CHIP REIT Announces Record 2007 Second Quarter Results



    HOT.un
    HOT.db
    HOT.db.a

    VANCOUVER, Aug. 8 /CNW/ - Canadian Hotel Income Properties Real Estate
Investment Trust ("CHIP REIT") today announced record results for the second
quarter of 2007. (For a complete statistical review, please see the MD&A
included in this news release)

    
    Second Quarter Highlights

    -  Diluted funds from operations grew by 13.0% to a record $22.5 million
       and were $0.44 per unit, up from $0.39 per unit in 2006.
    -  Total revenues increased by $13.2 million or over 15%.
    -  Same-hotel revenue per available room ("RevPAR") increased by 3.8% to
       $85.95 and reported RevPAR grew by 11.7%, reflecting the improving
       nature of the portfolio.
    -  Average daily room rates increased by 4.5%.
    -  RevPAR at CHIP REIT's 3-hotel Saskatchewan portfolio was up by 24.2%
       and growth of 12.0% was achieved at its 10-hotel Alberta portfolio.
    -  Second quarter results include a non-cash future income tax charge of
       $17.9 million of which, $16.9 million was the result of the new tax
       legislation with respect to the taxation of certain listed Canadian
       trusts.

    Year-to-date Highlights

    -  Diluted funds from operations increased by 7.7% to $29.7 million and
       were $0.58 per unit, up from $0.54 per unit last year
    -  Total revenues grew by $28.5 million or 18.7%
    -  Same-hotel RevPAR increased by 4.8% due to a 5.8% increase in average
       daily rates
    -  RevPAR growth in Saskatchewan and Alberta exceeded 14%
    

    "We are pleased with our year-over-year cash flow growth and the
contribution of the hotels we acquired in the last half of 2006", said Ed
Pitoniak, President and CEO of CHIP REIT. "Our western properties continue to
be strong performers, with our Saskatchewan and Alberta regions achieving
double-digit RevPAR gains. Industry fundamentals, including the supply of and
demand for hotel rooms, continue to be positive on an overall basis but with a
significant disparity between the strong western markets and the softer
eastern markets."
    On August 1, 2007, CHIP REIT announced that its Board of Trustees had
entered into a support agreement in favour of a cash takeover offer of $19.10
per unit by British Columbia Investment Management Corporation. The mailing of
the bid circular (which is expected to occur in mid-August) is subject to
certain conditions. The transaction is conditional upon the receipt of
customary regulatory approvals, 66 2/3% of the outstanding units being validly
tendered to the offer and the satisfaction of certain other conditions. The
offer is not subject to a financing condition and is expected to close during
the fourth quarter of 2007.

    CHIP REIT is an integrated hotel real estate investment trust focused on
mid-market and upscale full-service hotels. Through its large, diversified
portfolio, CHIP REIT provides investors with stable income and growth
potential through acquisitions, repositioning and franchising under banners
that include Delta, Radisson, Marriott and Hilton. CHIP REIT currently owns
and manages 32 hotels with approximately 7,700 guestrooms. In 2006, CHIP REIT
was named "Hotel Company of the Year" by Hotelier Magazine, becoming the first
REIT to win a Pinnacle Award in the hospitality industry's national
recognition program. CHIP REIT units and convertible debentures trade on the
Toronto Stock Exchange under the symbols HOT.un, HOT.db and HOT.db.a.


    
                     Management's Discussion & Analysis
                         2007 Second Quarter Results
                                June 30, 2007
    

    The following discussion is intended to assist readers in understanding
Canadian Hotel Income Properties Real Estate Investment Trust ("CHIP REIT" or
the "Trust"), its history, business environment, strategies, performance and
risk factors from the viewpoint of management of the Trust. It should be read
in conjunction with the unaudited interim consolidated financial statements
for the six months ended June 30, 2007, the audited consolidated financial
statements and accompanying notes for the years ended December 31, 2005 and
2006 and management's discussion and analysis ("MD&A") thereon.
    This MD&A contains forward-looking information based on management's best
estimates and the current operating environment. These forward-looking
statements are related to, but not limited to, CHIP REIT's operations,
anticipated financial performance, business prospects and strategies. Forward-
looking information typically contains statements with words such as
"anticipate", "believe", "expect", "plan" or similar words suggesting future
outcomes. Such forward-looking statements are subject to risks, uncertainties
and other factors, which could cause actual results to differ materially from
future results expressed, projected or implied by such forward-looking
statements. Such factors include, but are not limited to economic, competitive
and lodging industry conditions. Please refer to CHIP REIT's Annual
Information Form, dated March 14, 2007, which can be found on the Canadian
Securities Administrators' System for Electronic Document Analysis and
Retrieval ("SEDAR"), for a list of the risks inherent in the activities of the
Trust. CHIP REIT disclaims any intention or obligation to update or revise any
such forward-looking statements, whether as a result of new information,
future events or otherwise.

    Overview

    There have been no significant changes in the Trust's operating strategy,
economic and business environment or risks since the MD&A for the period ended
December 31, 2006, except as follows.
    On June 22, 2007, the Canadian Government passed new tax legislation that
effectively imposes an income tax on publicly traded trusts, including CHIP
REIT. A transitional provision applies to publicly traded trusts that existed
prior to November 1, 2006 to exempt them from the tax until January 1, 2011.
The Trust will therefore not be liable to pay taxes under the new legislation
until after January 1, 2011. During the quarter ended June 30, 2007, the Trust
recorded a non-cash future income tax charge of $16.9 million as it has
recognized the impact of temporary timing differences expected to reverse
after January 1, 2011.
    On August 1, 2007, CHIP REIT announced that its Board of Trustees has
entered into a support agreement in favour of a cash takeover offer of $19.10
per unit by British Columbia Investment Management Corporation. The
transaction is conditional upon the receipt of customary regulatory approvals,
66 2/3 percent of the outstanding units being validly tendered to the offer
and the satisfaction of certain other conditions. Following a thorough review
of strategic and structural alternatives, the Board of Trustees has
unanimously resolved to recommend to the unitholders that they accept the
offer. The proposed transaction is expected to close in the fourth quarter of
2007.

    Non-GAAP Financial Measures

    As a real estate enterprise, management believes the most important
measure of performance is Funds from Operations ("FFO"), rather than net
income. Net income includes depreciation on real estate and gains and losses
on disposal of real estate, which are based on historical cost accounting and,
in management's opinion, is of limited significance when evaluating current
performance of the Trust or when comparing performance to other real estate
organizations. FFO has been defined by the Real Property Association of Canada
("RealPAC") as a standard industry-wide measure of a real estate entity's
operating performance. FFO is defined as net income (computed in accordance
with generally accepted accounting principles), excluding gains or losses from
sales of depreciable real estate and extraordinary items, plus depreciation
and amortization, plus future income taxes and after adjustments for equity-
accounted-for entities and non-controlling interests. The Trust believes that
FFO and FFO per unit are useful supplemental measures of operating
performance.
    Distributable income is a measure of cash flow that is not required under
Canadian generally accepted accounting principles, and accordingly, may not be
comparable to similar measures used by other organizations. Distributable
income and FFO per unit are calculated on a basis consistent with that
described by Canadian generally accepted accounting principles for calculating
earnings per share.


