InnVest REIT reports results for the three months and year ended December 31, 2006



    TORONTO, March 9 /CNW/ - InnVest Real Estate Investment Trust (TSX:
INN.UN) today announced financial results for the three months and year ended
December 31, 2006.
    "2006 was a solid year for InnVest due to the strong fundamentals
experienced in the industry combined with our ability to capitalize on
accretive acquisitions. This strong trend continued in the fourth quarter with
RevPAR growth of 4.9% on a same hotel basis", said Mr. Kenneth Gibson,
President and Chief Executive Officer of InnVest REIT.

    
    -------------------------------------------------------------------------
    Financial Highlights
    -------------------------------------------------------------------------
    (In thousands of Canadian dollars except average daily rate,
     revenue per available room and per unit amounts)

                             Three months ended            Year ended
                                December 31                December 31
    -------------------------------------------------------------------------
                          2006     2005      +/-     2006     2005      +/-
    -------------------------------------------------------------------------
    Occupancy             57.0%    58.1%   (1.1)%    63.8%    63.0%     0.8%
    -------------------------------------------------------------------------
    Average daily rate
     ("ADR")            $100.03   $90.37    $9.66   $97.37   $91.92    $5.45
    -------------------------------------------------------------------------
    Revenue Per Available
     Room ("RevPAR")     $56.97   $52.52    $4.45   $62.09   $57.93    $4.16
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Operating revenues  $99,384  $80,641  $18,743 $389,649 $324,090  $65,559
    -------------------------------------------------------------------------
    Hotel operating
     income             $23,391  $20,374   $3,017 $117,489 $101,107  $16,382
    -------------------------------------------------------------------------
    Net (loss) income     ($745) ($2,198)  $1,453  $38,596  $16,950  $21,646
    -------------------------------------------------------------------------
    Add / (deduct)
      Depreciation,
       amortization and
       accretion         14,409   12,098    2,311   52,548   43,256    9,292
      Future income
       tax (recovery)
       expense           (1,302)      15   (1,317) (15,473)  (1,464) (14,009)
      Reserve for
       replacement of
       furniture,
       fixtures and
       equipment and
       capital
       improvements      (3,994)  (3,248)    (746) (15,682) (13,175)  (2,507)
      Writedown of
       assets held
       for sale               -       40      (40)   1,000    1,722     (722)
      Convertible
       debentures
       accretion            221      239      (18)     816    1,014     (198)
      Corporate
       reorganization
       expense              506        -      506      506        -      506
      Non-cash executive
       and trustee
       compensation          88       89       (1)     349      362      (13)
      Deferred land lease
       expense and retail
       lease income, net     27       39      (12)     111       56       55
    -------------------------------------------------------------------------
    Distributable
     income(1)           $9,210   $7,074   $2,136  $62,771  $48,721  $14,050
    -------------------------------------------------------------------------
    Distributable
     income per unit
     - basic             $0.168   $0.148   $0.020   $1.194   $1.039   $0.155
    -------------------------------------------------------------------------
    Distributable income
     per unit - diluted  $0.168   $0.148   $0.020   $1.141   $1.015   $0.126
    -------------------------------------------------------------------------
    Distributions
     per unit           $0.2813  $0.2813        -  $1.1250  $1.1250        -
    -------------------------------------------------------------------------
    (1) Distributable income is a measure of earnings and cash flow that is
        not required or does not have a prescribed meaning under Canadian
        generally accepted accounting principles, and accordingly, may not be
        comparable to similar measures used by other organizations.
        Distributable income per unit is calculated on a basis consistent
        with earnings per unit.


    The key performance measures related to room revenue for the REIT's
portfolio of hotels on a same hotel basis, excluding the hotels that have been
classified as discontinued operations and the hotels acquired in the second
and third quarters of 2006, for which comparative data is not available, are
as follows:

                           Three months ended             Year ended
                               December 31                December 31
                          2006     2005     Var %    2006     2005     Var %
    -------------------------------------------------------------------------
    Occupancy
      Ontario             57.4%    57.9%   (0.9)%    63.0%    62.7%    0.5 %
      Quebec              59.0%    57.8%    2.1 %    63.8%    64.4%   (0.9)%
      Atlantic            54.0%    56.7%   (4.8)%    62.4%    63.0%   (1.0)%
      Western             61.4%    54.2%   13.3 %    64.2%    59.0%    8.8 %
                        -----------------------------------------------------
      Total               57.9%    57.2%    1.2 %    63.3%    62.6%    1.1 %
                        -----------------------------------------------------
                        -----------------------------------------------------

    ADR
      Ontario           $100.31   $97.28    3.1 %  $102.62   $99.17    3.5 %
      Quebec             $88.50   $86.15    2.7 %   $92.04   $90.22    2.0 %
      Atlantic           $85.85   $81.89    4.8 %   $91.93   $87.51    5.1 %
      Western            $79.08   $71.53   10.6 %   $79.65   $74.03    7.6 %
                        -----------------------------------------------------
      Total              $93.51   $90.19    3.7 %   $96.29   $92.94    3.6 %
                        -----------------------------------------------------
                        -----------------------------------------------------

    RevPAR
      Ontario            $57.62   $56.30    2.3 %   $64.67   $62.20    4.0 %
      Quebec             $52.25   $49.78    5.0 %   $58.68   $58.10    1.0 %
      Atlantic           $46.37   $46.43   (0.1)%   $57.35   $55.10    4.1 %
      Western            $48.55   $38.77   25.2 %   $51.15   $43.66   17.2 %
                        -----------------------------------------------------
      Total              $54.15   $51.62    4.9 %   $60.91   $58.14    4.8 %
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    RECENT DEVELOPMENTS

    In 2006, the REIT obtained the approval of unitholders to effect a
proposed reorganization (the "Reorganization"). The purpose of the
Reorganization is to reorganize the REIT and its subsidiaries in order to
achieve a more efficient and integrated operational structure that will
position the REIT to pursue additional hotel acquisitions in accordance with
its long-term objectives. It is anticipated that the REIT will achieve
operating and other cost reductions and a more tax-efficient structure by
virtue of the Reorganization.
    In the fourth quarter, the REIT received an advanced ruling from the
Canada Revenue Agency in respect of the Reorganization. The REIT obtained the
requisite approval of unitholders at the annual and special meeting of
unitholders held on May 17, 2006. The Reorganization was completed on January
2, 2007.

    FINANCIAL REVIEW

    Three months ended December 31, 2006

    Room revenues increased $13.0 million from $68.1 million to
$81.1 million. The increase in room revenues primarily reflects a $9.6 million
increase in revenues from the seven hotels acquired in 2006 (the "acquired
hotels"). The remaining $3.4 million improvement stems from increases in room
revenue in the REIT's base portfolio.
    Non-room revenues increased by $5.8 million, primarily reflecting the
non-room revenues generated by the REIT's acquired hotels not owned in the
comparative period.
    Hotel expenses for the fourth quarter of 2006 increased by $15.7 million
or 26.1% compared to the same period in 2005, excluding the results of the
hotels classified as discontinued operations, primarily due to increases
related to the acquired hotels.
    The net amount of other income and expenses for the three months ended
December 31, 2006 was $25.6 million, $3.3 million or 14.9% more than the same
period in 2005. The increase is due primarily to the acquired hotels.
    Current income tax recovery for the three months ended December 31, 2006
was $206, a decrease of $408 from the same period expense in 2005. This is
attributable to refunds received in the current period as the result of
taxable losses generated in corporate subsidiaries of the REIT. Further,
InnVest experienced a $1.3 million future income tax recovery in the current
period.
    Distributable income for the three months ended December 31, 2006 was
$9.2 million or $0.168 per unit basic and diluted. This reflects a $2.1
million improvement over the distributable income experienced for the same
period in the prior year of $7.1 million or $0.148 per unit basic ($0.148 -
diluted).

