InnVest REIT reports results for the three months and year ended December 31, 2007



    TORONTO, March 7 /CNW/ - InnVest Real Estate Investment Trust (TSX:
INN.UN) today announced financial results for the three months and year ended
December 31, 2007.
    "Strong performance in our hotels in all regions allowed InnVest to grow
its same hotel RevPAR in the quarter and the contribution from the acquired
hotels allowed InnVest to continue to grow its distributable income," said
Mr. Kenneth Gibson, President and Chief Executive Officer of InnVest REIT.

    
    -------------------------------------------------------------------------
    Financial Highlights
    -------------------------------------------
    (In thousands of dollars except average
     daily rate, revenue per available room
     and per unit amounts)
    -------------------------------------------------------------------------
                        Three months ended                Year ended
                            December 31                   December 31
    -------------------------------------------------------------------------
                      2007      2006       +/-      2007      2006       +/-
    -------------------------------------------------------------------------
    Occupancy        60.7%     59.3%      1.4%     63.9%     64.2%    (0.3)%
    -------------------------------------------------------------------------
    Average daily
     rate ("ADR")  $113.03    $96.93    $16.10   $106.68    $97.52     $9.16
    -------------------------------------------------------------------------
    Revenue Per
     Available Room
     ("RevPAR")     $68.56    $57.51    $11.05    $68.15    $62.59     $5.56
    -------------------------------------------------------------------------
    (In thousands
     of dollars,
     except per
     unit amounts)
    -------------------------------------------------------------------------
    Operating
     revenues     $162,316   $97,431   $64,885  $495,955  $380,470  $115,485
    -------------------------------------------------------------------------
    Hotel operating
     income        $38,130   $23,137   $14,993  $138,808  $115,565   $23,243
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Net income
     (loss) and
     comprehensive
     income (loss) $16,972     ($745)  $17,717   $41,222   $38,596    $2,626
    -------------------------------------------------------------------------
    Add/(deduct)
      Depreciation,
       amortization
       and
       accretion    22,212    13,678     8,534    64,154    49,878    14,276
      Future income
       tax
       recovery    (27,891)   (1,302)  (26,589)  (25,869)  (15,473)  (10,396)
      Non-cash
       executive
       and trustee
       compensation    286        88       198       672       349       323
      Write down of
       assets held
       for sale,
       net of gain   7,155         -     7,155     6,322     1,000     5,322
      Corporate
       reorganization
       expense           -       506      (506)    1,514       506     1,008
    -------------------------------------------------------------------------
    Funds from
     operations(1) $18,734   $12,225    $6,509   $88,015   $74,856   $13,159
    -------------------------------------------------------------------------
    Funds from
     operations
     per unit
      - basic       $0.257    $0.223    $0.034    $1.403    $1.424   ($0.021)
    -------------------------------------------------------------------------
      - diluted     $0.257    $0.222    $0.035    $1.345    $1.347   ($0.002)
    -------------------------------------------------------------------------
    Amortization
     of deferred
     financing
     costs             836       731       105       836     2,670    (1,834)
    Non-cash
     portion of
     interest
     expense           570         -       570     2,587         -     2,587
    Reserve for
     replacement
     of furniture,
     fixtures and
     equipment
     and capital
     improvements   (6,741)   (3,994)   (2,747)  (20,371)  (15,682)   (4,689)
    Convertible
     debentures
     accretion         271       221        50       887       816        71
    Deferred land
     lease expense
     and retail
     lease income,
     net                16        27       (11)       41       111       (70)
    -------------------------------------------------------------------------
    Distributable
     income(1)     $13,686    $9,210    $4,476   $71,995   $62,771    $9,224
    -------------------------------------------------------------------------
    Distributable
     income per
     unit
      - basic       $0.188    $0.168    $0.020    $1.148    $1.194   ($0.046)
    -------------------------------------------------------------------------
      - diluted     $0.188    $0.168    $0.020    $1.102    $1.141   ($0.039)
    -------------------------------------------------------------------------
    Distributions
     per unit      $0.2813    $0.2813        -    $1.125    $1.125         -
    -------------------------------------------------------------------------
    (1) Funds from operations and distributable income are measures of
        earnings and cash flow that are 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. Funds from operations and
        distributable income per unit are calculated on a basis consistent
        with earnings per unit.


    The key performance measures related to room revenues are on a same hotel
basis, excluding the hotels that have been classified as discontinued
operations, the hotels acquired in the second and third quarters of 2006 for
the year ended December 31 only, the two new build hotels opened in the third
quarter of 2007 and the 11 hotels acquired as part of the Legacy transaction
for which comparative data is not available:

                        Three months ended                Year ended
                            December 31                   December 31
                      2007      2006     Var %      2007      2006     Var %
    -------------------------------------------------------------------------
    Occupancy
      Ontario        59.1%     58.5%     1.0 %     62.5%     63.8%    (2.0)%
      Quebec         60.8%     61.0%    (0.3)%     63.0%     64.2%    (1.9)%
      Atlantic       57.3%     57.4%    (0.2)%     65.4%     65.3%     0.2 %
      Western        60.1%     61.4%    (2.1)%     65.2%     64.2%     1.6 %
                 ------------------------------------------------------------
      Total          59.5%     59.3%     0.3 %     63.3%     64.1%    (1.2)%
                 ------------------------------------------------------------
                 ------------------------------------------------------------
    ADR
      Ontario      $105.36   $102.47     2.8 %   $105.62   $103.28     2.3 %
      Quebec       $104.53    $97.85     6.8 %    $94.66    $91.31     3.7 %
      Atlantic      $95.78    $90.35     6.0 %    $96.51    $91.93     5.0 %
      Western       $85.88    $79.08     8.6 %    $86.43    $79.65     8.5 %
                 ------------------------------------------------------------
      Total        $101.60    $96.93     4.8 %    $99.73    $96.40     3.5 %
                 ------------------------------------------------------------
                 ------------------------------------------------------------
    RevPAR
      Ontario       $62.31    $59.91     4.0 %    $65.97    $65.88     0.1 %
      Quebec        $63.58    $59.73     6.4 %    $59.67    $58.58     1.9 %
      Atlantic      $54.90    $51.90     5.8 %    $63.15    $60.02     5.2 %
      Western       $51.66    $48.55     6.4 %    $56.36    $51.15    10.2 %
                 ------------------------------------------------------------
      Total         $60.41    $57.51     5.0 %    $63.10    $61.77     2.2 %
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    


    RECENT DEVELOPMENTS

    In February 2008, the REIT secured $350 million of mortgage financing on
certain of the hotels acquired as part of its participation in the acquisition
of Legacy Hotels Real Estate Investment Trust ("Legacy"). The average interest
rate on the financing is 5.6% with an average term of just under 5 years.
Proceeds were used to repay the $215 million bridge loan financing and certain
existing mortgages.
    In September 2007, LGY Acquisition LP ("LGY"), a joint venture of InnVest
and Cadbridge Investors LP, acquired Legacy, a publicly traded real estate
investment trust focused on the ownership of first-class hotels. Following
LGY's acquisition, eleven hotels (and the operating assets relating thereto)
previously held by Legacy were transferred to affiliates of the InnVest as
part of a reorganization of the affairs of Legacy.
    The purchase price of $652 million, plus closing and transaction costs
was partially funded through the issuance of $200 million of equity at a price
of $12.35 per subscription receipt representing the right to receive trust
units of the REIT and $70 million of convertible extendible unsecured
subordinated debentures. The remainder of the purchase price was satisfied
with the assumption of $194 million in mortgage debt secured by the properties
and $215 million of bridge financing from a Canadian chartered bank.
    The subscription receipts were exchanged on a one-for-one basis for units
of InnVest upon completion of LGY's take-over bid for Legacy. The convertible
debentures have a maturity date of August 1, 2014, a coupon of 5.85% per annum
and will pay interest semi-annually in arrears on August 1 and February 1 in
each year commencing on February 1, 2008. The convertible debentures are
convertible into 68.027 units of the REIT per $1,000 principal amount, at any
time, at the option of the holder, representing a conversion price of
$14.70 per unit.
    In the first quarter of 2007, InnVest entered into a contract to purchase
three hotels and develop a fourth, for a combined purchase price of
$48.3 million plus transaction costs and construction costs of $14.0 million.
In the third quarter of 2007, InnVest acquired two new build hotels, the
117 room Staybridge Suites located in London, Ontario and a 116 room Holiday
Inn Express located in North Bay, Ontario for a combined cost of $31.5 million
plus transaction costs. The REIT assumed first mortgages of $8.3 million and
$7.1 million, which bear interest at 6.4% and 6.0% respectively, each for a
term of 10 years, with the balance being funded from cash on hand.

