INNSUITES HOSPITALITY TRUST
10-Q, 2000-06-14
REAL ESTATE INVESTMENT TRUSTS
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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

-----------------

QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000

Commission File Number 1-7062

INNSUITES HOSPITALITY TRUST
(Exact name of registrant as specified in its charter)

OHIO
34-6647590
(State or other jurisdiction
(I.R.S. Employer Identification Number)

of incorporation or organization)

 

InnSuites Hotels Centre
1625 E. Northern Ave., Suite 201
Phoenix, AZ 85020
(Address of principal executive offices)

 

Registrant's telephone number, including area code (602) 944-1500

Indicate by check mark whether the registrant: (l) has filed all reports required to be filed by Section 13 or l5(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X    No     

    Number of outstanding Shares of Beneficial Interest, without par value, as of June 5, 2000: 2,448,657.

PART 1

FINANCIAL INFORMATION

ITEM 1.          FINANCIAL STATEMENTS.

INNSUITES HOSPITALITY TRUST AND SUBSIDIARY

BALANCE SHEETS

  APRIL 30, 2000
    JANUARY 31, 2000
 
ASSETS   (UNAUDITED)        (AUDITED)  
Hotel properties, net $  64,125,135     $  64,479,187  
Cash and cash equivalents   225,846       208,109  
Rent receivable from affiliate,              
    net of $3,100,890 and $2,845,732 allowance respectively   —       —  
Interest receivable and other assets   595,715       618,063  
 
   
 
TOTAL ASSETS $  64,946,696     $  65,305,519  
 
   
 
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES		              
Mortgage notes payable $  24,071,090     $ 24,251,662  
Notes payable to banks   11,300,000       11,300,000  
Other notes payable   —       225,000  
Advances payable to related parties   2,625,000       2,970,000  
Accounts payable and accrued expenses   780,364       1,138,168  
 
   
 
TOTAL LIABILITIES $  38,776,455       39,884,830  
MINORITY INTEREST IN PARTNERSHIP   17,293,861       16,789,423  
SHAREHOLDERS' EQUITY              
     Shares of beneficial interest, without par value; unlimited              
      authorization; 2,441,449 and 2,507,949 shares issued and              
      outstanding at April 30 and January 31, 2000, respectively   9,488,256       9,093,020  
     Treasury stock   (611,875 )     (461,754 )
 
   
 
   
TOTAL SHAREHOLDERS' EQUITY $    8,876,381       8,631,266  
   
 
   
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $  64,946,696     $ 65,305,519  
 
   
 

See accompanying notes to unaudited financial statements.

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
UNAUDITED STATEMENTS OF OPERATIONS

   
FOR THE THREE MONTH PERIOD ENDED APRIL 30,
 
   
2000
               
1999
 
       
(Restated)
  
REVENUES       
     Rent revenue from affiliate $ 3,319,046   3,255,511  
     Interest income   2,263   19,876  
     Other income   —   9,591  
 
 
 
TOTAL REVENUES $ 3,321,309   3,284,978  
 
 
EXPENSES        
     Real estate depreciation $  665,706   618,363  
     Real estate and personal property taxes          
       insurance and ground rent,   342,852   375,727  
     General and administrative   468,886   517,376  
     Interest on mortgage notes payable   545,100   503,550  
     Interest on notes payable to banks   245,897   251,206  
     Interest on note payable to related party   49,830   25,211  
     Amortization of loan fees   16,265   257  
 
 
 
TOTAL EXPENSES $ 2,334,537   2,291,690  
 
 
 
INCOME BEFORE MINORITY INTEREST $ 986,773   993,288  
LESS: MINORITY INTEREST $ 594,284   613,981  
 
 
 
NET INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST $ 392,489   379,307  
 
 
 
EARNINGS PER SHARE — basic $            .16   .16  
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING — basic   2,474,377   2,321,133  
 
 
 
EARNINGS PER SHARE — diluted $ .10   .10  
 
 
 
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING — diluted   9,733,222   10,090,213  
 
 
 

See accompanying notes to unaudited financial statements.

