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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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AMENDED QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999
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 May 31, 1999: 2,229,174.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
INNSUITES HOSPITALITY TRUST
BALANCE SHEETS
APRIL 30, 1999 JANUARY 31, 1999
-------------- ----------------
(UNAUDITED) (AUDITED)
(Restated)
ASSETS
HOTEL PROPERTIES, NET........................................................... $65,506,764 $65,509,187
CASH AND CASH EQUIVALENTS....................................................... 838,856 420,935
PERCENTAGE RENT RECEIVABLE FROM AFFILIATE....................................... 1,119,653 788,179
INTEREST RECEIVABLE AND OTHER ASSETS............................................ 1,451,034 1,086,469
----------- -----------
$68,916,307 $67,804,770
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LIABILITIES AND SHAREHOLDERS' EQUITY
MORTGAGE NOTES PAYABLE.......................................................... $24,213,631 $23,161,052
NOTES PAYABLE TO BANKS.......................................................... 11,300,000 11,300,000
OTHER NOTES PAYABLE............................................................. -- 450,000
ADVANCES PAYABLE TO RELATED PARTIES............................................. 2,031,000 2,013,782
ACCOUNTS PAYABLE AND ACCRUED EXPENSES........................................... 1,778,771 2,188,709
MINORITY INTEREST IN PARTNERSHIP................................................ 19,453,943 20,621,900
SHAREHOLDERS' EQUITY:
Shares of beneficial interest, without par value; unlimited authorization;
2,327,793 shares outstanding at April 30 and 2,286,951
shares outstanding at January 31, 1999 10,138,962 8,069,327
----------- -----------
$68,916,307 $67,804,770
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The accompanying notes are an integral part of these statements.
2
INNSUITES HOSPITALITY TRUST
UNAUDITED STATEMENTS OF INCOME
For the three month period
ended April 30,
--------------------------
1999 1998
------------ -----------
(Restated)
REVENUES:
Rent revenue from affiliate......................................... $ 3,255,511 $3,771,239
Interest income..................................................... 19,876 11,345
Other income........................................................ 9,591 --
----------- ----------
3,284,978 3,782,584
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EXPENSES:
Real estate depreciation............................................ 618,363 519,269
Real estate and personal property taxes, insurance and ground rent.. 375,727 229,495
General and administrative.......................................... 517,376 430,625
Interest on mortgage notes payable.................................. 503,550 628,512
Interest on notes payable to banks.................................. 251,206 --
Interest on note payable to related party........................... 25,211 --
Advisory fee paid to related party.................................. -- 144,153
Amortization of loan fees........................................... 257 --
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2,291,690 1,952,054
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INCOME BEFORE MINORITY INTEREST...................................... 993,288 1,830,530
LESS: MINORITY INTEREST.............................................. 613,981 1,395,361
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NET INCOME ATTRIBUTABLE TO SHARES OF BENEFICIAL INTEREST............. $ 379,307 $ 435,169
=========== ==========
EARNINGS PER SHARE -- basic.......................................... $ .16 $ .26
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- basic............... 2,321,133 1,667,817
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EARNINGS PER SHARE -- diluted........................................ $ .10 $ .11
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING -- diluted............. 10,090,213 3,873,215
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The accompanying notes are an integral part of these statements.
3
INNSUITES HOSPITALITY TRUST
UNAUDITED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 30,
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................. $ 379,307 $ 435,169
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization......................................... 618,620 519,269
Minority interest..................................................... 613,981 1,395,361
Increase in amounts due lessee........................................ -- 2,063,197
Increase in interest receivable and other assets...................... (364,822) (410,295)
Increase in percentage rent receivable................................ (331,474) (2,510,532)
Increase (decrease) in accounts payable and accrued expenses.......... (409,938) 292,715
----------- -----------
Net cash provided by operating activities............................ 505,674 1,784,884
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of hotel properties........................................ -- (5,148,000)
Improvements and additions to hotel properties......................... (615,940) --
----------- -----------
Net cash used in investing activities................................ (615,940) (5,148,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net bank borrowings.................................................... -- 3,430,000
Payments of mortgage notes payable..................................... (699,341) --
Issuance of shares..................................................... 177,573 --
Refinancing of mortgage notes payable.................................. 1,751,920 1,561,309
Payments of other notes payable........................................ (450,000) (211,438)
Repurchase of partnership units........................................ (269,183) --
Advances from related parties.......................................... 2,000,000 --
Payments on advances from related parties.............................. (1,982,782) (1,938,652)
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Net cash used for financing activities............................... 528,187 2,841,219
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NET CHANGE IN CASH AND CASH EQUIVALENTS................................. 417,921 (521,897)
CASH AT BEGINNING OF PERIOD............................................. 420,935 2,378,398
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CASH AT END OF PERIOD................................................... $ 838,856 $ 1,856,501
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The accompanying notes are an integral part of these statements.
4
INNSUITES HOSPITALITY TRUST
NOTES TO UNAUDITED FINANCIAL STATEMENTS
APRIL 30, 1999 AND 1998
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION:
Prior to fiscal 1999, InnSuites Hospitality Trust, formerly known as Realty
ReFund Trust (the "Trust" or the "Company"), 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, 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.