    FINANCIAL REVIEW (In thousands of dollars, except per unit amounts unless
    otherwise stated)

    Three months ended December 31, 2007

    In the fourth quarter, hotel revenue increased by $64.9 million, with the
majority of the increase due to the hotels acquired in 2007. The Base
Portfolio of 131 hotels contributed $4.5 million of the increase. The 2007
Acquisitions include the 11 hotels acquired in the Legacy transaction on
September 18, 2007 and the newly built London Staybridge Suites and the North
Bay Holiday Inn Express, which were acquired in the third quarter.
    The increase of $39.9 million in room revenues for the three months ended
December 31, 2007 reflects $35.9 million from the hotels acquired in 2007. The
balance of $4.0 million of improvement reflects an overall increase in room
revenue of 5.0% in the Base Portfolio. There were increases in all regions,
with the largest dollar increase achieved in Ontario and the largest
percentage increases experienced in Quebec and the Western region.
    Non-room revenues increased by $25.0 million, reflecting the non-room
revenues generated by the hotels the REIT acquired in 2007, which were not
owned for any of the comparative period. The hotels which were acquired in
2007 typically generate a higher proportion of total revenues from non-room
revenues such as food and beverage sales.
    Hotel expenses for the three months ended December 31, 2007 increased by
$49.9 million or 67.2% when compared to the same period in 2006. This increase
reflects $47.5 million in expenses incurred in the hotels acquired in 2007,
which were not owned for any of the comparative period. The remaining
$2.4 million related to the Base Portfolio represents a 3.2% increase over
2006, which was consistent with the increase in room and total revenues. The
decline in property taxes, rent and insurance was the result of property tax
refunds received in the quarter related to successful tax appeals at several
hotels.
    The net amount of other income and expenses for the three months ended
December 31, 2007 was $41.5 million, $16.5 million or 66.0% more than the same
period in 2006. The main contributors to this increase were a $7.7 million
increase in interest on mortgages and interest on operating and bridge loans,
a $1.3 million increase in convertible debentures interest and accretion, an
$8.7 million increase in depreciation and amortization, a $733 reduction in
corporate and administrative expenses and a $337 reduction in capital tax. The
increases were mainly related to the hotels acquired during 2006 and 2007. The
increase in convertible debentures interest and accretion was the result of
the issuance of the Series C - 5.85% Debentures on August 3, 2007. The
reduction in capital tax was the result of the corporate reorganization
completed on January 2, 2007. The decrease in corporate and administrative
expenses was mainly the result of a reduction in corporate reorganization
expense.
    Current income tax expense for the three months ended December 31, 2007
was $1, a decrease of $207 from the same period in 2006. This decrease is
attributable to refunds received in the prior period as the result of taxable
losses generated in corporate subsidiaries of the REIT. Further, InnVest
experienced a $27.9 million future income tax recovery during the quarter as
the result of the reduction in corporate income tax rates.
    Funds from operations for the three months ended December 31, 2007
increased $6.5 million to $18.7 million or $0.257 per unit basic and diluted
from $0.223 basic ($0.222 - diluted) for the same period in 2006. The increase
is primarily attributable to the $15.0 million increase in hotel operating
income net of an increase in interest expense on mortgages and interest
expense on operating and bridge loans and convertible debentures interest and
accretion of $9.0 million, a decrease of $227 in corporate and administrative
expense (after eliminating corporate reorganization costs), a reduction of
$337 in capital tax net of increases in other business income and other income
of $123.
    Distributable income for the three months ended December 31, 2007 was
$13.7 million or $0.188 per unit basic and diluted. This reflects a
$4.5 million improvement over the distributable income experienced for the
same period in the prior year of $9.2 million or $0.168 per unit basic and
diluted. This increase is consistent with the increase in funds from
operations discussed above after taking into account an increase in the
reserve for replacement of furniture, fixtures and equipment and capital
improvements of $2.7 million.

    Year ended December 31, 2007

    The increase of $76.5 million in room revenues for the year ended
December 31, 2007 reflects $26.6 million in revenues from the hotels acquired
in 2006 and $43.4 million in revenues from the hotels acquired in 2007. The
balance of $6.5 million improvement reflects an overall increase in room
revenue of 2.1% in the Base Portfolio. There were increases in all regions,
with the largest dollar and percentage increase experienced in the Western
region.
    Non-room revenues increased by $39.0 million, primarily reflecting the
non-room revenues generated by the hotels the REIT acquired in 2007 and 2006,
which were not owned for all of the comparative period. The majority of the
hotels acquired in 2007 and 2006 compete in the mid-scale with food and
beverage sector and earn a higher proportion of total revenues from non-room
revenues.
    Hotel expenses for the year ended December 31, 2007 increased by
$92.2 million or 34.8% when compared to the prior year. This increase reflects
$31.1 million in expenses incurred in the hotels acquired in 2006, which were
not owned for the entire comparative period, and $55.5 million in expenses
incurred in the 2007 Acquisitions. The remaining $5.6 million relates to the
Base Portfolio and represents a 2.3% increase over the same period in 2006.
    The net amount of other income and expenses for the year ended
December 31, 2007 was $116.1 million, $24.7 million or 27.0% more than the
same period in 2006. The main contributors to this increase were a
$12.8 million increase in depreciation and amortization, a $12.6 million
increase in interest on mortgages and interest on operating and bridge loans,
a $1.5 million increase in corporate and administrative expenses, a
$1.1 million increase in other business income and a $1.4 million reduction in
capital tax and a $1.6 million increase in convertible debentures interest and
accretion. The increases were mainly related to the hotels acquired during
2006 and 2007, while the corporate and administrative expense increase was the
result of land transfer tax and legal costs associated with a reorganization
of InnVest. The increase in convertible debentures interest and accretion was
the net result of the issuance of the Series C - 5.85% Debentures on August 3,
2007, the conversion of debentures in the period and the amortization of costs
associated with the issuing of the debentures because of the use of the
effective interest method. The reduction in capital tax was the result of the
corporate reorganization completed on January 2, 2007.
    Current income tax recovery for the year ended December 31, 2007 was $4,
a decrease of $388 from the recovery recorded as the net result of large
corporation tax and losses carried back to prior periods in corporate
subsidiaries of InnVest in 2006. Further, InnVest experienced a $25.9 future
income tax recovery during the year as the net result of changes in the income
tax legislation related to Real Estate Investment Trusts and the reduction of
corporate income tax rates, as compared to a recovery of $15.5 million in 2006
which resulted from using lower blended income tax rates related to a change
in the federal income tax rate in June 2006 for the corporate subsidiaries of
the REIT.
    Funds from operations for the year ended December 31, 2007 increased
$13.2 million to $88.0 million or $1.403 per unit basic ($1.345 - diluted).
The increase is primarily attributable to the $23.2 million increase in hotel
operating income net of an increase in interest expense on mortgages, interest
on operating and bridge loans and convertible debentures interest and
accretion of $12.4 million (after adjusting for deferred financing costs
included in depreciation and amortization), an increase of $491 in corporate
and administrative expense (after eliminating corporate reorganization costs),
a reduction of $1.4 million in capital tax net of increases in other business
income, in other income of $2.4 million and in losses from discontinued
operations before depreciation and amortization of $942.
    Distributable income for the year ended December 31, 2007 was
$72.0 million or $1.148 per unit basic ($1.102 - diluted). This reflects a
$9.2 million improvement over the distributable income experienced the prior
year of $62.8 million or $1.194 per unit basic ($1.141 - diluted). This
increase is consistent with the increase in funds from operations discussed
above after taking into account an increase in the reserve for replacement of
furniture, fixtures and equipment and capital improvements of $4.7 million.

    BALANCE SHEET REVIEW

    At December 31, 2007, InnVest's cash totaled $25.3 million, of which
$3.0 million is restricted for replacement of furniture, fixture and equipment
and capital improvements. Financial leverage was 47.4% debt to gross asset
value (defined as total assets before accumulated depreciation less future
income tax liabilities included in assets) excluding convertible debentures
and 55.7% including convertible debentures at the end of the year.
    Continuing with its strategy of investing in its hotels, InnVest deployed
approximately $29.0 million for capital asset improvements during year and
committed an additional $2.0 million.
    The REIT had unused operating loan availability of $16.8 million at
December 31, 2007 and eight hotel properties that remained unencumbered. In
the first quarter of 2008, the REIT provided five unencumbered properties as
security to increase its operating line from $25 million to $40 million. A
further two unencumbered properties were financed, providing proceeds of
$40 million, which was used to partially repay the $215 million bridge loan
incurred as part of the acquisition of the Legacy Portfolio. The REIT has an
unused loan facility of $29.1 million available to fund capital expenditures.

    INCOME TAX DEFERRAL PERCENTAGE

    In 2006, 40.5% of the distributions made during that year were not
taxable to unitholders. For calendar 2007, 40% of unitholder distributions
will not be taxable to unitholders.

