. Interest and debt coverage ratios are not expected to be materially impacted.
Progress achieved and ongoing activities

The following describes the progress achieved and ongoing activities towards the IFRS implementation program: Changes in accounting policies Key differences have been identified and are summarized herein.
Key accounting policy changes and options have been presented to the Audit Committee and elective accounting policies have been selected as summarized herein. A real estate valuation strategy was developed to revalue InnVests hotel properties as at January 1, 2010. A significant portion of the portfolio has been subject to external valuation with the remainder being valued by management. The valuation process was largely completed in the third quarter of 2010 with the resulting impact to the opening balance sheet summarized herein.
Restatement of comparative periods Opening retained earnings adjustments have been identified as discussed herein. The opening balance sheet restatement is in process and will be finalized in advance of the first quarter of 2011 IFRS financial reporting period.
The restatement of comparative quarters is underway and will be completed prior to the release of the first quarter 2011 IFRS financial statements.
Internal controls over financial reporting and disclosure controls and procedures New controls have been put into place to address certain unique IFRS accounting and disclosure requirements. The conversion to IFRS did not result in a comprehensive change to current internal controls or disclosure control processes. The most significant updates to internal control processes address senior management oversight on the development of key assumptions for impairment testing, changes to PP&E component accounting and the compilation of data for new disclosure requirements.
InnVest has kept its key stakeholders informed about the anticipated effects of the IFRS transition through continued regular and appropriate disclosures of its progress.
Modification of existing systems InnVest has determined that it will use its existing accounting software system for IFRS accounting. InnVest will track accounting under both Canadian GAAP and IFRS in its systems for the year 2010.
The implementation of the process to capture dual record-keeping is substantially complete. Testing of the system is underway.
AnnuAl report 2010
39

(cONT.)
Training and awareness of staff InnVest has determined that it has sufficient internal resources to prepare for the IFRS transition. Internal resources are working closely with InnVests external auditors, including holding bi-weekly meetings to assess progress towards implementation.
Ifrs 1: first-time adoption of Ifrs (Ifrs 1)

At adoption of IFRS, an entity is required to apply IFRS 1, which provides guidance for an entitys initial adoption of IFRS. IFRS 1 generally requires an entity to apply all IFRS retrospectively, as though IFRS had been in place since inception. However, IFRS 1 provides certain mandatory exceptions and permits limited optional exemptions. The following are significant optional exemptions applicable to InnVest under IFRS 1 which it expects to apply in preparation of its first financial statements under IFRS. The adjustments remain subject to change. a) Fair value as deemed cost IFRS 1 allows an entity to initially measure its property, plant and equipment (PP&E) upon transition to IFRS at fair value as a deemed cost. InnVest intends to make this election as at January 1, 2010. InnVest has finalized its asset valuation process. 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 being 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, InnVest 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. b) Business combinations IFRS 1 allows entities to elect to implement the guidance under IFRS 3 Business Combinations either (i) prospectively from the date of transition to IFRS, or (ii) retrospectively from a previous date chosen by the entity and onwards. InnVest intends to make the election to apply IFRS 3 to business combinations prospectively from the date of transition to IFRS. This election will not result in an opening retained earnings adjustment upon conversion to IFRS. c) Employee benefits IFRS 1 allows entities to recognize all cumulative actuarial gains and losses immediately at transition. InnVest intends to make this election for its existing defined benefit pension programs. This election is expected to result in an adjustment to increase opening retained earnings by approximately $813. d) Other elections InnVest also intends to apply IFRS 1 elections relating to decommissioning liabilities and compound financial instruments that were settled prior to January 1, 2010. These elections allow InnVest to apply IFRS prospectively and avoid the need to retrospectively adjust financial statements. As such, InnVest does not expect related adjustments to its opening retained earnings. Management does not believe the value of restating these assets and liabilities warrants the cost of retrospective application.
Key accounting staff have regularly attended CICA and other training courses on IFRS. InnVest has held regular IFRS information sessions with its Board of Trustees and Audit Committee since June 2008. Such meetings have included a review of the timeline to implementation and an overview of the key differences in IFRS standards and their potential implications for the business. In June 2010, management met with the Audit Committee to review and approve IFRS 1 elections and key accounting policy choices and differences, as summarized herein. Regular quarterly IFRS updates have been, and will continue to be, provided to the Audit Committee and Board of Trustees through the implementation process.
Impact on business activities InnVest has reviewed all material contracts including but not limited to, financial covenants, the Declaration of Trust, management and franchise agreements and employee compensation plans to assess the need to amend any contracts in advance of the IFRS transition. Changes have been made, or are in the process of being made, to such agreements as required.
As part of this process, InnVest obtained unitholder approval during the second quarter of 2010 to amend its Declaration of Trust to (i) remove language which may have been interpreted as creating a mandatory obligation to make distributions, thus potentially causing the classification of unit equity to be presented as a liability on the balance sheet (see Trust units liability vs. equity herein), and (ii) permit the Trustees to make future amendments resulting from the conversion to IFRS which are deemed necessary or desirable in the circumstances, without seeking additional unitholder approval. InnVest expects to further amend its Declaration of Trust in the first quarter of 2011 to address its leverage restrictions in light of upcoming changes resulting from the conversion to IFRS.
40
Impact of Ifrs on statement of financial position

InnVest has identified IFRS and Canadian GAAP differences including various policy choices available under IFRS. The following paragraphs summarize the differences believed to have the most significant impact on InnVests accounting policies. This is not a complete list of changes that will result from the transition to IFRS. In addition to the accounting policy differences, IFRS is generally expected to result in enhanced disclosure as compared to Canadian GAAP. The implications of the IFRS impact discussed below have not been audited or reviewed by InnVests external auditors and as such, are subject to change. Hotel properties Hotel properties are accounted for as PP&E under IFRS. Similar to Canadian GAAP, PP&E is initially measured at cost. However, subsequent to initial recognition, IFRS requires that an entity choose either the cost model or the revaluation model to account for its PP&E.
and from its disposal at the end of its useful life. Given the change to an evaluation based on discounted cash flows under IFRS versus undiscounted cash flows under Canadian GAAP, IFRS is expected to result in a greater frequency of impairment charges and could therefore lead to income statement and earnings volatility in future periods. IFRS also allows the reversal of an impairment loss when the recoverable amount is higher than the carrying value (to no more than what the depreciated amount of an asset would have been had the impairment not occurred). Canadian GAAP does not permit impairment reversals. Since InnVest intends to apply the fair value as deemed cost election under IFRS 1, no asset impairment is anticipated upon conversion to IFRS. As required under IFRS, impairment indicators will be assessed at each reporting date thereafter. Accounting for joint ventures IFRS currently provides the option to choose between proportionate consolidation and the equity method when accounting for joint ventures. The International Accounting Standards Board is currently reviewing its standards for accounting for joint ventures. Management is monitoring this process to understand potential implications for InnVest. InnVest currently accounts for its 50% interest in Choice Hotels Canada under the proportionate consolidation method and intends to maintain this accounting treatment pending any changes made to the current IFRS standard. If the current exposure draft relating to joint ventures is implemented as proposed, InnVests investment in Choice Hotels Canada would need to be accounted for using the equity method. Trust units liability vs. equity Under current Canadian GAAP, trust units are presented as equity. Under IFRS, a trust unit may be considered a financial instrument where a liability arises when a financial instrument has a contractual obligation feature to deliver cash or another financial asset to another entity. Previously, the mandatory requirement to distribute taxable income under InnVests Declaration of Trust may have constituted such a contractual obligation and, accordingly, InnVest units would be presented as a liability under IFRS with future distributions treated as interest expense. InnVest has modified its Declarations of Trust, with the consent of unitholders, to eliminate the mandatory distribution and leave distributions to the discretion of the Trustees. This change enables trust units to be presented as equity with more certainty. InnVest obtained unitholder approval for this change at its annual and special meeting on June 16, 2010. As a result, for balance sheet periods subsequent to June 16, 2010, trust units will be presented as equity. For InnVests comparative balance sheets at January 1, 2010 (opening balance sheet) and March 31, 2010 (first quarter of 2010), InnVest expects to present its trust units as a liability. As a result, distributions paid on units
The revaluation model requires an entity to periodically revalue its properties to their fair value on a recurring basis. Gains in value are recorded in the statement of unitholders equity. Losses are applied against any previous increases realized in equity with any excess recorded as a loss in income. Depreciation continues to be recorded under the revaluation model. The cost model is generally consistent with Canadian GAAP in that separate components are recognized for each significant part of an asset and are carried at their cost less any accumulated depreciation and any accumulated impairment losses. However, requirements to identify different components of PP&E under IFRS are more explicit than those existing under Canadian GAAP. Asset componentization involves breaking down an asset by identifying significant individual components and separately depreciating those individual components over their useful lives. As a result, InnVest expects to identify one or two additional components of its assets which may result in an increase in depreciation expense in future periods given the shorter useful life attributed to those individual components.
InnVest expects to use the cost model when preparing its financial statements under IFRS. Impairment Under Canadian GAAP, impairment is recognized for assets, other than financial assets, based on estimated fair value when the undiscounted future cash flows from an asset are less than its carrying value. Under IFRS, an entity is required to recognize an impairment charge if the recoverable amount, determined as the higher of (i) the estimated fair value less costs to sell or (ii) value-in-use, is less than its carrying value. Value-in-use is the discounted present value of estimated future cash flows expected to arise from the planned use of an asset
AnnuAl report 2010
41