    Year ended December 31, 2006

    Room revenues increased $51.4 million from $282.1 million to
$333.5 million. The improvement in room revenues for the year primarily
reflects the $38.4 million increase in revenues from the acquired hotels. The
remaining $13.0 million improvement stems from increases in room revenue in
all regions of the REIT's base portfolio.
    Non-room revenues increased by $14.1 million, reflecting primarily the
non-room revenues generated by the REIT's acquired hotels not owned for the
entire comparative period.
    Hotel expenses for the year December 31, 2006 increased by $49.2 million
or 22.1% when compared to 2005, excluding the results of the hotels classified
as discontinued operations. This primarily reflects $40.2 million in expenses
incurred in the acquired hotels that were not owned for the entire comparative
period.
    The net amount of other income and expenses for the year ended December
31, 2006 was $94.0 million, $10.7 million or 12.9% more than 2005. This is
mainly a result of an increase in depreciation expense for the acquired
hotels.
    Current income tax recovery for the year ended December 31, 2006 was
$392, a decrease of $1.1 million from the expense recorded for the same period
in 2005. This is attributable to income tax refunds received during the year
which resulted from taxable losses generated in corporate subsidiaries of the
REIT and the reversal of the large corporation tax recorded in the first
quarter due to the elimination of the large corporation tax by the Federal
Government. Further, InnVest experienced a $14.0 million increase in future
income tax recovery over the same period in the prior year, mainly from using
a lower blended income tax rate as the result of a change in the federal
income tax rate in June 2006 for the corporate subsidiaries of the REIT.
    Distributable income for the year ended December 31, 2006 was
$62.8 million or $1.194 per unit basic ($1.141 - diluted). This reflects an
$14.1 million improvement over the distributable income experienced in the
prior year of $48.7 million or $1.039 per unit basic ($1.015 - diluted)

    BALANCE SHEET REVIEW

    At December 31, 2006, InnVest's cash totaled $9.2 million, of which
$4.7 million is restricted for replacement of furniture, fixture and equipment
and capital improvements. Financial leverage was 39.7% debt to gross asset
value (defined as total assets before accumulated depreciation less future
income tax liability) excluding convertible debentures and 50.0% including
convertible debentures at the end of the year.
    Continuing with its strategy of investing in its hotels, InnVest deployed
approximately $7.9 million for capital asset improvements during the fourth
quarter and committed an additional $1.1 million.
    The REIT had unused operating loan availability of $21.7 million at
December 31, 2006 and eight hotel properties that remain unencumbered that the
REIT estimates could generate approximately $45 million in mortgage proceeds.
The REIT also has an unused acquisition facility of $40 million available to
acquire hotel properties and an unused loan facility of $29.1 million
available to fund 50% of capital expenditures incurred.

    INCOME TAX DEFERRAL PERCENTAGE

    In 2006, the REIT estimates that 41% of the distributions made to
unitholders will not be taxable to unitholders.

    OUTLOOK

    The strong trend experienced in the Canadian hospitality industry in 2006
is expected to continue in 2007. PKF Consulting Inc., lodging industry experts
are forecasting a 4% increase in RevPAR in 2007 due to the growth in demand
continuing to outpace supply. Accordingly, InnVest is expecting growth within
its base portfolio and from its 2006 acquisitions.

    
    InnVest's objectives for 2007 are:

    1. To provide stable and growing distributions,
    2. To maximize the long term value of our portfolio by investing in and
       actively managing hotel assets, and
    3. To pursue acquisitions expected to be accretive to earnings and
       cash flow.
    

    Our confidence that we will be able to achieve these objectives is based
on the anticipated growth in the hospitality industry, our ability to manage
cost pressures the industry has experienced in recent years and our ability to
capitalize on acquisition opportunities.

    FORWARD LOOKING STATEMENTS

    Statements contained in this press release that are not historical facts
are forward-looking statements which involve risk and uncertainties which
could cause actual results to differ materially from those expressed in the
forward-looking statements. Among the key factors that could cause such
differences are real estate investment risks, hotel industry risks and
competition. These and other factors are discussed in InnVest REIT's 2005
annual information form which is available at http://www.sedar.com. InnVest
disclaims any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise, unless required to do so by applicable securities law.

    TRUST PROFILE

    InnVest REIT holds Canada's largest hotel portfolio together with an
interest in Choice Hotels Canada Inc. the largest franchisor of hotels in
Canada. The hotel portfolio currently comprises 137 hotel properties, with
15,661 guest rooms, operated under internationally recognized franchise brands
such as Comfort Inn(R), Holiday Inn(R) Quality Suites/Inn(R), Radisson(R),
Travelodge(R), Delta(R), Hilton Hotel(R), Hilton Garden Inn(R) and Hilton
Homewood Suites(R). InnVest's trust units and outstanding convertible
debentures trade on the Toronto Stock Exchange under the symbols INN.UN,
INN.DB.A and INN.DB.B, respectively.

    QUARTERLY CONFERENCE CALL

    Management will host a conference call on Friday March 9, 2007 at
11:00 a.m. Toronto time to discuss the performance of InnVest. Investors are
invited to access the call by dialing (416)-644-3424 or 1-800-814-4859. You
will be required to identify yourself and the organization on whose behalf you
are participating. A recording of this call will be made available March 9
beginning at 1:00 pm through to 11:59 p.m. on March 16. To access the
recording please call (416)-640-1917 and use the reservation number 21215741
followed by the number sign.


    
    InnVest Real Estate Investment Trust
    -------------------------------------------------------------------------

    CONSOLIDATED BALANCE SHEETS

                                                   December 31,  December 31,
    (in thousands of dollars)                             2006          2005
    -------------------------------------------------------------------------
                                                                   (Restated)
                                                                (Notes 2 and
                                                                     Note 24)
    ASSETS

    Current Assets
      Cash                                         $     4,531   $     5,893
      Accounts receivable                               13,242        10,122
      Prepaid expenses and other assets                  5,627         4,929
      Assets held for sale (Note 24)                        42            69
    -------------------------------------------------------------------------
                                                        23,442        21,013

    Restricted cash (Note 4)                             4,693         6,079

    Hotel properties (Note 5)                        1,136,730     1,036,309

    Other real estate properties (Note 6)               16,933             -

    Licence contracts (Note 7)                          20,485        21,800

    Deferred financing and other assets (Note 8)        19,067        10,560

    Assets held for sale (Note 24)                       5,566         6,729
    -------------------------------------------------------------------------

                                                   $ 1,226,916   $ 1,102,490
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES

    Current Liabilities
      Bank indebtedness (Note 10)                  $     3,300   $     7,100
      Accounts payable and accrued liabilities          41,515        29,553
      Distributions payable                              5,161         4,496
      Current portion of long-term debt (Note 11)       11,434         8,377
      Liabilities related to assets held for sale
       (Note 24)                                           139           160
    -------------------------------------------------------------------------
                                                        61,549        49,686

    Long-term debt (Note 11)                           490,998       423,303

    Other long-term obligations (Note 12)                4,535         3,322

    Convertible debentures (Note 13)                   126,339       125,917

    Future income tax liability (Note 14)              124,759       140,386

    Long-term debt related to assets held for sale
     (Note 24)                                           2,191         2,233
    -------------------------------------------------------------------------
                                                       810,371       744,847
    Commitments and contingencies (Note 16)

    UNITHOLDERS' EQUITY                                416,545       357,643
    -------------------------------------------------------------------------

                                                   $ 1,226,916   $ 1,102,490
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.