    OUTLOOK

    The fundamentals in the hotel industry continue to be favourable, despite
concerns over the US economy and the potential spill over into Canada. While
varying by market, PKF Consulting Inc. ("PKF"), lodging industry experts,
forecasts continued Canadian RevPAR growth in 2008 following solid growth in
2007.
    InnVest's geographic, customer and brand diversity ideally positions it
to continue to benefit from the favourable conditions in the hospitality
industry. While InnVest is expecting RevPAR growth in its overall portfolio,
there are certain markets in Ontario and Quebec that will continue to be more
negatively impacted by the strength of the Canadian dollar. The decline in US
visitation is expected to continue but is being offset by strengthening
domestic and international corporate and group travel.
    The acquisition of the Legacy Portfolio further expands the REIT's
geographic diversity in Western Canada, which continues to experience the
strongest growth in the country. The acquisition also enhances InnVest's
presence in the upscale segment of the lodging industry. Given that the Legacy
acquisition closed late in the third quarter, the contribution on a per unit
basis for 2007 was dilutive due to the seasonality inherent in the hotel
business. However, the Legacy acquisition is expected to be accretive in 2008.
    The benefit of a full year of operations from the recent acquisitions and
forecasted RevPAR growth are expected to contribute to improved performance
for the Trust in 2008. With no significant debt maturities until 2010
resulting from the financings completed in 2007 and early in 2008, InnVest is
well positioned to focus on optimizing the performance of its hotel portfolio.

    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 2006
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 148 hotel properties, with
19,381 guest rooms, operated under internationally recognized franchise brands
such as Comfort Inn(R), Holiday Inn(R) Quality Suites/Inn(R), Radisson(R),
Delta(R), Travelodge(R), Hilton Hotel(R), Staybridge Suites(R), Fairmont
Hotels(R), Sheraton Suites(R) and Best Western(R). InnVest's trust units and
outstanding convertible debentures trade on the Toronto Stock Exchange under
the symbols INN.UN, INN.DB.A, INN.DB.B and INN.DB.C, respectively.

    QUARTERLY CONFERENCE CALL

    Management will host a conference call on Friday March 7, 2008 at
11:00 am Eastern time to discuss the performance of InnVest. Investors are
invited to access the call by dialing (416)-644-3415 or 1-800-733-7560. 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 7th
beginning at 1:00 pm through to 11:59 p.m. on March 14th. To access the
recording please call (416)-640-1917 and use the reservation number 21259583
followed by the number sign.


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

    CONSOLIDATED BALANCE SHEETS

                                                  December 31,   December 31,
    (in thousands of dollars)                            2007           2006
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                  Note 2 and
                                                                     Note 25)
    ASSETS

    Current Assets
      Cash                                        $    22,271    $     4,531
      Accounts receivable                              28,677         13,354
      Prepaid expenses and other assets                 9,487          5,569
      Assets held for sale (Note 25)                      301            407
    -------------------------------------------------------------------------
                                                       60,736         23,861

    Restricted cash (Note 4)                            2,995          4,693

    Hotel properties (Note 5)                       1,884,765      1,105,384

    Other real estate properties (Note 6)              16,428         16,933

    Licence contracts (Note 7)                         19,169         20,485

    Intangible and deferred assets (Note 8)            55,101         19,984

    Assets held for sale (Note 25)                     23,085         37,012
    -------------------------------------------------------------------------

                                                  $ 2,062,279    $ 1,228,352
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    LIABILITIES

    Current Liabilities
      Bank indebtedness (Note 10)                 $   223,200    $     3,300
      Accounts payable and accrued liabilities         73,682         40,405
      Acquisition related liabilities                  17,569            957
      Distributions payable                             6,844          5,161
      Current portion of long-term debt (Note 11)      12,725         11,141
      Liabilities related to assets held
       for sale (Note 25)                                 610            711
    -------------------------------------------------------------------------
                                                      334,630         61,675

    Long-term debt (Note 11)                          698,892        476,520

    Other long-term obligations (Note 12)               6,692          4,145

    Convertible debentures (Note 13)                  177,387        126,339

    Future income tax liability (Note 14)             225,503        124,759

    Long-term liabilities related to assets
     held for sale (Note 25)                           14,509         17,297
    -------------------------------------------------------------------------
                                                    1,457,613        810,735

    Commitments and contingencies (Note 17)

    UNITHOLDERS' EQUITY                               604,666        417,617
    -------------------------------------------------------------------------

                                                  $ 2,062,279    $ 1,228,352
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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



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

    CONSOLIDATED STATEMENTS OF NET INCOME AND COMPREHENSIVE INCOME

                                                   Year Ended     Year Ended
    (in thousands of dollars,                     December 31,   December 31,
     except per unit amounts)                            2007           2006
    -------------------------------------------------------------------------
                                                                   (Restated
                                                                     Note 25)

    Total revenues (reference only) (Note 23)     $   505,753    $   388,191

    Hotel revenues                                $   495,955    $   380,470
    -------------------------------------------------------------------------

    Hotel expenses
      Operating expenses (Note 21)                    297,454        217,768
      Property taxes, rent and insurance               41,964         34,353
      Management fees (Note 21)                        17,729         12,784
    -------------------------------------------------------------------------
                                                      357,147        264,905
    -------------------------------------------------------------------------

    Hotel operating income                            138,808        115,565
    -------------------------------------------------------------------------

    Other (income) and expenses
      Interest on mortgages and other debt             36,814         28,802
      Interest on operating and bridge loans            5,262            638
      Convertible debentures interest and accretion    11,047          9,445
      Corporate and administrative (Note 21)            6,883          5,384
      Capital tax                                          75          1,523
      Other business income, net (Note 24)             (5,916)        (4,850)
      Other income                                     (1,614)          (310)
      Depreciation and amortization                    63,583         50,803
    -------------------------------------------------------------------------
                                                      116,134         91,435
    -------------------------------------------------------------------------

    Income before income tax recovery                  22,674         24,130
    -------------------------------------------------------------------------

    Income tax recovery (Note 14)
      Current                                              (4)          (392)
      Future                                          (25,869)       (15,473)
    -------------------------------------------------------------------------
                                                      (25,873)       (15,865)
    -------------------------------------------------------------------------

    Net income from continuing operations              48,547         39,995
    -------------------------------------------------------------------------

    Loss from discontinued operations (Note 25)        (1,003)          (399)
    Writedown on assets held for sale, net of gain
     on sale of assets (Note 25)                       (6,322)        (1,000)
    -------------------------------------------------------------------------
    Net loss from discontinued operations              (7,325)        (1,399)
    -------------------------------------------------------------------------

    Net income and comprehensive income           $    41,222    $    38,596
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income from continuing operations,
     per unit (Note 19)
      Basic                                       $     0.774    $     0.761
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Diluted                                     $     0.773    $     0.760
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net income per unit (Note 19)
      Basic                                       $     0.657    $     0.734
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Diluted                                     $     0.657    $     0.734
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net loss from discontinued operations,
     per unit
      Basic                                       $    (0.117)   $    (0.027)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
      Diluted                                     $    (0.117)   $    (0.027)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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



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

    CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY

                                 Net Income
                                  and Comp-
                                  rehensive    Distri-                 Units
    (in thousands of dollars)        Income    butions    Deficit       in $
    -------------------------------------------------------------------------

    Balance December 31, 2005     $  57,188  $(169,328) $(112,140) $ 464,164

    CHANGES DURING THE YEAR

    Net income and comprehensive
     income                          38,596          -     38,596          -
    Unit distributions (Note 20)          -    (59,605)   (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
     (Note 13)                            -          -          -          -
    Vested executive compensation         -          -          -        152
    Executive and trustee
     compensation                         -          -          -        108

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

    Balance December 31, 2006     $  95,784  $(228,933) $(133,149) $ 543,363
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Change in accounting policy
     for financial instruments
     (Note 2)                           917          -        917          -
    -------------------------------------------------------------------------
    Restated balance
     December 31, 2006            $  96,701  $(228,933) $(132,232) $ 543,363
    -------------------------------------------------------------------------

    CHANGES DURING THE YEAR

    Net income and comprehensive
     income                          41,222          -     41,222          -
    Unit distributions (Note 20)          -    (70,758)   (70,758)         -
    Distribution reinvestment
     plan units issued                    -          -          -     10,606
    Conversion of debentures
     (Note 13)                            -          -          -     10,605
    Issue of new debentures
     (Note 13)                            -          -          -          -
    Issue of new units (Note 18)          -          -          -    192,268
    Vested executive compensation         -          -          -        275
    Executive and trustee
     compensation                         -          -          -        258

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

    Balance December 31, 2007     $ 137,923  $(299,691) $(161,768) $ 757,375
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    Balance December 31, 2005     $     186  $   5,588  $ 357,798

    CHANGES DURING THE YEAR

    Net income and comprehensive
     income                               -          -     38,596
    Unit distributions (Note 20)          -          -    (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
     (Note 13)                            -      3,400      3,400
    Vested executive compensation      (152)         -          -
    Executive and trustee
     compensation                       244          -        352

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

    Balance December 31, 2006     $     278  $   6,208  $ 416,700
    --------------------------------------------------------------
    --------------------------------------------------------------

    Change in accounting policy
     for financial instruments
     (Note 2)                             -          -        917
    --------------------------------------------------------------
    Restated balance
     December 31, 2006            $     278  $   6,208  $ 417,617
    --------------------------------------------------------------

