IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Fiscal year ended January 31, 2002
Operations: The Trust operates as an unincorporated Ohio REIT owning a 48.73% general partner interest in RRF Limited Partnership, which holds eleven InnSuites hotels (1,679 suites) in Arizona, New Mexico, and Southern California. Effective February 1, 2001, the Trust acquired InnSuites Hotels, Inc. (the Lessee), consolidating its operations and converting it into a Taxable REIT Subsidiary (TRS). The hotels operate under percentage leases, with management and licensing fees paid to affiliates.

Key Financial Metrics

Operational Metrics: Occupancy decreased to 59.49% (from 63.23% in 2001). Average Daily Rate (ADR) increased slightly to $66.57. Revenue Per Available Room (REVPAR) declined to $39.62 (from $42.02).

Material Changes vs. Prior Period

• Revenue Surge: Total revenue increased by $17.9 million (184%) primarily due to the consolidation of the Lessee's operations effective February 1, 2001. On a pro forma basis, revenue actually decreased by $1.2 million due to economic slowdowns and the impact of the September 11, 2001 terrorist attacks.
• Expense Increase: Total expenses rose by $17.1 million to $32.0 million, driven by the inclusion of Lessee expenses. Pro forma expenses decreased by $3.9 million due to cost-cutting measures and the absence of a $3.2 million impairment loss recorded in 2001 for the Scottsdale property.
• Net Loss: Net loss attributable to shareholders increased by $945,000. This was largely due to acquisition costs ($1.6 million) and the consolidation of the Lessee's operating losses, offset by the absence of the prior year's impairment charge.
• Debt Structure: The Trust replaced a $12 million credit facility with individual mortgages on specific properties and a new line of credit. Total debt increased by approximately $2.7 million.

Guidance, Outlook, Risks, and Contingencies

• Liquidity Restrictions: Due to debt covenants, Partnership distributions to the Trust in fiscal 2003 are restricted to $0.01 per share. Consequently, dividends are capped at this level for the upcoming year.
• Covenant Compliance: As of January 31, 2002, the Trust was not in compliance with debt coverage ratios (1.5:1.0) on its line of credit and certain mortgages. Waivers were obtained for the period ended January 31, 2002, and covenants were amended to 1.35:1.0 for fiscal 2003.
• Fee Suspensions: Management and licensing fee payments to affiliates are suspended from May 1, 2002, to September 30, 2002, pending compliance with amended debt covenants.
• Capital Expenditures: Capital spending is restricted to $1.4 million for fiscal 2003 under credit agreements.
• Asset Sales: The Scottsdale and Flagstaff properties were listed for sale in August 2001. Management does not anticipate a loss on sale as market value exceeds carrying value.
• Risks: Significant exposure to the hospitality industry's seasonality and the lingering economic effects of the September 11 attacks, which caused short-term occupancy declines. The Trust relies heavily on related-party loans for liquidity.

Investor Verification Checklist

• Covenant Compliance: Verify if the Trust has met the amended 1.35:1.0 debt coverage ratio for fiscal 2003 to avoid further fee suspensions or default.
• Related Party Dependence: Assess the sustainability of operations given the heavy reliance on loans from James F. Wirth and affiliates (approx. $8.7 million outstanding) and the suspension of affiliate fee payments.
• Asset Disposition: Monitor the status of the Scottsdale and Flagstaff properties listed for sale to determine if they will be sold to improve liquidity.
• Dividend Policy: Confirm the continuation of the $0.01 per share dividend cap for fiscal 2003 and the likelihood of future increases given the net loss position.
• Occupancy Trends: Track occupancy rates and REVPAR to gauge recovery from the September 11 impact and the effectiveness of cost-cutting measures.