(cONT.)
classified as liabilities will be presented as interest expense as opposed to a reduction from equity. These changes will impact comparative period accounting only. In addition, specific restrictions exist under IFRS relating to puttable instruments. InnVests units include a puttable feature. But for limited circumstances (including the qualification of InnVests units as equity), puttable instruments must be presented as liabilities under IFRS, as compared to their current presentation as equity under Canadian GAAP. For InnVest, this will result in a change in classification relating to the equity component allocation of convertible debentures issued as well as unit-based compensation which vests over time. In addition, IOT units currently reflected as non-controlling interest under Canadian GAAP will be shown as a liability under IFRS. These liabilities will be measured at fair value at each reporting date with any changes included on the consolidated statement of net income (loss) and comprehensive income (loss). Income taxes Under Canadian GAAP, a real estate investment trust does not have to recognize any future income tax assets or liabilities on temporary differences as long as it meets certain criteria enabling it to become a Qualifying REIT, namely: i) It expects or is obligated to distribute to its unitholders all of its taxable income; ii) It intends to continue to meet the requirements under the applicable tax act and there is no indication that they will fail to meet such requirements; and
iii) It is eligible to claim tax deductions for distributions paid to unitholders in future years. During the fourth quarter of 2010, InnVest eliminated $186.7 million of its future income tax liability as part of its conversion to a Qualifying REIT. IFRS recognizes that, in some jurisdictions, income taxes may be payable at different rates if all or part of the net profit is paid out as a distribution to unitholders of the entity. In these circumstances, there is a requirement that current and future tax assets and liabilities be measured at the tax rate applicable to undistributed profits until a liability to pay the distribution has been recognized. For a real estate investment trust that is not a Qualifying REIT, this means that future taxes should be measured at the undistributed tax rate applicable to trusts (which is higher than the corporate-like rate of tax applicable to a Qualifying REIT). On December 31, 2010, the REIT completed an internal reorganization to become a Qualifying REIT. As a result, the REIT will be subject to a single rate of tax and the obligation for tax is substantially reduced or eliminated by way of a deduction from taxable income for distributions paid to its unitholders. IOT is a taxable investment trust which will be subject to income taxes on its net income.
cONTROLS AND PROcEDURES
Management of InnVest is responsible for establishing and maintaining adequate internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with GAAP. In accordance with National Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings respecting certification, the President and Chief Executive Officer and the Chief Financial Officer and Corporate Secretary have assessed, or caused an assessment to be made under their direct supervision, of the design and operating effectiveness of InnVests internal controls over financial reporting as at December 31, 2010, and based on that assessment have concluded that InnVests internal controls over financial reporting were appropriately designed and were operating effectively. InnVest did not make any changes to its internal controls over financial reporting during the year ended December 31, 2010, that have materially affected, or are reasonably likely to affect those controls. However, a control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. The inherent limitations in all controls systems ensure that no evaluation of controls can provide absolute assurance that all control issues, including instances of fraud, if any, have been detected. These inherent limitations include, amongst other items: (i) that managements assumptions and judgment could ultimately prove to be incorrect under varying conditions and circumstances; and/or (ii) the impact of material errors. Additionally, controls may be circumvented by the unauthorized acts of individuals, by collusion of two or more people, or by management override. The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential (future) conditions. Management continues to review existing control processes and procedures for the impact of IFRS implementation and SIFT legislation on internal controls over financial reporting and disclosure controls and procedures.
42
MANAGEMENTS RESPONSIBILITY FOR cONSOLIDATED FINANcIAL STATEMENTS

The consolidated financial statements and managements discussion and analysis contained in this annual report are the responsibility of the management of InnVest Real Estate Investment Trust and InnVest Operations Trust, collectively referred to as InnVest. To fulfill this responsibility, InnVest maintains a system of internal controls to ensure that its reporting practices and accounting and administrative procedures are appropriate, and provide assurance that relevant and reliable financial information is produced. The consolidated financial statements have been prepared in conformity with Canadian generally accepted accounting principles and, where appropriate, reflect estimates based on managements best judgment in the circumstances. The financial information presented throughout this annual report is consistent with the information contained in the consolidated financial statements. Deloitte & Touche LLP, the independent auditors appointed by the Board of Trustees, have audited the consolidated financial statements in accordance with Canadian generally accepted auditing standards to enable them to express to the unitholders their opinion on the consolidated financial statements. Their report is set out on the following page. The consolidated financial statements have been further examined by the Board of Trustees and by its Audit Committee, which meets regularly with the auditors and management to review the activities of each. The Audit Committee, which is comprised of four independent trustees, reports to the Board of Trustees.
Kenneth Gibson President and Chief Executive Officer March 16, 2011
Tamara Lawson Chief Financial Officer and Corporate Secretary
AnnuAl report 2010
43
INDEPENDENT AUDITORS REPORT
to tHe unItHolders of Innvest real estate Investment trust

We have audited the accompanying consolidated financial statements of InnVest Real Estate Investment Trust, which comprise the consolidated balance sheets as at December 31, 2010 and December 31, 2009, and the consolidated statements of net income (loss) and comprehensive income (loss), unitholders equity and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
managements responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
auditors responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of InnVest Real Estate Investment Trust as at December 31, 2010 and December 31, 2009 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles.
Chartered Accountants Licensed Public Accountants Toronto, Ontario, Canada March 16, 2011
44
cONSOLIDATED FINANcIAL STATEMENTS
cONSOLIDATED BALANcE SHEETS
(in thousands of dollars)
December 31, 2010
December 31, 2009

(restated, note 25)
assets
Current Assets Cash Accounts receivable Prepaid expenses and other assets Asset held for sale (Note 25) Restricted cash Hotel properties (Note 3) Other real estate properties (Note 4) Licence contracts (Note 5) Intangible and other assets (Note 6) Future income tax asset (Note 13) Asset held for sale (Note 25) $ 9,001 28,751 8,345 46,097 3,831 1,694,210 16,955 15,221 18,116 5,603 $ 1,800,033
$ 101,054 22,591 7,962 33 131,640 3,815 1,740,642 15,770 16,537 36,120 5,685 $ 1,950,209
lIabIlItIes
Current Liabilities Accounts payable and accrued liabilities Distributions payable Current portion of long-term debt (Note 9) Liabilities related to asset held for sale (Note 25) Long-term debt (Note 9) Other long-term obligations (Note 10) Convertible debentures (Note 11) Future income tax liability (Note 13) Non-controlling interest (Note 16) Commitments and contingencies (Note 17) $ 78,236 3,731 82,808 164,775 758,122 6,921 241,472 2,537 1,173,827 52,832 573,374 $ 1,800,033
The accompanying notes are an integral part of these consolidated financial statements.
67,710 3,649 21,326 54 92,739 931,685 6,448 225,918 186,430 1,443,220 506,989
unItHolders equIty
$ 1,950,209
On behalf of the Board of Trustees:
Majid Mangalji Chairman of the Board of Trustees
Frank Anderson, FCA Chairman of the Audit Committee
AnnuAl report 2010
45
consolidated financial statements
cONSOLIDATED STATEMENTS OF NET INcOME (LOSS) AND cOMPREHENSIVE INcOME (LOSS)
(in thousands of dollars, except per unit amounts)
Year ended December 31, 2010

(restated, note 25)
Total revenues (Note 23) Hotel revenues Hotel expenses Operating expenses (Note 21) Property taxes, rent and insurance Management fees (Note 21) Hotel operating income Other (income) and expenses Interest on mortgages and other debt Convertible debentures interest and accretion Corporate and administrative (Note 21) Capital tax Other business income, net (Note 24) Other income Depreciation and amortization Writedown of hotel properties and intangible assets (Notes 3 and 6) Loss from continuing operations before income tax recovery Future income tax recovery (Note 13) Income (loss) from continuing operations Net income (loss) from discontinued operations (Note 25) Net income (loss) and comprehensive income (loss) Income (loss) from continuing operations, per unit (Note 19) Basic Diluted Net income (loss) per unit (Note 19) Basic Diluted Income (loss) from discontinued operations, per unit Basic and diluted
$ 622,847 $ 609,566 395,585 54,282 22,549 472,416 137,150 57,587 19,189 8,005 74 (5,231) (558) 94,678 5,907 179,651 (42,501) (189,497) 146,996 461 $ 147,457
$ $
619,1 15 607,139 389,870 52,728 23,030 465,628 141,511 55,955 13,598 5,574 193 (5,184) (944) 91,165 36,489 196,846 (55,335) (24,547) (30,788) (135)
(30,923)
$ $ $ $ $
1.658 1.487 1.663 1.492 0.005
$ $ $ $ $
(0.398) (0.398) (0.400) (0.400) (0.002)
46
cONSOLIDATED STATEMENTS OF UNITHOLDERS EQUITY
Cumulative net income (loss) and comprehensive income (loss)
Cumulative distributions
Deficit
units in $
Contributed surplus
Convertible debentures holders conversion option
total
Balance December 31, 2008
$ 134,546 $ (378,164) $ (243,618) $ 768,034 $ (30,923) (51,297) (30,923) (51,297) 47,601 2,756 (3,467) 20 170 76
2,672 $ 2,301 (170) 192
8,642 $ 535,730 4,000 (30,923) (51,297) 47,601 4,000 2,756 (1,166) 20 268
changes during the year

Net loss and comprehensive loss Distributions to unitholders (Note 20) Issue of new units (Note 18) Issue of new debentures (Note 11) Distribution reinvestment plan units issued (Note 18) Units repurchased pursuant to normal course issuer bid (Note 18) Conversion of debentures (Note 11) Vested executive compensation Executive and trustee compensation Balance December 31, 2009
$ 103,623 $ (429,461) $ (325,838) $ 815,190 $
4,995 $ 12,642 $ 506,989
changes during the year

Net income and comprehensive income Distributions to unitholders (Note 20) Redemption and cancellation of debentures (Note 11) Distribution reinvestment plan units issued (Note 18) Conversion of debentures (Note 11) Issue of new debentures (Note 11) Vested executive compensation Executive and trustee compensation Non-controlling interest (Note 16) Balance December 31, 2010 147,457 2,094 (44,384) 147,457 (44,384) 2,094 1,688 11,611 225 76 (52,832) (225) 136 (2,289) (922) 3,750 147,457 (44,384) (195) 1,688 10,689 3,750 212 (52,832)
$ 253,174 $ (473,845) $ (220,671) $ 775,958 $
4,906 $ 13,181 $ 573,374
AnnuAl report 2010
47
consolidated financial statements
cONSOLIDATED STATEMENTS OF cASH FLOWS