    CHANGES DURING THE YEAR

    Net income and comprehensive
     income                               -          -     41,222
    Unit distributions (Note 20)          -          -    (70,758)
    Distribution reinvestment
     plan units issued                    -          -     10,606
    Conversion of debentures
     (Note 13)                            -       (519)    10,086
    Issue of new debentures
     (Note 13)                            -      2,953      2,953
    Issue of new units (Note 18)          -          -    192,268
    Vested executive compensation      (275)         -          -
    Executive and trustee
     compensation                       414          -        672

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

    Balance December 31, 2007     $     417  $   8,642  $ 604,666
    --------------------------------------------------------------
    --------------------------------------------------------------

    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)                            2007           2006
    -------------------------------------------------------------------------
                                                                   (Restated
                                                                     Note 25)
    OPERATING ACTIVITIES
    Net income from continuing operations         $    48,547    $    39,995
    Add (deduct) items not affecting operations
      Depreciation and amortization                    63,583         50,803
      Non-cash portion of interest expense              2,587              -
      Future income tax recovery                      (25,869)       (15,473)
      Non-cash executive and trustee compensation         672            349
      Convertible debentures accretion                    887            816
      Discontinued operations                             392          1,352
      Changes in non-cash working capital              11,666          6,578
    -------------------------------------------------------------------------
                                                      102,465         84,420
    -------------------------------------------------------------------------

    FINANCING ACTIVITIES
    Repayment of long-term debt                       (10,204)        (8,595)
    Proceeds from long-term debt                       42,473         62,766
    Issue of convertible debentures                    66,875         71,896
    Issue of new units (net)                          191,748              -
    Unit distributions                                (58,469)       (54,774)
    Increase (decrease) in operating loan               4,900         (3,800)
    Proceeds from bridge loan                         212,850              -
    Discontinued operations repayment of debt          (2,788)          (322)
    -------------------------------------------------------------------------
                                                      447,385         67,171
    -------------------------------------------------------------------------

    INVESTING ACTIVITIES
    Capital expenditures on hotel properties          (28,851)       (26,936)
    Discontinued operations capital expenditures         (185)          (332)
    Hotel under development expenditures              (12,128)          (342)
    Proceeds from sale of discontinued assets,
     net of costs (Note 25)                             6,400              -
    Proceeds from sale of other real estate assets        121              -
    Gain on sale of other real estate assets              (78)             -
    Additions to other assets                          (2,859)            54
    Acquisition of hotel properties and other
     real estate properties (Note 3)                 (496,228)      (126,983)
    Changes in restricted cash                          1,698          1,386
    Collection of vendor-take-back mortgage                 -            200
    -------------------------------------------------------------------------
                                                     (532,110)      (152,953)
    -------------------------------------------------------------------------

    Increase (decrease) in cash during the year        17,740         (1,362)
    Cash, beginning of year                             4,531          5,893
    -------------------------------------------------------------------------
    Cash, end of year                             $    22,271    $     4,531
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental disclosure of cash flow
     information:
    Cash paid for interest                        $    49,760    $    39,004
    Cash paid for income taxes
     (including capital tax)                      $       216    $     1,256


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



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

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    December 31, 2007 (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, 2007, the REIT owned 148 Canadian hotels
    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.

    Comprehensive Income

    Effective January 1, 2007, the REIT adopted the new Canadian Institute of
    Chartered Accountants ("CICA") recommendations under Section 1530 -
    Comprehensive Income, wherein comprehensive income includes net earnings
    and other comprehensive income ("OCI"), which represents changes in the
    unitholders' equity during a period arising from transactions and other
    events with non-owner sources. The standard requires prospective
    application and, accordingly, comparative amounts for prior periods have
    not been restated. For the year ended December 31, 2007, there is no
    difference between the REIT's Consolidated Statement of Net Income and
    its Statement of Comprehensive Income.

    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, determination of useful lives for depreciation and amortization
    purposes, hedge effectiveness, conditional asset retirement obligations,
    fair value of financial instruments for disclosure purposes, value of
    conversion option in convertible debentures and determination of future
    income tax liability.

    Inventory

    Inventory, comprised of operating supplies including food and beverage,
    is valued at the lower of cost, determined on a first-in, first-out
    basis, and replacement cost. Inventory is included in 'Prepaid expenses
    and other assets' in the current asset section of the balance sheet.

    Hotel Properties

    Hotel properties, consisting of land, buildings and furniture, fixtures
    and equipment are stated at cost less accumulated depreciation.

    Hotel Under Development

    The costs of the hotel under development are specifically identifiable
    costs incurred in the period before the project is substantially
    completed. The capitalized costs include pre-construction costs essential
    to the development of the hotel, development costs, construction costs,
    chattel costs, real estate taxes and other costs incurred during the
    period of development.

    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


    Asset Retirement Obligation

    The REIT recorded an asset retirement obligation 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 (PCBs) 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.

    Intangible and Deferred Assets

    Intangible and deferred assets include customer and tenant relationships,
    lease origination costs, above and below market leases, franchise rights
    recognized upon acquisition of new hotel properties and other real estate
    properties and deferred financing fees on the bridge loan.

    The lease origination costs, above and below market leases and franchise
    rights are amortized over the term of contracts. The customer and tenant
    relationships are amortized over five years. The deferred financing fees
    are amortized over the term of the bridge loan.

    Financial Instruments - Recognition and Measurement

    Effective January 1, 2007, the REIT adopted several new CICA
    recommendations related to accounting for Financial Instruments,
    including Section 3855 - Financial Instruments, Recognition and
    Measurement. All financial instruments are required to be measured at
    fair value on initial recognition, except for certain related party
    transactions. Measurement in subsequent periods depends on whether the
    financial instrument has been classified as held-for-trading, available-
    for-sale, held-to-maturity, loans and receivables, or other liabilities.
    This standard requires a prospective application and, accordingly,
    comparative amounts for prior periods have not been restated.

    As a result of implementing Section 3855, the REIT has designated its
    accounts receivable as "loans and receivables" and its long-term debt,
    convertible debentures, and accounts payable and accrued liabilities as
    "other liabilities" pursuant to Section 3855, all of which are reflected
    on the Consolidated Balance Sheet at amortized cost using the effective
    interest method ("EIM").

    The REIT has recorded the interest expense for both the mortgage debt and
    convertible debentures using EIM. Transaction costs that are directly
    attributable to the issue of financial instruments classified as other
    than "held-for-trading" are included in the initial carrying value of
    such instruments and amortized using the EIM; therefore, the deferred
    financing costs which were related to these instruments were reclassified
    to the appropriate debt on the balance sheet. The amortization of these
    costs is included in interest expense in the financial statements in a
    manner that yields a constant rate of interest over the life of the
    respective financial instrument, for the year ended December 31, 2007. An
    adjustment has been made to the opening accumulated comprehensive income
    in the amount of $917 to reflect the application of the EIM.

    Cash, restricted cash and bank indebtedness have been designated as "held
    for trading" and are reflected on the Consolidated Balance Sheet at fair
    value. Deferred financing costs related to the credit facility are
    included in Intangible and other assets.

    In accordance with Section 3855, the REIT conducted a search for embedded
    derivatives in all contractual arrangements dated subsequent to
    October 31, 2002 and identified certain embedded features that required
    separate presentation; however, all embedded features were determined to
    have a negligible fair value.

    With the introduction of the new standards relating to financial
    instruments, the CICA replaced Section 3250 - Surplus with Section 3251 -
    Equity, effective January 1, 2007. Section 3251 establishes standards for
    the presentation of equity and changes in equity during the reporting
    period. Equity is presented as accumulated net income and other
    comprehensive income, distributions and total deficit.

    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 using EIM
    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 and 2007.

    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 and recognizes the revenues on a straight-line basis.

    Hedging Relationships

    The REIT 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. Currently, the REIT does not have
    any instruments that qualify as a hedge.

    Income Taxes

    Income taxes are accounted for using the liability method, whereby future
    income tax assets and liabilities are determined based on differences
    between the carrying amount of the balance sheet items and their
    corresponding tax values. Future income taxes are computed using enacted
    or substantively enacted income tax rates for the years in which tax and
    accounting basis differences are expected to reverse.

    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.

    Accounting Changes

    Effective January 1, 2007, the REIT adopted new CICA standard 1506 -
    Accounting Changes. The new standard sets out the conditions that must be
    met for a change in accounting policies. Also, the standard specifies
    that changes in accounting estimates be recognized prospectively in net
    income and requires disclosure of the impact of a change in estimate on
    the current and future periods. As a result of this new standard, the
    REIT has included additional disclosure below addressing the impact of
    future accounting policy changes.

    Capital Disclosures

    On December 1, 2006, the CICA issued Section 1535 - Capital Disclosures
    which specifies the disclosure of (i) an entity's objectives, policies
    and processes for managing capital; (ii) quantitative data about what the
    entity regards as capital; (iii) whether the entity has complied with any
    capital requirements; and (iv) if it has not complied, the consequences
    of such non-compliance. This new standard will be effective for the REIT
    in the first quarter of 2008.