INNSUITES HOSPITALITY TRUST AND SUBSIDARY
UNAUDITED STATEMENTS OF CASH FLOWS

 

FOR THE THREE MONTHS ENDED APRIL 30,

 
 
2000
    
1999
CASH FLOWS FROM OPERATING ACTIVITIES      
   Net income $     392,489     379,307  
   Adjustments to reconcile net income to net            
   cash provided by operating activities:            
     Stock option compensation expense   13,129     —  
     Depreciation and amortization   681,971     618,620  
     Minority interest   594,284     613,981  
     (Increase) Decrease in interest receivable and other
     assets		   6,084     (364,822 )
     Increase in percentage rent receivable   (255,158 )   (331,474 )
     Provision for uncollectible receivable from affiliate   255,158     —  
     Decrease in accounts payable and accrued expenses   (357,805 )   (409,938 )
 
   
 
NET CASH PROVIDED BY OPERATING ACTIVITIES $  1,330,152     505,674  
 
   
 
CASH FLOWS FROM INVESTING ACTIVITIES  
   Improvements and additions to hotel properties   (311,494 )   (615,940 )
 
   
 
   
NET CASH (USED IN) INVESTING ACTIVITIES $   (311,494 )   (615,940 )
 
   
 
CASH FLOWS FROM FINANCING ACTIVITIES  
   Payments on mortgage notes payable $   (180,572 )   (699,341 )
   Issuance (Repurchase) of shares   (150,120 )   177,573  
   Refinancing of mortgage notes payable   —     1,751,920  
   Payments on other notes payable   (225,000 )   (450,000 )
   Repurchase of partnership units   (73,822 )   (269,183 )
   Payment of dividends   (26,407 )   —  
   Advances from related parties   —     2,000,000  
   Payments on advances from related parties   (345,000 )   (1,982,782 )
 
   
 
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES $ (1,000,921 )   528,187  
 
   
 
NET INCREASE IN CASH AND CASH EQUIVALENTS $       17,737     417,921  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD $     208,109     420,935  
 
   
 
CASH AND CASH EQUIVALENTS AT END OF PERIOD $     225,846     838,856  
 
   
 

See accompanying notes to unaudited financial statements.

 

INNSUITES HOSPITALITY TRUST AND SUBSIDIARY
NOTES TO UNAUDITED FINANCIAL STATEMENTS
As of and for the three months ended APRIL 30, 2000 and 1999

1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION:

InnSuites Hospitality Trust (the "Trust") is a real estate investment trust ("REIT"), which owns directly or indirectly, ten hotels with 1,665 suites in Arizona and southern California. The hotels operate as InnSuites Hotels.

Until January 31, 1998, the Trust, formerly known as Realty ReFund Trust, specialized in mortgage financing as its investment vehicle, refinancing existing income producing commercial, industrial and multi-unit residential real property by supplementing or replacing existing financing. The primary refinancing technique, which the Trust employed, was wrap-around mortgage lending.

On January 31, 1998, the Trust contributed $2,081,000 to RRF Limited Partnership (the "Partnership"), a Delaware limited partnership, in exchange for a 13.6% general partnership interest therein. The Trust is the sole general partner of the Partnership. The Partnership issued limited partnership interests representing 86.4% of the Partnership to acquire six hotel properties from various entities. In addition, in order to acquire a seventh hotel property, through a wholly-owned subsidiary, RRF Sub Corp., the Trust issued 647,231 shares of beneficial interest in exchange for all of the outstanding shares of Buenaventura Properties, Inc. (BPI), which owned a hotel located in Scottsdale, Arizona (InnSuites Hotels Scottsdale). These seven hotels are collectively referred to as the "Initial Hotels." The Initial Hotels, together with the hotels described in Note 4, are referred to herein as the "Hotels". The Hotels are leased to InnSuites Hotels, Inc., formerly known as Realty Hotel Lessee Corp. (the "Lessee"), pursuant to leases, which contain provisions for rent based on the revenues of the Hotels (the "Percentage Leases"). Each Percentage Lease obligates the Lessee to pay rent equal to the greater of the minimum rent (Base Rent) or a percentage rent based on the gross revenues of each Hotel. The Lessee holds the franchise agreement for each Hotel. The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by James F. Wirth, Chairman, President and Chief Executive Officer of the Trust ("Wirth") and his spouse.

As of and for the 3 month period ended April 30, 2000, the Trust's general partnership interest in the Partnership was 45.1% and 45.0% (weighted average), respectively.