(restated, note 25)
oPeratIng actIvItIes
Income (loss) from continuing operations Add (deduct) items not affecting operations Depreciation and amortization Writedown of hotel properties and intangible assets Non-cash portion of mortgage interest expense Non-cash portion of convertible debentures interest and accretion Future income tax recovery Non-cash executive and trustee compensation Changes in non-cash working capital Discontinued operations $ 146,996 94,678 5,907 2,209 3,791 (189,497) 212 6,581 440 71,317
$ (30,788) 91,165 36,489 1,680 2,142 (24,547) 268 401 (2,089) 74,721 (11,217) 5,979 47,601 47,825 (1,166) (49,543) (2,000) (4,576) 32,903 (25,280) (1,795) 3,164 (802) (24,713) 82,911 18,143 $ $ $ 101,054 65,365 230
fInancIng actIvItIes
Repayment of long-term debt Proceeds from long-term debt Issue of new units, net Issue of convertible debentures Redemption and cancellation of convertible debentures Units repurchased pursuant to normal course issuer bid (Note 18) Unit distributions Increase in operating loan Repayment of bridge loan Discontinued operations repayment of debt (123,710) 3,100 71,688 (45,678) (42,614) 7,200 (1,000) (131,014)
InvestIng actIvItIes
Capital expenditures on hotel properties Change in intangible and other assets Deposit on lease arrangement Proceeds from sale of discontinued asset, net of costs and mortgages receivable Increase in restricted cash (39,441) (943) 2,013 6,031 (16) (32,356) (Decrease) increase in cash during the year Cash, beginning of year Cash, end of year Supplemental disclosure of cash flow information: Cash paid for interest Cash paid for income taxes (including capital tax)
(92,053) 101,054 $ $ $ 9,001 69,323 76
48
NOTES TO cONSOLIDATED FINANcIAL STATEMENTS

December 31, 2010 (all dollar amounts are in thousands, except unit and per unit amounts)
1. BASIS OF PRESENTATION
InnVest Real Estate Investment Trust (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. As at December 31, 2010, the REIT owned 144 Canadian hotels operated under international brands. Effective December 31, 2010, the REIT leased 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. (CHC). The REIT and IOT are collectively referred to as InnVest. Each issued and outstanding unit of the REIT trades together with a non-voting unit of IOT as a stapled unit (InnVest Unit) on the Toronto Stock Exchange (the TSX) under the symbol INN.UN.
2. SIGNIFIcANT AccOUNTING POLIcIES
PrIncIPles of consolIdatIon
The consolidated financial statements include the accounts of the REIT and IOT and their subsidiaries and the proportionate share of the assets, liabilities, revenues and expenses of a joint venture, IOTs 50% interest in CHC, and a co-tenancy that owns one of the REITs hotels. IOT was formed as at December 31, 2010.
comPreHensIve Income (loss)

InnVest recognizes comprehensive income (loss) which represents changes in the unitholders equity during a period arising from transactions and other events with non-owner sources. For the years ended December 31, 2010 and 2009, there is no difference between InnVests Consolidated Statement of Net Income (Loss) and its Statement of Comprehensive Income (Loss) and there is no accumulated other comprehensive income (loss) as at December 31, 2010 and 2009.
use of estImates
The preparation of InnVests financial statements in conformity with Canadian generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Significant estimates are required in the determination of future cash flows and probabilities in assessing the recoverability of hotel properties and other long-term assets, the allocation of the purchase price to components of hotels and other real estate assets acquired, determination of useful lives for depreciation and amortization purposes, conditional asset retirement obligations, fair value of financial instruments for disclosure purposes, value of conversion options in convertible debentures and the determination of future income tax assets and liabilities.
Hotel ProPertIes
Hotel properties, consisting of land, buildings and furniture, fixtures and equipment, are stated at cost less accumulated depreciation.
otHer real estate ProPertIes

Other real estate properties include office and retail properties as well as a retirement residence. Office and retail properties include land and buildings. The buildings are stated at cost less accumulated depreciation. The retirement residence includes land, buildings and furniture, fixtures and equipment. The buildings and furniture, fixtures and equipment are stated at cost less accumulated depreciation.
dePrecIatIon
Depreciation for Hotel Properties and Other Real Estate Properties is provided on a straight-line basis over a period not to exceed the following: Buildings Building renovations Furniture, fixtures and equipment 40 years 7 years 7 years
AnnuAl report 2010
49
notes to consolidated financial statements

(cONT.)
asset retIrement oblIgatIon

InnVest records asset retirement obligations (ARO) related to various environmental obligations for certain properties where the quantum of such costs and the timing for settlement is reasonably determinable. The obligations relates to the eventual removal of asbestos, underground storage tanks and polychlorinated biphenyls (PCBs) and eventual remediation of land contamination. ARO assets are amortized over the remaining lives of the buildings. ARO liability are accreted over the terms of the obligations.
ImPaIrment of long-lIved assets

Management reviews long-lived assets on a regular basis for impairment to determine if any events or changes in circumstances exist that would indicate that the carrying amount of an asset may not be recoverable over time. If it is determined that the cumulative future cash flows of a long-lived asset are less than its carrying value, the long-lived asset is written down to its fair value. Cumulative future cash flows represent the undiscounted estimated future cash flow expected to be received from the long-lived asset. Assets reviewed for impairment under this policy include hotel properties, other real estate properties, licence contracts and intangible assets.
lIcence contracts
Licence contracts include franchise contracts related to the joint venture interest in CHC, and are recorded at the value attributed to the discounted cash flow of the expected earnings stream under the contract terms at the time of acquisition. This amount is amortized on a straight-line basis over the average life or expected renewal life of the contracts, which is estimated to be twenty years.
IntangIble assets
Intangible assets include customer and tenant relationships, lease origination costs, above and below market leases and franchise rights recognized upon acquisition of new hotel properties and other real estate properties. Customer and tenant relationships are amortized over five years. Lease origination costs, above and below market leases and franchise rights are amortized over the term of the respective leases. Effective January 1, 2009, InnVest adopted the Canadian Institute of Chartered Accountants (CICA) Section 3064 Goodwill and Intangible Assets. The standard was applied retrospectively. This new standard had no material impact on InnVest.
guarantees
InnVest is required to disclose its obligations undertaken in issuing certain guarantees. Where InnVest expects to make a payment in respect of any guarantee, a liability will be recognized to the extent that one has not yet been recognized.
fInancIal Instruments financial instruments recognition and measurement

Financial instruments are required to be measured at fair value on initial recognition, except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held-for-trading, available-for-sale, held-to-maturity, loans and receivables, or other liabilities. InnVest has designated its accounts receivable and mortgages receivable as loans and receivables and its long-term debt, convertible debentures, and accounts payable and accrued liabilities as other liabilities, all of which are reflected on the balance sheet at amortized cost using the effective interest method (EIM). InnVest has recorded the interest expense for both the mortgage debt and convertible debentures using the EIM. Transaction costs that are directly attributable to the issue of financial instruments classified as other than held-for-trading are included in the initial carrying value of such instruments and amortized using the EIM so as to yield a constant rate of interest over the life of the particular financial instrument. Cash, restricted cash and bank indebtedness have been designated as held-for-trading and are reflected on the balance sheet at fair value. Long-term debt assumed on the acquisition of hotel properties is recorded at its estimated fair value on the date of acquisition (the fair value amount). The difference between the fair value amount and the face value of the long-term debt has been amortized to interest expense using EIM until maturity.
50
fair value
The fair value of a financial instrument is the amount of consideration that could be agreed upon in an arms-length transaction between knowledgeable, willing parties who are under no compulsion to act. In certain circumstances, however, the initial fair value may be based on other observable current market transactions in the same instrument, without modification, or on a valuation technique using market based inputs. InnVests financial assets include cash and restricted cash, accounts receivable, and mortgages receivable (included in Intangible and other assets). InnVests financial liabilities include bank indebtedness, accounts payable and accrued liabilities, long-term debt and convertible debentures. Except as noted below, the carrying value of InnVests financial assets and financial liabilities approximate their fair values because of the short period until receipt or payment of cash. The fair values of long-term debt are based on the current market conditions for mortgages with similar terms and conditions. The fair value of the convertible debentures is based on the current market rates for similar convertible debentures. Fair value measurements recognized in the balance sheet are categorized using a fair value hierarchy that reflects the significance of inputs used in determining the fair values: (i) Level 1 derived from quoted prices (unadjusted) in active markets for identical assets or liabilities that InnVest has the ability to access at the measurement date; (ii) Level 2 derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e.: as prices) or indirectly (i.e.: derived from prices); and (iii) Level 3 derived from inputs for the asset or liability that is not based on observable market data (unobservable inputs). Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.

InnVest maintains defined benefit pension plans for the benefit of management employees and non-union non-management employees of certain hotels acquired in 2006 and 2007. The cost of pensions and other retirement benefits earned by employees is actuarially determined using the projected benefit method pro-rated on service and managements best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected health care costs. For the purpose of calculating the expected return on plan assets, those assets are valued at fair value. The excess of the net actuarial gain or loss over 10% of the greater of the benefit obligation and the fair value of plan assets, at the beginning of the year, is amortized over the remaining service period of active employees. The transitional asset or liability is amortized over the average remaining service period of active employees expected to receive benefits under the benefit plans. The average remaining service periods of the active employees covered by the pension plan for the benefit of management employees and non-union non-management employees are 14 years and 16 years, respectively.
revenue recognItIon Hotel revenue

Revenues from hotel operations are recognized when services are provided and ultimate collection is reasonably assured.
franchise revenue
Monthly revenues from licence contracts are based on gross room revenue as reported by the franchisees and are recorded when earned with an appropriate provision for estimated uncollectable amounts. Initial franchise fees are recorded as income when the cash has been received and upon execution of binding contracts.
retail, office and retirement residence revenue

InnVest retains all the risks and benefits of ownership of its other real estate properties and therefore accounts for leases with its tenants as operating leases. Rental revenue from retail, office and retirement residence leases includes all amounts earned from tenants related to lease agreements and recognizes the revenues on a straight-line basis.
Income taxes
For InnVests taxable entities, income taxes are accounted for using the liability method, whereby future income tax assets and liabilities are determined based on differences between the carrying amount of the balance sheet items and their corresponding tax values. Future income taxes are computed using enacted or substantively enacted income tax rates for the years in which tax and accounting basis differences are expected to reverse.
AnnuAl report 2010
51

(cONT.)
executIve comPensatIon Plan

The senior executives participate in an incentive plan that involves the issuance of InnVest Units. An InnVest Unit granted entitles the holder to receive on the vesting date the then current fair market value of the InnVest 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 InnVest Units. The payment will be satisfied through the issuance of InnVest Units. The benefit resulting from the issuance of InnVest Units under this plan is recorded as compensation expense, on a straight-line basis over the vesting period, based on the fair value of the InnVest Units on the date of grant.
future accountIng cHanges International 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 InnVest in the first quarter of 2011.
3. HOTEL PROPERTIES
Cost
Accumulated depreciation
December 31, 2010 net book value
Land Buildings Furniture, fixtures and equipment
185,777 1,726,399 152,137
292,880 77,223 370,103