    
    Reconciliation of net income to FFO:
    (expressed in thousands of dollars)

                                        Three months              Six months
                                       ended June 30           ended June 30
                               ----------------------  ----------------------
                                    2007        2006        2007        2006

    Net income (loss)          $  (2,044)  $  11,942   $  (1,780)  $  12,606
    Add:
    Depreciation on real
     property                      6,062       5,430      12,122      10,653
    Other losses                      55         892          55         892
    Future income taxes           17,891         125      18,085         250
                               ----------------------  ----------------------
    Basic FFO                  $  21,964   $  18,389   $  28,482   $  24,401
    Interest on convertible
     debentures                      509       1,497       1,247       3,193
                               ----------------------  ----------------------
    Diluted FFO                $  22,473   $  19,886   $  29,729   $  27,594
                               ----------------------  ----------------------
                               ----------------------  ----------------------

    In determining FFO, depreciation and amortization related to the Trust's
head office and amortization of franchise pre-opening costs are not added back
to net income.


    Reconciliation of net income to distributable income:
    (expressed in thousands of dollars)

                                      Three months                Six months
                                     ended June 30             ended June 30
                           ------------------------  ------------------------
                                 2007         2006         2007         2006

    Net income (loss)      $   (2,044)  $   11,942   $   (1,780)  $   12,606
    Add:
    Depreciation and
     amortization               6,138        5,547       12,284       10,871
    Non-cash interest
     expense                      159          242          348          504
    Other losses                   55          892           55          892
    Future income taxes        17,891          125       18,085          250
                           ------------------------  ------------------------
    Basic distributable
     income                $   22,199   $   18,748   $   28,992   $   25,123

    Interest on convertible
     debentures                   442        1,327        1,084        2,821
                           ------------------------  ------------------------
    Diluted distributable
     income                $   22,641   $   20,075   $   30,076   $   27,944
                           ------------------------  ------------------------
                           ------------------------  ------------------------


    Reconciliation of cash flow from operations to distributable income:
    (expressed in thousands of dollars)

                                      Three months                Six months
                                     ended June 30             ended June 30
                           ------------------------  ------------------------
                                 2007         2006         2007         2006

    Cash flow from
     operations            $   18,784   $   17,970   $   21,607   $   23,087
    Add (deduct):
    Changes in non-cash
     working capital            3,440          778        7,426        2,036
    Stock based
     compensation expense         (25)           -          (41)           -
                           ------------------------  ------------------------
    Basic distributable
     income                $   22,199   $   18,748   $   28,992   $   25,123
                           ------------------------  ------------------------
                           ------------------------  ------------------------


    Reconciliation of cash flow from operations to FFO:
    (expressed in thousands of dollars)

                                      Three months                Six months
                                     ended June 30             ended June 30
                           ------------------------  ------------------------
                                 2007         2006         2007         2006
    Cash flow from
     operations            $   18,784   $   17,970   $   21,607   $   23,087
    Add (deduct):
    Changes in non-cash
     working capital            3,440          778        7,426        2,036
    Non-cash interest
     expense                     (159)        (242)        (348)        (504)
    Depreciation and
     amortization of non-
     real estate property         (76)        (117)        (162)        (218)
    Stock based
     compensation expense         (25)           -          (41)           -
                           ------------------------  ------------------------
    Basic FFO              $   21,964   $   18,389   $   28,482   $   24,401
                           ------------------------  ------------------------
                           ------------------------  ------------------------


    Results of Operations

    Operational statistics:

                                Three
                               months                Six months
                                ended       Change        ended       Change
                              June 30,  from prior      June 30,  from prior
                                 2007       year(*)        2007       year(*)
    -------------------------------------------------------------------------

    Available Room Nights     696,660        +6.6%    1,376,970        +8.2%
    Occupancy                   70.9% -0.4% points        66.1% -0.7% points
    Average daily rate
     (ADR)                 $   121.24        +4.5%   $   115.37        +5.8%
    Revenue per available
     room night (RevPAR)   $    85.95       + 3.8%   $    76.29        +4.8%

    RevPAR by Region
      British Columbia     $   125.15        +5.3%   $   100.52        +5.0%
      Alberta              $    82.94       +12.0%   $    79.68       +14.0%
      Saskatchewan         $    78.63       +24.2%   $    74.39       +14.9%
      Ontario              $    64.87        +1.1%   $    57.39        +1.1%
      Quebec               $    98.83        -6.9%   $    83.65        -4.8%
      Atlantic Canada      $    70.81        +0.7%   $    59.83        +1.1%

    (*) Based on same hotel sales, except for available room nights


    Financial highlights:

    (expressed in thousands of dollars, except per unit amounts)

                                   Three months               Six months
                                   ended June 30             ended June 30
                           ------------------------  ------------------------
                                 2007         2006         2007         2006

    Operating revenues     $  100,332   $   87,137   $  181,030   $  152,505
    Gross profit           $   57,761   $   49,752   $  100,344   $   85,615
    Net income (loss)
     - basic               $   (2,044)  $   11,942   $   (1,780)  $   12,606
    Net income (loss)
     - diluted             $   (2,044)  $   13,439   $   (1,780)  $   12,606
    Net income (loss)
     per unit - basic      $    (0.04)  $     0.28   $    (0.04)  $     0.29
    Net income (loss)
     per unit - diluted    $    (0.04)  $     0.26   $    (0.04)  $     0.29
    FFO - basic            $   21,964   $   18,389   $   28,482   $   24,401
    FFO - diluted          $   22,473   $   19,886   $   29,729   $   27,594
    FFO per unit - basic   $     0.45   $     0.42   $     0.60   $     0.57
    FFO per unit
     - diluted             $     0.44   $     0.39   $     0.58   $     0.54
    