    InnVest Real Estate Investment Trust
    -------------------------------------------------------------------------

    CONSOLIDATED STATEMENTS OF NET INCOME

                                                    Year Ended    Year Ended
    (in thousands of dollars,                      December 31,  December 31,
     except per unit amounts)                             2006          2005
    -------------------------------------------------------------------------
                                                                   (Restated)
                                                                    (Note 24)

    Total revenues (reference only) (Note 22)      $   397,370   $   329,951
    -------------------------------------------------------------------------


    Hotel revenues                                 $   389,649   $   324,090
    -------------------------------------------------------------------------

    Hotel expenses
      Operating expenses (Note 20)                     223,524       180,722
      Property taxes, rent and insurance                35,542        31,323
      Management fees (Note 20)                         13,094        10,938
    -------------------------------------------------------------------------
                                                       272,160       222,983
    -------------------------------------------------------------------------

    Hotel operating income                             117,489       101,107
    -------------------------------------------------------------------------

    Other (income) and expenses
      Interest on mortgages                             30,403        26,856
      Convertible debentures interest and accretion      9,445        11,667
      Corporate and administrative (Note 20)             5,384         3,777
      Capital tax                                        1,523         1,447
      Other business income, net (Note 23)              (4,850)       (3,110)
      Other income                                        (310)         (190)
      Depreciation, amortization and accretion          52,359        42,768
    -------------------------------------------------------------------------
                                                        93,954        83,215
    -------------------------------------------------------------------------

    Income before income tax (recovery) expense         23,535        17,892
    -------------------------------------------------------------------------

    Income tax (recovery) expense (Note 14)
      Current                                             (392)          727
      Future                                           (15,473)       (1,464)
    -------------------------------------------------------------------------
                                                       (15,865)         (737)
    -------------------------------------------------------------------------

    Net income from continuing operations               39,400        18,629

    Income from discontinued operations (Note 24)          196            43
    Write down of assets held for sale (Note 24)        (1,000)       (1,722)
    -------------------------------------------------------------------------
    Net loss from discontinued operations                 (804)       (1,679)
    -------------------------------------------------------------------------

    Net income                                     $    38,596   $    16,950
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    Net income from continuing operations,
     per unit  (Note 18)
      Basic                                        $     0.750   $     0.397
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Diluted                                      $     0.749   $     0.397
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per unit  (Note 18)
      Basic                                        $     0.734   $     0.362
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Diluted                                      $     0.734   $     0.361
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net loss from discontinued operations,
     per unit
      Basic                                        $    (0.016)  $    (0.035)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Diluted                                      $    (0.016)  $    (0.036)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.



    InnVest Real Estate Investment Trust
    -------------------------------------------------------------------------

    CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY

                                                                      Distri-
    (in thousands of dollars)             Units in $  Net Income     butions
    -------------------------------------------------------------------------
                                            (Note 17)  (Restated)
                                                         (Note 2)

    Balance December 31, 2004              $ 438,652   $  40,083   $(116,444)

    CHANGES DURING THE YEAR

    Net income                                     -      16,950           -
    Unit distributions (Note 19)                   -           -     (52,884)
    Issue of new units                        18,870           -           -
    Costs incurred regarding issue
     of new units                               (100)          -           -
    Distribution reinvestment
     plan units issued                         3,303           -           -
    Conversion of debentures                   3,035           -           -
    Vested executive compensation                283           -           -
    Executive and trustee compensation           121           -           -

    -------------------------------------------------------------------------

    Balance December 31, 2005              $ 464,164   $  57,033   $(169,328)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    CHANGES DURING THE YEAR

    Net income                                     -      38,596           -
    Unit distributions (Note 19)                   -           -     (59,605)
    Distribution reinvestment plan units
     issued                                    4,166           -           -
    Conversion of debentures (Note 13)        70,054           -           -
    Redemption of debentures (Note 13)         4,719
    Issue of new debentures
    Vested executive compensation                152
    Executive and trustee compensation           108           -           -

    -------------------------------------------------------------------------

    Balance December 31, 2006              $ 543,363   $  95,629   $(228,933)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                        Holders'
                                          Executive  Conversion
    (in thousands of dollars)          Compensation      Option        Total
    -------------------------------------------------------------------------



    Balance December 31, 2004             $     226   $   5,705   $  368,222

    CHANGES DURING THE YEAR

    Net income                                    -           -       16,950
    Unit distributions (Note 19)                  -           -      (52,884)
    Issue of new units                            -           -       18,870
    Costs incurred regarding issue
     of new units                                 -           -         (100)
    Distribution reinvestment
     plan units issued                            -           -        3,303
    Conversion of debentures                      -        (117)       2,918
    Vested executive compensation              (283)          -            -
    Executive and trustee compensation          243           -          364

    -------------------------------------------------------------------------

    Balance December 31, 2005             $     186   $   5,588   $  357,643
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    CHANGES DURING THE YEAR

    Net income                                    -           -       38,596
    Unit distributions (Note 19)                  -           -      (59,605)
    Distribution reinvestment plan units
     issued                                       -           -        4,166
    Conversion of debentures (Note 13)            -      (2,608)      67,446
    Redemption of debentures (Note 13)                     (172)       4,547
    Issue of new debentures                               3,400        3,400
    Vested executive compensation              (152)                       -
    Executive and trustee compensation          244           -          352

    -------------------------------------------------------------------------

    Balance December 31, 2006             $     278   $   6,208   $  416,545
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The accompanying notes are an integral part of these consolidated
    financial statements.



    InnVest Real Estate Investment Trust
    -------------------------------------------------------------------------

    CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                    Year Ended    Year Ended
                                                   December 31,  December 31,
    (in thousands of dollars)                             2006          2005
    -------------------------------------------------------------------------
                                                                   (Restated)
                                                                    (Note 24)
    OPERATING ACTIVITIES
    Net income from continuing operations            $  39,400     $  18,629
    Add (deduct) items not affecting operations
      Depreciation and amortization                     47,924        40,242
      Amortization of deferred financing and
       other assets                                      4,435         2,526
      Future income tax (recovery) expense             (15,473)       (1,464)
      Non-cash executive and trustee compensation          352           364
      Convertible debentures accretion                     815         1,014
      Discontinued operations                              391           232
      Changes in non-cash working capital                6,576         8,840
    -------------------------------------------------------------------------
                                                        84,420        70,383
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Repayment of long-term debt                         (8,875)      (45,458)
    Proceeds from long-term debt                        63,300       126,933
    Issue of convertible debentures (Note 13)           75,000             -
    Unit distributions                                 (54,774)      (49,581)
    Decrease in bank indebtedness and loan payable      (3,800)       (3,900)
    Discontinued operations repayment of debt              (42)       (5,592)
    Deferred financing                                  (4,018)       (1,926)
    Changes in non-cash working capital related to
     financing activities                                  380            (6)
    -------------------------------------------------------------------------
                                                        67,171        20,470
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Capital expenditures on hotel properties           (27,242)      (30,766)
    Discontinued operations capital expenditures           (26)         (104)
    Hotel under development                               (342)            -
    Sale of assets held for sale                             -         9,424
    Other assets                                            54          (525)
    Acquisition of hotel properties (Note 3)          (127,445)      (96,871)
    Changes in restricted cash                           1,386        10,945
    Collection of vendor-take-back mortgage                200             -
    Changes in non-cash working capital related
     to investing activities                               462           300
    -------------------------------------------------------------------------
                                                      (152,953)     (107,597)
    -------------------------------------------------------------------------

    Decrease in cash during the year                    (1,362)      (16,744)
    Cash, beginning of year                              5,893        22,637
    -------------------------------------------------------------------------
    Cash, end of year                                $   4,531     $   5,893
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental disclosure of cash flow
     information:
    Cash paid for interest                           $  39,004     $  19,959
    Cash paid for income taxes
     (including capital tax)                         $   1,256     $   1,794


    The accompanying notes are an integral part of these consolidated
    financial statements.



    -------------------------------------------------------------------------
    InnVest Real Estate Investment Trust

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2006 (all dollar amounts are in thousands,
    except unit and per unit amounts)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    1.  Basis of Presentation

    InnVest Real Estate Investment Trust ("InnVest" or the "REIT") is an
    unincorporated open-ended real estate investment trust governed by the
    laws of Ontario. The REIT began operations on July 26, 2002. The units of
    the REIT are traded on the Toronto Stock Exchange under the symbol of
    "INN.UN". As at December 31, 2006, the REIT owned 137 Canadian hotels
    with 15,661 guest rooms operated under international brands and has a 50%
    interest in Choice Hotels Canada Inc. ("CHC").