185,777 1,433,519 74,914
$ 2,064,313
Cost
$ 1,694,210
(restated, note 25)
185,841 1,710,509 147,070
237,682 65,096 302,778
185,841 1,472,827 81,974
$ 2,043,420
$ 1,740,642
InnVests ongoing review of hotel properties for impairment of value, identified one Ontario leasehold hotel at December 31, 2010 which required a writedown of its carrying value of $1,445, to its estimated fair value. During 2009, a writedown of $36,489 was recorded on two Quebec hotels and nine Ontario hotels, to their estimated fair value.
52
4. OTHER REAL ESTATE PROPERTIES
Other real estate properties include office and retail properties and a retirement residence.
Cost Accumulated depreciation December 31, 2010 net book value
1,624 17,109 118 18,851

Cost
1,834 62 1,896
1,624 15,275 56 16,955
1,624 15,491 96 17,211
1,396 45 1,441
1,624 14,095 51 15,770
5. LIcENcE cONTRAcTS
Cost
Accumulated amortization
Licence contracts
26,320
Cost
11,099
15,221
Licence contracts
26,320
9,783
16,537
During the year ended December 31, 2010, the licence contracts were amortized by $1,316 (2009 $1,316).
6. INTANGIBLE AND OTHER ASSETS
Cost
Intangible assets: Customer relationships Tenant relationships Franchise rights Lease origination costs Other Total intangible assets Other assets: Mortgages receivable Total intangible and other assets
38,424 2,602 3,832 3,362 1,039 49,259 241
26,387 2,235 1,524 283 955 31,384
12,037 367 2,308 3,079 84 17,875 241
49,500
31,384
18,116
AnnuAl report 2010
53
6. INTANGIBLE AND OTHER ASSETS

(cONT.)
Cost

(restated, note 25)
Intangible assets: Customer relationships Tenant relationships Franchise rights Lease origination costs Other Total intangible assets Other assets: Mortgages receivable Total intangible and other assets
48,794 2,635 3,280 6,256 1,047 62,012 3,441
24,640 1,740 1,289 916 748 29,333
24,154 895 1,991 5,340 299 32,679 3,441
65,453
29,333
36,120
During the year ended December 31, 2010, the intangible assets were amortized by $11,285 (2009 $11,387). InnVests ongoing review of intangible assets for impairment of value identified one Ontario leasehold hotel at December 31, 2010 which required a writedown of its carrying value of $4,462, to its estimated fair value. On April 1, 2009, as part of the sale of an Ontario hotel property held for sale since 2007, the REIT gave a vendor-take-back mortgage of $2,700 with 4.75% interest payable monthly in arrears, for a two-year term. This mortgage receivable is secured by a mortgage on the property and has been reclassified to Accounts Receivable as it matures in 2011. On July 29, 2009, as part of the sale of another Ontario hotel property held for sale since March 31, 2009, the REIT gave a vendor-take-back mortgage of $500 with 5.0% interest payable monthly in arrears, for a two-year term. This mortgage receivable is also secured by a mortgage on that property and has been reclassified to Accounts Receivable as it matures in 2011. Also included in mortgages receivable is a mortgage receivable issued May 1, 2009, for $241 with 4.0% interest payable quarterly, for a three-year term.
7. JOINT VENTURE AND cO-TENANcY
The following represents the proportionate share of CHC, a joint venture, and 50% share in a co-tenancy that owns one of its hotels, as at and for the years ended December 31, 2010 and 2009:
December 31, 2010
December 31, 2009
Current assets Fixed assets Current liabilities Long-term liabilities Revenues Expenses Net income Cash flow from (used in): Operating activities Financing activities Investing activities
5,435 4,689 4,431 4,094 10,167 6,796 3,371 4,464 (3,526) (49)
4,369 3,977 3,580 3,833 8,954 5,568 3,386 2,524 (3,507) (48)
Included in current assets above is $2,602 (2009 $1,566) which represents 50% share of restricted cash held by CHC.
54
8. BANK INDEBTEDNESS 9. LONG-TERM DEBT
As at December 31, 2010, the bridge loan amount was $ 6,000 (2009 $7,000). Subsequent to year ended December 31, 2010, InnVest signed an extension of the loan to March 1, 2012. The extension bears interest at the Canadian Bankers Acceptance rate plus 3.5%, requires payments of $1,750 during 2011, and requires interest payments only. InnVest provides a hotel as security. The bridge loan was reclassified to long-term debt due to extensions made subsequent to both years ended December 31, 2010 and 2009.
December 31, 2010
December 31, 2009

(restated, note 25)
Mortgages payable Operating line Bank indebtedness Less debt issuance costs Total long-term debt Less current portion Net long-term debt
834,029 7,200 6,000 847,229 (6,299) 840,930 (82,808)
952,158 7,000 959,158 (6,147) 953,011 (21,326)
758,122
931,685
Substantially all of InnVests assets have been pledged as security under debt agreements. At December 31, 2010, long-term debt had a weighted average interest rate of 6.0% (2009 5.9%) and a weighted average effective interest rate of 6.3% (2009 6.1%). The long-term debt is repayable in average monthly payments of principal and interest totalling $6,241 (2009 $6,190) and matures at various dates from September 20, 2011 to March 21, 2018. InnVest has a $39,787 operating line that is a term facility which bears interest at either, the Canadian bank prime rate plus 2.5% or the 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 December 31, 2010, InnVest qualifies for $39,787 of the maximum amount of $40,000. The amount drawn on the operating line as at December 31, 2010 was $7,200 (2009 $ nil). Scheduled repayment of long-term debt is as follows:
regular amortization Due on maturity total
2011 2012 2013 2014 2015 2016 and thereafter
30,181 25,250 14,828 7,804 2,812 1,977 82,852
52,627 187,976 149,064 289,375 70,088 15,247 764,377
82,808 213,226 163,892 297,179 72,900 17,224 847,229
During the year, InnVest 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, InnVest repaid $95,000 of the mortgage principal plus yield maintenance and other fees. This extension enabled InnVest to secure its one-year renewal interest rate on the remaining balance at 3.51%, the one-year Composite Swap Rate plus 1.85%. The balance of this debt at December 31, 2010 is $169,987. The estimated fair value of InnVests mortgages payable at December 31, 2010 was approximately $872,679 (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 $96,443 (2009 $103,117) which is subject to floating interest rates. Annual interest expense will increase by $964 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.
AnnuAl report 2010
55
10. OTHER LONG-TERM OBLIGATIONS
December 31, 2010
December 31, 2009

(restated, note 25)
Capital leases Other lease obligations Less current portion Total lease obligations Pension liability Asset retirement obligation Total other long-term obligations
1,428 271 1,699 (189) 1,510 3,076 2,335
1,549 319 1,868 (276) 1,592 3,304 1,552
6,921
6,448

The defined benefit pension plans are for specific employees of certain hotels in InnVest and are closed plans. The most recent actuarial valuation with respect to the funding of InnVests pension plans was prepared on December 31, 2008. The pension plan liability as at December 31, 2010 consists of the following:
Management pension benefit plans Non-union non-management pension benefit plans
December 31, 2010 benefit plans
Accrued benefit obligation Fair value of plan assets Funded status plan deficit Unamortized net actuarial gain (loss) Accrued employee future benefit liability (asset)
5,095 2,642 2,453 707
1,501 1,407 94 (178)
6,596 4,049 2,547 529
3,160
management pension benefit plans
(84)
3,076
non-union non-management pension benefit plans
December 31, 2009 benefit plans
Accrued benefit obligation Fair value of plan assets Funded status plan deficit Unamortized net actuarial gain (loss) Accrued employee future benefit liability
4,528 2,228 2,300 881
1,344 1,204 140 (17)
5,872 3,432 2,440 864
3,181
123
3,304
The pension expense for the year ended December 31, 2010 is $270 (2009 $203).
56
11. cONVERTIBLE DEBENTURES
The details of the convertible debentures at December 31, 2010 and 2009 are outlined in the tables below:
Debenture maturity date Interest rate effective interest rate
Series A Series B Series C Series D Series E

Original face amount Converted to trust units
April 15, 2011 may 31, 2013 August 1, 2014 march 31, 2016 september 30, 2017
Redemption and cancellation Face amount outstanding Holders conversion option
6.25% 6.00% 5.85% 6.75% 6.00%

Accretion and issue costs
7.73% 7.53% 7.42% 9.41% 7.75%
Debenture
2010
Series A Series B Series C Series D Series E
$ 57,500 75,000 70,000 50,000 75,000 $ 327,500
$ (11,822) $ (45,678) $ (20) 74,980 70,000 (11,526) 38,474 75,000 $ (23,368) $ (45,678) $ 258,454
original face amount Converted to trust units Face amount outstanding
$ (3,400) (2,953) (3,078) (3,750)
$ 789 72,369 (544) 66,503 (999) 34,397 (3,047) 68,203 (3,801) $ 241,472
Accretion and issue costs
$ (13,181) $
Holders conversion option
Debenture
2009
Series A Series B Series C Series D
57,500 75,000 70,000 50,000
$ (11,736) $ (20)
45,764 74,980 70,000 50,000
(2,289) $ (3,400) (2,953) (4,000)
1,518 $ (160) (1,367) (2,175)
44,993 71,420 65,680 43,825
$ 252,500
$ (11,756) $ 240,744
$ (12,642) $
(2,184) $ 225,918
The fair value of InnVests convertible debentures, estimated based on the market rates for convertible debentures as at December 31, 2010, is $267,435 (2009 $234,445). 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 components resulted in a $2,094 credit to deficit in unitholders equity. During the year ended December 31, 2010 prior to the redemption and cancellation of Series A 6.25% convertible debentures there were 6,880 units converted at a price of $12.50 per unit.
serIes b debentures
On May 16, 2006, InnVest announced the closing on a bought deal basis of $75,000 6.00% convertible unsecured subordinated debentures (Series B 6.00% Debentures). These debentures are convertible into InnVest Units at a strike price of $14.90 per unit, bear interest at 6.00% per annum payable semi-annually on May 31 and November 30 of each year and will mature May 31, 2013. The InnVest Units to be issued upon conversion of the Series B 6.00% Debentures, of which $74,980 are outstanding at December 31, 2010, are 5,032,214. Each $1 principal amount is convertible at the option of the holder into 67 InnVest Units. The Series B 6.00% Debentures were not redeemable prior to May 31, 2009. From May 31, 2009 to May 31, 2011, the Series B 6.00% Debentures may be redeemed by InnVest, in whole or in part, on not more than 60 days and 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 InnVest 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 received, exceeds 125% of the conversion price. On or after June 1, 2011, the Series B 6.00% Debentures may be redeemed by InnVest at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. During the year ended December 31, 2010, there were no conversions of Series B (2009 1,342 units were issued as a result of the conversion of debentures at a price of $14.90 per unit).
AnnuAl report 2010
57
11. cONVERTIBLE DEBENTURES