    Three months ended June 30

    Net loss for the three months ended June 30, 2007 was $2.0 million or
$0.04 per unit as compared with basic net income of $11.9 million or $0.28 per
unit in 2006. If converted, the impact of outstanding convertible debentures
was not dilutive to net income for the current quarter. On June 22, 2007, the
Canadian Government enacted new tax legislation that, after January 1, 2011,
effectively imposes an income tax on publicly traded trusts, including CHIP
REIT. While the Trust will not be liable for current taxes until after
January 1, 2011, it has recognized, in the current period, the future income
taxes arising from temporary tax differences in existence at June 30, 2007
that are expected to reverse after January 1, 2011 at the legislated tax rate
of 31.5%. Of the $17.9 million future income tax expense recorded in the
quarter, $16.9 million or $0.35 per unit was the result of the new tax
legislation.
    Basic FFO for the quarter was $22.0 million, an increase of 19.4% from
$18.4 million in the prior year. Basic FFO per unit increased by 7.1% to
45 cents compared to 42 cents in 2006. Diluted FFO per unit was 44 cents, an
increase of 12.8% over the 39 cents reported in 2006.
    In 2006, CHIP REIT acquired two hotels after the second quarter of the
year, the Hilton Montreal Bonaventure in Montreal, Quebec and the Harbour
Towers Hotel & Suites in Victoria, B.C. These hotels, which were both acquired
in September 2006, added 591 guest rooms to the portfolio. In June 2006, CHIP
REIT sold the 152-room Hotel Gander in Gander, Newfoundland. As a result of
this portfolio activity, available room nights increased by 6.6% in 2007, and
impacted the comparability of operating results between the second quarters of
2007 and 2006.
    The two acquisitions noted above had a positive impact on FFO of nearly
$.04 per unit after taking into account the cost of incremental debt.
    Operating revenues increased by approximately $13.2 million or 15.1%. Of
this increase, approximately $9.9 million or 75% resulted from the portfolio
changes noted above. Revenues on properties owned throughout the same period
last year increased by approximately $3.3 million or 3.8%. Total room revenue
increased by $9.6 million or 19%. This increase reflects the additional rooms
added in the third quarter of 2006 as well as a year-over-year increase in
reported RevPAR of 11.7%. Food, beverage and other revenues increased by
$3.6 million or 9.8%, with portfolio changes accounting for approximately
$3.1 million or 87% of this increase.
    On a same-hotel basis, RevPAR for CHIP REIT's portfolio increased by 3.8%
over 2006, due to a 4.5% increase in the average daily room rate, combined
with a 0.4 percentage point decrease in occupancy rates. Management of the
Trust has been focusing on achieving room rate growth, particularly in Western
Canada where demand conditions are robust.
    Regionally, CHIP REIT's Saskatchewan properties reported a 24.2% increase
in RevPAR for the quarter due to a 10.3% increase in average daily room rate,
combined with an 8.2 percentage point increase in occupancy. All three hotels
in Saskatchewan enjoyed strong RevPAR growth of between 19% and 28% due to
increased group and transient demand brought on by the strengthening economy
in the province, particularly in the resource sector. The Alberta properties
reported RevPAR growth of 12.0% due primarily to an 11.4% increase in average
daily room rates. The strength of the resource sector in Alberta resulted in
RevPAR growth in nine of the Trust's ten hotels. Growth was strongest in the
northern part of Alberta, with RevPAR increases ranging between 5.8% and
50.9%. The Quality Hotel, Grande Prairie was the exception, with a 9.8%
decrease in RevPAR on a 24.6% drop in occupancy due to a slow down in activity
in the natural gas sector starting in April. All three properties in the BC
region showed growth with a 5.3% increase in RevPAR. Reduced demand for hotel
rooms in Quebec, primarily the result of fewer US travelers and lower
convention activity, resulted in a decrease in RevPAR of 6.9% for the quarter.
Atlantic Canada and Ontario showed modest increases in RevPAR of 0.7% and
1.1%, respectively.
    Gross profit margin increased half a percentage point from 57.1% to 57.6%
due mainly to higher revenue growth in the rooms division in comparison with
the food and beverage division. Cash operating margin decreased by
approximately 40 basis points due in part to the portfolio changes, as the
margin on properties owned throughout each period improved by approximately
70 basis points. Head office costs increased $900,000 or 0.5 percentage points
of total revenues due to higher salary costs and the costs of the strategic
review work being done by the Special Committee of the Board of Trustees.
    Selling, general and administration expenses increased $4.2 million or
19.0% and increased 0.9 percentage points as a percent of total revenue. The
increase as a percent of revenue was predominantly the result of higher costs
in our newly acquired properties and the higher head office costs noted above.
Taxes insurance and rent and depreciation and amortization increased $700,000
and $600,000 respectively as a result of the acquisitions in September 2006.
    Net interest expense for the quarter decreased by approximately $400,000.
This change consisted of a $1 million decrease in interest on convertible
debentures as a result of the conversion of debentures into units over the
past year, offset by interest paid on new debt incurred in 2006 to fund
property acquisitions. Other losses of $892,000 in 2006 were incurred on the
sale of Hotel Gander.