    2.  Significant Accounting Policies

    Principles of Consolidation

    The consolidated financial statements include the accounts of the REIT
    and its subsidiaries and the proportionate share of the assets,
    liabilities, revenues and expenses of joint ventures, including the
    REIT's 50% interest in CHC.

    Use of Estimates

    The preparation of the REIT's 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, depreciation and amortization, hedge effectiveness, conditional
    asset retirement obligations and fair value of mortgage debt for
    disclosure purposes.

    Hotel Properties

    Hotel properties, consisting of land, buildings and furniture, fixtures
    and equipment and paving 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                                    - 40 years
    Building renovations                         - 7 years
    Furniture, fixtures and equipment            - 7 years
    Paving                                       - 10 years


    Asset Retirement Obligation

    Effective April 1, 2006 the REIT adopted the guidelines contained in the
    Emerging Issues Committee Abstract No. 159 "Conditional Asset Retirement
    Obligations" and accordingly has retroactively recorded a conditional
    asset retirement obligation in accordance with Section 3110 Asset
    Retirement Obligations of the CICA Handbook. The REIT recorded a
    liability in the amount of $1,321, a net increase in hotel properties of
    $906 and a decrease in unitholders' equity of $415 related to various
    environmental obligations for certain properties where the quantum of
    such costs and the timing for settlement is reasonably determinable. The
    obligation relates to the eventual removal of asbestos, underground
    storage tanks and Polychlorinated Biphenyls (PCB's) and eventual
    remediation of land contamination. The asset will be amortized over the
    remaining life of the building. The liability will be accreted over the
    term of the obligations and accretion will be included in depreciation,
    amortization and accretion expense in the consolidated statement of net
    income.

    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, licence contracts and other
    assets.

    Licence Contracts

    Licence contracts include franchise contracts related to the REIT's 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 over the
    average life or expected renewal life of the contracts, which is
    estimated to be twenty years.

    Deferred Financing

    Deferred financing costs consist of commitment fees, underwriting costs
    and legal costs associated with the sourcing of new debt and the renewal
    of existing debt of the REIT. These costs are amortized over the term of
    the applicable debt.

    Other Assets

    Other assets include franchise fee costs, 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.

    The franchise fee costs, lease origination costs, above and below market
    leases and franchise relationships are amortized over the term of
    contracts.

    The customer and tenant relationships are amortized over five years.

    Long-term Debt

    Long-term debt assumed on the acquisition of hotel properties is recorded
    at their 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 on a
    straight-line basis over the then average remaining period until
    maturity.

    Defined Benefit Pension Plans

    The REIT maintains defined benefit pension plans for the benefit of
    management employees and non-union non-management employees of certain
    hotels acquired in 2006.

    The REIT accrues its obligations under employee benefit plans and the
    related costs, net of plan assets. This accrual is included in
    Other long-term obligations. The cost of pensions and other retirement
    benefits earned by employees is actuarially determined using the
    projected benefit method pro rated on service and management's 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 uncollectible 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

    The REIT 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.

    Hedging Relationships

    The Trust utilizes derivative financial instruments primarily to manage
    financial risks related to the use of commodities. Hedge accounting is
    applied when the derivative is designated as a hedge of a specific
    exposure and there is reasonable assurance that the hedge will be
    effective. Financial instruments that are not designated as hedges are
    carried at estimated fair values and gains and losses arising from the
    changes in fair values are recognized in income as a component of other
    income. The use of derivative financial instruments is governed by
    documented risk management policies.

    Income Taxes

    Pursuant to the terms of the Declaration of Trust, the REIT is required
    to make distributions or designate all taxable income earned by the
    REIT's unitholders, including the taxable part of net realized capital
    gains, and will deduct such distributions and designations for income tax
    purposes. Therefore, no provision for income taxes is required on income
    earned by the REIT.

    The REIT's corporate subsidiaries are subject to tax on their taxable
    income. 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
    substantively enacted corporate income tax rates for the years in which
    tax and accounting basis differences are expected to reverse.

    Executive Compensation Plan

    The senior executives participate in an incentive plan that involves the
    issue of REIT units. A unit granted entitles the holder to receive on the
    vesting date the then current fair market value of the unit plus the
    value of the cash distributions that would have been paid on the unit if
    it had been issued on the date of grant assuming the reinvestment of the
    distribution into REIT units. The payment will be satisfied through the
    issuance of units. The benefit resulting from the issue of units under
    this plan is recorded as compensation expense, on a straight-line basis
    over the vesting period, based on the market price of the REIT units on
    the date of grant.

    3. Asset Acquisitions

    On  March 3, 2006, the REIT purchased the Comfort Inn Leamington, Ontario
    for cash consideration of $3,275.

    During the second quarter, the REIT entered into two separate agreements
    to acquire four hotels with a total of 540 rooms for a combined purchase
    price of $74,500 plus transaction costs. Two of the hotels are branded
    Delta hotels and are city centre located hotels in Sherbrooke and
    Trois Rivieres, Quebec ("Quebec Deltas"). These hotels operate in the
    full-service segment and include convention centres, office and retail
    space. The Trois Rivieres location also includes a retirement home.
    The remaining two hotels are newly built hotels located in Burlington,
    Ontario, one of which is branded a Hilton Garden Inn and the other a
    Homewood Suites ("Burlington Hiltons"). The acquisitions were financed
    through the assumption of $14,327 of mortgages, a vendor-take-back loan
    of $2,000 and cash. The Burlington Hiltons transaction closed on
    April 28, 2006, while the Quebec Deltas transaction closed on May 25,
    2006.

    On September 19, 2006, the REIT acquired two Hiltons, a 571 room hotel in
    Quebec City, Quebec and a 197 room hotel in Saint John, New Brunswick
    ("2006 Hilton Acquisition"). The purchase price of $62,656 plus
    transaction costs was financed with cash and new mortgage debt of
    $49,800.

                                                           Quebec
                                                           City &
                      Leamington                            Saint
                         Comfort Burlington     Quebec       John
                             Inn    Hiltons     Deltas    Hiltons      Total
    -------------------------------------------------------------------------
    Cash               $       1  $       3  $      22  $     100  $     126
    Current assets            21        112        196      1,985      2,314
    Hotel properties       3,117     28,128     26,618     61,777    119,640
    Other real estate          -          -     17,181          -     17,181
    Other assets             143        122      4,501      4,241      9,007
    -------------------------------------------------------------------------
                           3,282     28,365     48,518     68,103    148,268
    Assumption of
     long-term debt            -    (14,327)         -          -    (14,327)
    Current liabilities       (7)         -     (1,019)    (2,053)    (3,079)
    Pension liability                                      (1,291)    (1,291)
    -------------------------------------------------------------------------
                       $   3,275  $  14,038  $  47,499  $  64,759  $ 129,571
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    The consideration
     paid consists of
     the following:
    Cash               $   3,275  $  12,038  $  47,499  $  14,959  $  77,771
    New mortgage debt          -          -          -     49,800     49,800
    Loan payable               -      2,000          -          -      2,000
    -------------------------------------------------------------------------
                       $   3,275  $  14,038  $  47,499  $  64,759  $ 129,571
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    4.  Restricted Cash

    The restricted cash of $4,693 (2005 - $6,079) is being held by the REIT
    to undertake capital refurbishments in accordance with the REIT's
    Declaration of Trust.

