Business Context and Reporting Period
Company: InnSuites Hospitality Trust (REIT)
Reporting Period: Quarter ended April 30, 1999
Business Model: The Trust owns a 42% interest in RRF Limited Partnership, which holds ten hotel properties. These properties are leased to an affiliate, InnSuites Hotels, Inc. (the Lessee), under percentage leases. Revenue is derived from the greater of minimum rent or a percentage of hotel gross revenues.
Key Financial Metrics
| Metric | Q1 1999 | Q1 1998 |
|---|---|---|
| Total Revenues | $3,284,978 | $3,782,584 |
| Net Income (Attributable to Shares) | $379,307 | $435,169 |
| Earnings Per Share (Basic) | $0.16 | $0.26 |
| Earnings Per Share (Diluted) | $0.09 | $0.11 |
| Funds From Operations (FFO) | $599,000 | $581,000 (Recalculated) |
| Cash and Cash Equivalents | $838,856 | $1,856,501 |
| Total Debt (Mortgage + Bank Notes) | $35,513,631 | $23,161,052 (Mortgage only) |
| Net Cash Provided by Operating Activities | $505,674 | $1,784,884 |
Operational Metrics (Lessee): Occupancy 71.0%; Average Daily Rate (ADR) $77.12; Revenue Per Available Room (REVPAR) $54.78.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately $500,000 (13%) compared to the prior year. This was primarily due to a change in accounting for contingent rent (EITF 98-9) and the reduction of the Trust's ownership interest in the highly seasonal Scottsdale property from 100% to 42%.
- Expense Increases: Total expenses rose by $300,000. Interest expense increased by $151,000 due to new fixed mortgages and lines of credit. Depreciation increased by $99,000 due to new hotel acquisitions (Buena Park and San Diego).
- Net Income: Net income attributable to shares decreased by $56,000. However, management notes that on a recalculated basis (adjusting for the accounting change), the Trust performed better than the prior year.
- Debt Structure: The Trust increased its leverage, drawing $11.3 million on a revolving credit facility and increasing mortgage notes payable to $24.2 million.
Guidance, Outlook, and Risks
- Seasonality: The Trust anticipates reduced seasonality in future quarters due to the diversification of its portfolio (increased ownership in California properties with different peak seasons) and the reduced stake in the Scottsdale property.
- Capital Expenditures: Approximately $140,000 is budgeted for the next quarter for Year 2000 computer system compliance (Nova Front Desk systems). An additional $450,000 is expected for refurbishing the San Diego hotel.
- Liquidity: The Trust maintains a $12 million credit facility with Pacific Century Bank. It is in negotiations to adjust covenant requirements. Liquidity depends heavily on the Lessee's ability to generate cash flow.
- Year 2000 Risk: The Trust estimates total Y2K compliance costs at $400,000, with $260,000 already spent. While systems are being upgraded, there is a risk of disruption from third-party vendors.
- Forward-Looking Statements: Management cautions that future results may differ due to fluctuations in occupancy, interest rates, and economic conditions.
Investor Verification Checklist
- Accounting Change Impact: Verify the specific impact of EITF 98-9 on the reported revenue decline versus the "recalculated" performance metrics provided by management.
- Lessee Dependency: Confirm the financial health of InnSuites Hotels, Inc. (the Lessee), as the Trust's revenue is entirely dependent on the Lessee's ability to pay rent under percentage leases.
- Debt Covenants: Review the status of negotiations regarding the credit facility covenants (net worth, debt-to-net worth, and coverage ratios) to ensure no default risk exists.
- Year 2000 Compliance: Assess the timeline and budget for the remaining $140,000 in Y2K expenditures and the potential for operational disruption.
- Ownership Structure: Understand the implications of the 42% ownership interest in the Partnership and the convertibility of Class A and Class B limited partnership units.