    Financial Instruments - Disclosures and Presentation

    On December 1, 2006, the CICA issued two new accounting standards:
    Section 3862 - Financial Instruments - Disclosures and Section 3863 -
    Financial Instruments - Presentation. These new sections replace Section
    3861 - Financial Instruments - Disclosure and Presentation. They revise
    and enhance disclosure requirements, and carry forward, unchanged,
    existing presentation requirements. These new sections place increased
    emphasis on disclosure about the nature and extent of risks arising from
    financial instruments and how the entity manages those risks. These new
    standards will be effective for the REIT in the first quarter of 2008.

    Goodwill and Intangible Assets

    On January 31, 2008, the CICA issued a new accounting standard, Section
    3064 - Goodwill and Intangible Assets. Section 3064 will replace Section
    3062 - Goodwill and Other Intangible Assets and Section 3450 - Research
    and Development Costs. Section 3064 establishes standards for the
    recognition, measurement and disclosure of goodwill and intangible
    assets. This new standard, regarding intangible assets, will be effective
    for the REIT in the first quarter of 2009.

    The REIT is currently in the process of evaluating the potential impact
    of these new standards to the consolidated financial statements.

    3.  Asset Acquisitions

    During the first quarter of 2007, the REIT entered into a contract to
    purchase three hotels for a combined purchase price of $48,300 plus
    transaction costs. The transaction to acquire these new build hotel
    properties will close in stages as the construction of each hotel is
    completed. The hotels include a Staybridge Suites located in London,
    Ontario, a Holiday Inn Express located in North Bay, Ontario and a
    Staybridge Suites located in Guelph, Ontario. On July 20 and
    September 13, 2007, the REIT completed the purchases of the Staybridge
    Suites London and the Holiday Inn Express North Bay ("New-build
    Acquisitions"), respectively for $32,537. These transactions were funded
    through cash on hand. The Staybridge Suites Guelph is scheduled to close
    in the first quarter of 2008 for approximately $16,820 plus transaction
    costs.

    On July 12, 2007, InnVest, in partnership with Cadbridge Investors LP
    ("Cadbridge"), a joint venture entity between affiliates of Cadim, a
    division of the Caisse de Dépôt et Placement du Québec, and an affiliate
    of InnVest's hotel manager, announced a take-over bid for all of the
    outstanding units of Legacy Hotels Real Estate Investment Trust
    ("Legacy") at a price of $12.60 per unit. The take-over bid was effected
    by LGY Acquisition LP ("LGY"), a newly-formed limited partnership between
    InnVest (through a wholly-owned limited partnership) and Cadbridge, in
    which InnVest has an approximate 26% interest with joint control over
    LGY. On September 18, 2007, the take-over of the acquisition of 100% of
    Legacy's outstanding units was successfully completed. InnVest and
    Cadbridge reorganized Legacy's assets such that InnVest became the owner
    of nine, and lessee of two, of the following eleven first class hotels:
    The Fairmont Palliser, Sheraton Suites Calgary Eau Claire, Delta Calgary
    Airport, Fairmont Hotel Macdonald, Delta Winnipeg Hotel, Delta Ottawa
    Hotel and Suites, Delta Centre-Ville, Delta Beauséjour, Delta Prince
    Edward, Delta Barrington and the Delta Halifax (collectively, the "Legacy
    Portfolio"). This reorganization was completed on October 31, 2007,
    except for the Delta Calgary Airport which completed on November 14,
    2007.

    During the year ended December 31, 2006, the REIT acquired the Comfort
    Inn Leamington, Ontario, the Delta Sherbrooke Hotel and Conference
    Centre, Quebec, the Delta Trois Rivieres Hotel and Conference Centre,
    Quebec (which also includes a retirement home), the Hilton Garden Inn
    Burlington, Ontario, the Homewood Suites Burlington, Ontario, the Hilton
    Quebec City, Quebec and the Hilton Saint John, NB.

                                                       December     December
                            New-build       Legacy     31, 2007     31, 2006
                         Acquisitions    Portfolio        Total        Total
    -------------------------------------------------------------------------
    Cash                  $         -  $         -  $         -  $       126
    Current assets                  -       24,473       24,473        2,314
    Hotel properties           32,180      761,972      794,152      119,640
    Other real estate               -            -            -       17,181
    Other assets                  357       47,109       47,466        9,007
    -------------------------------------------------------------------------
                               32,537      833,554      866,091      148,268
    Assumption of existing
     long-term debt                 -     (196,674)    (196,674)     (14,327)
    Future income tax
     liability                      -     (127,133)    (127,133)           -
    Current liabilities             -      (26,882)     (26,882)      (3,079)
    Long-term liabilities           -       (2,493)      (2,493)      (1,291)
    -------------------------------------------------------------------------
                          $    32,537  $   480,372  $   512,909  $   129,571
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    The consideration paid,
     including transaction
     costs, consists of
     the following:
    Cash                  $    32,127  $         -  $    32,127  $    77,309
    Bank indebtedness               -      212,850      212,850            -
    Units issued                    -      191,748      191,748            -
    Debentures issued               -       58,615       58,615            -
    Loan payable                    -            -            -        2,000
    New mortgage debt               -            -            -       49,800
    -------------------------------------------------------------------------
                               32,127      463,213      495,340      129,109
    -------------------------------------------------------------------------
    Acquisition related
     liabilities                  410       17,159       17,569          462
    -------------------------------------------------------------------------
                          $    32,537  $   480,372  $   512,909  $   129,571
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at December 31, 2007, the REIT is continuing to evaluate the fair
    value of the net assets acquired in 2007, and based on this ongoing
    evaluation, the purchase price allocation may be adjusted in future
    periods.

    As at December 31, 2007, there is an account receivable due from
    Cadbridge of $1,746 related to the Legacy acquisition. This amount was
    received subsequent to year end.

    4.  Restricted Cash

    The restricted cash of $2,995 (2006 - $4,693) is being held by the REIT
    to undertake capital refurbishments in accordance with the REIT's
    Declaration of Trust.

    5.  Hotel Properties

                                                                 December 31,
                                                                        2007
                                                  Accumulated       Net Book
                                          Cost   Depreciation          Value
    -------------------------------------------------------------------------

    Land                           $   182,960    $         -    $   182,960
    Buildings                        1,733,197        133,017      1,600,180
    Furniture, fixtures and
     equipment                         120,243         31,088         89,155
    -------------------------------------------------------------------------
                                     2,036,400        164,105      1,872,295
    Hotel under development             12,470              -         12,470
    -------------------------------------------------------------------------
                                   $ 2,048,870    $   164,105    $ 1,884,765
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                 December 31,
                                                                        2006
                                                  Accumulated       Net Book
                                          Cost   Depreciation          Value
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                     Note 25)

    Land                           $    91,514    $         -    $    91,514
    Buildings                        1,056,321         95,857        960,464
    Furniture, fixtures and
     equipment                         109,866         56,802         53,064
    -------------------------------------------------------------------------
                                     1,257,701        152,659      1,105,042
    Hotel under development                342              -            342
    -------------------------------------------------------------------------
                                   $ 1,258,043    $   152,659    $ 1,105,384
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    6.  Other Real Estate Properties

                                                                 December 31,
                                                                        2007
                                                  Accumulated       Net Book
                                          Cost   Depreciation          Value
    -------------------------------------------------------------------------

    Land                           $     1,624    $         -    $     1,624
    Buildings                           15,382            616         14,766
    Furniture, fixtures and
     equipment                              56             18             38
    -------------------------------------------------------------------------
                                   $    17,062    $       634    $    16,428
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                 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 2006.

    7.  Licence Contracts

                                                                 December 31,
                                                                        2007
                                                  Accumulated       Net Book
                                          Cost   Amortization          Value
    -------------------------------------------------------------------------

    Licence contracts              $    26,320    $     7,151    $    19,169
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

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

    During the year ended December 31, 2007, the licence contracts were
    amortized by $1,316.

    8.  Intangible and Deferred Assets

                                                                 December 31,
                                                                        2007
                                                  Accumulated       Net Book
                                          Cost   Amortization          Value
    -------------------------------------------------------------------------

    Deferred financing related to
     credit facility (Note 2)      $     2,150    $       836    $     1,314
    Intangible assets                   61,547          7,760         53,787
    -------------------------------------------------------------------------
                                   $    63,697    $     8,596    $    55,101
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    Deferred financing             $    16,563    $     7,708    $     8,855
    Intangible assets                   13,399          2,270         11,129
    -------------------------------------------------------------------------
                                   $    29,962    $     9,978    $    19,984
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In accordance with the new CICA recommendations related to accounting for
    Financial Instruments, including Section 3855 - Financial Instruments and
    Measurement, the unamortized balance of deferred financing costs related
    to long-term debt and convertible debentures were reallocated as a
    reduction to long-term debt and convertible debentures, effective
    January 1, 2007.