(cONT.)
The holder conversion option was valued separately from the convertible debentures at $3,400 and was recorded in equity. The liability component is being accreted by the same amount over the term of the Series B 6.00% Debentures using the effective Interest method (EIM).
serIes c debentures
On August 3, 2007, InnVest announced the closing on a bought deal basis of $70,000, 5.85% convertible unsecured subordinated debentures (Series C 5.85% Debentures). These debentures are convertible into InnVest Units at a strike price of $14.70 per unit, bear interest at 5.85% per annum payable semi-annually on February 1 and August 1 of each year and will mature August 1, 2014. The InnVest Units to be issued upon conversion of the Series C 5.85% Debentures are 4,761,904. Each $1 principal amount is convertible at the option of the holder into 68 InnVest Units. The Series C 5.85% Debentures are not redeemable prior to August 1, 2010. On or after August 1, 2010 and prior to August 1, 2012, the Series C 5.85% Debentures may be redeemed by InnVest, in whole or in part, on not more than 60 days and 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 InnVest 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 received, exceeds 125% of the conversion price. On or after August 1, 2012 and prior to August 1, 2014, the Series C 5.85% Debentures may be redeemed by InnVest at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. There were no conversions of Series C debentures during the years ended December 31, 2010 and 2009. The holder conversion option was valued separately from the convertible debentures at $2,953 and was recorded in equity. The liability component is being accreted by the same amount over the term of the Series C 5.85% Debentures using the EIM.
serIes d debentures
On December 30, 2009, InnVest announced the closing on a bought deal basis of $50,000, 6.75% convertible unsecured subordinated debentures (Series D 6.75% Debentures). These debentures are convertible into InnVest Units at a strike price of $5.70 per unit, bear interest at 6.75% per annum payable semi-annually on March 31 and September 30 of each year and will mature March 31, 2016. The InnVest Units to be issued upon conversion of the Series D 6.75% Debentures, of which $38,474 are outstanding at December 31, 2010, are 6,749,824. Each $1 principal amount is convertible at the option of the holder into 175 InnVest Units. The Series D 6.75% Debentures are not redeemable on or prior to December 31, 2013. From January 1, 2014 to December 31, 2014, the Series D 6.75% Debentures may be redeemed by InnVest, 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 InnVest 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 January 1, 2015, the Series D 6.75% Debentures may be redeemed by InnVest in whole or in part, at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. During the year ended December 31, 2010, there were 2,022,100 units issued as a result of the conversion of debentures at a price of $5.70 per unit (2009 nil). The holder conversion option was valued separately from the convertible debentures at $4,000 and was recorded in equity. The liability component is being accreted by the same amount over the term of the Series D 6.75% Debentures using the EIM. The Series D holder conversion option was adjusted by $922 due to the conversions during the year ended December 31, 2010.
serIes e debentures
On August 6, 2010, InnVest 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 InnVest Units. The Series E 6.00% Debentures are not redeemable prior to September 30, 2013. The proceeds, net of costs, were $71,688.
58
On or after September 30, 2013 and prior to September 30, 2015, the Series E 6.00% Debentures may be redeemed by InnVest, 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 InnVest 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 InnVest in whole or in part, at any time at a redemption price equal to the principal amount thereof plus accrued and unpaid interest. There were no conversions of Series E debentures, during the year ended December 31, 2010. The holder conversion option was valued separately from the convertible debentures at $3,750 and was recorded in equity. The liability component is being accreted by the same amount over the term of the Series E 6.00% Debentures using the EIM.
12. cAPITAL MANAGEMENT
InnVest manages its capital, which is defined as the aggregate of unitholders equity and debt, under the terms of the Declaration of Trusts for the REIT and IOT, collectively referred to as the DOT. InnVests capital management objectives are (i) to ensure compliance with debt and investment restrictions outlined in its DOT 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 InnVests strategic plan and annual budget plan, along with changes to the approved plans periodically throughout each year. At December 31, 2010, InnVests 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 DOT. InnVest is permitted to hold indebtedness excluding convertible debentures up to a level of 50% of gross asset value. Further, InnVest is permitted to have indebtedness and convertible debentures up to a level of 60% of gross asset value. Under the terms of the DOT, 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 InnVests balance sheet, plus accumulated depreciation and amortization, less future income tax liabilities. At December 31, 2010, InnVests leverage excluding and including convertible debentures was 38.3% and 50.0%, respectively, calculated as follows:
December 31, 2010
December 31, 2009
Total assets per consolidated balance sheet Accumulated depreciation and amortization Future income tax liability Future income tax liability not included in assets Gross asset value Book value of mortgages and other indebtedness(1) Convertible debentures(2) $ 847,229 258,454
$ 1,800,033 414,482 (2,537) $ 2,211,978 38.3% 11.7% 50.0%

$ 958,636 240,744
$ 1,950,209 345,098 (186,430) 16,114 $ 2,124,991 45.1% 11.3% 56.4%
$ 1,105,683
$ 1,199,380
(1) Adjusted to eliminate financing issuance costs and include long-term debt related to assets held for sale. (2) Adjusted to face value.
AnnuAl report 2010
59
12. cAPITAL MANAGEMENT

(cONT.)
The DOT 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 & Poors 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. InnVest is in compliance with these guidelines. InnVest maintains an operating line of $39,787 with a Canadian chartered bank (the Bank) with the following covenants in addition to the leverage limits under the DOT: (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 1.9 times at December 31, 2010 and 2.2 times at December 31, 2009); (b) Trailing 12 months consolidated EBITDA to consolidated debt service of not less than 1.5 times (actual being 1.5 times at December 31, 2010 and 1.9 times at December 31, 2009); and (c) Unitholders Equity and Non-controlling Interest of not less than $300,000 (actual being $626,206 at December 31, 2010 and $506,989 at December 31, 2009). The lender waived compliance with the trailing 12 month minimum interest coverage ratio and debt service coverage ratio for the fourth quarter of 2010 and has agreed to a reduced minimum interest coverage ratio for the first three quarters of 2011.
13. INcOME TAxES AND FUTURE INcOME TAx
The future income tax asset (liability) net, relates to tax and book basis differences of the following:
December 31, 2010
December 31, 2009
Hotel properties Licence contracts Pension liability and other
5,089 (3,986) 1,963 3,066
(185,305) (4,117) 2,992 (186,430)
A subsidiary of the REIT has non-capital losses for income tax purposes of $3,386 for which no future income tax asset has been recognized. These losses will expire between the years 2028 and 2030. The provision for income taxes is summarized as follows:
Loss from continuing operations before income tax recovery Income tax based on a combined Federal and Provincial rate of 31% (2009 33%) Tax effect of loss not recognized Income tax effect of statutory rate adjustment Effects of rescheduling temporary differences Effects of writedowns Effects of internal reorganization Income tax recovery
$ $
(42,501) (13,175) 11,958 (98) (1,489) (186,693)
$ $
(55,335) (18,261) 16,416 (13,378) (2,582) (6,742) (24,547)
$ (189,497)
In 2010, InnVest completed an internal reorganization in order to become a Qualifying REIT under Canadian income tax rules applicable to specified investment flow-through entities (SIFT) trusts. The purpose of the reorganization was to increase unitholder value by adopting a structure that allows the REIT to continue to flow through its income to unitholders without being subject to entity-level taxation, which resulted in a $186,693 future income tax recovery. The reorganization was completed on December 31, 2010. Under the reorganization, the REIT transferred all of its directly and indirectly held operating assets to IOT, a newly-formed taxable investment trust. Following this transaction, 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 CHC.
60
14. GUARANTEES
Significant guarantees provided by InnVest to third parties are as follows:
trustee and offIcer IndemnIfIcatIon agreements

InnVest has entered into indemnification agreements with its trustees and officers to indemnify them, to the extent permitted by law, against any and all charges, costs, expenses, amounts paid in settlement and damages incurred by the trustees and officers as a result of any lawsuit or any other judicial or administrative proceeding in which the trustees and officers are sued as a result of their service. These indemnification claims will be subject to any statutory or other legal limitation period. InnVest has purchased trustees and officers liability insurance. The nature of the indemnification agreements prevents InnVest from making a reasonable estimate of the maximum potential amount it could be required to pay to counter parties. No amount has been recorded in the financial statements with respect to these indemnification agreements.
IndemnIfIcatIon of underwrIters
InnVest has entered into agreements that provide for indemnification in underwriting agreements. These indemnifications generally require InnVest to indemnify the underwriters for costs incurred as a result of losses from litigation that may be suffered by the underwriters arising from transactions with InnVest. These types of indemnifications normally extend over an unspecified period of time and do not provide for any limit on the maximum potential amount.
15. FINANcIAL INSTRUMENTS
rIsK management
In the normal course of business, InnVest is exposed to a number of risks that can affect its operating performance. These risks, and the actions taken to manage them, are as follows:
Interest rate risk