These hotels, together with the hotels described in Note 5, 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 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.
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, 1999, a total of 2,496,948 Class A limited partnership
units were issued and outstanding. Additionally a total of 5,246,364 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
Class B (restated) limited partnership units were to be converted, the limited
partners in the Partnership would receive 7,743,312 (restated) 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 and its
wholly owned subsidiary 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, 1999 are
not necessarily indicative of the results that may be expected for the year
ended January 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A as of and for the year ended January 31, 1999.
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 and 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. Restatement:
While finalizing the financial statement balances as of and for the year
ended January 31, 2000, management identified certain matters that were not
appropriately reflected in the quarterly financial information. These matters
included the reporting of the weighted average number of shares used to
calculate diluted earnings per share for the quarter ended April 30, 1999 and
the reporting of minority interest. Therefore, the quarterly financial
information for the three months ended April 30, 1999 has been restated to
reflect these matters in accordance with generally accepted accounting
principles. The weighted average number of shares used in the calculation of
diluted earnings per share increased to 10,090,213 from 4,060,635 for the three
months ended April 30, 1999. The change was due to the addition of the weighted
average total of Class B partnership units added into the calculation for
diluted earnings. The resulting change was an increase in diluted earnings per
share to $0.10 for the three months ended April 30, 1999 from $0.09 as
previously reported. Minority interest decreased to $19,453,943 from $20,966,698
and shareholders' equity increased to $10,138,962 from $8,626,207 due to
appropriately using the operating partnership's total equity in the calculation
of minority interest instead of using the consolidated Trust's equity as
previously reported. All of the aforementioned changes are reflected in the
Trust's Annual Report filed on Form 10K/A as of and for the year ended January
31, 2000.
5
3. REVENUE RECOGNITION:
In May 1998, the Financial Accounting Standards Board's Emerging Issues Task
Force issued EITF number 98-9 "Accounting for Contingent Rent in Interim
Periods" (EITF 98-9). EITF 98-9 provides that a lessor shall defer recognition
of contingent rental income in interim periods until specified targets that
trigger the contingent income are met. In July 1998, the Task Force issued
transition guidance stating that the consensus could be applied on a prospective
basis or in a manner similar to a change in accounting principle. Effective
August 1, 1998, the Company amended its Percentage Leases to eliminate the
annualization of interim hotel revenue. During the third quarter of fiscal 1999,
accounting for contingent rent under EITF 98-9 was rescinded; the Trust believes
that eliminating annualization of hotel revenue will provide for recognition of
percentage rent more consistently with the generation of revenue from the
Hotels.
4. EARNINGS PER SHARE:
In February 1997, SFAS No. 128 "Earnings Per Share", was issued which
eliminated the concept of common stock equivalents and "primary" and "fully
diluted" earnings per share and replaced them 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 periods ended April 30, 1999 and 1998, there were Class A and B
(restated) limited partnership units outstanding which are convertible to shares
of beneficial interest of the Trust. Assuming conversion, the weighted average
of these shares of beneficial interest would be 7,769,080 (restated) and
6,893,893 (restated), respectively. In connection with the purchase of the
Scottsdale hotel by the Partnership on April 2, 1999 (see Note 7), the Class A
limited partnership units no longer have a dilutive effect since the minority
interests' share of income would increase net income proportionately to the
increase in weighted average shares of beneficial interest.
5. ACQUISITIONS:
Effective February 1, 1998, the Partnership acquired 100% of the ownership
interests in the Tucson St. Mary's Hotel and Resort for $10,820,000. The
Partnership issued 699,933 Class B limited partnership units to Wirth, and his
spouse, who each held a 50% equity ownership interest in the Tucson St. Mary's
hotel.
On April 29, 1998, the Trust acquired a hotel property located in San Diego,
California for an aggregate consideration of $5,148,000, which was funded with
cash, proceeds from the Trust's credit facility and two promissory notes secured
by mortgage trust deeds on the property.
Effective June 1, 1998, the Partnership acquired 100% of the ownership of the
InnSuites Hotel Buena Park for $7,100,000. The Partnership assumed $4,116,754 in
mortgage debt and other obligations and issued 628,052 limited partnership units
to Wirth and Steven S. Robson (of which 13,034 units were subsequently paid to a
third party as an advisory fee), who each held a 50% equity ownership interest
in the Buena Park hotel. Mr. Robson is a Trustee of the Trust.
All of the aforementioned acquisitions were accounted for as purchases.
6. CREDIT FACILITY:
In April 1998, the Trust established a $12,000,000 secured revolving line of
credit with Pacific Century Bank. The credit facility requires, among other
things, the Trust to maintain a minimum net worth, a specified coverage ratio of
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
7. PERCENTAGE LEASE AGREEMENTS:
As previously stated, effective August 1, 1998, the Company amended its
Percentage Leases modifying the interim calculations of percentage rent and the
expiration dates of the 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 the Hotels for each of the
next five fiscal years and in total thereafter are as follows:
Fiscal 2000.................................. $ 5,137,500
2000......................................... 6,850,000
2001......................................... 6,850,000
2002......................................... 6,850,000
2003......................................... 6,850,000
Thereafter................................... 27,400,000
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$59,937,500
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8. RELATED PARTY TRANSACTIONS:
Wirth beneficially owns 9.8% of the common stock of the Lessee. The Lessee
was the sole source of the Trust's Percentage Lease revenue during the quarter
ended April 30, 1999.
