IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Quarterly period ended July 31, 1999 (Six-month and Three-month data provided)
Business Model: The Trust owns a 42% interest in ten hotel properties through a limited partnership (RRF Limited Partnership). The hotels are leased to an affiliate, InnSuites Hotels, Inc. (the Lessee), under percentage leases where rent is the greater of a minimum amount or a percentage of gross revenues. The Trust does not operate the hotels directly.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Six-month revenues increased by approximately $637,000 (13.4%) compared to the prior year, driven by higher room revenues and food/beverage sales from repositioned hotels.
• Profitability Improvement: Net income attributable to shareholders for the six months increased by $267,000 (356%) compared to the prior year. The quarterly loss narrowed significantly from $(97,816) to $(37,123).
• Expense Fluctuations:
  • Interest Expense: Increased by $344,000 for the six months due to new fixed mortgages and lines of credit used for capital improvements and dividends.
  • Advisory Fees: Decreased by $304,000 for the six months following the sale of the advisory company (MARA) to the Partnership.
  • Depreciation: Increased by $167,000 due to new hotel acquisitions (Buena Park and San Diego) and capitalized refurbishment costs.
• Ownership Structure: The Trust's ownership interest in the Partnership increased from 15% (July 1998) to 42% (July 1999) through the purchase of general partner units and the transfer of the Scottsdale property to the Partnership.

Guidance, Outlook, and Risks

• Operational Outlook: Management notes that while occupancy declined slightly (1.5%) due to increased supply, Average Daily Rate (ADR) improved by $2.89, resulting in a 2.2% growth in Revenue Per Available Room (REVPAR). The repositioning of hotels as studio/two-room suites is credited for higher revenue per room.
• Seasonality: Operations remain seasonal. The reduction of ownership in the highly seasonal Scottsdale hotel (from 100% to 42%) is expected to reduce earnings volatility in future quarters.
• Liquidity and Capital Resources:
  • The Trust maintains a $12 million credit facility with Pacific Century Bank, with $11.3 million currently drawn.
  • Future capital expenditures include approximately $140,000 for Year 2000 compliant front desk systems and $450,000 for refurbishing the San Diego hotel.
  • The Trust intends to acquire additional hotels but is subject to financing availability and covenant compliance.
• Risks and Contingencies:
  • Year 2000 Compliance: Estimated total cost is $400,000; $260,000 has been spent. Risks remain regarding third-party vendors and potential litigation.
  • Lessee Dependency: The Trust's revenue is entirely dependent on the Lessee's ability to generate cash flow from hotel operations.
  • Interest Rate Risk: The Trust has variable rate debt and is exposed to interest rate fluctuations, though it seeks to utilize fixed-rate debt where possible.

Investor Verification Checklist

• Lessee Performance: Verify the Lessee's ability to meet percentage rent obligations, as the Trust has no direct control over hotel operations.
• Debt Covenants: Confirm compliance with the Credit Facility covenants (Net Worth > $15M, Debt/Net Worth < 1.5:1, NOI/Debt Service > 1.25:1).
• Year 2000 Costs: Monitor actual costs and operational disruptions related to the Year 2000 system upgrades.
• Seasonality Impact: Assess the effectiveness of the ownership structure changes in smoothing quarterly earnings volatility.
• Capital Expenditures: Track the $1.2 million spent on capital improvements during the period and future funding requirements for refurbishments.