Partnership Agreement

The Partnership Agreement provides for the issuance of two classes of limited partnership units, Class A and Class B. Such classes are identical in all respects, except that each Class A limited partnership unit in the Partnership shall be convertible into a like number of shares of beneficial interest of the Trust, at any time at the option of the particular limited partner, if the Trust determines that such conversion would not cause the Trust to fail to qualify as a REIT. As of April 30, 2000, a total of 2,032,481 Class A limited partnership units were issued and outstanding. Additionally a total of 5,226,364 Class B limited partnership units were outstanding to Wirth and his affiliates, in lieu of the issuance of Class A limited partnership units. If all of the Class A and B limited partnership units were to be converted, the limited partners in the Partnership would receive 7,258,845 shares of beneficial interest of the Trust. The Class B limited partnership units may only become convertible with the approval of the Board of Trustees, in its sole discretion.

Basis of Presentation

As sole general partner, the Trust exercises unilateral control over the Partnership. Therefore, the financial statements of the Partnership are consolidated with the Trust. All significant intercompany transactions and balances have been eliminated.

 

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended April 30, 2000 are not necessarily indicative of the results that may be expected for the year ended January 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Trust's Annual Report on Form 10-K/A as of and for the year ended January 31, 2000.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.          REVENUE RECOGNITION:

Trust revenues are earned monthly as per the Percentage Leases and recognized when earned.

3.          EARNINGS PER SHARE:

SFAS No. 128, "Earnings per Share" eliminates the concept of common stock equivalents and replaces "primary" and "fully diluted" earnings per share with "basic" and "diluted" earnings per share. Basic and diluted earnings per share have been computed based on the weighted-average number of shares outstanding during the periods.

For the quarters ended April 30, 2000 and 1999, there were Class A and Class B partnership units outstanding, which are convertible to shares of beneficial interest of the Trust. Assuming conversion, the aggregated weighted-average of these shares of beneficial interest would be 7,258,845 in the first quarter of fiscal 2001 and 7,769,080 in the first quarter of fiscal 2000. These shares are dilutive due to the earnings for the first quarters of fiscal years 2001 and 2000.

4.          ACQUISITIONS:

There were no hotel acquisitions during the first quarter of fiscal 2001.

 

 

5.          CREDIT FACILITY:

During the first quarter of fiscal 1999, the Trust established a $12,000,000 revolving line of credit with Pacific Century Bank. The credit facility requires the Trust, among other things, to maintain a minimum net worth, a specified coverage ratio of earnings before interest, taxes, depreciation, and amortization (EBITDA) to debt service, and a specified coverage ratio of EBITDA to debt service and fixed charges. Further, the Trust is required to maintain its franchise agreement at each of the hotel properties and to maintain its REIT status.

6.          PERCENTAGE LEASE AGREEMENTS:

The Percentage Leases have non-cancelable terms, which expire on January 31, 2008, subject to earlier termination on the occurrence of certain contingencies, as defined. The rent due under each Percentage Lease is the greater of minimum rent, as defined, or percentage rent. Percentage rent applicable to room and other hotel revenue varies by lease and is calculated on a quarterly basis by multiplying fixed percentages by the actual quarterly amounts of such gross revenues in excess of specified threshold amounts. Both the minimum rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments beginning January 1, 1999, based on increases in the United States Consumer Price Index. Percentage rent applicable to food and beverage revenues is calculated as 5% of such revenue over a minimum threshold.

Future minimum rentals (ignoring CPI increases) to be received by the Trust from the Lessee pursuant to the Percentage Leases for each of the next five years and in total thereafter are as follows:

Fiscal
      
2001
  
$
5,137,500
2002
  
6,850,000
2003
  
6,850,000
2004
  
6,850,000
2005
  
6,850,000
 Thereafter
  
20,550,000
   
   
$
53,087,500
   

The Trust earned approximately $3.3 million in rent revenue during both the first quarter of fiscal 2001 and 2000, of which approximately $1.6 million and $1.5 million, respectively, was in excess of base rent. After a review of projected cash flows to assess the future collectiblity of current rents, the Trust recorded a provision for uncollectible rent receivables of $255,158 for the first quarter of fiscal 2001.

7.          RELATED PARTY TRANSACTIONS:

The Partnership is responsible for all expenses incurred by the Trust in accordance with the Partnership Agreement.

Wirth is a 9.8% indirect shareholder of the Lessee. At April 30, 2000 the Trust had an $185,000 receivable from the Lessee.

The Initial Hotels were acquired by the Partnership from entities in which Wirth and his affiliates had substantial ownership interests. Wirth and his affiliates received 4,017,361 Class B limited partnership units and 647,231 shares of Beneficial Interest in the Trust in exchange for their interests in the Initial Hotels. As of April 30, 2000, Wirth and his affiliates held 5,226,364 Class B limited partnership units. As of April 30, 2000 Wirth and his affiliates held 834,613 shares of beneficial interest in the Trust.