    5.  Hotel Properties

                                                                 December 31,
                                                                        2006
                                                    Accumulated     Net Book
                                            Cost   Depreciation        Value
    -------------------------------------------------------------------------

    Land                             $    94,623   $         -   $    94,623
    Buildings                          1,086,968        99,553       987,415
    Furniture, fixtures and equipment    113,638        59,288        54,350
    -------------------------------------------------------------------------
                                     $ 1,295,229   $   158,841   $ 1,136,388
    Hotel under development                  342             -           342
    -------------------------------------------------------------------------
                                     $ 1,295,571   $   158,841   $ 1,136,730
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                 December 31,
                                                                        2005
                                                    Accumulated     Net Book
                                            Cost   Depreciation        Value
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                   Note 2 and
                                                                     Note 24)

    Land                             $    83,371   $         -   $    83,371
    Buildings                            969,897        71,507       898,390
    Furniture, fixtures and equipment     95,562        41,014        54,548
    -------------------------------------------------------------------------
                                     $ 1,148,830   $   112,521   $ 1,036,309
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  Other Real Estate Properties

                                                                 December 31,
                                                                        2006
                                                   Accumulated      Net Book
                                            Cost  Depreciation         Value
    -------------------------------------------------------------------------

    Land                             $     1,675   $         -   $     1,675
    Buildings                             15,447           227        15,220
    Furniture, fixtures and equipment         59            21            38
    -------------------------------------------------------------------------
                                     $    17,181   $       248   $    16,933
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other real estate includes the office and retail properties and a
    retirement residence which were acquired during the year as part of the
    Quebec Deltas acquisition (Note 3).

    7.  Licence Contracts

                                                                 December 31,
                                                                        2006
                                                   Accumulated      Net Book
                                            Cost  Amortization         Value
    -------------------------------------------------------------------------

    Licence Contracts                $    26,320   $     5,835   $    20,485
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                 December 31,
                                                                        2005
                                                    Accumulated     Net Book
                                            Cost   Amortization        Value
    -------------------------------------------------------------------------

    Licence Contracts                $    26,320   $     4,520   $    21,800
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    8.  Deferred Financing and Other Assets

                                                                 December 31,
                                                                        2006
                                                    Accumulated     Net Book
                                            Cost   Amortization        Value
    -------------------------------------------------------------------------

    Deferred financing               $    16,563   $     8,625   $     7,938
    Other assets                          13,399         2,270        11,129
    -------------------------------------------------------------------------
                                     $    29,962   $    10,895   $    19,067
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                 December 31,
                                                                        2005
                                                    Accumulated     Net Book
                                            Cost   Amortization        Value
    -------------------------------------------------------------------------

    Deferred financing               $    12,544   $     5,955   $     6,589
    Other assets                           4,476           505         3,971
    -------------------------------------------------------------------------
                                     $    17,020   $     6,460   $    10,560
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    9.  Joint Ventures

    The following represents the proportionate share of the REIT's interest
    in joint ventures:

                                                   December 31,  December 31,
                                                          2006          2005
    -------------------------------------------------------------------------
    Current assets                                 $     4,467   $     3,673
    Fixed assets                                         4,121         4,260
    Current liabilities                                  2,740         2,368
    Long-term liabilities                                5,371         5,489
    Revenues                                             5,935         5,360
    Expenses                                             3,091         2,751
    Net income                                           2,844         2,609
    Cash flow from:
      Operating activities                               3,683         3,633
      Financing activities                              (3,534)       (3,108)
      Investing activities                                 (43)          (25)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    10. Bank Indebtedness

    The REIT has a $25,000 operating loan facility that bears interest at
    Canadian bank prime plus 0.5% or Canadian Bankers' Acceptance rate plus
    1.5%. It is secured by nine properties and is payable on demand. At
    December 31, 2006, the REIT had drawn $3,300 on this facility
    (December 31, 2005 - $7,100).

    11. Long-term Debt

                                                   December 31,  December 31,
                                                          2006          2005
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                     Note 24)

    Mortgages payable                              $   502,432   $   431,680
    Less current portion                               (11,434)       (8,377)
    -------------------------------------------------------------------------
    Total long-term debt                           $   490,998   $   423,303
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Substantially all of the REIT's assets have been pledged as security
    under various debt agreements. At December 31, 2006, long-term debt had a
    weighted average interest rate of 6.5% (2005 - 6.3%). The long-term debt
    is repayable in average monthly payments of principal and interest
    totalling $3,495 (2005 - $2,982) per month, and matures at various dates
    from April 28, 2007 to September 1, 2015.

    Scheduled repayment of long-term debt is as follows:

    2007                                                         $    11,434
    2008                                                             151,124
    2009                                                               8,029
    2010                                                             149,410
    2011                                                              52,058
    2012 and thereafter                                              130,377
    -------------------------------------------------------------------------
                                                                 $   502,432
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The estimated fair value of the REIT's long-term debt at December 31,
    2006 was approximately $507,243 (2005 - $440,904). This estimate was
    determined by discounting expected cash flows at the interest rates
    currently being offered to the REIT for debt of the same remaining
    maturities. Long-term debt includes $68,305 (2005 - $69,896) of mortgages
    payable, which are subject to floating interest rates. Interest expense
    will increase by $683 for every 1% increase in the base Bankers'
    Acceptance rate.

    12. Other Long-term Obligations

                                                   December 31,  December 31,
                                                          2006          2005
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                      Note 2)

    Capital lease                                  $     1,861   $     1,931
    Other lease obligations                                299           182
    -------------------------------------------------------------------------
                                                         2,160         2,113
    Less current portion                                  (207)         (121)
    -------------------------------------------------------------------------
    Total long-term obligations                          1,953         1,992
    -------------------------------------------------------------------------
    Pension liability                                    1,212             -
    Asset retirement obligation                          1,370         1,330
    -------------------------------------------------------------------------
    Total other long-term obligations              $     4,535   $     3,322
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Defined Benefit Pension Plans

    The defined benefit pension plan was assumed pursuant to the 2006 Hilton
    Acquisition. The most recent actuarial valuation with respect to the
    funding of the REIT's pension plans was prepared on December 31, 2006.
    The pension plan assets as at December 31, 2006 consist of the following:

                                                     Non-Union
                                                           Non-
                                      Management    Management
                                         Pension       Pension         Total
                                         Benefit       Benefit       Benefit
                                           Plans         Plans         Plans
    -------------------------------------------------------------------------
    Accrued benefit obligation       $     2,334   $     1,539   $     3,873
    Fair value of plan assets              1,611         1,050         2,661
    -------------------------------------------------------------------------
    Funded status - plan deficit             723           489         1,212
    Unamortized net actuarial gain            99            68           167
    -------------------------------------------------------------------------

    Accrued employee future benefit
     liability                       $       822   $       557   $     1,379
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    13. Convertible Debentures

    The details of the three series of convertible debentures are outlined in
    the tables below:

                                                                    Original
                                                       Interest       Face
                      Issue Date       Maturity Date     Rate        Amount
    -------------------------------------------------------------------------
    Initial
     Debentures     July 26, 2002      June 30, 2007     9.75%     $  75,000
    Series A
     Debentures     April 2, 2004     April 15, 2011     6.25%        57,500
    Series B
     Debentures      May 16, 2006       May 31, 2013     6.00%        75,000
    -------------------------------------------------------------------------
                                                                   $ 207,500
    -------------------------------------------------------------------------

                   Converted      Face      Holders'
                    to Trust     Amount    Conversion            December 31,
                     Units    Outstanding    Option    Accretion      2006
    -------------------------------------------------------------------------
    Initial
     Debentures    $  75,000   $       -   $       -   $       -   $       -
    Series A
     Debentures        1,351      56,149       2,808       1,096      54,437
    Series B
     Debentures            -      75,000       3,400         302      71,902
    -------------------------------------------------------------------------
                   $  76,351   $ 131,149   $   6,208   $   1,398   $ 126,339
    -------------------------------------------------------------------------


                                                                    Original
                                                       Interest       Face
                      Issue Date       Maturity Date     Rate        Amount
    -------------------------------------------------------------------------
    Initial
     Debentures     July 26, 2002      June 30, 2007     9.75%     $  75,000
    Series A
     Debentures     April 2, 2004     April 15, 2011     6.25%        57,500
    -------------------------------------------------------------------------
                                                                   $ 132,500
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                   Converted      Face      Holders'
                    to Trust     Amount    Conversion            December 31,
                     Units    Outstanding    Option    Accretion      2005
    -------------------------------------------------------------------------
    Initial
     Debentures    $   3,355   $  71,645   $   2,723   $   1,851   $  70,773
    Series A
     Debentures          210      57,290       2,865         719      55,144
    -------------------------------------------------------------------------
                   $   3,565   $ 128,935   $   5,588   $   2,570   $ 125,917
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Initial Debentures