    Six months ended June 30

    Net loss for the six months ended June 30, 2007 was $1.8 million or $0.04
per unit as compared with basic net income of $12.6 million or $0.29 per unit
in 2006. If converted, the impact of outstanding convertible debentures was
not dilutive to net income for either year. On June 22, 2007, the Canadian
Government enacted new tax legislation that, after January 1, 2011,
effectively imposes an income tax on CHIP REIT. While the Trust will not be
liable for current taxes until after January 1, 2011, it has recognized, in
the current period, the future income taxes arising from temporary tax
differences expected to reverse after January 1, 2011 at the legislated tax
rate of 31.5%. Of the $18.1 million future income tax expense recorded in the
period, $16.9 million or $0.35 per unit was the result of the new tax
legislation.
    Basic FFO for the period was $28.5 million, an increase of 16.7% from
$24.4 million in the prior year. Basic FFO per unit increased by 5.3% to
60 cents compared to 57 cents in 2006. Diluted FFO per unit was 58 cents, an
increase of 7.4% over the 54 cents reported in 2006.
    In 2006, CHIP REIT acquired one hotel and two restaurants early in the
second quarter and two additional hotels late in the third quarter. The three
hotels acquired were the Delta Victoria Ocean Pointe Resort & Spa in Victoria,
B.C. (April 2006), the Hilton Montreal Bonaventure in Montreal, Quebec
(September 2006), and the Harbour Towers Hotel & Suites in Victoria, B.C.
(September 2006). These hotels added 830 guest rooms to the portfolio. As a
result of this portfolio activity, available room nights increased by 8.2% for
the period in 2007 and affected the comparability of results between the six
months ended June 30, 2007 and the six months ended June 30, 2006.
    Operating revenues increased by approximately $28.5 million or 18.7%. Of
this increase, approximately $21.2 million or 74% resulted from the portfolio
changes noted above. Revenues on properties owned over the same period in 2006
increased by approximately $7.3 million or 4.8%. Total room revenue increased
by $17.9 million or 20.6%. The increase is composed of $12.4 million revenue
from additional rooms added during 2006 and a year-over-year increase in
reported RevPAR of 11.5%. Food, beverage and other revenues increased by
$10.6 million or 16.2%, with portfolio changes accounting for approximately
$8.8 million or 83% of this increase.
    On a same-hotel basis, RevPAR for CHIP REIT's portfolio increased by 4.8%
over 2006, due to a 0.7 percentage point decrease in occupancy rates combined
with average daily room rate growth of 5.8%. Management of the Trust has been
focusing on achieving room rate growth, particularly in Western Canada where
demand conditions are robust.
    Regionally, properties in CHIP REIT's Saskatchewan region reported RevPAR
growth of 14.9% due to an 8.5% increase in the average daily room rate,
combined with a 4.0 percentage point increase in occupancy. The strong results
in Saskatchewan can be attributed to higher group and transient demand brought
on by a strengthening economy in the region, particularly in the resource
sector. Alberta properties reported a 14.0% increase in RevPAR for the period
primarily due to a 13.3% increase in average daily room rates with occupancy
growing by 0.4 percentage points. Growth was strongest in Northern Alberta
with RevPAR increases of over 10% in each of these six properties. British
Columbia recorded RevPAR growth of 5.0% with the most significant growth
coming from the Residence Inn, Vancouver with a 12.8% increase. The Ontario
and Atlantic regions reported modest RevPAR increases of 1.1%. RevPAR in the
Quebec region was down 4.8% over last year on a combination of 1.8 percentage
point decline in occupancy and a 2.2% reduction in average daily room rates.
    Gross profit margin decreased by 0.7 percentage points to 55.4% from
56.1% as two of the new properties acquired in 2006 operate at lower margins,
particularly in the first quarter of the year. Cash operating margin decreased
by 1.4 percentage points due to the portfolio changes as margins on hotels
owned throughout the same period last year increased by approximately 90 basis
points.
    Selling, general and administration expenses increased $9.2 million or
21.2% and, as a percentage of revenue, were 0.6 percentage points higher than
last year. The increase as a percent of revenue was predominantly the result
of higher cost levels in the newly acquired properties. Head office costs
increased $1.3 million or 0.2 percentage points of total revenues due to
higher salary costs and the costs of the strategic review work being done by
the Special Committee of the Board of Trustees. Increases in taxes, insurance
and rent of $1.8 million and depreciation and amortization of $1.4 million
reflect the additional properties acquired in 2006.
    Net interest expense for the period decreased by approximately $300,000.
This change consisted of a $1.9 million decrease in interest on convertible
debentures as a result of the conversion of debentures into units over the
past year, offset by $1.6 million additional interest expense on new debt
incurred in 2006 to fund property acquisitions. Other losses in 2006 of
$892,000 were incurred on the sale of Hotel Gander.

    
    Summary of Quarterly Results

                                            Quarters Ended
                                   ($ 000's except per unit amounts)

                              Sep. 30,    Dec.  31,     Mar. 31,     June 30,
                                 2005         2005         2006         2006
                           --------------------------------------------------
    Revenue and earnings
    Total revenue          $   82,225   $   77,202   $   65,368   $   87,137
    Net income (loss)      $   13,337   $    6,744   $      664   $   11,942
    Distributable income
     - basic               $   19,349   $   13,084   $    6,375   $   18,748
    Distributable income
     - diluted             $   20,745   $   14,672   $    6,375   $   20,075
    FFO - basic            $   18,427   $   12,689   $    6,012   $   18,389
    FFO - diluted          $   20,524   $   14,478   $    6,012   $   19,886

    Per Unit Results
    Net income (loss)
     - basic               $     0.33   $     0.16   $     0.02   $     0.28
    Net income (loss)
     - diluted             $     0.30   $     0.16   $     0.02   $     0.26
    Distributable income
     - basic               $     0.47   $     0.31   $     0.15   $     0.43
    Distributable income
     - diluted             $     0.41   $     0.29   $     0.15   $     0.40
    FFO - basic            $     0.45   $     0.30   $     0.14   $     0.42
    FFO - diluted          $     0.41   $     0.29   $     0.14   $     0.39



                                            Quarters Ended
                                   ($ 000's except per unit amounts)

                              Sep. 30,     Dec. 31,     Mar. 31,     June 30,
                                 2006         2006         2007         2007
                           --------------------------------------------------
    Revenue and earnings
    Total revenue          $   89,219   $   93,395   $   80,698   $  100,332
    Net income (loss)      $   15,669   $    8,000   $      264   $   (2,044)
    Distributable income
     - basic               $   21,471   $   15,019   $    6,793   $   22,199
    Distributable income
     - diluted             $   22,614   $   15,815   $    6,793   $   22,641
    FFO - basic            $   21,138   $   14,708   $    6,518   $   21,964
    FFO - diluted          $   22,423   $   15,623   $    6,518   $   22,473

    Per Unit Results
    Net income (loss)
      - basic              $     0.35   $     0.17   $     0.01   $    (0.04)
    Net income (loss)
     - diluted             $     0.33   $     0.17   $     0.01   $    (0.04)
    Distributable income
     - basic               $     0.48   $     0.32   $     0.14   $     0.46
    Distributable income
     - diluted             $     0.45   $     0.31   $     0.14   $     0.45
    FFO - basic            $     0.47   $     0.32   $     0.14   $     0.45
    FFO - diluted          $     0.44   $     0.31   $     0.14   $     0.44
    

    Liquidity and Capital Resources

    At June 30, 2007, CHIP REIT had net short-term borrowings of $2.6 million
with an additional $46 million available under a secured credit facility. As
at June 30, 2007, CHIP REIT's debt to capitalization was 28.1%, well below the
40% limit in its declaration of trust. The last six months of the year is
traditionally a strong period for the Canadian hotel industry, normally
producing more than half of any given year's cash flows. Accordingly, CHIP
REIT's liquidity and capital resources are adequate to support ongoing
operations. As at June 30, 2007, 11 of CHIP REIT's 32 hotel properties
continued to be unsecured.

    Three Months Ended June 30, 2007:

    During the quarter ended June 30, 2007, CHIP REIT's cash and cash
equivalents decreased by approximately $1.1 million to $1.4 million.

    Operating activities

    Cash flow from operations, before changes in working capital, was
$22.2 million for the quarter, an increase of $3.5 million or 18.5% from 2006.
This improvement reflects the improved operating performance of the Trust as
described earlier. Changes in non-cash operating working capital utilized cash
of approximately $3.4 million, compared with approximately $800,000 in 2006.
The variation between the years results from timing differences in working
capital balances.

    Investing activities

    Investing activities utilized cash of $4.3 million compared to
$30.6 million last year. In 2006, $31.9 million was invested in the
acquisition of the Delta Victoria Ocean Pointe Resort & Spa and two Vancouver
restaurants, and proceeds of $4.7 million were received on the sale of the
Hotel Gander. Capital expenditures of $4.4 million in 2007 were $900,000
higher than in 2006.

