IHT

Business Context and Reporting Period

Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Three months ended April 30, 2005 (First Quarter of Fiscal Year 2006)
Operations: The Trust owns six hotels (947 suites) in Arizona, southern California, and New Mexico, managed by InnSuites Hotels, Inc. The Trust operates through a partnership structure where it holds the general partner interest. During the period, the Trust consolidated results for the Management Company and Licensing Corp. were excluded as they no longer met Variable Interest Entity criteria.

Key Financial Metrics

Operational Metrics: Occupancy increased to 78.6% (from 77.0%); Average Daily Rate (ADR) increased to $79.32 (from $76.99); Revenue Per Available Room (REVPAR) increased to $62.35 (from $59.27).

Material Changes vs. Prior Period

• Revenue Decline: Total revenue decreased 10.7% ($785,207) primarily due to the disposition of the Tempe, Arizona, and San Diego, California properties in the prior year's first quarter, which contributed $905,000 in revenue in 2004.
• Expense Reduction: Total operating expenses decreased 10.6% ($674,000), driven by the same property dispositions. However, General and Administrative expenses increased 10.7% due to higher legal and accounting fees.
• Depreciation: Hotel property depreciation dropped 31.5% ($237,000) as assets became fully depreciated and the Phoenix property (held for sale) ceased depreciation.
• Interest Expense: Total interest expense decreased 27.4% ($190,000), largely due to reduced debt related to sold properties and a 95.3% drop in interest on related party notes.
• Net Income Volatility: Net income dropped 80.1% year-over-year. The prior year included a $5.1 million gain on the disposition of hotels and a cumulative effect of accounting principle adoption loss of $854,402, neither of which occurred in the current period.

Outlook, Risks, and Unusual Items

• Liquidity Concerns: The Trust reported $0 in cash and cash equivalents as of April 30, 2005, with outstanding checks exceeding the cash balance ($185,341). However, subsequent to the quarter-end, the Trust received a $1.0 million deposit for the Phoenix hotel sale and used $500,000 to pay off its bank line of credit in full.
• Debt Maturity: The $500,000 bank line of credit matures in July 2005; the Trust is negotiating an extension. Mortgage principal payments of $800,429 are due for the remainder of fiscal 2006.
• Asset Sale: The Phoenix, Arizona hotel is held for sale to a related party (affiliate of James F. Wirth) for $5.1 million. The sale is expected to close in the second quarter of fiscal 2006. Any gain/loss will be recorded as a contribution/distribution.
• Seasonality: Operations are seasonal, with southern Arizona hotels peaking in Q1 and Q4, while California/New Mexico properties peak in summer quarters.
• Risks: Key risks include fluctuations in occupancy, interest rate changes, competition, and the uncertainty of converting from a REIT to a tax-paying entity.

Investor Verification Checklist

• Cash Position: Verify the status of the $1.0 million deposit received post-quarter-end and the full payoff of the bank line of credit.
• Phoenix Hotel Sale: Confirm the closing date and final terms of the related-party sale of the Phoenix property.
• Debt Extension: Monitor the negotiation status of the bank line of credit maturing in July 2005.
• Related Party Transactions: Review the volume of transactions with James F. Wirth and affiliates, including the conversion of loans to deposits and the purchase of partnership units.
• Capital Expenditures: Assess the adequacy of the 4% revenue reserve for capital improvements versus actual spending ($270,000 in Q1).