IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Fiscal year ended January 31, 2003
Operations: The Trust operates as an unincorporated Ohio REIT owning a 50.80% general partner interest in RRF Limited Partnership, which holds eleven all-suite hotels in Arizona, New Mexico, and Southern California. The hotels feature 1,667 suites and are managed by Suite Hospitality Management, Inc., an entity in which the CEO, James F. Wirth, holds a 9.8% interest. Effective February 1, 2001, the Trust acquired InnSuites Hotels, Inc., consolidating its operations and converting it into a Taxable REIT Subsidiary (TRS).

Key Financial Metrics

Operational Metrics: Occupancy increased to 60.46% (from 59.49% in 2002). Average Daily Rate (ADR) was $66.59. Revenue Per Available Room (REVPAR) was $40.26.

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased by approximately $716,000 (2.6%) compared to 2002. Management attributes this to sluggish economic conditions, the threat of terrorism, and the war in Iraq, which reduced travel demand.
• Impairment Charges: The Trust recorded a $590,000 loss on impairment of the Scottsdale hotel property due to decreased value and prospects for future development. This property was subsequently sold in March 2003 to an affiliate of Mr. Wirth for $3.1 million.
• Expense Reductions: Total expenses decreased by $224,000. This was primarily due to the absence of the $1.6 million one-time acquisition charge incurred in 2002, partially offset by increased bad debt expense ($300,000) and depreciation ($339,000).
• Related Party Transactions: Management and licensing fees were reduced from 2.5% to 2.0% of gross room revenues effective February 1, 2003, through January 31, 2005. Additionally, related parties waived certain fees during 2002-2003 to assist with covenant compliance, recorded as capital contributions.

Guidance, Outlook, Risks, and Contingencies

• Liquidity and Covenants: As of January 31, 2003, the Trust was not in compliance with debt coverage ratio covenants and capital expenditure limits on its term loan and line of credit. A waiver was obtained from the lender on April 30, 2003. Distributions to the Trust were restricted to $0.01 per share to maintain compliance.
• Debt Maturities: The Trust has minimum debt payments of $5.1 million due in fiscal 2004 and $5.2 million in fiscal 2005. A $2.6 million term loan and line of credit mature in September 2003 and are expected to be refinanced.
• Accounting Changes: The Trust is evaluating the impact of FASB Interpretation No. 46 (Consolidation of Variable Interest Entities), which may require the consolidation of the Management Company and Licensing Corp. in future periods.
• Risks: Significant risks include high competition in the Southwest hotel market, over-supply of rooms in Phoenix and Tucson, and dependence on the performance of the hotels to service debt and pay dividends. The Trust relies heavily on borrowings from affiliates (Mr. Wirth and related entities) for liquidity.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the debt coverage ratio waiver and the Trust's ability to refinance the $2.6 million facility maturing in September 2003.
• Related Party Dependence: Assess the extent of reliance on Mr. Wirth and affiliates for debt financing ($9.9 million outstanding) and fee waivers.
• Asset Disposition: Confirm the finalization of the Scottsdale property sale to an affiliate and the impact on future cash flows.
• Dividend Sustainability: Review the ability to maintain even the minimal $0.01 dividend given the net loss and restricted cash distributions from the Partnership.
• Impairment Testing: Monitor the remaining hotel portfolio for potential future impairment charges given the economic headwinds cited in the filing.