IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Three months ended April 30, 2001 (Fiscal Q1 2002)
Operations: The Trust owns 11 hotels with 1,751 suites in Arizona, southern California, and New Mexico. Effective February 1, 2001, the Trust acquired 100% of the Lessee (InnSuites Hotels, Inc.), consolidating hotel operations directly into the Trust's financial statements. This structural change eliminated intercompany rent revenue and expenses previously recorded under percentage leases.

Key Financial Metrics

Debt Profile: Mortgage Notes Payable totaled $36.2 million; Notes Payable to Banks totaled $2.3 million. Related party notes and advances totaled approximately $7.2 million.

Material Changes vs. Prior Period

• Revenue Structure: Total revenues increased by $5.5 million (167%) primarily due to the consolidation of the Lessee's operating revenues (Rooms, F&B, Telecom). Conversely, "Rent Revenue from Affiliate" dropped to zero as intercompany transactions were eliminated.
• Operating Expenses: Total operating expenses increased by $7.2 million to $7.6 million. This includes a one-time non-recurring charge of $1.6 million for "Expenses Incurred in Acquiring Lessee."
• Net Loss: The Trust reported a net loss of $1.2 million compared to a net income of $392k in the prior year. This was driven by the $1.6 million acquisition expense and a $577k extraordinary loss on the early extinguishment of debt (Ontario property refinancing).
• Hotel Performance: Occupancy decreased 3.2% to 71.8%, and Average Daily Rate (ADR) decreased $2.95 to $71.54, resulting in a REVPAR decline of $4.89 to $51.38. Management attributed this to a slow winter season and oversupply in Arizona markets.

Guidance, Outlook, and Risks

• Liquidity and Debt Refinancing: The Trust successfully reduced its $12 million Credit Facility balance to approximately $2.3 million through property refinancings in April 2001. The facility was modified to extend maturity to July 20, 2001, with a reduced limit of $2.3 million. Management believes unencumbered equity in Flagstaff and Scottsdale properties is sufficient to refinance this balance if the current lender does not convert it to a term loan.
• Covenant Compliance: The Trust notified Bank One of non-compliance with certain covenants regarding the Tucson St. Mary's hotel mortgage (maturing June 27, 2001). The bank has extended the term temporarily while a new loan is processed. Management asserts sufficient equity exists to prevent loss in a foreclosure scenario.
• Related Party Obligations: Approximately $4.3 million is due to James F. Wirth and affiliates in fiscal 2002. Wirth has agreed to extend terms if the Trust cannot satisfy amounts as they come due.
• Seasonality: Operations are seasonal, with southern Arizona hotels typically experiencing lower occupancy in the second fiscal quarter.

Investor Verification Checklist

• Debt Maturity Wall: Verify the status of the $2.3 million Credit Facility (due July 2001) and the $3.8 million Bank One mortgage (due June 2001) to ensure refinancing is secured.
• Covenant Compliance: Confirm resolution of the covenant non-compliance with Bank One regarding the Tucson St. Mary's property.
• Related Party Concentration: Assess the risk associated with $7.2 million in debt owed to the Chairman and affiliates, and the reliance on their willingness to extend terms.
• Operational Trends: Monitor occupancy and ADR trends in Arizona markets to determine if the Q1 decline is a temporary seasonal dip or a structural market issue.
• FFO vs. GAAP: Note the divergence between GAAP Net Loss ($1.2M) and Comparable FFO ($1.0M) due to non-cash depreciation and one-time acquisition costs.