The time period over which management is spreading debt maturities implies an average term to maturity of approximately three years. This strategy reduces InnVests 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. InnVests floating rate debt balance is monitored by management to minimize InnVests exposure to interest rate fluctuations. As at December 31, 2010, InnVests floating rate debt balance of $96,443 (2009 $103,117) is approximately 11.4% (2009 10.9%) of total long-term debt, excluding convertible debentures.
credit risk
Credit risk relates to the possibility that hotel guests, either individual or corporate, do not pay the amounts owed to InnVest. InnVest mitigates this risk by limiting its exposure to customers allowed to pay by invoice after check out (direct bill). Accounts receivable as at December 31, 2010 are $28,751 (2009 $22,591). InnVest reviews accounts receivable regularly 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 December 31, 2010 is $538 or 1.9% (2009 $505 or 2.3%) of total receivables. The bad debt expense included in hotel expenses for the year ended December 31, 2010 is $240 (2009 $130 was credited in the operating income, due to a prior over provision). Accounts receivable amounts outstanding for over 90 days, which have not been provided for, total $196 at December 31, 2010 (2009 $106). Mortgages receivable are secured by mortgages on the assets sold.
liquidity risk
Liquidity risk arises from the possibility of not having sufficient cash available to InnVest 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 InnVest 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 InnVest or on any terms at all. On February 28, 2011, InnVest announced a public offering on a bought deal basis of $50,000, 5.75% stapled convertible unsecured debentures due March 30, 2018 and 3,600,000 InnVest Units at a price of $7.00 per unit for gross proceeds of $25,200 (Note 26).
AnnuAl report 2010
61
15. FINANcIAL INSTRUMENTS

(cONT.)
Estimated maturities of the REITs financial liabilities are:

2011 2012 2013 2014 2015 2016 and thereafter Contractual cash flows (2)
Accounts payable and accrued liabilities Mortgage payable principal (1) interest (3) Operating line principal interest Bridge loan principal interest Convertible debentures principal interest Total
78,236 $ 81,058 46,944 396 1,750 246 15,692
$ 201,776 42,534 7,200 264 4,250 36 15,692 271,752 $
$ 163,892 22,613 74,980 13,067 274,552 $
$ 297,179 10,751 70,000 9,486 387,416 $
$ 72,900 3,335 7,097 83,332 $
$ 17,224 1,779 113,474 8,524
78,236 834,029 127,956 7,200 660 6,000 282 258,454 69,558
224,322 $
141,001 $ 1,382,375
(1) Principal includes regular amortization and repayments. (2) Contractual cash flows include principal and interest payments and include extension options available to InnVest. (3) Interest amounts for floating rate debt is based on interest rates prevailing at December 31, 2010.
faIr values
The fair values of InnVests financial assets and liabilities approximate their recorded values at December 31, 2010 and December 31, 2009 due to their short-term nature. The fair value of InnVests long-term debt is greater than the carrying value by approximately $25,450 at December 31, 2010 (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 InnVests convertible debentures is greater than the carrying value by approximately $10,493 at December 31, 2010 (2009 $4,115 less than the carrying value). The fair value of convertible debentures is based on the market rates for similar convertible debentures, as at December 31, 2010 and 2009. The fair value hierarchy of financial instruments measured at fair value on the balance sheet is as follows:
December 31, 2010
December 31, 2009
Financial assets: Cash and restricted cash InnVest has no Level 2 or Level 3 inputs.
Level 1 12,832
level 1 104,869
16. NON-cONTROLLING INTEREST
Non-controlling interest represents the InnVest unitholders interest in IOT through ownership of the IOT non-voting units after giving effect to the reorganization of InnVest. Each non-voting unit of IOT trades together with each issued and outstanding unit of the REIT as an InnVest Unit. On December 31, 2010, IOT directly and indirectly holds all of the hotel operating assets and indirectly holds a 50% interest in CHC.
62
17. cOMMITMENTS AND cONTINGENcIES
lease commItments
InnVest is committed under various equipment operating leases to minimum annual rental payments and under long-term land and building leases to minimum annual payments as follows:
equipment leases land and building leases total
2011 2012 2013 2014 2015 2016 and thereafter
172 50 35 257
4,802 4,802 4,802 4,826 4,826 83,225 107,283
4,974 4,852 4,837 4,826 4,826 83,225 107,540
The land leases expire between 2015 and 2088. Certain operating leases are rentals that are determined as a percentage of revenues with no minimum amounts and are excluded from these figures as they are not quantifiable.
letters of credIt
As at December 31, 2010, InnVest has letters of credit totalling $3,638 (2009 $3,603) held on behalf of security deposits for various utility companies and liquor licences, and additional security for the pension liabilities.
18. UNITHOLDERS EQUITY
Each issued and outstanding unit of the REIT trades together with a non-voting unit of IOT as a stapled unit (InnVest Unit) on the TSX. An unlimited number of InnVest Units have been authorized, each of which represents an equal undivided beneficial interest in any distributions from InnVest. Per the DOT, InnVest Units cannot be issued from treasury unless the trustees consider it not to be dilutive to ensuing annual distributions of distributable income to existing unitholders.
units Amount
Balance at December 31, 2008 Issue of new units Units issued under distribution reinvestment plan Units repurchased pursuant to normal course issuer bid Units issued on conversion of debentures Units issued for vested executive compensation plan Units issued under trustee compensation plan Balance at December 31, 2009 Units issued on conversion of debentures Cancellation of units Units issued under distribution reinvestment plan Units issued for vested executive compensation plan Non-controlling interest Units issued under trustee compensation plan Balance at December 31, 2010
74,412,317 12,658,500 720,399 (336,549) 1,342 19,052 23,293
768,034 47,601 2,756 (3,467) 20 170 76
87,498,354 2,028,980 (362,869) 276,361 22,215 11,650 89,474,691
815,190 11,611 1,688 225 (52,832) 76
775,958
Pursuant to InnVests normal course issuer bid (the Bid), InnVest purchased 13,268 InnVest Units (2009 354,636 InnVest Units) at an average price of $5.91 per unit (2009 $3.49 per unit) during the year ended December 31, 2010. These units (2009 18,087 units) were transferred to the trustees of InnVest in satisfaction of a portion of their annual retainer fee. InnVest recognized $ nil contributed surplus as these units were not cancelled. The Bid terminated on November 15, 2010.
AnnuAl report 2010
63
18. UNITHOLDERS EQUITY

(cONT.)
trustee comPensatIon Plan

The members of the Board of Trustees receive 50% of their annual retainer in units (based on the then current market price of the InnVest Units). InnVest had set aside 100,000 InnVest Units in reserve for this purpose and during the second quarter of 2010 this reserve was increased by 250,000 InnVest Units. The balance in this reserve account at December 31, 2010 is 238,725 InnVest Units. Under the Trustee Compensation Plan, 24,918 units were awarded during the year ended December 31, 2010, comprising 13,268 InnVest Units purchased under the Bid and 11,650 InnVest Units issued from the reserve (2009 41,380 units were awarded; 18,087 units were bought under the Bid and 23,293 units issued from the reserve).
executIve comPensatIon Plan

The senior executives participate in the executive compensation plan under which InnVest Units are granted by the Board of Trustees from time to time. InnVest has reserved a maximum of 1,000,000 InnVest Units for issuance under the plan. The balance in this reserve account at December 31, 2010 is 741,740 InnVest Units. An InnVest Unit granted through the plan entitles the holder to receive, on the vesting date, the then current fair market value of the InnVest Unit plus the value of the cash distributions that would have been paid on the InnVest Unit if it had been issued on the date of grant assuming the reinvestment of the distribution into InnVest Units. The payment will be satisfied through the issuance of InnVest Units. The following table summarizes the status of the executive compensation plan at December 31, 2010, excluding granted units which have fully vested:
unvested executive units units accumulated from distributions total units
2007 granted 2008 granted 2009 granted 2010 granted Units vested 2010
15,000 20,455 25,500 28,500 (7,500) 81,955
8,788 10,290 7,505 2,252 (3,921) 24,914
23,788 30,745 33,005 30,752 (11,421) 106,869
The 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)

InnVest has a DRIP whereby eligible Canadian unitholders may elect to have their distributions of income from InnVest automatically reinvested in additional InnVest Units.
excHangeable unIts
As part of an acquisition made in 2005, 362,869 exchangeable units (Exchangeable Units) were granted to a third party by InnVest and included in equity. The Exchangeable Units receive a monthly cash payment equal to the value of the cash distributions that would have been paid on the InnVest Units if they had been issued on the date of grant. During the year ended December 31, 2010, $181 (2009 $250) was paid to the holder of the Exchangeable Units and is recorded in distributions to the unitholders. These units are exchangeable with three business days prior written notice to InnVest.
64
19. PER UNIT INFORMATION

Income (loss) from continuing operations basic Dilutive effect of convertible debentures Dilutive effect of executive compensation plan Income (loss) from continuing operations diluted $ 146,996 16,579 163,575
Year ended December 31, 2010 Weighted average units

(restated, note 25)
88,652,017 21,221,673 101,542 109,975,232

(30,788) (30,788)
77,269,226 85,773 77,354,999

(restated, note 25)
Net income (loss) basic Dilutive effect of convertible debentures Dilutive effect of executive compensation plan Net income (loss) diluted
147,457 16,579 164,036
88,652,017 21,221,673 101,542 109,975,232
(30,923) (30,923)
77,269,226 85,773 77,354,999
The impact of all the debentures has been included in the year ended December 31, 2010 in the calculations in the tables above. In 2009, they have been excluded from the per unit calculations above because the conversions would not be dilutive.
AnnuAl report 2010
65
20. DISTRIBUTIONS TO UNITHOLDERS
Distributions to unitholders are computed based on distributable income as defined by the DOT. 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 DOT, 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 InnVest in their discretion.
Net income (loss) Add (deduct) Depreciation and amortization Future income tax recovery Non-cash portion of mortgage interest expense Non-cash portion of convertible debentures interest and accretion Reserve for replacement of furniture, fixtures, equipment, capital improvements Writedown of hotel properties and intangible assets (Gain on sale) writedown of assets held for sale SIFT transition expenses Non-cash executive and trustee compensation Deferred land lease expense and retail lease income, net Distributable income Distributions paid or payable Distributions in excess of (less than) distributable income
147,457 94,678 (189,497) 2,209 3,791 (25,081) 5,907 (327) 2,756 212 98 (105,254)
(30,923) 91,218 (24,547) 1,680 2,142 (25,085) 36,489 226 268 56 82,447
$ $
42,203 44,384 2,181
$ $
51,524 51,297 (227)
21. MANAGEMENT AGREEMENTS
westmont HosPItalIty canada lImIted