    Financing activities

    Financing activities utilized cash of $15.5 million, as compared with
$18.4 million cash generated last year. In 2006, $30 million was drawn under a
secured long term debt facility to help fund acquisitions. Distributions to
unitholders increased by approximately $1.8 million to $11.7 million as a
result of an increase in the number of units outstanding and two distribution
increases totaling 7.6% in the past year. Payments to reduce the Trust's line
of credit were $3.4 million compared with $1.4 million in 2006.

    Six months ended June 30, 2007:

    During the six months ended June 30, 2007, CHIP REIT's cash and cash
equivalents decreased by approximately $6.8 million.

    Operating activities

    Cash flow from operations, before changes in working capital, was
$29.0 million for the period, an increase of $3.9 million or 15.6% from 2006.
This increase reflects the improved operating performance of the Trust as
described earlier. Changes in non-cash operating working capital utilized cash
of approximately $7.4 million, compared with approximately $2.0 million in
2006. The variation between the years results from timing differences in
working capital balances.

    Investing activities

    Investing activities utilized cash of $9.5 million compared to
$34.2 million in 2006. Capital expenditures of $9.2 million made up the
majority of the investment activity in the six month period, and were $2.7
million higher than last year. In 2006, $32.7 million was utilized in the
acquisition of the Delta Victoria Ocean Pointe Resort and Spa and two
Vancouver restaurants and proceeds of $4.7 million were received on the sale
of the Hotel Gander.

    Financing activities

    Financing activities utilized cash of $18.9 million, as compared with
$10.0 million cash generated last year. Distributions to unitholders were
$23 million for the period and increased $3.5 million over last year as a
result of an increase in the number of units outstanding and two distribution
increases over the past year totaling 7.6%. In 2006, $30 million was drawn
under a secured long term debt facility. Drawings on the short term loan
facility totaled $4.0 million in the six month period, compared to no drawings
during the same period last year. Repayment of long term debt decreased by
$600,000 as a larger portion of the Trust's credit facilities are non-
amortizing.

    
    Contractual Obligations

    Contractual obligations due by period from December 31, 2006 are as
follows:

                                   Payments Due by December 31
                                             (000's)
                                                                      After
                           Total     1 year  2-3 years  4-5 years    5 years
                      -------------------------------------------------------

    Long-term debt     $ 243,138  $   8,751  $  64,656  $  84,401  $  85,330
    Operating leases      62,101      1,272      4,298      4,061     52,470
                      -------------------------------------------------------
    Total contractual
     obligations       $ 305,239  $  10,023  $  68,954  $  88,462  $ 137,800
                      -------------------------------------------------------
                      -------------------------------------------------------
    

    Internal Control over Financial Reporting

    There has been no change in the Trust's internal control over financial
reporting that occurred during the second quarter ended June 30, 2007 that has
materially affected, or is reasonably likely to materially affect, the Trust's
internal control over financial reporting.

    Disclosure of Outstanding Unit Data

    As of August 2, 2007, CHIP REIT had 48,552,805 units issued and
outstanding and 769,375 options outstanding of which, 353,125 were
exercisable, at exercise prices ranging from $7.94 per unit to $16.94 per
unit.

    Outlook

    The Canadian hospitality industry is continuing to perform well as the
strength in the domestic economy has more than offset lower levels of visitors
from the United States. Growth in demand for hotel rooms is exceeding the
growth in supply of hotel rooms with Western Canada continuing to be a robust
marketplace. Occupancies continue to remain strong and increases in average
daily room rates are being achieved.


    
    CANADIAN HOTEL INCOME PROPERTIES
    REAL ESTATE INVESTMENT TRUST
    Consolidated Balance Sheets
    (Expressed in thousands of dollars)

    -------------------------------------------------------------------------
                                                       June 30,  December 31,
                                                          2007          2006
    -------------------------------------------------------------------------
                                                    (unaudited)
    Assets

    Current assets:
      Cash and cash equivalents                      $   1,354     $   8,153
      Restricted cash                                      607           572
      Accounts receivable                               17,966        17,352
      Inventories                                        3,453         3,447
      Prepaid expenses and other                         7,444         1,791
      Current portion of mortgages receivable            1,871            62
      -----------------------------------------------------------------------
                                                        32,695        31,377

    Future income tax assets (note 5)                    3,018         3,762

    Mortgages receivable                                 4,453         6,296

    Hotel properties and equipment (note 3)            548,681       551,804

    Other assets                                           685         3,562

    Goodwill                                            18,735        18,735
    -------------------------------------------------------------------------

                                                     $ 608,267     $ 615,536
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Accounts payable and accrued liabilities       $  42,736     $  44,229
      Short-term borrowings                              3,999             -
      Current portion of long-term debt (note 4)        58,471        19,070
      -----------------------------------------------------------------------
                                                       105,206        63,299

    Long-term debt (note 4)                            184,667       244,978

    Future income tax liabilities (note 5)              17,341             -

    Unitholders' equity (note 6)                       301,053       307,259
    -------------------------------------------------------------------------

                                                     $ 608,267     $ 615,536
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Commitments and contingencies (note 9)
    Subsequent event (note 11)

    See accompanying notes to the consolidated financial statements.



    CANADIAN HOTEL INCOME PROPERTIES
    REAL ESTATE INVESTMENT TRUST
    Consolidated Statements of Unitholders' Equity (unaudited)
    (Expressed in thousands of dollars)

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

                                                    Contributed   Conversion
                                             Units      surplus       option
    -------------------------------------------------------------------------
    Balance, December 31, 2006           $ 477,503    $       -    $     635
    Units issued on exercise of options        983            -            -
    Conversion of convertible debentures    17,829            -         (324)
    Stock-based compensation                     -           41            -
    Net income (loss) and distributions
     to unitholders                              -            -            -
    -------------------------------------------------------------------------
    Balance, June 30, 2007               $ 496,315    $      41    $     311
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                        Net income
                                                to
                                       unitholders  Distributions      Total
    -------------------------------------------------------------------------
    Balance, December 31, 2006           $ 196,317    $(367,196)   $ 307,259
    Units issued on exercise of options          -            -          983
    Conversion of convertible debentures         -            -       17,505
    Stock-based compensation                     -            -           41
    Net income (loss) and distributions
     to unitholders                         (1,780)     (22,955)     (24,735)
    -------------------------------------------------------------------------
    Balance, June 30, 2007               $ 194,537    $(390,151)   $ 301,053
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

                                                    Contributed   Conversion
                                             Units      surplus       option
    -------------------------------------------------------------------------
    Balance, December 31, 2005           $ 428,212            -    $   1,217
    Units issued on exercise of options        971            -            -
    Conversion of convertible debentures    14,247            -         (338)
    Net income and distributions to
     unitholders                                 -            -            -
    -------------------------------------------------------------------------
    Balance, June 30, 2006               $ 443,430            -    $     879
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


    -------------------------------------------------------------------------
                                        Net income
                                                to
                                       unitholders  Distributions      Total
    -------------------------------------------------------------------------
    Balance, December 31, 2005           $ 160,042    $(326,305)   $ 263,166
    Units issued on exercise of options          -            -          971
    Conversion of convertible debentures         -            -       13,909
    Net income and distributions to
     unitholders                            12,606      (19,452)      (6,846)
    -------------------------------------------------------------------------
    Balance, June 30, 2006               $ 172,648    $(345,757)   $ 271,200
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to the consolidated financial statements.



