IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Nine months ended October 31, 2009 (Fiscal Year 2010)
Operations: The Trust owns five hotels (843 suites) in Arizona, southern California, and New Mexico. It operates through a partnership structure and provides management and licensing services to affiliated and third-party properties. The company is transitioning from a hotel owner to a hospitality service provider.

Key Financial Metrics

Liquidity: The Trust maintains an $850,000 line of credit with approximately $830,000 available as of October 31, 2009. Cash balances decreased significantly due to operating losses and capital expenditures.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 18.3% year-over-year, driven by a 19.7% drop in hotel operating revenues. This was caused by lower occupancy (58.6% vs. 64.6%) and a 10.1% decrease in Average Daily Rate (ADR) to $73.48.
• Operating Performance: Operating income collapsed by 96.1% to $9,983. However, the Net Loss attributable to controlling interests improved slightly by 2.0% due to expense reductions.
• Depreciation Impact: Hotel property depreciation decreased by $952,000 compared to the prior year. This reduction is attributed to the reclassification of properties from "held for sale" to "held and used" in the prior year, which had previously suspended depreciation.
• Cash Flow Deterioration: Net cash provided by operating activities swung from a positive $1.1 million in the prior year to a negative $123,668, reflecting the impact of the economic downturn on cash generation.

Guidance, Outlook, and Risks

Management Commentary: Management projects that cash flows from operations alone may not be sufficient to meet all financial obligations in the final quarter of fiscal year 2010. However, recent refinancing of the Yuma and Albuquerque properties provided net cash proceeds of $617,224, which management believes will cover obligations through fiscal year 2011.

Outlook: The company expects the global recession to negatively affect business through the end of the year. Small improvements in occupancy and ADR are anticipated in the first half of calendar year 2010, with more significant growth expected in the second half.

Risks and Contingencies:

• Liquidity Risk: Dependence on refinancing and credit lines to meet debt service obligations.
• Market Conditions: Significant exposure to economic downturns affecting travel demand and room rates.
• Related Party Transactions: Significant revenue and expense items involve related parties (Mr. Wirth and affiliates), including payroll reimbursements of nearly $2 million for the nine-month period.
• Asset Strategy: The company continues to explore selling hotel properties to transition into a service-based model, though no qualified buyers were found in the previous year.

Investor Verification Checklist

• Debt Maturity Profile: Verify the specific maturity dates and interest rates of the $22 million in total debt, particularly the recent refinancing of the Albuquerque property.
• Cash Burn Rate: Confirm the sustainability of the negative operating cash flow and the sufficiency of the $830,000 available credit line to bridge the gap until projected recovery.
• Related Party Dependence: Assess the impact of the $2 million in related-party payroll reimbursements on the company's true operating leverage and cost structure.
• Occupancy Trends: Monitor the 58.6% occupancy rate and $73.48 ADR to see if the projected recovery in calendar year 2010 materializes.
• Share Repurchases: Note the aggressive share repurchase program (317,194 shares in Q3) despite operating losses, and evaluate the impact on remaining liquidity.