At April 30, 2000, the Trust owned a 45.1% interest in the ten hotels (the "Hotels") through its sole general partner's interest in the Partnership. This change in ownership resulted primarily from the following transactions:

The Trust paid interest on related party notes to Wirth in the amount of $143,597 for the three months ended April 30, 2000.

The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt and depreciation of the Hotels. Under the terms of the Partnership agreement, the Partnership is required to reimburse the Trust for all such expenses.

Loans payable to related parties consists of funds provided by Wirth to repurchase Partnership units and to fund working capital and capital improvement needs. The aggregate amounts outstanding were approximately $2.6 million and $3.0 million as of April 30 and January 31, 2000, respectively. The loans payable to related parties are as follows:

 

8.          STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:

The Trust issued 3,000 shares of beneficial interest during the quarter ended April 30, 2000 valued at $6,375 in exchange for Class A limited partnership units.

The Trust paid $99,394 in dividends and distributions in the quarter ended April 30, 2000.

9.          STATEMENTS OF OPERATIONS OF INNSUITES HOTELS, INC. (LESSEE)

          Certain condensed financial information related to the Lessee's operations is as follows:

INNSUITES HOTELS, INC.
UNAUDITED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)

 

 
THREE MONTHS ENDED APRIL 30,
 
 
2000
  
1999
 
REVENUES FROM HOTEL OPERATIONS
          
          Room, food and beverage
$
 8,912   8,866  
          Other
295   383  
 
 
 
TOTAL REVENUES
$
 9,207   9,249  
EXPENSES          
          Departmental
$
 2,430   2,482  
          Percentage rent
3,319   3,256  
          Advertising
585   597  
          Other 2,471   2,442  
 
 
 
TOTAL EXPENSES
$
 8,805   8,777  
 
 
 
NET INCOME
$
 402   473  
 
 
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
  RESULTS OF OPERATIONS.

 

GENERAL

                     The following discussion should be read in conjunction with the InnSuites Hospitality Trust condensed consolidated financial statements and notes thereto and the InnSuites Hotels, Inc. (the "Lessee") unaudited condensed statements of operations appearing elsewhere in this quarterly report.

                     The Trust is a real estate investment trust, which owns the sole general partner interest in the Partnership. In order for the Trust to qualify as a REIT under the Code, neither the Trust nor the Partnership can operate the Hotels. Therefore, each of the Hotels is leased to, and operated by, the Lessee pursuant to a Percentage Lease. Each Percentage Lease obligates the Lessee to pay rent equal to the greater of a minimum rent or a percentage rent based on the gross revenues of each hotel. The Lessee also holds the franchise agreement for each of the Hotels. The Lessee is owned 9.8% by InnSuites Innternational Hotels, Inc., an entity owned by Wirth and his wife. The Trust's principal source of cash flows is distributions from the Partnership, which are dependent upon lease payments from the Lessee pursuant to the Percentage Leases. The Lessee's ability to make payments to the Partnership pursuant to the Percentage Leases is dependent primarily upon the operations of the Hotels.

                     The Trust's Management intends to restructure and acquire the Lessee in January 2001 following the guidelines of the REIT Modernization Act.

                     At April 30, 2000, the Trust owned a 45.1% interest in the Hotels through its sole general partner's interest in the Partnership. This change in ownership resulted primarily from the following transactions occurring between February 1, 1999 and April 2, 1999:

On March 15, 1999, the Trust purchased 1 million additional general partner units in the Partnership for $2 million. This transaction was fully funded by Wirth who provided an unsecured loan to the Trust at 7% interest payable annually beginning March 15, 2000. The unpaid principal balance and accrued interest is due on March 15, 2004.

On April 2, 1999, the Partnership made an unsecured loan to the Trust in the amount of $2.6 million. Annual interest only payments are due on March 1 of each year and are based on a 7% interest rate. The unpaid principal balance is due at maturity on April 2, 2006. The Trust used the proceeds of that loan to purchase 1.3 million general partner units in the Partnership. The money loaned by the Partnership was generated by refinancing the Northern Phoenix hotel and borrowing an additional $1.8 million that was secured by a mortgage on that property. The original mortgage note was restructured to match the terms of the refinanced note, which bears interest at 8.25% and matures on April 1, 2014. Monthly principal and interest payments began on April 1, 1999.