    CANADIAN HOTEL INCOME PROPERTIES
    REAL ESTATE INVESTMENT TRUST
    Consolidated Statements of Income (unaudited)
    (Expressed in thousands of dollars)

    -------------------------------------------------------------------------
                                          THREE MONTHS            SIX MONTHS
                                         ENDED JUNE 30         ENDED JUNE 30
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------

    Revenue:
      Room                        $  59,878  $  50,306  $ 105,053  $  87,113
      Food, beverage and other       40,454     36,831     75,977     65,392
      -----------------------------------------------------------------------
                                    100,332     87,137    181,030    152,505

    Cost of sales                    42,571     37,385     80,686     66,890
    -------------------------------------------------------------------------

    Gross profit                     57,761     49,752    100,344     85,615

    Operating expenses:
      Selling, general and
       administration                26,503     22,266     52,789     43,560
      Taxes, insurance and rent       5,300      4,600     10,828      8,987
      Depreciation and amortization   6,128      5,537     12,265     10,852
      -----------------------------------------------------------------------
                                     37,931     32,403     75,882     63,399
    -------------------------------------------------------------------------

    Operating income                 19,830     17,349     24,462     22,216

    Other expenses (income):
      Interest expense                4,166      4,550      8,480      8,787
      Interest income                  (144)      (166)      (290)      (331)
      Other losses                       55        892         55        892
      -----------------------------------------------------------------------
                                      4,077      5,276      8,245      9,348
    -------------------------------------------------------------------------

    Income before income taxes       15,753     12,073     16,217     12,868

    Income taxes:
      Current                           (94)         6        (88)        12
      Future (note 5)                17,891        125     18,085        250
      -----------------------------------------------------------------------
                                     17,797        131     17,997        262
    -------------------------------------------------------------------------
    Net income (loss)             $  (2,044) $  11,942     (1,780) $  12,606
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Basic net income (loss) per
     unit (note 7)                $   (0.04) $    0.28  $   (0.04) $    0.29
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Diluted net income (loss) per
     unit (note 7)                $   (0.04) $    0.26  $   (0.04) $    0.29
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to the consolidated financial statements.



    CANADIAN HOTEL INCOME PROPERTIES
    REAL ESTATE INVESTMENT TRUST
    Consolidated Statements of Cash Flows (unaudited)
    (Expressed in thousands of dollars)

    -------------------------------------------------------------------------
                                          THREE MONTHS            SIX MONTHS
                                         ENDED JUNE 30         ENDED JUNE 30
                                       2007       2006       2007       2006
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operations:
      Net income (loss)           $  (2,044) $  11,942  $  (1,780) $  12,606
      Items not affecting cash:
        Depreciation and
         amortization                 6,128      5,537     12,265     10,852
        Other losses                     55        892         55        892
        Non-cash interest expense       159        242        348        504
        Future income taxes          17,891        125     18,085        250
        Stock-based compensation         25          -         41          -
        Amortization of other assets     10         10         19         19
    -------------------------------------------------------------------------

      Cash flow from operations
       before changes in non-cash
       operating working capital     22,224     18,748     29,033     25,123

      Changes in non-cash operating
       working capital (note 10)     (3,440)      (778)    (7,426)    (2,036)
    -------------------------------------------------------------------------
      Cash flow from operations      18,784     17,970     21,607     23,087

    Investments:
      Capital expenditures           (4,408)    (3,470)    (9,167)    (6,466)
      Acquisition of properties           -    (31,947)         -    (32,675)
      Proceeds on sale of property        -      4,678          -      4,678
      Decrease (increase) in other
       assets                            23       (419)        48       (836)
      (Decrease) increase in
       accounts payable for capital
       expenditures                    (170)       383       (340)       765
      Decrease (increase) in
       restricted cash                  196        186        (35)       277
      Repayment of mortgage receivable   17         15         34         26
    -------------------------------------------------------------------------
                                     (4,342)   (30,574)    (9,460)   (34,231)

    Financing:
      Distributions to unitholders  (11,725)    (9,905)   (22,955)   (19,452)
      Proceeds from long-term debt        -     30,000          -     30,000
      Repayment of long-term debt      (487)      (792)      (973)    (1,550)
      Issuance of units on exercise
       of options                        83        494        983        971
      (Repayment of) proceeds from
       short-term borrowings         (3,378)    (1,372)     3,999          -
    -------------------------------------------------------------------------
                                    (15,507)    18,425    (18,946)     9,969
    -------------------------------------------------------------------------

    (Decrease) increase in cash and
     cash equivalents                (1,065)     5,821     (6,799)    (1,175)

    Cash and cash equivalents,
     beginning of period              2,419      1,651      8,153      8,647
    -------------------------------------------------------------------------

    Cash and cash equivalents, end
     of period                    $   1,354  $   7,472  $   1,354  $   7,472
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary information (note 10)

    See accompanying notes to the consolidated financial statements.



    CANADIAN HOTEL INCOME PROPERTIES REAL ESTATE INVESTMENT TRUST
    Notes to the Consolidated Financial Statements
    (Tabular dollar amounts in thousands, except per unit amounts)

    Six months ended June 30, 2007 (unaudited)

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

    1.  General:

        These unaudited interim consolidated financial statements do not
        include all disclosures required by Canadian generally accepted
        accounting principles and therefore should be read in conjunction
        with the consolidated financial statements of Canadian Hotel Income
        Properties Real Estate Investment Trust ("CHIP REIT" or the "Trust")
        for the year ended December 31, 2006.

        CHIP REIT's business follows a seasonal pattern with rooms occupancy
        and revenues traditionally being lower in the first quarter and
        reaching a peak in the third quarter. This seasonality is the result
        of business and leisure travel patterns. The results in the six
        months ended June 30, 2007 are, therefore, not necessarily indicative
        of performance for the balance of the year.