InnVest has 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 InnVest as a result of its ability to exercise significant influence through the Agreements. Westmont manages all but 15 of InnVests 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 InnVest. 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 InnVest 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, InnVest pays a termination fee equal to the fees paid based on trailing 12 months revenues. InnVest recorded termination fees of $135 during the year ended December 31, 2010 (2009 $132). 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.
66
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 years ended December 31, 2010 and 2009, the fees charged to InnVest pursuant to the Agreements were as follows:
(restated, note 25)
Fees from continuing operations: Management fees Asset management fees (included in management fee expense) Accounting services (included in hotel operating expenses) Administrative services (included in corporate and administrative expenses) Project management and general contractor services (capitalized to hotel properties) Fees from discontinued operations
11,562 2,013 2,346 451 990 169
11,437 2,019 2,329 450 669 270
17,531
17,174
In addition, salaries of InnVest employees paid by Westmont and reimbursed by InnVest were $268 for the year ended December 31, 2010 (2009 $277). Included in accounts payable and accrued liabilities are amounts owed to Westmont at December 31, 2010 totalling $1,230 (2009 $1,193).
otHer management agreements

Hilton Canada Co. (Hilton) manages two Hilton hotel properties for InnVest. 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 year ended December 31, 2010, total management fees paid to Hilton were $1,137 (2009 $1,142). Delta Hotels Limited (Delta) manages 10 Delta hotel properties for InnVest. 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. For the two hotels purchased by InnVest in 2006, Delta can qualify for an incentive management fee of 0.5% of total revenues from the hotel if the hotels annual gross operating profit is greater than the budgeted gross operating profit. 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, 2011 to December 31, 2047. For the year ended December 31, 2010, total management fees paid to Delta were $4,490 (2009 $4,674). Fairmont Hotels and Resorts (Fairmont) manages three hotel properties for InnVest. 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 year ended December 31, 2010, the total base management and incentive management fees paid to Fairmont were $3,347 (2009 $3,772). 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 years ended December 31, 2010 and 2009.
AnnuAl report 2010
67
22. SEGMENTED FINANcIAL INFORMATION
InnVest operates hotel properties throughout Canada. Information related to these properties by geographic segment is presented below. InnVest primarily evaluates operating performance based on hotel operating income. All key financing, investing and capital allocation decisions are centrally managed. The comparatives have been restated to exclude discontinued operations and assets held for sale at December 31, 2010.
Western ontario Quebec Atlantic total
Year ended December 31, 2010 Hotel revenues $ Hotel expenses Hotel operating income Year ended December 31, 2009
(restated, note 25)
154,916 113,542 41,374
$ $
227,534 178,865 48,669
$ $
135,514 107,841 27,673
$ $
91,602 72,168 19,434
$ $
609,566 472,416 137,150
Hotel revenues Hotel expenses Hotel operating income
$ $
157,614 111,580 46,034
$ $
223,223 176,304 46,919
$ $
133,214 105,610 27,604
$ $
93,088 72,134 20,954
$ $
607,139 465,628 141,511
Capital expenditures on hotel properties Year ended December 31, 2010 $ Year ended December 31, 2009 (restated, note 25) $ Hotel properties December 31, 2010 December 31, 2009
(restated, note 25)
10,526
8,275
$
$
13,166
10,605
$
$
11,442
3,546
$
$
4,307
2,854
$
$
39,441
25,280
$
$
483,731
497,252
$
$
595,166
616,306
$
$
393,006
398,330
$
$
222,307
228,754
$ 1,694,210
$ 1,740,642
23. TOTAL REVENUES

(restated, note 25)
Hotel revenues Other business income
$ $
609,566 13,281 622,847
$ $
607,139 11,976 619,115
24. OTHER BUSINESS INcOME
Other business income includes franchise business income, which is InnVests 50% share of CHCs operations, and the income from the other real estate properties.
Franchise business Retail/ office Retirement residence Year ended December 31, 2010
Revenues Expenses Other business income, net
$ $
9,565 6,107 3,458

Franchise business
$ $
2,716 1,175 1,541

retail/ office
$ $
1,000 768 232

retirement residence
$ $ $
13,281 8,050 5,231
Revenues Expenses Other business income, net
$ $
8,204 4,843 3,361
$ $
2,707 1,231 1,476
$ $
1,065 718 347
$ $ $
11,976 6,792 5,184
68
25. ASSETS HELD FOR SALE AND DIScONTINUED OPERATIONS
Discontinued operations for the years ended December 31, 2010 and 2009 are as follows:
Hotel revenues Hotel expenses Operating expenses Property taxes, rent and insurance Management fees Hotel operating income Interest on mortgages Depreciation and amortization Income from discontinued operations Gain on sale of asset Writedown of asset held for sale Net income (loss) from discontinued operations
590 372 64 20 456 134 134 327
2,658 1,737 594 90 2,421 237 93 53 146 91 273 (499)
461
(135)
The discontinued operations for the year ended December 31, 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 measured as the lower of the carrying amount before classified as held for sale, net of continuous depreciation expense and fair value at the date of reclassification for 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. InnVest 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.
26. SUBSEQUENT EVENT
On February 28, 2011, InnVest announced a public offering, on a bought deal basis, of $50,000, 5.75% stapled convertible unsecured debentures due March 30, 2018 and 3,600,000 InnVest Units at a price of $7.00 per unit for gross proceeds of $25,200.
AnnuAl report 2010
69
INNVEST PORTFOLIO
DISTRIBUTION BY REGION
no. of guest rooms no. of guest rooms
Hotel
City
prov.
Hotel
City
prov.
Western
Comfort Inn Prince Albert Quality Hotel Regina Comfort Inn Regina Comfort Inn Saskatoon Comfort Inn Swift Current Comfort Inn Brandon Delta Winnipeg Comfort Inn Winnipeg Airport Comfort Inn Winnipeg South Comfort Inn Chilliwack Travelodge Hotel Calgary Macleod Trail Travelodge Hotel Calgary Airport The Fairmont Palliser Sheraton Suites Calgary Eau Claire Holiday Inn Calgary Macleod Trail South Delta Calgary Airport Fairmont Hotel Macdonald Comfort Inn Edmonton Travelodge Edmonton West Travelodge Edmonton South Prince Albert Regina Regina Saskatoon Swift Current Brandon Winnipeg Winnipeg Winnipeg Chilliwack Calgary Calgary Calgary Calgary Calgary Calgary Edmonton Edmonton Edmonton Edmonton SK SK SK SK SK MB MB MB MB BC AB AB AB AB AB AB AB AB AB AB
3,535 62 126 99 80 74 81 393 81 85 83 254 203 405 323 152 296 199 100 220 219
Ontario (cont.)
Quality Suites London Delta London Armouries Comfort Inn London Comfort Inn Midland Holiday Inn Toronto West Comfort Inn Newmarket Travelodge Airport North Bay Holiday Inn Express Hotel & Suites Best Western North Bay Travelodge North York Holiday Inn Express North York Comfort Inn North York Holiday Inn Oakville Centre Staybridge Oakville Comfort Inn Orillia Quality Hotel & Conference Centre Oshawa Comfort Inn Oshawa Quality Hotel Ottawa Les Suites Hotel, Ottawa Delta Ottawa Hotel and Suites Travelodge Ottawa East Comfort Inn Ottawa East Comfort Inn Owen Sound Comfort Inn Parry Sound Comfort Inn Pembroke Comfort Inn Pickering Comfort Inn Sault Ste. Marie Comfort Inn Simcoe Comfort Inn St. Catharines Travelodge Sudbury Comfort Inn Sudbury East Comfort Inn Sudbury Comfort Inn Thunder Bay Comfort Inn Timmins Quality Suites Toronto Airport Holiday Inn Toronto Midtown Holiday Inn Express Toronto East Holiday Inn Express Toronto Downtown Radisson Suite Hotel Toronto Airport Holiday Inn Toronto Airport East Comfort Inn Trenton Comfort Inn Waterloo Quality Suites Whitby Comfort Inn Windsor London London London Midland Mississauga Newmarket North Bay North Bay North Bay North York North York North York Oakville Oakville Orillia Oshawa Oshawa Ottawa Ottawa Ottawa Ottawa East Ottawa East Owen Sound Parry Sound Pembroke Pickering Sault Ste. Marie Simcoe St. Catharines Sudbury Sudbury Sudbury Thunder Bay Timmins Toronto Toronto Toronto Toronto Toronto Toronto Trenton Waterloo Whitby Windsor ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON 118 245 79 60 138 102 100 116 130 183 163 144 144 105 80 193 80 212 83 328 129 69 60 61 61 147 82 61 100 140 81 80 80 91 254 209 140 196 216 191 76 85 104 80
Ontario
Holiday Inn Barrie Comfort Inn Brampton Homewood Suites by Hilton Hilton Garden Inn Toronto / Burlington Comfort Inn Burlington Holiday Inn Burlington Hotel & Conference Centre Comfort Inn Cambridge Comfort Inn Chatham Comfort Inn Cobourg Comfort Inn Dryden Comfort Inn Guelph Holiday Inn Guelph Staybridge Guelph Comfort Inn Hamilton Comfort Inn Huntsville Holiday Inn Ottawa Kanata Comfort Inn Kanata Comfort Inn Kapuskasing Comfort Inn Kenora Comfort Inn Kingston 401 Holiday Inn Kingston-Waterfront Comfort Inn Kirkland Lake Radisson Hotel Kitchener Comfort Inn Leamington Staybridge Suites London Radisson Hotel & Suites London Barrie Brampton Burlington Burlington Burlington Burlington Cambridge Chatham Cobourg Dryden Guelph Guelph Guelph Hamilton Huntsville Kanata Kanata Kapuskasing Kenora Kingston Kingston Kirkland Lake Kitchener Leamington London London ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON ON
8,413 161 108 83 120 99 240 83 81 62 62 80 136 120 60 73 152 146 66 76 52 197 65 172 62 117 144
70
Hotel
City
prov.
no. of guest rooms
Hotel
City
prov.
no. of guest rooms
Quebec
Comfort Inn Alma Comfort Inn Ancienne-Lorette Quality Hotel Montreal Anjou Comfort Inn Baie-Comeau Comfort Inn Beauport Comfort Inn Boucherville Comfort Inn Brossard Comfort Inn Chicoutimi Comfort Inn Dorval Comfort Inn Drummondvillle Comfort Inn Gatineau Holiday Inn Laval Quality Suites Laval Comfort Inn Laval Comfort Inn Lvis Quality Hotel Downtown Montreal Delta Centre-Ville Quality Suites Montreal Aeroport Comfort Inn Montreal Aeroport Hilton Quebec Quality Suites Quebec City Comfort Inn Rimouski Comfort Inn Rivire-du-Loup Comfort Inn Rouyn-Noranda Comfort Inn Sept-Iles Delta Sherbrooke Hotel and Conference Centre Comfort Inn Sherbrooke Comfort Inn Ste-Foy Comfort Inn Thetford Mines Delta Trois-Rivires Hotel and Conference Centre Comfort Inn Trois-Rivires Comfort Inn Val DOr Alma Ancienne-Lorette Anjou Baie-Comeau Beauport Boucherville Brossard Chicoutimi Dorval Drummondvillle Gatineau Laval Laval Laval Lvis Montreal Montreal Pointe Claire Pointe Claire Quebec City Quebec City Rimouski Rivire-du-Loup Rouyn-Noranda Sept-Iles Sherbrooke Sherbrooke Ste-Foy Thetford Mines Trois-Rivires Trois-Rivires Val DOr QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC QC
4,242 61 59 158 61 80 100 100 81 98 59 81 175 115 121 100 140 711 162 100 571 119 81 69 80 61 178 59 79 63 159 80 81
Atlantic
Delta Prince Edward Comfort Inn Charlottetown Comfort Inn Amherst Comfort Inn Bridgewater Holiday Inn Halifax Harbourview Comfort Inn Dartmouth Delta Halifax Delta Barrington Comfort Inn New Glasgow Comfort Inn Sydney Comfort Inn Truro Comfort Inn Yarmouth Comfort Inn Corner Brook Quality Hotel Harbourview Comfort Inn Campbellton Comfort Inn Edmundston Comfort Inn Fredericton Delta Beausejour Comfort Inn Moncton Magnetic Hill Comfort Inn Moncton East Hilton Saint John Comfort Inn Saint John Charlottetown Charlottetown Amherst Bridgewater Dartmouth Dartmouth Halifax Halifax New Glasgow Sydney Truro Yarmouth Corner Brook St. Johns Campbellton Edmundston Fredericton Moncton Moncton Moncton Saint John Saint John PEI PEI NS NS NS NS NS NS NS NS NS NS NL NL NB NB NB NB NB NB NB NB
2,696 211 81 61 62 196 81 296 200 62 62 81 80 78 160 60 121 101 310 59 78 197 59
DISTRIBUTION BY BRAND
Western no. of hotels no. of guest rooms no. of hotels
ontario no. of guest rooms no. of hotels
Quebec no. of guest rooms no. of hotels
Atlantic no. of guest rooms no. of hotels
total no. of % of total guest guest rooms rooms
As at march 16, 2011
Comfort Inn Delta Hotel Holiday Inn, Holiday Inn Express Quality Hotel, Quality Suites Travelodge Hilton Hotel Fairmont Hotels & Resorts Radisson Hotel/Suites Staybridge Suites Sheraton Best Western Hilton Garden Inn Hilton Homewood Suites Independent
9 2 1 1 4 2 1 20
745 689 152 126 896 604 323 3,535
36 2 13 5 4 3 3 1 1 1 1 70
2,934 573 2,183 881 552 532 342 130 120 83 83 8,413
22 3 1 5 1 32
1,754 1,048 175 694 571 4,242
15 4 1 1 1 22
1,126 1,017 196 160 197 2,696
82 11 16 12 8 2 2 3 3 1 1 1 1 1 144
6,559 3,327 2,706 1,861 1,448 768 604 532 342 323 130 120 83 83 18,886
34.7% 17.6% 14.3% 9.8% 7.7% 4.1% 3.2% 2.9% 1.8% 1.7% 0.7% 0.7% 0.4% 0.4% 100.0%
AnnuAl report 2010
71
SENIOR MANAGEMENT
Kenneth D. Gibson President and Chief Executive Officer Kenneth D. Gibson is the President and Chief Executive Officer of InnVest and the Chief Operating Officer of Westmont Hospitality Management Limited and Westmont Hospitality Canada Limited. Mr. Gibson leads the Canadian operations for the Westmont Group and has been in the Canadian hotel marketplace with the Westmont Group since 1994. Prior to joining the Westmont Group in 1990, Mr. Gibson held the position of Vice-President of Operations for Texas based Southwest Inns, a hotel development and management company. Mr. Gibson is also the Chairman of the Board of Choice Canada. Tamara L. Lawson Chief Financial Officer and Corporate Secretary Tamara L. Lawson is the Chief Financial Officer and Corporate Secretary of InnVest and the Chief Financial Officer of Westmont Hospitality Management Limited and Westmont Hospitality Canada Limited, positions she has held since 2001. Ms. Lawson has over 25 years of financial management and capital market experience. Prior to joining the Westmont Group in 2001, she held several senior executive positions at major Canadian companies, including Executive Vice President, Chief Financial Officer and Secretary of Chapters Inc. and Treasurer of Sears Canada Inc. Ms. Lawson is also currently a director of Choice Canada. Ms. Lawson holds a Master of Business Administration degree from York University and is a Chartered Accountant.
BOARD OF TRUSTEES
Independent trustee Audit committee Investment committee Compensation & corporate governance committee
Frank Anderson Chairman and Chief Executive Officer Preferred One Inc. Morton G. Gross Senior Partner Borden Ladner Gervais LLP Michael P. Kitt Executive Vice President, Canada Oxford Properties Group Fereed Mangalji Executive Director Westmont Hospitality Group, Inc. Majid Mangalji Founder and President Westmont Hospitality Group, Inc. Minhas N. Mohamed President, Chief Executive Officer and Co-Founder MMV Financial Inc.
72
corporate and unitholder information