As of April 2, 1999, the Trust transferred, at historical cost, its interest in the Scottsdale property to the Partnership (approximately $7 million) in exchange for 1.6 million general partner units.

As a result of the aforementioned transactions, the Trust increased its ownership interest in the Partnership from approximately 18% to approximately 42% as of April 2, 1999.

                     The expenses of the Trust consist primarily of property taxes, insurance, corporate overhead, interest on mortgage debt and depreciation of the Hotels. Under the terms of its Partnership Agreement, the Partnership is required to reimburse the Trust for all such expenses. The Percentage Leases provide for the payment of base rent and percentage rent. For the three month period ended April 30, 2000, base rent and percentage rent in the aggregate amount of $3.3 million was earned by the Trust. The principal determinant of percentage rent is the Lessee's room revenues at the Hotels, as defined by the Percentage Leases. Therefore, management believes that a

review of the historical performance of the operations of the Hotels, particularly with respect to occupancy, average daily rate ("ADR"), calculated as total room revenue divided by number of rooms sold, and revenue per available room, calculated as total room revenue divided by number of rooms available (known as "REVPAR"), is appropriate for understanding revenue from the Percentage Leases. In comparing the first quarters of fiscal 2001 and 2000, ADR decreased $2.13 or 2.76% to $74.99 in the first quarter of fiscal 2001 from $77.12 in the first quarter of fiscal 2000, primarily due to a conscious effort to drive additional occupancy by managing down the ADR. Occupancy increased by 5.63% to 75.0% in first quarter of fiscal 2001 from 71.0% in the first quarter of fiscal 2000 primarily the result of the rate management activity. Increased occupancy rates resulted in an increase in REVPAR of $1.52 or 2.78% to $56.27 in the first quarter of fiscal 2001 from $54.75 in the first quarter of fiscal 2000.

     The following table shows certain historical financial and other information for the periods indicated.

  FOR THE THREE MONTHS ENDED
APRIL 30,
 
  2000
   
1999
 
               
Occupancy  
75.00
%    
71.00
%
Average Daily Rate (ADR)
$
74.99
   
$
77.12
 
Revenue Per Available Room (REVPAR)
$
56.27
   
$
54.75
 

     No assurance can be given that the trends reflected in this data will continue or that Occupancy, ADR and REVPAR will not decrease as a result of changes in national or local economic or hospitality industry conditions.

Results of Operations of the Trust for the three months ended April 30, 2000 compared to the three months ended April 30, 1999

     For the three months ended April 30, 2000, the Trust had revenues of approximately $3.3 million compared to a similar amount for the three months ended April 30, 1999. Total expenses increased approximately $43,000 or 1.9% from approximately $2,292,000 for the three months ended April 30, 1999.

     Real estate depreciation for the three months ended April 30, 2000 compared to the three months ended April 30, 1999 increased approximately $48,000 or 7.7% to approximately $666,000 from approximately $618,000, respectively. The increase was primarily due to an increase in capitalized refurbishment costs in the first quarter of fiscal 2001.

     Real estate and personal property taxes, insurance and ground rent decreased approximately $33,000 or 8.7% to approximately $343,000 from approximately $376,000 in comparing the three months ended April 30, 2000 and 1999, respectively. The decrease was primarily due to successful and ongoing efforts to reduce real and personal property tax assessments made by local and state governments.

     General and administrative expenses include overhead charges for management, accounting, shareholder and legal services for the Trust. In comparing general and administrative expenses for the quarters ended April 30, 2000 and 1999, general and administrative expenses decreased approximately $48,000 or 9.4% to approximately $469,000 from approximately $517,000, respectively. The decrease of approximately $48,000 was primarily due to a combination of the final settlement of accounting and legal charges of approximately $300,000 associated with the Trust's closing of the Cleveland office in the first quarter ended April 30, 1999 and the provision of approximately $255,000 for uncollectible rent in the first quarter ended April 30, 2000.

     Total interest expense increased approximately $61,000 or 7.8% to approximately $841,000 from approximately $780,000 in comparing the three months ended April 30, 2000 and 1999, respectively. Interest on mortgage notes payable increased approximately $41,000 or 8.3% to approximately $545,000 from approximately $504,000 in comparing the three months ended April 30, 2000 and 1999, respectively. The increase was primarily due to net additional borrowings of approximately $2.3 million during fiscal 2000 for a loan modification relating to the Northern Phoenix property and the refinancing of the San Diego property. Interest on notes payable to related parties increased approximately $25,000 or 97.7% to approximately $50,000 from approximately $25,000 due to additional loans from Wirth during the second half of fiscal 2000. These were partially offset by a slight decrease in the variable rate paid on the $12 million credit facility.