    The Initial Debentures bore interest at the rate of 9.75% per annum
    payable semi-annually in arrears and matured on June 30, 2007. Each $1
    principal amount of the initial debentures was convertible at the option
    of the holder into 93.0233 units (representing a conversion price of
    $10.75 per unit). These convertible debentures were redeemable, in whole
    or from time to time in part, on and after July 1, 2005 at the option of
    the REIT, provided that the volume-weighted average trading price of the
    units for a stipulated period prior to the date on which the notice of
    redemption is given exceeds 115% of the conversion price. The REIT had
    the option to satisfy its obligation to pay the principal amount of these
    convertible debentures due at maturity or upon redemption, in whole or in
    part, by issuing the number of units equal to the principal amount of
    convertible debentures then outstanding divided by 95% of the volume-
    weighted average trading price of the units for a stipulated period prior
    to the date of redemption or maturity, as applicable. During the year
    ended December 31, 2006, 6,242,415 units (2005 - 262,782 units) were
    issued as a result of conversions of debentures at a price of $10.75 per
    unit.

    In accordance with GAAP, the holder conversion option was valued
    separately from the convertible debentures at $2,850, being the estimated
    fair market value of the option on the date the security was issued. The
    debenture discount equal to the value of the option is being accreted
    over the term of the initial debentures. During the year ended
    December 31, 2006, $2,551 (2005 - $107) of the holder conversion option
    was reallocated from unitholders' equity to the convertible debenture
    liability as accretion attributable to the converted debentures.

    On April 26, 2006 the REIT issued a redemption notice for all issued and
    outstanding Initial Series Debentures. The redemption was effective
    June 1, 2006. There were 392,307 units issued for the redemption, at a
    price of $11.57 per unit. There was no gain or loss recorded on the
    redemption of the outstanding Initial Series Debentures.

    Series A Debentures

    On April 2, 2004, the REIT raised a total amount of $57,500 in
    convertible debentures, which bear interest at an annual rate of 6.25%
    payable semi-annually in arrears on April 15 and October 15 in each year
    ("Series A - 6.25% Debentures"). These convertible debentures have a term
    of seven years and each $1 principal amount is convertible at the option
    of the holder, into 80 units (representing the conversion price of $12.50
    per unit). On or after April 15, 2008 to April 14, 2010, the Series A -
    6.25% Debentures may be redeemed by the REIT, 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 Units on the Toronto Stock Exchange ("TSX") for the 20 consecutive
    trading days ending on the fifth trading day preceding the date on which
    the notice of the redemption exceeds 125% of the conversion price. On or
    after April 15, 2010, the Series A - 6.25% Debentures may be redeemed by
    the REIT at any time at a redemption price equal to the principal amount
    thereof plus accrued and unpaid interest. During the year ended
    December 31, 2006, 91,280 units (2005 - 16,800 units) were issued as a
    result of conversions of debentures at a price of $12.50 per unit.

    The holder conversion option was valued separately from the convertible
    debentures at $2,875. The holder conversion option is being accreted over
    the term of the Series A debentures. During the year ended December 31,
    2006, $57 (2005 - $10) of the holder conversion option was reallocated
    from unitholders' equity to the convertible debenture liability as
    accretion attributable to the converted debentures.

    Series B Debentures

    On May 16, 2006 the REIT announced the closing on a bought deal basis of
    $75,000 6% convertible unsecured subordinated debentures ("Series B -
    6.00% Debentures"). These debentures are convertible into trust units at
    a strike price of $14.90, 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 trust units to be issued upon conversion of the Series B -
    6.00% Debentures are 5,033,557. Each $1 principle amount is convertible
    at the option of the holder into 67 units. The Series B - 6.00%
    Debentures are 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 the
    REIT, 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 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 exceeds 125% of the conversion
    price. On or after June 1, 2011, the Series B - 6.00% Debentures may be
    redeemed by the REIT at any time at a redemption price equal to the
    principal amount thereof plus accrued and unpaid interest.

    The holder conversion option was valued separately from the convertible
    debentures at $3,400. The holder conversion option is being accreted over
    the term of the Series B - 6.00% Debentures. There were no conversions of
    Series B debentures during the year.

    14. Income Taxes and Future Income Tax Liability

    The future income tax liability relates to tax and book basis differences
    for assets held by corporate subsidiaries of InnVest and consists of the
    following:

                                                   December 31,  December 31,
                                                          2006          2005
    -------------------------------------------------------------------------

    Hotel properties                               $   121,275   $   136,184
    Licence contracts                                    3,380         3,925
    Financing costs and other assets                       104           277
    -------------------------------------------------------------------------
                                                   $   124,759   $   140,386
    -------------------------------------------------------------------------

    The provision for income taxes is summarized as follows:

                                                    Year Ended    Year Ended
                                                   December 31,  December 31,
                                                          2006          2005
    -------------------------------------------------------------------------
    Income before income tax (recovery) expense    $    23,535   $    17,892
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Income tax based on a combined Federal and
     Provincial income tax rate of 36%
     (2005 - 36%)                                  $     8,473   $     6,441
    Income tax effect of statutory rate adjustment     (11,575)        1,045
    Tax effect of income attributable to
     unitholders                                       (12,245)       (8,908)
    -------------------------------------------------------------------------
    Future income tax recovery                         (15,347)       (1,422)
    Large corporations tax                                   -           685
    Recovery of income tax paid                           (518)            -
    -------------------------------------------------------------------------
    Income tax recovery                            $   (15,865)  $      (737)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In June 2006, the federal general corporate income tax rate reductions
    were enacted. The federal corporate income tax rate reductions were as
    follows: 20.5% effective January 1, 2008; 20% effective January 1, 2009;
    and 19% effective January 1, 2010. Since the majority of InnVest REIT's
    temporary differences are expected to reverse in 2010 and onward, a
    future income tax recovery of $11,575 relating to these federal rate
    reductions was recognized in the consolidated statement of net income.

    In respect of the assets and liabilities of the REIT, where income is
    taxed directly in the hands of the unitholders, the net book value for
    accounting purposes of those net assets exceeds their tax basis by an
    amount of approximately $86,185 (2005 - $89,117).

    InnVest currently qualifies as a Mutual Fund Trust for income tax
    purposes. As required by its Declaration of Trust, InnVest intends to
    distribute all taxable income to its unitholders and to deduct these
    distributions for income tax purposes. Except for corporate subsidiaries
    of InnVest, no provision for income taxes is required under the current
    Canadian income tax legislation.

    On December 21, 2006, the Minister of Finance Canada released draft
    legislation for the federal income taxation of publicly traded trusts,
    including income trusts. The draft legislation would apply to publicly
    traded trusts which existed prior to November 1, 2006 starting with
    taxation years ending in or after 2011, except for those existing trusts
    that qualify for the real estate investment trust ("Qualifying REIT")
    exception included in the draft legislation. There are certain
    circumstances where an existing trust may lose its relief in the interim
    periods to 2011 where it undergoes "undue expansion".

    Under the draft legislation, a publicly traded fund will not be a
    Qualifying REIT if it or its subsidiaries hold any Canadian business
    assets, other than real estate that is not eligible for a high rate of
    capital cost allowance (greater than 5%).

    Under the draft legislation, InnVest would not be a Qualifying REIT,
    given that it carries on a hotel business and related activities through
    subsidiaries and holds some real estate assets that are eligible for
    higher rates of capital cost allowance. Accordingly, the draft
    legislation in its current form could adversely affect the level of cash
    distribution to unitholders commencing in 2011 if InnVest does not become
    a Qualifying REIT by then. Unless the draft legislation is amended prior
    to being enacted in a manner that will accommodate the holding of REIT-
    related business operations, InnVest will become subject to tax under the
    proposals, or will only be able to become a Qualifying REIT by making
    asset dispositions prior to 2011.