    Intangible assets include customer and tenant relationships, lease
    origination costs, above and below market leases, and franchise rights
    recognized upon acquisition of new hotel properties and other real estate
    properties.

    During the year ended December 31, 2007, the intangible assets were
    amortized by $5,490 and the deferred financing related to the credit
    facility was amortized by $836.

    9.  Joint Ventures

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

                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------
    Current assets                                $     3,853    $     4,467
    Fixed assets                                        4,092          4,121
    Current liabilities                                 3,023          2,740
    Long-term liabilities                               5,444          5,371
    Revenues                                            6,552          5,935
    Expenses                                            3,145          3,091
    Net income                                          3,407          2,844
    Cash flow from:
      Operating activities                              4,155          3,683
      Financing activities                             (3,886)        (3,534)
      Investing activities                               (126)           (43)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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, 2007, the REIT had drawn $8,200 on this facility
    (December 31, 2006 - $3,300).

    The REIT entered into a $215,000 bridge loan facility as part of the
    closing for the acquisition of the Legacy Portfolio. It is secured by
    five properties, is due June 13, 2008 and bears interest at Canadian
    Bankers' Acceptance rate plus 2.75% (see Note 26).

    11. Long-term Debt

                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                     Note 25)

    Mortgages payable                             $   715,699    $   487,661
    Less debt issuance costs                           (4,082)             -
    -------------------------------------------------------------------------
    Total long-term debt                              711,617        487,661
    Less current portion                              (12,725)       (11,141)
    -------------------------------------------------------------------------
    Net long-term debt                            $   698,892    $   476,520
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Substantially all of the REIT's assets have been pledged as security
    under debt agreements. At December 31, 2007, long-term debt had a
    weighted average interest rate of 6.4% (2006 - 6.5%) and a weighted
    average effective interest rate of 6.5%. The long-term debt is repayable
    in average monthly payments of principal and interest totalling $4,805
    (2006 - $3,495) per month, and matures at various dates from June 1, 2009
    to September 11, 2017.

    Scheduled repayment of long-term debt is as follows:

    2008                                                         $    12,725
    2009                                                              54,011
    2010                                                             101,049
    2011                                                             126,379
    2012                                                              75,743
    2013 and thereafter                                              345,792
    -------------------------------------------------------------------------
                                                                 $   715,699
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The estimated fair value of the REIT's long-term debt at December 31,
    2007 was approximately $717,463 (2006 - $492,133). 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 $79,777 (2006 - $69,305) of mortgages payable,
    which are subject to floating interest rates. Interest expense will
    increase by $798 for every 1% increase in the base Bankers' Acceptance
    rate.

    In the second quarter, the REIT completed an early extension of $147,665
    of mortgage debt that was to have matured on July 26, 2008, fixing the
    interest rate on $130,000 at 5.8% for a blended interest rate of 6.1% per
    annum for a period of seven years, and maintained floating rate debt of
    $17,665 which, at current rates, bears interest at approximately 6.7% per
    annum. As part of this early extension, the REIT increased its fixed-rate
    proceeds by $25,924 which was used to repay the operating loan balance
    and to fund potential acquisitions.

    During the third quarter, the REIT raised new debt on the Staybridge
    Suites London of $8,300 at an interest rate of 6.4% for a ten year term
    and $7,100 of new debt on the Holiday Inn Express North Bay at an
    interest rate of 6.0% for a ten year term.

    As part of the Legacy acquisition, the REIT assumed $193,959 of long-term
    debt with a weighted average interest rate of 7.1%, a weighted average
    effective interest rate of 7.1% and an average term to maturity of
    4.8 years (See Note 26).

    12. Other Long-term Obligations

                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                     Note 25)

    Capital lease                                 $     1,767    $     1,861
    Other lease obligations                               360            299
    -------------------------------------------------------------------------
                                                        2,127          2,160
    Less current portion                                 (165)          (207)
    -------------------------------------------------------------------------
    Total lease obligations                             1,962          1,953
    -------------------------------------------------------------------------
    Pension liability                                   3,294          1,212
    Asset retirement obligation                         1,436            980
    -------------------------------------------------------------------------
    Total other long-term obligations             $     6,692    $     4,145
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Defined Benefit Pension Plans

    The defined benefit pension plans were assumed pursuant to the
    acquisition of certain hotels in 2006 and the Legacy Portfolio in the
    third quarter of 2007. The most recent actuarial valuation with respect
    to the funding of the REIT's pension plans was prepared on December 31,
    2007. The pension plan assets as at December 31, 2007 consist of the
    following:

                                         Non-Union
                                              Non-  December 31, December 31,
                           Management   Management         2007         2006
                              Pension      Pension        Total        Total
                              Benefit      Benefit      Benefit      Benefit
                                Plans        Plans        Plans        Plans
    -------------------------------------------------------------------------
    Accrued benefit
     obligation             $   5,616    $   1,292    $   6,908    $   3,873
    Fair value of plan
     assets                     2,410        1,204        3,614        2,661
    -------------------------------------------------------------------------
    Funded status -
     plan deficit               3,206           88        3,294        1,212
    Unamortized net
     actuarial (loss) gain       (114)         363          249          167
    -------------------------------------------------------------------------

    Accrued employee future
     benefit liability      $   3,092    $     451    $   3,543    $   1,379
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    13. Convertible Debentures

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

                                            Effective    Original  Converted
                                  Interest   Interest      Face     to Trust
    Debenture      Maturity Date    Rate       Rate       Amount     Units
    -------------------------------------------------------------------------
    Series A      April 15, 2011    6.25%     7.73%    $  57,500   $ (11,736)
    Series B        May 31, 2013    6.00%     7.53%       75,000           -
    Series C      August 1, 2014    5.85%     7.42%       70,000           -
    -------------------------------------------------------------------------
                                                       $ 202,500   $ (11,736)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                     Face       Holders'
                    Amount     Conversion             Transaction   December
    Debenture     Outstanding    Option    Accretion     Costs      31, 2007
    -------------------------------------------------------------------------
    Series A       $  45,764   $  (2,289)  $   1,127   $  (1,356)  $  43,246
    Series B          75,000      (3,400)        768      (2,497)     69,871
    Series C          70,000      (2,953)        169      (2,946)     64,270
    -------------------------------------------------------------------------
                   $ 190,764   $  (8,642)  $   2,064   $  (6,799)  $ 177,387
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



                                            Original   Converted
                                  Interest    Face      to Trust  Face Amount
    Debenture      Maturity Date    Rate     Amount      Units    Outstanding
    -------------------------------------------------------------------------
    Series A      April 15, 2011    6.25%  $  57,500   $  (1,351)  $  56,149
    Series B        May 31, 2013    6.00%     75,000           -      75,000
    -------------------------------------------------------------------------
                                           $ 132,500   $  (1,351)  $ 131,149
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                   Holders'
                  Conversion                December
    Debenture      Options     Accretion    31, 2006
    -------------------------------------------------
    Series A       $  (2,808)  $   1,096   $  54,437
    Series B          (3,400)        302      71,902
    -------------------------------------------------
                   $  (6,208)  $   1,398   $ 126,339
    -------------------------------------------------
    -------------------------------------------------

    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, 2007, 830,800 units (2006 - 91,280 units) were issued as a
    result of conversions of debentures at a price of $12.50 per unit.

    In accordance with GAAP, the holder conversion option was valued
    separately from the convertible debentures at $2,875, 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 Series A debentures. During the year ended
    December 31, 2007, $519 (2006 - $57) 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 per unit, bear interest at 6.00% per annum
    payable semi-annually on May 31 and November 30 of each year and will
    mature May 31, 2013. The trust units to be issued upon conversion of the
    Series B - 6.00% Debentures are 5,033,557. Each $1 principal 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.

    Series C Debentures

    On August 3, 2007, the REIT announced the closing on a bought deal basis
    of $70,000, 5.85% convertible unsecured subordinated debentures
    ("Series C - 5.85% Debentures"). These debentures are convertible into
    trust units at a strike price of $14.70 per unit, bear interest at 5.85%
    per annum payable semi-annually on February 1 and August 1 of each year
    and will mature August 1, 2014. The trust units to be issued upon
    conversion of the Series C - 5.85% Debentures are 4,761,905. Each
    $1 principal amount is convertible at the option of the holder into
    68 units. The Series C - 5.85% Debentures are not redeemable prior to
    August 1, 2010. On or after August 1, 2010 and prior to August 1, 2012,
    the Series C - 5.85% Debentures may be redeemed by 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
    August 1, 2012 and prior to August 1, 2014, the Series C - 5.85%
    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 $2,953.  The holder conversion option is being accreted
    over the term of the Series C - 5.85% Debentures. There were no
    conversions of Series C debentures during the year.

    The fair value of the REIT's convertible debentures at December 31, 2007
    is $180,917 (2006 - $136,946).