     Amortization of loan fees was approximately $16,000 for the three months ended April 30, 2000.

Funds from Operations (FFO)

     The Trust notes that industry analysts and investors use Funds From Operations (FFO) as another tool to evaluate and compare equity REITs. The Trust also believes it is meaningful as an indicator of net income excluding most non-cash items and provides information about the Trust's cash available for distributions, debt service and capital expenditures. The Trust follows the March 1995 interpretation of the National Association of Real Estate Investment Trusts ("NAREIT") definition of FFO which is calculated (in the Trust's case) as net income plus depreciation and amortization, and loss on disposals and extraordinary items, if applicable. FFO does not represent cash flow from operating activities in accordance with generally accepted accounting principles ("GAAP") and is not indicative of cash available to fund all of the Trust's cash needs. FFO should not be considered as an alternative to net income or any other GAAP measure as an indicator of performance and should not be considered as an alternative to cash flows as a measure of liquidity. In addition, the Trust's FFO may not be comparable to other companies' FFO due to differing methods of calculating FFO and varying interpretations of the NAREIT definition.

  FUNDS FROM OPERATIONS
FOR THE THREE MONTHS
ENDED APRIL 30,
 
 
(amounts in thousands)
  
 
2000
    
1999
  
 
   
 
Net income attributable to common stockholders
$
392
    
379
  
Depreciation
666
    
618
  
Minority interest share of depreciation
(366
)
 
(398
)
 
   
 
Funds from Operations (FFO)
$
692
    
599
  
 
   
 

 

     FFO increased to approximately $692,000 from approximately $599,000 when comparing the first quarters of fiscal 2001 and 2000 ended April 30, 2000 and 1999, respectively. The increase of approximately $93,000 or 15.5% was primarily due to the increased ownership interest that the Trust has in the Partnership.

Results of Operations of InnSuites Hotels Inc., the Lessee, for the three months ended April 30, 2000 compared to the three months ended April 30, 1999

     For the three months ended April 30, 2000, the Lessee had total revenues of approximately $9.2 million compared to approximately the same amount for the three months ended April 30, 1999. Although ADR decreased by $2.13 or 2.76% to $74.99 from $77.12 when comparing the three months ended April 30, 2000 and 1999, respectively, occupancy increased 5.63% to 75.0% from 71.0%. Total expenses increased approximately $28,000 or less than 1%, remaining at approximately $8.8 million.

     Departmental expenses, which include operating expenses for the rooms, food and beverage, telecommunications, and miscellaneous departments, decreased approximately $52,000 or 2.1% to approximately $2.4 million from approximately $2.5 million for the three months ended April 30, 2000 and 1999, respectively. This decrease was primarily due to management's efforts to increase operational efficiency to reduce costs per occupied room.

     Percentage lease expense increased by approximately $63,000 or 2.0% remaining at approximately $3.3 million for the three month periods ended April 30, 2000 and 1999. The increase was primarily due to an increase in room revenues, which the percentage lease expenses are primarily based on, for the three months ended April 30, 2000.

     Advertising expense for the three months ended April 30, 2000 was approximately $585,000.

     Other expenses, including general and administrative, maintenance, hospitality, utility, and insurance expenses, was approximately $2.5 million for the three months ended April 30, 2000 compared to approximately $2.4 million for the three months ended April 30, 1999. The increase of approximately $29,000 or 1.2% was primarily due to increased utility and hospitality expenses resulting from the 5.63% increase in occupancy.

LIQUIDITY AND CAPITAL RESOURCES

     The Trust, through its ownership interest in the Partnership, will have its proportionate share of the benefits and obligations of the Partnership's ownership interests in the Hotels. The Trust's principal sources of cash to meet its cash requirements, including distributions to its shareholders, is its share of the Partnership's cash flow. The Partnership's principal source of revenue is rent payments under the Percentage Leases. The Lessee's obligations under the Percentage Leases are unsecured and its ability to make rent payments to the Partnership under the Percentage Leases, and the Trust's liquidity, including its ability to make distributions to its shareholders, will depend upon the ability of the Lessee to generate sufficient cash flow from hotel operations. For the three months ended April 30, 2000 and 1999, the Trust recorded a provision of approximately $255,000 and $0 for uncollectible receivables, respectively. These charges reflect the Trust's assessment of the collectibility of its receivables, which primarily consists of rent receivable from the Lessee, based on an evaluation of the Lessee's estimated future cash flows. The Trust's management may restructure and acquire the Lessee in January 2001 following the guidelines of the REIT Modernization Act.