    2.  Significant accounting policies:

        These interim consolidated financial statements have been prepared in
        accordance with Canadian generally accepted accounting principles,
        using the same accounting policies and methods of application as set
        out in note 2 to the consolidated financial statements for the year
        ended December 31, 2006, except as noted below:

        Financial instruments:

        Effective January 1, 2007, CHIP REIT adopted, on a prospective basis
        in accordance with their transitional provisions, the new
        recommendations of the Canadian Institute of Chartered Accountants
        ("CICA") relating to Sections 3855 ("Financial Instruments -
        Recognition and Measurement"), 3862 ("Financial Instruments -
        Disclosures") and 3863 ("Financial Instruments - Presentation") of
        the CICA Handbook.

        The new standards require that financial assets and liabilities be
        recognized on the balance sheet at fair value when the entity becomes
        a party to the contractual provisions of a financial instrument or
        non-financial derivative contract. Measurement in subsequent periods
        depends on whether the financial instrument has been classified as
        held for trading, available for sale, held to maturity, or loans and
        receivables. Financial assets and liabilities classified as held for
        trading and financial assets classified as held for sale are measured
        at fair value. Financial assets held to maturity, loans and
        receivables and financial liabilities other than those held for
        trading are measured at amortized cost using the effective interest
        method of amortization.

        In accordance with these new standards, CHIP REIT has categorized its
        financial assets as loans and receivables and its financial
        liabilities, net of deferred transaction costs, as liabilities not
        held for trading. In the accompanying consolidated balance sheet as
        at June 30, 2007, these financial assets and liabilities are valued
        at amortized cost using the effective interest method of
        amortization. Comparative figures for 2006 have not been reclassified
        to conform to the basis of presentation used commencing January 1,
        2007. The amount of deferred transaction costs reclassified to reduce
        long-term debt at January 1, 2007 was $2,780,000.

        In prior periods deferred transaction costs were amortized on a
        straight-line basis. There is no significant difference in the six
        months ended June 30, 2007 between the amortization that has been
        charged applying the effective interest method from that which would
        have been applied on a straight-line basis. In addition, the effect
        of these changes has had no impact on retained earnings at January 1,
        2007 or the previously reported carrying values of CHIP REIT's assets
        and liabilities.

        Income taxes:

        Prior to June 2007, income taxes were recorded only on income earned
        by CHIP REIT's wholly-owned corporate subsidiaries, as the trust
        entity was not subject to income tax under Part I of the Income Tax
        Act (Canada) provided it distributed its income for income tax
        purposes to its unitholders.

        On June 22, 2007, the Canadian Government enacted new tax legislation
        that effectively imposes an income tax on income trusts and
        certain REIT's not qualifying for tax exempt status. As at June 30,
        2007 CHIP REIT did not qualify as a tax exempt REIT under the new
        legislation. The new tax will not apply to the Trust until 2011 as a
        transition period applies to publicly traded trusts that existed
        prior to November 1, 2006. As a result of this new trust taxation,
        the Trust will use the asset and liability method of accounting for
        income taxes, whereby future income tax assets and liabilities are
        determined based on differences between the financial statement
        carrying amounts of existing assets and liabilities and their
        respective tax bases. Such differences are then measured using
        substantively enacted or enacted tax rates expected to apply to
        taxable income in the years in which those temporary differences are
        expected to reverse. Future tax assets are recognized to the extent
        that they are considered more likely than not to be realized.

    3.  Hotel properties and equipment:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------
                                        Accumulated    Net book     Net book
                                 Cost  Depreciation       value        value
        ---------------------------------------------------------------------

        Land               $   62,864   $        -   $   62,864   $   62,864
        Buildings             509,386       76,074      433,312      434,774
        Furniture,
         fixtures and
         equipment            144,321       98,797       45,524       47,851
        Operating stock         6,981            -        6,981        6,315
        ---------------------------------------------------------------------
                           $  723,552   $  174,871   $  548,681   $  551,804
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


    4.  Long-term debt:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------

        Debentures                                   $    4,782   $    4,782
        Mortgages(a)                                    213,617      216,178
        Convertible debentures(b)                        24,739       43,088
        ---------------------------------------------------------------------
                                                        243,138      264,048
        Less: current portion                            58,471       19,070
        ---------------------------------------------------------------------

                                                     $  184,667   $  244,978
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------



        (a)   Mortgages:

              ---------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
              ---------------------------------------------------------------

              Mortgages payable; secured by first
               charges over certain hotel properties;
               interest payable monthly at a weighted
               average fixed rate of 6.25%
               (December 31, 2006 - 6.25%); maturing
               between February 2008 and April 2016;
               net of unamortized deferred
               transaction costs of $1,404,000.      $  195,042   $  197,212

              Term loan facility of $20,000,000;
               secured by first charges over certain
               hotel properties; interest payable
               monthly on a floating rate basis;
               maturing May 2010; effective annual
               interest rate on balance drawn at
               June 30, 2007 was 6.41% (December 31,
               2006 - 6.33%); net of unamortized
               deferred transaction costs
               of $184,000.                              18,575       18,966
              ---------------------------------------------------------------

                                                     $  213,617   $  216,178
              ---------------------------------------------------------------
              ---------------------------------------------------------------



        (b)   Convertible debentures:

              ---------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
              ---------------------------------------------------------------

              $8,003,000 principal amount
               (December 31, 2006 - $17,167,000),
               maturing September 1, 2007;
               convertible at the holders' option
               at $9.60 per unit; interest at
               8.5% per annum, payable semi-annually;
               redeemable, in whole or in part,
               by CHIP REIT at a price equal to the
               principal amount plus accrued and
               unpaid interest; net of unamortized
               deferred transaction costs
               of $11,000.                           $    7,984   $   17,099

              $17,360,000 principal amount
               (December 31, 2006 - $26,047,000),
               maturing November 30, 2014;
               convertible at the holders' option
               at $11.75 per unit; interest at
               6.0% per annum, payable semi-annually;
               redeemable, in whole or in part,
               by CHIP REIT on or after November 30,
               2008 at a price equal to the principal
               amount plus accrued and unpaid
               interest. Prior to November 30, 2010,
               the redemption option can only be
               exercised by CHIP REIT if the current
               market price of the trust units is at
               least 125% of the conversion price;
               net of unamortized deferred
               transaction costs of $569,000.            16,755       25,989
              ---------------------------------------------------------------

                                                     $   24,739   $   43,088
              ---------------------------------------------------------------
              ---------------------------------------------------------------

              During the six months ended June 30, 2007, $9,164,000 (year
              ended December 31, 2006 - $14,883,000) of the 8.5% convertible
              debentures were converted into 954,573 (December 31, 2006 -
              1,550,291) CHIP REIT units, and $8,687,000 (year ended
              December 31, 2006 - 33,953,000) of the 6% convertible
              debentures were converted into 739,307 CHIP REIT units
              (December 31, 2006 - 2,889,606), both at the convertible
              debenture holders' option.


