HispanicBusiness

OPERATIONS REVIEW

Three months ended March 31, 2013

First quarter hotel revenues decreased $6.0 million, or 4.6%, as compared to the prior period. Excluding asset sales, same-hotel revenues declined $3.0 million or 2.4%. The shortfall is attributable to a 1.0% decline in same-hotel RevPAR, coupled with the loss of one day of operating performance as compared to the prior year (2012 was a leap year). An early Easter at the end of March (as opposed to early April in 2012) contributed to softer year-over-year occupancy this quarter with demand shifting to the second quarter highlighted by RevPAR growth of approximately 9% in April. RevPAR was particularly impacted by performance in the Ottawa market this quarter with InnVest's portfolio of seven hotels in the region (6% of its inventory) experiencing RevPAR declines of approximately 20% following the loss of distribution capacity at one hotel as a result of its de-branding in February 2012 and several non-recurring events benefitting the prior year (Junos, NHL All-Star game). Excluding the Ottawa region, InnVest's first quarter RevPAR increased 0.6%. The Atlantic region experienced reduced occupancies with growth in Halifax offset by reduced demand through the balance of the region.

During the first quarter of 2013, InnVest implemented operational enhancements to leverage InnVest's scale by consolidating certain hotel operation functions in select cities where it has multiple hotels. As a result, InnVest recognized a restructuring charge of $1.3 million but expects to fully recover these costs through expense savings by the end of the year.

The hotel industry has a high level of fixed costs with incremental revenue gains requiring marginal increases in costs. Conversely, in periods of declining revenues, such as experienced in the first quarter of 2013, corresponding decreases to expenses are limited, resulting in declining profitability.

The sale of low-yielding assets over the last year contributed to a modest improvement in Hotel GOP during the first quarter. However, the $3.0 million decline in first quarter same-hotel revenues as compared to the $0.5 million reduction in operating expenses (excluding the restructuring fee), resulted in reduced profitability and margins. Excluding the restructuring charge taken during the quarter, InnVest generated gross operating profit from hotel operations ("Hotel GOP") of $14.6 million, down $2.4 million as compared to the prior period.

PORTFOLIO REPOSITIONING PROGRAM

During the first quarter of 2013, InnVest closed the sale of one non-core leasehold hotel (220 rooms) for gross proceeds of $10.0 million and repaid $4.1 million of mortgage debt.

Subsequent to the end of the quarter, InnVest entered into separate binding purchase and sale agreements to sell two Quebec properties for aggregate gross proceeds of $71.6 million. Both transactions are expected to close in the second quarter. InnVest is currently marketing 10 additional hotels.

CAPITAL INVESTMENT PROGRAM

Capital expenditures during the three months ended March 31, 2013 totalled $5.8 million compared to the notional FF&E Reserve of $5.2 million. Over $12 million in additional capital has been committed as at March 31, 2013, largely reflecting the rollout of InnVest's Comfort Inn revitalization program during the quarter as well as the start of renovations at a number of full-service hotels. InnVest expects to renovate 10 Comfort Inn hotels through the first half of 2013 and an additional 20 hotels by the end of the year.