     As of April 30, 2000, the Trust has no commitments for capital expenditures beyond a 4% reserve for refurbishment and replacements set aside annually, as described below.

     The Trust intends to acquire and develop additional hotels and expects to incur indebtedness to fund those acquisitions and developments. The Trust may also incur indebtedness to meet distribution requirements imposed on a REIT under the Code to the extent that working capital and cash flow from the Trust's investments are insufficient to make the required distributions. The terms of the line of credit discussed below permit borrowings for that purpose, but impose certain limitations on the Trust's ability to engage in other borrowings.

    On April 16, 1998, the Trust obtained a $12 million Credit Facility (the "Credit Facility") from Pacific Century Bank to assist it in its funding of the acquisition and development of additional hotels and for certain other business purposes. Borrowings under the Credit Facility are secured by first mortgages on three of the Hotels. The Trust has drawn $11.3 million from its line of credit, which charges interest at a variable interest rate. By its terms, the Credit Facility will expire in approximately one year on April 16, 2001, subject to renewal. The terms of the Credit Facility require the Trust to maintain a net worth (combined with minority interest) of not less than $15 million and, as of the end of each fiscal quarter, maintain a debt to net worth ratio of not greater than 1.75 to 1.0 (renegotiated), a net operating income to debt service relating to encumbered properties ratio of not less than 1.30 to 1.0, and a net operating income to debt service ratio of not less than 1.25 to 1.0. The Trust may prepay the Credit Facility, subject to a prepayment penalty of $250 plus a yield-maintenance penalty. During the term of the Credit Facility the Trust may not further encumber its collateral, sell its collateral, change the nature of its business, or unreasonably suspend its business.

     The Trust may seek to increase the amount of its Credit Facility, negotiate additional credit facilities, or issue debt instruments. Any debt incurred or issued by the Trust may be secured or unsecured, long-term, medium-term or short-term, bear interest at a fixed or variable rate and be subject to such other terms as the Trust considers prudent.

     The Trust will acquire or develop additional hotels only as suitable opportunities arise, and the Trust will not undertake acquisition or redevelopment of properties unless adequate sources of financing are available. Funds for future acquisitions or development of hotels are expected to be derived, in whole or in part, from borrowings under the Credit Facility or other borrowings or from the proceeds of additional issuances of shares of beneficial interest or other securities. However, there can be no assurance that the Trust will successfully acquire or develop additional hotels.

     The Partnership will contribute to a Capital Expenditures Fund (the "Fund") on a continuing basis, from the rent paid under the Percentage Leases, an amount equal to 4% of the Lessee's revenues from operation of the Hotels. The Fund is intended to be used for capital improvements to the Hotels and refurbishment and replacement of furniture, fixtures and equipment, in addition to other uses of amounts in the Fund considered appropriate from time to time. The Partnership anticipates making similar arrangements with respect to future hotels that it may acquire or develop. During fiscal quarter ended April 30, 2000, the Hotels spent approximately $311,494 for capital expenditures. The Trust considers the majority of these improvements to be revenue-producing. Therefore, these amounts have been capitalized and are being depreciated over their estimated useful lives. The Lessee also spent $444,215 during the first fiscal quarter ended April 30, 2000 on repairs and maintenance to the Hotels and these amounts have been charged to expense as incurred.

INFLATION

     The Trust's revenues initially will be based on the Percentage Leases which will result in changes in the Trust's revenues based on changes in the underlying Hotel revenues. Therefore, the Trust initially will be relying entirely on the performance of the Hotels and the Lessee's ability to increase revenues to keep pace with inflation. Operators of hotels in general, and the Lessee in particular, can change room rates quickly, but competitive pressures may limit the Lessee's ability to raise rates faster than inflation.

     The Trust's largest fixed expense is the depreciation of the investment in Hotel properties. The Trust's variable expenses, which are subject to inflation, represented approximately 24.4% of revenues for the fiscal quarter ended April 30, 2000. These variable expenses (general and administrative costs, as well as real estate and personal property taxes, property and casualty insurance and ground rent) are expected to grow with the general rate of inflation.