    15. Guarantees

    The REIT is required to disclose its obligations undertaken in issuing
    certain guarantees on the date the guarantee is issued or modified. Where
    the REIT expects to make a payment in respect of the guarantee, a
    liability will be recognized to the extent that one has not yet been
    recognized.

    The REIT has not provided to third parties any significant guarantees
    other than the following:

    Trustee and Officer Indemnification Agreements

    The REIT 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, 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.
    The nature of the indemnification agreements prevents the REIT from
    making a reasonable estimate of the maximum potential amount it could be
    required to pay to counter parties. The REIT has purchased trustees' and
    officers' liability insurance. No amount has been recorded in the
    financial statements with respect to these indemnification agreements.

    Indemnification of Underwriters

    The REIT has entered into agreements that provide for indemnification in
    underwriting agreements. These indemnifications generally require the
    REIT to indemnify the underwriters for costs incurred as a result of
    losses from litigation that may be suffered by the underwriters arising
    from the transactions. These types of indemnifications normally extend
    over an unspecified period of time and do not provide for any limit on
    the maximum potential amount.

    16. Commitments and Contingencies

    Lease Commitments

    The REIT is committed under various equipment operating leases to minimum
    annual rental payments and under long-term land leases to minimum annual
    payments as follows:

                                       Operating       Land
                                        Leases        Leases         Total
    -------------------------------------------------------------------------

    2007                             $       573   $     2,179   $     2,752
    2008                                     441         2,183         2,624
    2009                                     362         2,203         2,565
    2010                                     221         2,203         2,424
    2011                                      55         1,743         1,798
    2012 and thereafter                       15        83,889        83,903
    -------------------------------------------------------------------------
                                     $     1,667   $    94,400   $    96,067
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The land leases expire between 2010 and 2088. Rentals that are determined
    as a percentage of revenues with no minimum amounts are excluded from
    these figures.

    Contingencies

    The REIT is subject to lawsuits and claims arising in the ordinary course
    of business. Management believes that the resolution of such matters will
    not have a material adverse effect on the REIT's financial position or
    future results of operations.

    17. Unitholders' Equity

    The REIT is authorized to issue an unlimited number of units, each of
    which represents an equal undivided beneficial interest in any
    distributions from the REIT. All units are of the same class with equal
    rights and privileges.

                                                         Units        Amount
    -------------------------------------------------------------------------
    Balance as at December 31, 2004                 45,815,071   $   438,652
    New units issued, net of costs                   1,553,345        18,770
    Units issued under distribution reinvestment
     plan                                              280,263         3,303
    Units issued on conversion of debentures           279,582         3,035
    Units issued for vested executive compensation      22,681           283
    Units issued under trustee compensation plan        10,221           121
    -------------------------------------------------------------------------
    Balance at December 31, 2005                    47,961,163   $   464,164
    -------------------------------------------------------------------------
    Units issued on conversion of debentures         6,333,692        70,054
    Units issued under distribution reinvestment
     plan                                              338,123         4,166
    Units issued on redemption of debentures           392,307         4,719
    Units issued for vested executive compensation      12,218           152
    Units issued under trustee compensation plan         7,848           108
    -------------------------------------------------------------------------
    Balance at December 31, 2006                    55,045,351   $   543,363
    -------------------------------------------------------------------------

    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 units). The REIT
    has set aside 100,000 units in reserve for this purpose. The balance in
    this reserve account at December 31, 2006 is 54,078 units. Under the
    Trustee Compensation Plan, 7,848 units were issued during the year ended
    December 31, 2006 (2005 - 10,221 units).

    Executive Compensation Plan

    The senior executives participate in the executive compensation plan
    under which units are granted by the Board of Trustees from time to time.
    The REIT has reserved a maximum of 1,000,000 units for issuance under the
    plan. The balance in this reserve account at December 31, 2006 is 869,215
    units. A unit granted through the plan entitles the holder to receive, on
    the vesting date, the then current fair market value of the unit plus the
    value of the cash distributions that would have been paid on the unit if
    it had been issued on the date of grant assuming the reinvestment of the
    distribution into REIT units. The payment will be satisfied through the
    issuance of units.

    The following table summarizes the status of the executive compensation
    plan at December 31, 2006, excluding granted units which have fully
    vested:

                                                         Units
                                        Unvested   Accumulated
                                       Executive          from         Total
                                           units Distributions         Units
    -------------------------------------------------------------------------
    January 1, 2003 - granted             17,846         7,726        25,572
    January 1, 2004 - granted             10,218         3,350        13,568
    January 1, 2005 - granted             13,118         2,614        15,732
    January 1, 2006 - granted             12,968         1,208        14,176
    January 1, 2006 - units vested        (8,923)       (3,295)      (12,218)
    -------------------------------------------------------------------------
                                          45,227        11,603        56,830
    -------------------------------------------------------------------------

    On March 5, 2006, the Board of Trustees approved the granting of
    12,968 units effective as of January 1, 2006. These units vest equally on
    the third and fourth anniversary of the effective date of grant.

    Distribution Reinvestment Plan ("DRIP")

    The REIT has a DRIP whereby eligible Canadian unitholders may elect to
    have their distributions of income from the REIT automatically reinvested
    in additional units. Unitholders who so elect will receive a further
    bonus distribution of units equal in value to 3% of each distribution
    that was reinvested.

    18. Per Unit Information

                                          Year Ended              Year Ended
                                         December 31,            December 31,
                                                2006                    2005
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                       Average Units           Average Units
    -------------------------------------------------------------------------
    Net income from continuing
     operations - basic        $ 39,400   52,558,268   $ 18,629   46,886,192
    Dilutive effect of
     executive compensation
     plan                             -       54,430          -       63,282
    -------------------------------------------------------------------------
    Net income from continuing
     operations - diluted      $ 39,400   52,612,698   $ 18,629   46,949,474
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                          Year Ended              Year Ended
                                         December 31,            December 31,
                                                2006                    2005
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                       Average Units           Average Units
    -------------------------------------------------------------------------
    Net income - basic         $ 38,596   52,558,268   $ 16,950   46,886,192
    Dilutive effect of
     executive compensation
     plan                             -       54,430          -       63,282
    -------------------------------------------------------------------------
     Net income - diluted      $ 38,596   52,612,698   $ 16,950   46,949,474
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The impact of the convertible debentures has been excluded from the per
    unit calculations above because the impact of the conversion(s) would not
    be dilutive.

    19. Distributions to Unitholders

    Distributions to unitholders are computed based on distributable income
    as defined by the Declaration of Trust.

    Distributable income is a measure of cash flow that is not defined under
    Canadian GAAP, and accordingly, may not be comparable to similar measures
    used by other issuers. Distributable income per unit has been calculated
    on a basis consistent with that prescribed by Canadian GAAP for
    calculating earnings per unit.

    Distributable income is defined as net income in accordance with Canadian
    GAAP, subject to certain adjustments as set out in the Declaration of
    Trust, including adding back depreciation and amortization, amortization
    of fair value debt adjustment and future income tax (recovery) expense,
    excluding any gains or losses on the disposition of real property and
    future income taxes, deducting the amount calculated, at 4% of hotel
    revenues, for the reserve for the replacement of furniture, fixtures and
    equipment and capital improvements, the accretion on convertible
    debentures that is included in the computation of net income, and making
    any other adjustments determined by the trustees of the REIT in their
    discretion.