corporate office
5090 Explorer Drive, Suite 700 Mississauga, Ontario L4W 4T9 Toll-free: 1-877-209-3429 Phone: 905-206-7100 Fax: 905-206-7114 Email: investor@innvestreit.com Website: www.innvestreit.com
stock exchange listing

The Toronto Stock Exchange Trading Symbol: INN.UN Convertible Debentures: INN.DB.B, INN.DB.C, INN.DB.D, INN.DB.E, INN.DB.F
registrar and transfer agent

Inquiries regarding change of address, registered holdings, transfers and duplicate mailings should be directed to the following: Computershare Trust Company of Canada 100 University Avenue, 11th floor Toronto, Ontario Phone: 1-800-564-6253 Fax: 1-866-249-777
distribution reinvestment plan

Unit holders may acquire units by reinvesting cash distributions without paying brokerage commissions or administrative charges. For general information concerning the Distribution Reinvestment Plan or for a change of address, please contact the transfer agent and registrar.
Design: Craib Design & CommuniCations www.Craib.Com PrinteD in CanaDa
annual general meeting

4:00pm Eastern Time June 1, 2011 The Fairmont Royal York Imperial Room 100 Front Street West Toronto, Ontario
auditors
Deloitte & Touche LLP Toronto, Ontario
Be our guest
faIrmont Hotels & resorts 1-800-257-7544
| Comfort Inn 1-800-424-6423 | Delta Hotels 1-888-890-3222 | HIlton GarDen Inn 1-877-staY-HGI (1-877-782-9444) | HIlton Hotels 1-800-HIltons (1-800-445-8667) HolIDaY Inn, HolIDaY Inn express 1-888-HolIDaY (1-888-465-4329) | HomeWooD suItes Hotels 1-800-Call-Home (1-800-225-5466) QualItY Hotel, QualItY suItes 1-800-424-6423 | raDIsson 1-888-201-1718 | sHeraton Hotels & resorts 1-800-325-3535 staYBrIDGe suItes Hotels 1-877-660-8550 | traveloDGe 1-800-578-7878
Best Western 1-800-780-7234
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Innvest reIt holds one of Canadas largest hotel portfolios together with an interest in Choice Hotels Canada Inc., one of the largest franchisors of hotels in Canada. our portfolio comprises 144 hotel properties with approximately 19,000 guest rooms, operated under 14 internationally recognized brands.
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www.innvestreit.com
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InnVest 2010 Annual FINAL

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INNvest

innvest real estate investment trust | www.innvestreit.com annual report 2010

premier canadian hotel investment

Improved occupancy across the portfolIo

strengthened balance sheet

Invested capItal to drIve returns

maIntaIned QualIfyIng reIt status

letter from the cfo

1 2 managements discussion & analysis

The Fairmont Palliser

Innvest real estate Investment trust

our diversity advantage

67% Full service 33% Limited service

Regional diversity limits risk

HOTEL REVENUES BY GEOGRAPHY

Customer diversity optimizes occupancy

annual report 2010

Delta beausejour, Moncton

Innvest real estate Investment trust

annual report 2010

Holiday inn barrie

Innvest real estate Investment trust

(1) Includes continuing and discontinued operations.

FUNDS FROM OPERATIONS

(1) Includes continuing and discontinued operations.

Holiday inn burlington Hotel & conference centre

Holiday inn Kingston

annual report 2010

The Fairmont Palliser, calgary

The Fairmont Palliser, calgary

Innvest real estate Investment trust

Kenneth Gibson President and Chief Executive Officer

annual report 2010

1 1 letter from the cfo 1 2 managements discussion & analysis

49 notes to consolidated financial statements

Innvest real estate Investment trust

letter from the Cfo

tamara lawson Chief Financial Officer and Corporate Secretary

Tamara Lawson Chief Financial Officer and Corporate Secretary

annual report 2010

managements disCussion & analysis

Fairmont Hotel Macdonald, edmonton

Innvest reAL estAte Investment trUst

AnnUAL rePOrt 2010

managements dIscussIon & analysIs

a diVersiFied Canadian hotel investment

innvests franchise business

hotel real estate oWner

office, retail and retirement home business

HOTEL REVENUES BY SERVICE CATEGORY

HOTEL REVENUES BY GEOGRAPHY

HOTEL ROOM REVENUES BY CUSTOMER

Innvest reAL estAte Investment trUst

successful completion of qualifying reit process

AnnUAL rePOrt 2010

managements dIscussIon & analysIs

increasing demand & limited suPPly

trends in the lodging industry

REVPAR TRENDS FOLLOW CHANGES IN NET DEMAND

REVPAR TRENDS TURNED POSITIVE IN EARLY 2010

6 4 5.0% 2 0 0% -2 -4 -5.0% -6 -8 -10.0% -10 -12 -15.0% -14

Innvest reAL estAte Investment trUst

hotels have significant operating leverage in a recovery