    14. Income Taxes and Future Income Tax Liability

    The future income tax liability relates to tax and book basis differences
    of the following:

                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------

    Hotel properties                              $   221,763    $   121,275
    Licence contracts                                   4,392          3,380
    Financing costs and other assets                     (652)           104
    -------------------------------------------------------------------------
                                                  $   225,503    $   124,759
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The provision for income taxes is summarized as follows:

                                                   Year Ended     Year Ended
                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------
    Income before income tax (recovery) expense   $    22,674    $    24,130
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Income tax based on a combined Federal
     and Provincial income tax rate of 36%
     (2006 - 36%)                                 $     8,163    $     8,687
    Income tax effect of statutory rate
     adjustment                                       (22,239)       (11,575)
    Tax effect of income attributable
     to unitholders                                    (9,135)       (12,459)
    Effects of the reorganization
     in the first quarter                            (115,431)             -
    Effects of the enactment of the Bill
     in the second quarter                            122,626              -
    Effects of on going operations and
     capital expenditures                              (9,857)             -
    Recovery of income tax paid                             -           (518)
    -------------------------------------------------------------------------
    Income tax recovery                           $   (25,873)   $   (15,865)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In December 2007, the federal general corporate income tax rate
    reductions were enacted. The federal corporate income tax rate reductions
    were as follows: 19.5% effective January 1, 2008; 19% effective
    January 1, 2009; 18% effective January 1, 2010; 16.5% effective
    January 1, 2011; and 15% effective January 1, 2012. Since the majority of
    InnVest's temporary differences are expected to reverse in 2012 and
    onward, a future income tax recovery of $22,239 relating to these federal
    rate reductions was recognized in the consolidated statement of net
    income.

    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.

    In June 2007, a Bill was enacted for the taxation of publicly traded
    trusts, including income trusts (the "Bill"). The Bill applies to
    publicly traded trusts which existed prior to November 1, 2006 starting
    with taxation years ending in 2011, except for those trusts that qualify
    for the real estate investment trust ("Qualifying REIT") exception
    included in the legislation. An existing trust may lose its relief from
    taxation in the interim periods to 2011 where it undergoes "undue
    expansion". Pursuant to the legislation, a REIT which carries on Canadian
    hotel operations (including through subsidiaries) will not be a
    Qualifying REIT. As a result, InnVest will be subject to tax starting
    January 1, 2011.

    The Bill may adversely affect the level of cash distribution to
    unitholders commencing in 2011 if InnVest does not become a Qualifying
    REIT by then. Management is reviewing whether it is feasible to
    reorganize InnVest so that non-qualifying operations and assets are
    transferred under a plan of arrangement to a taxable entity that is held
    by InnVest unitholders, and that the InnVest hotels, which continue to be
    owned by the REIT, are leased by it to the taxable entity. It is not
    possible at this preliminary juncture to provide any assurances that any
    such reorganization or a similar reorganization can or will be
    implemented before 2011, or that any such reorganization, if implemented,
    would not result in material costs or other adverse consequences to
    InnVest and its unitholders.

    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. Financial Instruments

    Risk Management

    In the normal course of business, the REIT is exposed to a number of
    risks that can affect its operating performance. These risks, and the
    actions taken to manage them, are as follows:

    Interest Rate Risk

    The time period over which Management is spreading the debt maturities
    implies an average term to maturity of approximately five years. This
    strategy reduces the REIT's exposure to re-pricing risk resulting from
    short-term interest rate fluctuations in any one year. Management is of
    the view that such a strategy will provide the most effective interest
    rate risk management for debt.

    The REIT's floating rate debt balance is monitored by Management to
    minimize the REIT's exposure to interest rate fluctuations. As at
    December 31, 2007 the REIT's floating rate of debt balance of $79,777
    (2006 - $69,305) is less than 15% of total long-term debt.

    Credit Risk

    Credit risks relate to the possibility that hotel guests, either
    individual or corporate, do not pay the amounts owed to the REIT. The
    REIT mitigates this risk by limiting its exposure to customers allowed to
    direct bill.

    Liquidity Risk

    Liquidity risk arises from the possibility of not having sufficient debt
    and equity capital available to the REIT to fund its growth and capital
    maintenance programs and refinance its obligations as they arise.

    There is a risk that lenders will not refinance maturing debt on terms
    and conditions acceptable to the REIT or on any terms at all.
    Management's strategy mitigates the REIT's exposure to excessive amount
    of debt maturing in any one year.

    There is also a risk that bank lenders will not refinance the operating
    credit facility on terms and conditions acceptable to the REIT or on any
    terms at all.

    Fair Values

    The fair values of the REIT's financial assets and liabilities,
    representing net working capital approximate their recorded values at
    December 31, 2007 and 2006 due to their short-term nature.

    The fair value of the REIT's long-term debt exceeds the carrying value by
    approximately $5,846 at December 31, 2007 (2006 - fair value exceeded
    carrying value by approximately $4,472) due to changes in interest rates
    since the dates on which the individual mortgages were received. The fair
    value of long-term debt has been estimated based on the current market
    rates for mortgages with similar terms and conditions.

    The fair value of the REIT's convertible debentures exceeds the carrying
    value by approximately $3,530 at December 31, 2007 (2006 - fair value
    exceeded carrying value by approximately $10,607). The fair value of
    convertible debentures has been estimated based on the market rates for
    convertible debentures as at December 31, 2007 and 2006.

    17. 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:
                                                     Land and
                                     Equipment       Building
                                        Leases         Leases          Total
    -------------------------------------------------------------------------

    2008                           $       813    $     4,787    $     5,600
    2009                                   643          4,790          5,433
    2010                                   392          4,862          5,254
    2011                                   172          4,409          4,581
    2012                                    50          4,409          4,459
    2013 and thereafter                     35         92,329         92,364
    -------------------------------------------------------------------------
                                   $     2,105    $   115,586    $   117,691
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    The land leases expire between 2010 and 2088. Certain of the operating
    leases are rentals that are determined as a percentage of revenues with
    no minimum amounts. They are excluded from these figures as they are not
    quantifiable.

    Letters of Credit

    As at December 31, 2007, the REIT has letters of credit totaling $3,378,
    held on behalf of security deposits for various utility companies and
    liquor licences and additional security for the new assumed Legacy
    portfolio pension liabilities.

    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.

    18. 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, 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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Units issued for acquisition of
     Legacy Portfolio                              16,195,000        192,268
    Units issued on conversion of debentures          830,800         10,605
    Units issued under distribution
     reinvestment plan                                887,745         10,606
    Units issued for vested executive compensation     20,139            275
    Units issued under trustee compensation plan       21,659            258
    -------------------------------------------------------------------------
    Balance at December 31, 2007                   73,000,694    $   757,375
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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, 2007 is 39,419 units. Under the
    Trustee Compensation Plan, 21,659 units were issued during the year ended
    December 31, 2007 (2006 - 7,848 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, 2007 is 849,338
    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, 2007, excluding granted units which have fully
    vested:

                                                        Units
                                      Unvested    Accumulated
                                     Executive           from          Total
                                         units  Distributions          Units
    -------------------------------------------------------------------------
    January 1, 2004 - granted           10,218          3,990         14,208
    January 1, 2005 - granted           13,118          4,099         17,217
    January 1, 2006 - granted           12,968          2,546         15,514
    January 1, 2007 - granted           15,000          1,416         16,416
    January 1, 2007 - units vested      (5,109)        (1,675)        (6,784)
    -------------------------------------------------------------------------
                                        46,195         10,376         56,571
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On March 30, 2007, the Board of Trustees approved the granting of
    15,000 units effective as of January 1, 2007. These units vest equally on
    the third and fourth anniversaries of the effective date of grant.

    Distribution Reinvestment Plan ("DRIP")

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

    19. Per Unit Information

                                          Year Ended              Year Ended
                                   December 31, 2007       December 31, 2006
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                             Average                 Average
                                               Units                   Units
    -------------------------------------------------------------------------
                                                                   (Restated,
                                                                     Note 24)
    Net income from continuing
     operations - basic         $ 48,547  62,714,239    $ 39,995  52,558,268
    Dilutive effect of executive
     compensation plan                 -      54,749           -      54,430
    -------------------------------------------------------------------------
    Net income from continuing
     operations - diluted       $ 48,547  62,768,988    $ 39,995  52,612,698
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                          Year Ended              Year Ended
                                   December 31, 2007       December 31, 2006
    -------------------------------------------------------------------------
                                            Weighted                Weighted
                                             Average                 Average
                                               Units                   Units
    -------------------------------------------------------------------------
    Net income - basic          $ 41,222  62,714,239    $ 38,596  52,558,268
    Dilutive effect of executive
     compensation plan                 -      54,749           -      54,430
    -------------------------------------------------------------------------
    Net income - diluted        $ 41,222  62,768,988    $ 38,596  52,612,698
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    20. 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. As outlined in the Declaration of Trust, the REIT is required
    to distribute monthly to unitholders not less than one-twelfth of eighty
    percent (80%) of distributable income of the REIT for the calendar year.

