IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Nine months ended October 31, 2005 (Fiscal Year 2006)
Operations: The Trust owns four hotels and one hotel directly (843 suites total) in Arizona, Southern California, and New Mexico. It also manages and licenses additional properties owned by affiliates and third parties. The Trust operates through a partnership structure where it holds the general partner interest.

Key Financial Metrics

Operational Metrics (Nine Months):
- Occupancy: 69.1% (vs. 68.6% prior year)
- Average Daily Rate (ADR): $71.60 (vs. $70.90 prior year)
- Revenue Per Available Room (REVPAR): $49.46 (vs. $48.61 prior year)

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 7.1% ($1.2 million) primarily due to the disposition of the Tempe, Arizona and San Diego, California properties in the prior fiscal year, and the Phoenix, Arizona property in the current fiscal year.
• Operating Income Improvement: Despite lower revenue, operating income increased significantly from $36,747 to $335,440. This was driven by a 9.5% reduction in total expenses, largely due to reduced depreciation (assets fully depreciated or held for sale) and lower interest expenses following property sales.
• Net Loss vs. Prior Income: The Trust reported a net loss of $549,551 compared to net income of $804,290 in the prior year. The prior year included a $5.1 million gain on the disposition of hotels and a cumulative effect of an accounting principle adoption which impacted comparability.
• Debt Reduction: Total liabilities decreased by approximately $4.8 million. Interest expense on mortgage notes dropped 11.3% due to property sales. Interest on related party notes decreased 92.2%.
• Asset Base: Total assets decreased by $4.3 million, reflecting the sale of the Phoenix property and the reclassification of assets held for sale.

Guidance, Outlook, and Risks

Management Commentary & Outlook:
- Condo-Hotel Conversions: Management is evaluating the potential for converting Arizona locations into condo-hotels to generate sales revenue and long-term management fees.
- Liquidity: The Trust anticipates cash flows from operations will be sufficient to meet debt obligations, including $794,603 in mortgage principal due in the next 12 months. A $500,000 bank line of credit is expected to be extended to May 31, 2006.
- Capital Expenditures: The Trust contributes 4% of hotel revenues to a Capital Expenditures Fund. Approximately $808,000 was spent on capital improvements in the nine-month period.

Risks and Contingencies:
- Seasonality: Operations are seasonal; Arizona hotels peak in Q1 and Q4, while California/New Mexico hotels peak in summer.
- Related Party Transactions: Significant transactions exist with James F. Wirth and affiliates, including property sales and debt. The sale of the Phoenix property to an affiliate resulted in a gain recorded as a capital contribution rather than operating income.
- Market Risks: Exposure to interest rate fluctuations, occupancy rate changes, and general economic conditions affecting the hospitality industry.

Investor Verification Checklist

• Related Party Sale Accounting: Verify the treatment of the $1.8 million gain on the Phoenix property sale to an affiliate, which was recorded as a capital contribution rather than a gain on disposition, impacting reported earnings.
• Debt Maturity: Confirm the status of the $500,000 bank line of credit extension to May 2006 and the ability to service $794,603 in upcoming mortgage principal payments.
• Asset Depreciation: Review the impact of assets becoming fully depreciated on future operating income projections.
• Condo-Hotel Strategy: Assess the feasibility and timeline for the proposed condo-hotel conversions in Arizona.
• Share Repurchases: Note the active share repurchase program; 9,824 shares were repurchased in the quarter at an average price of $1.38.