SEASONALITY

     The Hotels' operations historically have been seasonal. The six southern Arizona hotels experience their highest occupancy in the first fiscal quarter and, to a lesser extent, the fourth fiscal quarter. The second fiscal quarter tends to be the lowest occupancy period at those six southern Arizona hotels. This seasonality pattern can be expected to cause fluctuations in the Trust's quarterly lease revenue under the Percentage Leases. The hotels located in northern Arizona and California historically experience their most profitable periods during the second and third fiscal quarters (the summer season), providing some balance to the general seasonality of the hotel business. To the extent that cash flow from operations is insufficient during any quarter, because of temporary or seasonal fluctuations in lease revenue, the Trust may utilize other cash on hand or borrowings to make distributions to its shareholders. No assurance can be given that the Trust will make distributions in the future.

YEAR 2000 COMPLIANCE

     The Trust and the Lessee have upgraded their computer accounting programs and the Lessee upgraded its computerized property management system along with necessary hardware. The new systems have been warranted to be Year 2000 compliant. As of June 14, 2000, no computer or software problems relating to the Year 2000 have been discovered. However, problems relating to the Year 2000 could still arise.

FORWARD-LOOKING STATEMENTS

     Certain statements in this Form 10-Q constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Trust intends that such forward-looking statements be subject to the safe harbors created by such Acts. Those forward-looking statements include statements regarding the intent, belief or current expectations of the Trust, its Trustees or its officers in respect of (i) the declaration or payment of dividends; (ii) the leasing, management or operation of the Hotels; (iii) the adequacy of reserves for renovation and refurbishment; (iv) the Trust's financing plans; (v) the Trust's position regarding investments, acquisitions, developments, financings, conflicts of interest and other matters; (vi) the Trust's continued qualification as a REIT; and (vii) trends affecting the Trust's or any hotel's financial condition or results of operations. The words and phrases "looking ahead", "we are confident", "should be", "will be", "predicted", "believe", "expect", "anticipate" and similar expressions identify forward-looking statements.

     These forward-looking statements reflect the Trust's current views in respect of future events and financial performance, but are subject to many uncertainties and factors relating to the operations and business environment of the hotels which may cause the actual results of the Trust to differ materially from any future results expressed or implied by such forward-looking statements. Examples of such uncertainties include, but are not limited to: fluctuations in hotel occupancy rates; changes in room rental rates which may be charged by the Lessee in response to market rental rate changes or otherwise; interest rate fluctuations; changes in federal income tax laws and regulations; competition; any changes in the Trust's financial condition or operating results due to acquisitions or dispositions of hotel properties; real estate and hospitality market conditions; hospitality industry factors; and local or national economic and business conditions, including, without limitation, conditions which may affect public securities markets generally, the hospitality industry, or the markets in which the Trust operates or will operate. The Trust does not undertake any obligation to update publicly or revise any forward-looking statements whether as a result of new information, future events or otherwise. Pursuant to Section 21E(b)(2)(E) of the Securities Exchange Act of 1934, the qualifications set forth hereinabove are inapplicable to any forward-looking statements in this Form 10-Q relating to the operations of the Partnership.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Trust is exposed to interest rate risk primarily as a result of its mortgage notes payable, notes payable to banks and other notes payable. Proceeds from these loans are used to maintain liquidity, fund capital expenditures and expand the Trust's real estate investment portfolio and operations. The Trust's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Trust borrows using fixed rate debt, when possible. There have been no significant changes in the Trust's debt structure during the quarter ended April 30, 2000.

PART II

OTHER INFORMATION

ITEM 6.          EXHIBITS AND REPORTS ON FORM 8-K.

(a)

EXHIBIT
NUMBER
  EXHIBIT
27.1
  
Financial Data Schedule.(1)

(1) Filed only in electronic format pursuant to Item 601(c) of Regulation S-K.

(b)        REPORTS ON FORM 8-K.

No Current Reports on Form 8-K were filed by the Trust during the fiscal quarter ended April 30, 2000.

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: June 14, 2000 INNSUITES HOSPITALITY TRUST (Registrant)
   
  By: /s/ Marc E. Berg
   
    Marc E. Berg, Executive Vice President, Treasurer and Secretary
   
  And By:  /s/ Anthony B. Waters
     
      Anthony B. Waters, Chief Financial Officer



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