                                                   Year Ended     Year Ended
                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------
    Net income                                    $    41,222    $    38,596
    -------------------------------------------------------------------------
    Add (deduct)
      Depreciation and amortization                    64,990         52,548
      Future income tax recovery                      (25,869)       (15,473)
      Non-cash portion of interest expense              2,587              -
      Reserve for replacement of furniture,
       fixtures and equipment and
       capital improvements                           (20,371)       (15,682)
      Writedown of assets held for sale,
       net of gain on sale of assets                    6,322          1,000
      Convertible debenture accretion                     887            816
      Corporate reorganization costs                    1,514            506
      Non-cash executive and trustee compensation         672            349
      Deferred land lease expense and
       retail lease income, net                            41            111
    -------------------------------------------------------------------------
                                                       30,773         24,175
    -------------------------------------------------------------------------
    Distributable income                               71,995         62,771
    Distributions
      Required under the Declaration of Trust          57,596         50,217
      Discretionary                                    13,162          9,388
    -------------------------------------------------------------------------
    Distributions paid or payable                      70,758         59,605
    -------------------------------------------------------------------------
    Distributions less than distributable income  $     1,237    $     3,166
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    21. Management Agreements

    Westmont Hospitality Canada Limited

    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 is considered a related party to the REIT
    as a result of its ability to exercise significant influence through the
    Agreements. Westmont manages all but fifteen of the REIT's hotels.

    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, 2007 and 2006, the fees charged to
    the REIT pursuant to the Agreements were as follows:

                                                         2007           2006
    -------------------------------------------------------------------------
    Fees from continuing operations:
      Management fees                             $    12,521    $    12,171
      Asset management fees (included in
       hotel operating expenses)                          370             89
      Accounting services (included in
       hotel operating expenses)                        2,226          2,164
      Administrative services (included in
       corporate and administrative expenses)             440            551
      Project management and general contractor
       services (capitalized to hotel properties)         621            539
    Fees from discontinued operations                     476            506
    -------------------------------------------------------------------------
                                                  $    16,654    $    16,020
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    In addition, salaries of REIT employees paid by Westmont and reimbursed
    by the REIT were $192 (2006 - $189). Included in accounts payable and
    accrued liabilities are amounts outstanding at December 31, 2007
    totalling $1,137 (2006 - $1,076).

    The REIT paid Westmont an Acquisition Fee of $6,518 as part of the
    acquisition of the Legacy Portfolio.

    Other Management Agreements

    The REIT entered into management agreements with Hilton Canada Co.
    ("Hilton") to manage the two Hilton hotels acquired in 2006. The
    agreements provide for the payment of an annual management fee to Hilton
    in an amount equal to 2% of gross revenues during the term of the
    agreements. The agreements mature on December 31, 2026. For the year
    ended December 31, 2007, total management fees paid to Hilton were $1,123
    (2006 - $222).

    The REIT assumed the hotel management agreements with Delta Hotels
    Limited ("Delta"), dated January 1, 2003 when two Delta hotels were
    purchased in 2006. The agreements provide for the payment of an annual
    management fee to Delta in an amount equal to 3% of total revenues from
    the hotel, plus 0.5% of total revenues from the hotel if the hotel's
    annual gross operating profit is greater-than the budgeted gross
    operating profit. The agreements mature on December 31, 2015, with two
    ten-year extension options. For the year ended December 31, 2007, total
    management fees paid to Delta were $633 (2006 - $397).

    With the acquisition of the Legacy Portfolio, InnVest assumed the
    existing hotel management agreements with Fairmont Hotel and Resorts
    ("Fairmont") or Delta for each of the Legacy Portfolio hotels. The
    agreements provide for the payment of a base management fee and an
    incentive management fee to either Fairmont or Delta. Legacy was also
    subject to a portfolio incentive fee on 11 of its 25 hotels, of which six
    are now owned or leased by InnVest. The base management fee is equal to
    3% of total revenues from the hotel for nine of the hotels and 2% of
    total revenues for the remaining two hotels. The agreements mature from
    December 31, 2010 to December 31, 2047. The incentive fees are calculated
    based on net operating income from hotel operations plus amortization
    less the capital replacement reserve, in excess of a threshold. For the
    period ended from September 18, 2007 to December 31, 2007, total
    management fees paid for the Legacy Portfolio were $3,276.

    22. 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. The comparatives have been restated for discontinued
    operations and assets held for sale at December 31, 2007.

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

    Year ended
     December 31, 2007
    Hotel revenues    $  81,860  $ 234,923  $ 118,554  $  60,618  $  495,955
    Hotel expenses       55,664    171,291     87,269     42,923     357,147
    -------------------------------------------------------------------------
    Hotel operating
     income           $  26,196  $  63,632  $  31,285  $  17,695  $  138,808
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Year ended
     December 31, 2006
    Hotel revenues    $  39,044  $ 225,436  $  77,689  $  38,301  $  380,470
    Hotel expenses       25,213    160,859     53,870     24,963     264,905
    -------------------------------------------------------------------------
    Hotel operating
     income           $  13,831  $  64,577  $  23,819  $  13,338  $  115,565
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capital expenditures
     on hotel properties
    Year ended
     December 31,
     2007             $   3,712  $  15,201  $   5,601  $   4,337  $   28,851
    Year ended
     December 31,
     2006             $   1,269  $  20,918  $   2,446  $   2,303  $   26,936
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Hotel properties
    December 31, 2007 $ 525,322  $ 690,284  $ 430,570  $ 238,589  $1,884,765
    December 31, 2006 $  73,233  $ 681,290  $ 266,140  $ 116,067  $1,136,730
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    23. Total Revenues
                                                   Year Ended     Year Ended
                                                  December 31,   December 31,
                                                         2007           2006
    -------------------------------------------------------------------------

    Hotel revenues                                $   495,955    $   380,470

    Other business revenues (Note 24)                   9,798          7,721
    -------------------------------------------------------------------------
                                                  $   505,753    $   388,191
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    24. Other Business Income
                                                                       Total
                                                                  Year Ended
                      Franchise         Retail/    Retirement    December 31,
                       Business         Office      Residence           2007
    -------------------------------------------------------------------------

    Revenues        $     5,907    $     2,801    $     1,090    $     9,798

    Expenses              2,078          1,123            681          3,882
    -------------------------------------------------------------------------
    Other business
     income, net    $     3,829    $     1,678    $       409    $     5,916
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                                                                       Total
                                                                  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
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 in 2006.

    25. 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.

    On March 30, 2007, the REIT sold the hotel held for sale in Atlantic
    Canada for $2,350 less closing costs of $250, and recorded a gain of
    $659. On April 10, 2007, the Ontario hotel property held for sale was
    sold for $4,650 less closing costs of $350, and the REIT recorded a gain
    of $174. The debt owing of $1,010 and $1,181, respectively, was paid out
    of the proceeds. The operations for these two hotels are included in
    discontinued operations as summarized below.

    On December 18, 2007 the REIT reclassified three Ontario hotel properties
    and one Quebec hotel property to assets held for sale. The 2006 balance
    sheet has been restated to show these hotels in "Assets held for sale".
    The operations for these four hotels are included in discontinued
    operations as summarized below and the comparatives have been restated.

    Discontinued operations for the years ended December 31, 2007 and 2006
    are as follows:

                                                         2007           2006
    -------------------------------------------------------------------------
                                                                    Restated
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Hotel revenues                                $     8,846    $    11,549
    -------------------------------------------------------------------------

    Hotel expenses
      Operating expenses                                5,936          7,317
      Property taxes, rent and insurance                1,257          1,382
      Management fees                                     299            390
    -------------------------------------------------------------------------
                                                        7,492          9,089
    -------------------------------------------------------------------------
    Hotel operating income                              1,354          2,460
    -------------------------------------------------------------------------
    Interest on mortgages                                 950          1,114
    Depreciation and amortization                       1,407          1,745
    -------------------------------------------------------------------------
                                                        2,357          2,859
    -------------------------------------------------------------------------
    Loss from discontinued operations                  (1,003)          (399)

    Gain on sale of assets held for sale                  833              -
    Write down of assets held for sale                 (7,155)        (1,000)
    -------------------------------------------------------------------------
                                                       (6,322)        (1,000)
    -------------------------------------------------------------------------

    Net loss from discontinued operations         $    (7,325)   $    (1,399)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    26. Subsequent Events

    In the first quarter of 2008, the REIT provided five unencumbered
    properties as security to increase its operating line from $25,000 to
    $40,000. A further two unencumbered properties were financed, providing
    proceeds of $40,000, which was used to partially repay the $215,000
    bridge loan incurred as part of the acquisition of the Legacy Portfolio.

    InnVest secured an additional $350,000 of mortgage financing on 10 of the
    11 hotels acquired in the Legacy transaction. Proceeds were used to repay
    the balance of the $215,000 bridge loan and certain of the existing
    mortgages. InnVest fixed the interest rates on $370,000, with the
    remaining $20,000 subject to floating rates. The weighted average term to
    maturity is 4.9 years and the weighted average blended interest rate is
    5.6%.
    

    %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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