Business Context and Reporting Period
Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Three months ended April 30, 2003 (Fiscal Q1 2004)
Operations: Owns ten hotels (1,555 suites) in Arizona, Southern California, and New Mexico through a partnership structure. The Trust operates as a Real Estate Investment Trust (REIT).
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Total Revenue | $7,626,138 | $8,256,553 |
| Operating Income | $824,222 | $1,483,924 |
| Net Income (Attributable to Shares) | $147,099 | $618,422 |
| Funds From Operations (FFO) | $599,000 | $992,000 |
| Net Cash from Operating Activities | $565,848 | $1,534,902 |
| Total Assets | $57,971,814 | $61,494,579 (Jan 31, 2003) |
| Total Liabilities | $49,272,238 | $52,726,835 (Jan 31, 2003) |
| Shareholders' Deficit | $(1,107,410) | $(1,250,182) (Jan 31, 2003) |
| Cash and Cash Equivalents | $0 | $88,519 (Jan 31, 2003) |
Operational Metrics:
- Occupancy: 68.8% (vs. 68.5% prior year)
- Average Daily Rate (ADR): $70.88 (vs. $73.93 prior year)
- Revenue Per Available Room (REVPAR): $48.80 (vs. $50.64 prior year)
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 7.6% ($630,000) due to weak economic conditions, reduced Average Daily Rate (ADR), and the sale of the Scottsdale property.
- Profitability Drop: Net income attributable to shares fell 76% to $147,099. Operating income decreased 44% to $824,222.
- Asset Disposition: Sold the Scottsdale, Arizona property for $3.1 million on March 21, 2003. The buyer assumed $1.6 million in related party debt and $1.5 million in bank debt.
- Depreciation Increase: Hotel property depreciation rose 16.1% to $865,295, driven by refurbishment projects and resuming depreciation on the Flagstaff property (previously classified as "held for sale").
- Liquidity Position: Cash and cash equivalents dropped to zero by period end. The Trust fully utilized its $1.5 million line of credit secured by the Flagstaff property.
Guidance, Outlook, and Risks
Pending Sales:
- San Diego Property: Under contract to Lennar Homes for $9.6 million. Expected closing before February 2004. Book value approx. $4.9 million; mortgage approx. $4.855 million.
- Buena Park Property: Under contract to Lotte Holdings for $8.6 million. Closing expected by September 8, 2003. Book value approx. $6.9 million; mortgage approx. $3.113 million.
Management Commentary:
- Occupancy increased slightly due to room conversions, but ADR and REVPAR declined due to national economic weakness and travel industry downturns.
- The Trust is restricted from making distributions in excess of $0.01 per share during fiscal 2004 due to lender covenants on the Flagstaff line of credit.
Risks and Contingencies:
- FIN 46 Consolidation: Management believes it is reasonably possible the Trust will be required to consolidate Suite Hospitality Management, Inc. and InnSuites Licensing Corp. under new accounting rules (FIN 46), potentially impacting the balance sheet.
- Related Party Dependence: Significant debt ($8.1 million) and management fees are owed to affiliates of James F. Wirth. The Scottsdale sale was to an affiliate.
- Seasonality: Operations are seasonal; Q2 is historically the lowest occupancy period for southern Arizona hotels.
- Market Risks: Exposure to interest rate fluctuations, terrorist attacks, communicable diseases (e.g., SARS), and general economic conditions.
Investor Verification Checklist
- Cash Position: Verify the zero cash balance and reliance on the fully drawn $1.5 million line of credit maturing September 1, 2003.
- Related Party Transactions: Review the $8.1 million in notes payable to related parties and the terms of the Scottsdale sale to an affiliate.
- Pending Sale Closings: Monitor the closing dates and conditions for the San Diego and Buena Park property sales, which are critical for liquidity and debt reduction.
- FIN 46 Impact: Assess the potential financial statement impact of consolidating Suite Hospitality Management and InnSuites Licensing Corp.
- Dividend Restrictions: Confirm the $0.01 per share distribution limit imposed by the Flagstaff lender covenant for fiscal 2004.