    5.  Future income taxes:

        On June 22, 2007, the Canadian Government passed new tax legislation
        that, after January 1, 2011, will make the Trust a taxable entity.
        While CHIP REIT will not be liable for current taxes until after
        January 1, 2011, it must recognize, in the current period, the future
        income taxes arising from taxable temporary differences as at
        June 30, 2007 expected to reverse after January 1, 2011, at the 31.5%
        tax rate applicable by the legislation. Accordingly, and as a result
        of the new legislation, CHIP REIT recorded additional future income
        tax expense of $16,856,000 in the three months ended June 30, 2007,
        with a corresponding change in future income tax assets and
        liabilities.

        Future income tax assets and liabilities are recognized on temporary
        differences between accounting and tax bases of existing assets and
        liabilities as follows:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------

        Future income tax assets (liabilities):
        Hotel properties and equipment              $   (15,468) $       (83)
        Other                                              (483)           -
        Valuation allowance                              (1,711)           -
        Loss carry forwards                               3,339        3,845
        ---------------------------------------------------------------------
        Net future income tax (liabilities)
         assets                                     $   (14,323) $     3,762
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Presented as follows:
        Long-term future income tax assets          $     3,018  $     3,762
        Long-term future income tax liabilities         (17,341)           -
        ---------------------------------------------------------------------
                                                    $   (14,323) $     3,762
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    6.  Unitholders' equity:

    (a) Units issued and outstanding:

        As at June 30, 2007, 48,489,602 (December 31, 2006 - 46,697,982)
        units had been issued and outstanding for net proceeds of
        $496,315,000 (December 31, 2006 - $477,503,000).

    (b) Options:

        Options to purchase an aggregate of 769,375 (December 31, 2006 -
        312,115) units have been granted to certain trustees, officers, and
        employees of CHIP REIT, and its affiliates at prices ranging from
        $7.94 per unit to $16.94 per unit. These options expire at various
        dates ranging from November 25, 2007 to February 13, 2017.

        In February 2007, 555,000 options were granted to certain officers
        and employees of CHIP REIT at an exercise price of $16.94 per unit.
        The fair value of the options granted was $683,000 using a Black
        Scholes option pricing model with the following factors: volatility
        of 15%, term of seven years, dividend rate of 5.72% and a risk free
        interest rate of 3.9%. Compensation costs of $25,000 and $41,000
        respectively for the three and six months ended June 30, 2007
        (June 30, 2006 - nil), related to the options granted, were charged
        to selling, general and administration expenses on the consolidated
        statements of income.

    7.  Basic and diluted net income (loss) per unit:

        ---------------------------------------------------------------------
                                        THREE MONTHS              SIX MONTHS
                                       ENDED JUNE 30           ENDED JUNE 30
                                    2007        2006        2007        2006
        ---------------------------------------------------------------------

        Basic net
         income (loss)        $   (2,044) $   11,942  $   (1,780) $   12,606
        Add:  Interest on
               convertible
               debentures              -       1,349           -           -
              Accretion of
               convertible
               debentures              -         148           -           -
        ---------------------------------------------------------------------

        Diluted net
         income (loss)        $   (2,044) $   13,439  $   (1,780) $   12,606
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Weighted average
         units outstanding
         for basic per unit
         calculations         48,330,422  43,330,683  47,762,229  42,833,278
        Dilutive effect of
         convertible
         debentures                    -   7,298,971           -           -
        Dilutive effect of
         options                       -      86,437           -      88,498
        ---------------------------------------------------------------------

        Weighted average
         units used for
         diluted per unit
         calculations         48,330,422  50,716,091  47,762,229  42,921,776
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        For the three and six months ended June 30, 2007 and the six months
        ended June 30, 2006, debentures convertible into a weighted average
        of 2,466,747 and 3,007,461 units, respectively (six months ended
        June 30, 2006 - 7,768,759 units) and the associated net income impact
        were excluded from the computation of diluted net income (loss) per
        unit because their effect was not dilutive.

    8.  Employee future benefits:

        CHIP REIT charged to operations pension costs of $460,000 and
        $988,000 respectively for the three and six months ended June 30,
        2007 (June 30, 2006 - $317,000 and $611,000).

    9.  Commitments and contingencies:

        Certain subsidiaries of CHIP REIT have guaranteed the repayment of
        principal and interest on unit purchase loan facilities of three
        executives totaling $585,000 as at June 30, 2007 (December 31,
        2006 - $594,000). The loans are with a major Canadian financial
        institution and are repayable over eight years. Amounts drawn on the
        facilities are secured by the underlying CHIP REIT units purchased
        with no personal recourse to the executive beyond the pledged units.

    10. Supplementary information:

        ---------------------------------------------------------------------
                                          THREE MONTHS            SIX MONTHS
                                         ENDED JUNE 30         ENDED JUNE 30
                                       2007       2006       2007       2006
        ---------------------------------------------------------------------

        The change in non-cash operating working capital balances
        consists of the following:

        Increase in accounts
         receivable               $  (3,024) $  (3,198) $    (614) $  (2,024)
        Increase in inventories        (206)      (897)        (6)      (793)
        Increase in prepaid
         expenses and other          (2,513)      (200)    (5,653)    (2,701)
        Increase (decrease) in
         operating accounts
         payable and accrued
         liabilities                  2,303      3,517     (1,153)     3,482
        ---------------------------------------------------------------------
                                  $  (3,440) $    (778) $  (7,426) $  (2,036)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Other supplemental
         information:
        Interest paid             $   4,000  $   4,560  $   8,739  $   8,254
        Taxes paid, net
         of refunds                       3         17          7          7
        Conversion of convertible
         debentures into units        4,417      5,581     17,829     14,247
        Deposit applied to
         acquisition of properties        -      1,500          -      1,500
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11. Subsequent event:

        On August 1, 2007, CHIP REIT announced that its Board of Trustees had
        entered into a support agreement in favour of a cash takeover offer
        of $19.10 per unit by British Columbia Investment Management
        Corporation. The transaction is conditional upon the receipt of
        customary regulatory approvals, 66 2/3 percent of the outstanding
        units being validly tendered to the offer and the satisfaction of
        certain other conditions. The Board of Trustees has unanimously
        resolved to recommend to the unitholders that they accept the offer.
        The proposed transaction is expected to close in the fourth quarter
        of 2007.
    

    %SEDAR: 00005031E




For further information:

For further information: Kevin Grayston, Executive Vice President & CFO,
Phone: (604) 646-2447, Fax: (604) 646-2404, www.chipreit.com

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Canadian Hotel Income Properties Real Estate Investment Trust

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