IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (Ohio)

Reporting Period: Quarterly Report (Form 10-Q) for the period ended July 31, 2004.

Operations: The Trust owns six hotels (940 suites) in Arizona, southern California, and New Mexico through a partnership interest. Effective February 1, 2004, the Trust relinquished its REIT status and is now taxed as a C corporation. On June 8, 2004, the Trust acquired management and licensing contracts from its former management company, transitioning to self-management.

Key Financial Metrics

Operational Metrics (Six Months Ended July 31, 2004):

• Occupancy: 70.5% (vs. 64.6% prior year)
• Average Daily Rate (ADR): $72.62 (vs. $66.62 prior year)
• Revenue Per Available Room (REVPAR): $51.22 (vs. $43.03 prior year)

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 20.8% to $11.4 million. This was driven primarily by the consolidation of the Management Company and Licensing Corp. revenues ($1.6 million) and a 4.0% increase in core hotel operating revenues due to higher occupancy.
• Profitability: The Trust reported a net income of $1.14 million compared to a net loss of $0.86 million in the prior year. This turnaround was significantly influenced by a $2.8 million gain on the disposition of hotels (discontinued operations) and a reduction in interest expense.
• Asset Dispositions: The Trust sold two hotels: the Tempe, Arizona property (sold to an affiliate for $6.8 million, debt assumed) and the San Diego, California property (sold to a third party for $9.7 million cash). These sales generated a net gain of $2.8 million attributable to shareholders.
• Debt Reduction: Total liabilities decreased significantly from $42.2 million to $27.6 million. Mortgage notes payable dropped by $7.3 million, and notes payable to related parties decreased by $6.2 million, largely due to debt assumption by buyers in hotel sales.
• Accounting Change: A one-time charge of $854,402 was recorded for the cumulative effect of adopting FIN 46R, which required the consolidation of the Management Company (a variable interest entity).

Guidance, Outlook, and Risks

• REIT Status: The Trust is no longer a REIT. It is subject to corporate income tax (up to 35% federal) and is no longer required to distribute 90% of taxable income. Distributions will be taxed as dividends or capital gains.
• Liquidity: The Trust obtained a $500,000 bank line of credit on July 21, 2004 (interest-only, maturing July 2005). Management anticipates cash flow from operations will be sufficient to meet debt obligations.
• Listing Status: The Trust is working to regain compliance with American Stock Exchange (Amex) listing standards, which it failed to meet due to prior losses. Management expects to regain compliance by January 2005 through asset sales and expense reduction.
• Risks: Key risks include fluctuations in hotel occupancy and rates, interest rate changes, competition, and the uncertainty of transitioning from a REIT to a tax-paying entity. The Trust also faces risks related to the hospitality industry's sensitivity to economic conditions and events like terrorist attacks or communicable diseases.

Investor Verification Checklist

• Asset Sales: Verify the final closing details and net proceeds from the sale of the Tempe and San Diego properties, specifically the debt assumption terms.
• Tax Implications: Confirm the impact of the C-corporation tax status on future net income and distribution policies compared to the previous REIT structure.
• Related Party Transactions: Review the remaining $681,786 in notes payable to related parties (Wirth affiliates) and the terms of the new $500,000 bank line of credit.
• Amex Compliance: Monitor the Trust's progress in meeting Amex listing standards to avoid potential delisting, which could impact share liquidity.
• Operating Cash Flow: Note that operating cash flow was negative ($0.56 million) despite net income; verify the sustainability of cash generation from core hotel operations excluding asset sales.