                                                    Year Ended    Year Ended
                                                   December 31,  December 31,
                                                          2006          2005
    -------------------------------------------------------------------------
    Net income                                     $    38,596   $    16,950
    -------------------------------------------------------------------------

    Add (deduct)
      Depreciation, amortization and accretion          52,548        43,256
      Future income tax recovery                       (15,473)       (1,464)
      Reserve for replacement of furniture, fixtures
       and equipment and capital improvements          (15,682)      (13,175)
      Writedown of asset held for sale                   1,000         1,722
      Convertible debentures accretion                     816         1,014
      Corporate reorganization costs                       506             -
      Non-cash executive and trustee compensation          349           362
      Deferred land lease expense and retail lease
       income, net                                         111            56
    -------------------------------------------------------------------------
                                                        24,175        31,771
    -------------------------------------------------------------------------
    Distributable income                                62,771        48,721
    Distributions (in excess of) less than
     distributable income                               (3,166)        4,163
    -------------------------------------------------------------------------
    Distributions                                  $    59,605   $    52,884
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    20. Management Agreements

    On July 26, 2002, the REIT entered into a Management Agreement for hotel
    management and accounting services and an Administrative Services
    Agreement (the "Agreements") with Westmont Hospitality Management Canada
    Limited ("Westmont"). Westmont manages all but four of the REIT's hotels.
    The total management fees paid to other parties is $619.

    The Agreements have an initial term of 10 years with two successive five-
    year renewal terms, subject to the consent of Westmont and approval of
    the REIT. The Agreements will expire July 25, 2012. The Agreements
    provide for the payment of an annual management fee to Westmont in an
    amount equal to 3.375% of gross revenues during the term of the
    Agreements, including renewal periods. In addition, Westmont may receive
    an annual incentive fee if the REIT achieves distributable income (see
    Note 19) 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.

    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 Administrative
    Services Agreement) and project management and general contractor service
    fees related to hotel renovations managed by Westmont.

    During the years ended December 31, 2006 and 2005, the fees charged to
    the REIT pursuant to the Agreements were as follows:

                                                          2006          2005
    -------------------------------------------------------------------------
    Fees from continuing operations:                               (Restated,
                                                                     Note 24)
      Management fees                              $    12,475   $    10,938
      Asset Management fees (included in hotel
       operating expenses)                                  89             -
      Accounting services (included in hotel
       operating expenses)                               2,249         2,064
      Administrative services (included in
       corporate and administrative expenses)              551           502
      Project management and general contractor
       services (capitalized to hotel properties)          546           682
    Fees from discontinued operations                      110           429
    -------------------------------------------------------------------------
                                                   $    16,020   $    14,615
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In addition, salaries of REIT employees paid by Westmont and reimbursed
    by the REIT were $189 (2005 - $185). Included in accounts payable and
    accrued liabilities are amounts outstanding at December 31, 2006
    totalling $1,076 (2005 - $977).

    21. Segmented Financial Information

    The REIT operates hotel properties throughout Canada. Information related
    to these properties by geographic segment is presented below. The REIT
    primarily evaluates operating performance based on hotel operating
    income. All key financing, investing and capital allocation decisions are
    centrally managed.


                         Western    Ontario     Quebec   Atlantic     Total
    -------------------------------------------------------------------------

    Year ended
     December 31, 2006
    Hotel revenues    $   39,044 $  232,420 $   79,884 $   38,301 $  389,649
    Hotel expenses        25,213    166,398     55,586     24,963    272,160
    -------------------------------------------------------------------------
    Hotel operating
     income           $   13,831 $   66,022 $   24,298 $   13,338 $  117,489
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Year ended
     December 31, 2005
    Hotel revenues    $   33,545 $  197,200 $   58,925 $   34,420 $  324,090
    Hotel expenses        23,199    139,859     38,102     21,823    222,983
    -------------------------------------------------------------------------
    Hotel operating
     income           $   10,346 $   57,341 $   20,823 $   12,597 $  101,107
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures
    Year ended
     December 31,
     2006             $    1,269 $   21,162 $    2,508 $    2,303 $   27,242
    Year ended
     December 31,
     2005             $    2,555 $   19,615 $    2,369 $    6,227 $   30,766
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Hotel properties
    December 31, 2006 $   73,233 $  681,290 $  266,140 $  116,067 $1,136,730
    December 31, 2005 $   75,969 $  657,390 $  194,056 $  108,894 $1,036,309
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    22. Total Revenues

                                                    Year Ended    Year Ended
                                                   December 31,  December 31,
                                                          2006          2005
    -------------------------------------------------------------------------

    Hotel revenues                                 $   389,649   $   324,090

    Other business revenues (Note 23)                    7,721         5,861
    -------------------------------------------------------------------------
                                                   $   397,370   $   329,951
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    23. Other Business Income

                                                                  Year Ended
                         Franchise        Retail/   Retirement   December 31,
                          Business        Office     Residence          2006
    -------------------------------------------------------------------------

    Revenues           $     5,389   $     1,675   $       657   $     7,721

    Expenses                 1,859           654           358         2,871
    -------------------------------------------------------------------------
    Other business
     income, net       $     3,530   $     1,021   $       299   $     4,850
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                  Year Ended
                         Franchise        Retail/   Retirement   December 31,
                          Business        Office     Residence          2006
    -------------------------------------------------------------------------

    Revenues           $     5,861   $         -   $         -   $     5,861

    Expenses                 2,751             -             -         2,751
    -------------------------------------------------------------------------
    Other business
     income, net       $     3,110   $         -   $         -   $     3,110
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Other business income includes Franchise Business Income, which is
    InnVest's 50% share of Choice Canada's operations and the income from the
    other real estate properties acquired with the Quebec Deltas (Note 3).

    24. Assets Held for Sale and Discontinued Operations

    On April 18, 2006, the REIT reclassified one Ontario hotel property to
    assets held for sale. At September 30, 2006, the REIT reclassified a
    second hotel property, in Atlantic Canada, to assets held for sale. The
    long-term debt of $2,191 (2005 - $2,233) for these assets is with the
    REIT's main mortgage lender and can be repaid at any time without
    penalty. This debt matures on July 26, 2008. The operations for these two
    hotels are included as discontinued operations as summarized below. The
    comparative amounts include the operating results for these same two
    hotels, along with three additional hotels sold in 2005.

    Discontinued operations for the years ended December 31, 2006 and 2005
    are as follows:

                                                          2006          2005
    -------------------------------------------------------------------------
                                                                   (Restated)
    -------------------------------------------------------------------------
    Hotel revenues                                 $     2,370   $     5,299
    -------------------------------------------------------------------------

    Hotel expenses
      Operating expenses                                 1,561         3,654
      Property taxes, rent and insurance                   193           453
      Management fees                                       80           178
    -------------------------------------------------------------------------
                                                         1,834         4,285
    -------------------------------------------------------------------------
    Hotel operating income                                 536         1,014
    -------------------------------------------------------------------------
    Interest on mortgages                                  151           483
    Depreciation and amortization                          189           488
    -------------------------------------------------------------------------
                                                           340           971
    -------------------------------------------------------------------------
    Income from discontinued operations                    196            43
    Write down of assets held for sale                  (1,000)       (1,722)
    -------------------------------------------------------------------------
    Net loss from discontinued operations          $      (804)  $    (1,679)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    25. Subsequent Event

    In 2006, the REIT obtained the approval of unitholders to effect a
    proposed reorganization (the "Reorganization"). The purpose of the
    Reorganization is to reorganize the REIT and its subsidiaries in order to
    achieve a more efficient and integrated operational structure that will
    position the REIT to pursue additional hotel acquisitions in accordance
    with its long-term objectives. It is anticipated that the REIT will
    achieve operating and other cost reductions and a more tax-efficient
    structure by virtue of the Reorganization.

    In the fourth quarter, the REIT received an advanced ruling from the
    Canada Revenue Agency in respect of the Reorganization. The REIT obtained
    the requisite approval of unitholders at the annual and special meeting
    of unitholders held on May 17, 2006. The Reorganization was completed on
    January 2, 2007. Approximately $115,000 of the future income tax
    liability will be reduced and included in net income in the first quarter
    of 2007.
    

    %SEDAR: 00018005E




For further information:

For further information: Kenneth D. Gibson, President and Chief
Executive Officer, Tamara L. Lawson, Chief Financial Officer and Secretary,
Tel: (905) 206-7100, Fax: (905) 206-7114, Website: www.innvestreit.com

Organization Profile

InnVest Real Estate Investment Trust

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