Wirth made an unsecured loan to the Trust of $2 million, bearing interest at
7% per year, effective March 15, 1999. Interest only payments are due annually
beginning March 15, 2000. The unpaid principal balance and accrued interest is
due on March 15, 2004. The Trust used the proceeds to purchase general
partnership units in the Partnership.
Effective April 2, 1999, the Trust transferred its interest in the Scottsdale
property to the Partnership in exchange for 1,600,000 general partnership units.
There was no gain or loss resulting from the transfer as the transaction
involved entities under common control.
9. STATEMENTS OF CASH FLOWS, SUPPLEMENTAL DISCLOSURES:
The Trust issued 40,842 shares of beneficial interest during the quarter
ended April 30, 1999 valued at $177,573 in exchange for Class A limited
partnership units.
7
10. PRO FORMA RESULTS OF OPERATIONS OF THE TRUST:
The unaudited pro forma financial information set forth below for the
Trust is presented as if the San Diego and Buena Park properties had been
acquired as of February 1, 1998. The pro forma financial information is not
necessarily indicative of what actual results of operations of the Trust would
have been assuming the two properties had been acquired as of February 1,
1998, nor does it purport to represent the results of operations for future
periods.
PRO FORMA
QUARTER ENDED
April 30
1998 1999
Restated
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(Unaudited, in thousands except per share data)
Rent revenue from affiliate............................................ $4,094 $3,256
Interest and other income.............................................. 11 29
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Total revenues................................................ 4,105 3,285
Interest expense on mortgage and other notes payable................... 763 780
Depreciation and amortization.......................................... 629 618
General and administration............................................. 622 518
Real estate and personal property taxes and casualty
insurance and ground rent............................................ 262 376
Minority interest ..................................................... 1,395 614
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Total expenses and minority interest.......................... 3,671 2,906
------ ------
Net income attributable to shares of beneficial interest............... $ 434 $ 379
====== ======
Net income per share-basic............................................. $ .26 $ .16
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Net income per share-diluted........................................... $ .11 $ .10
====== ======
11. Certain condensed financial information, related to the Lessee's operations
is as follows:
INNSUITES HOTELS, INC.
STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS)
Three Months Ended
March 31,
1999 1998
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Revenues from hotel operations:
Room, food and beverage revenue.. $8,167 $ 7,909
Other revenue.................... 632 222
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Total revenues.......... 8,799 8,131
Expenses:
Departmental expenses............ 2,088 2,226
Percentage lease expense......... 3,212 3,933
Advertising...................... 368 285
Other expenses................... 3,034 3,325
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Net income (loss)......................... $ 97 $(1,638)
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8
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, the InnSuites
Hotels, Inc. (the "Lessee") results of operations, and the notes thereto
appearing elsewhere in this quarterly report, respectively.
InnSuites Hospitality Trust is a real estate investment trust which owns the
sole general partner interest in RRF Limited Partnership (the "Partnership") and
100% of RRF Sub Corp. (Unless the context indicates otherwise, all references to
the Partnership shall include RRF Sub Corp.) In order for the Trust to qualify
as a real estate investment trust under the Internal Revenue Code of 1986, as
amended (a "REIT"), neither the Trust nor the Partnership can operate the
hotels. Therefore, each of the hotels is leased to, and operated by, the Lessee
(formerly known as Realty Hotel Lessee Corp.) 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 hotel. The Lessee is owned
9.8% by InnSuites Innternational Hotels, Inc., an entity owned by Mr. Wirth and
his wife. The Trust's principal source of revenue 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.
At April 30, 1999, the Trust owned a 42% interest in the ten hotels through
its sole general partner's interest in the Partnership. This change in ownership
resulted from the following transactions:
On March 15, 1999, the Trust purchased 1 million additional general partner
units in the Partnership for $2 million. This transaction was funded by Mr.
Wirth who provided an unsecured loan to the Trust of $2 million 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 loaned the Trust $2.615 million dollars.
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 lent by the
Partnership was generated by refinancing the Northern Phoenix property and
borrowing an additional $1.75 million which 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 sold the Scottsdale property to the
Partnership for its appraised value of approximately $7 million in exchange
for 1.6 million general partner units.
The Trust's primary source of revenue is rent payments by the Lessee under
Percentage Leases covering all the Hotels in operation. The expenses of the
Trust consist of property taxes, insurance, corporate overhead, interest on
mortgage debt and depreciation of the Hotels. The Percentage Leases provide for
the payment of base rent and percentage rent. For the quarter ended April 30,
1999, 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 operating 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. ADR and REVPAR improved due to
the acquisitions in the prior year and the successful repositioning of those
hotels as studio and two room suite hotels which contribute more revenue per
available room.
9
The following table shows certain historical financial and other information
for the periods indicated.
For the Three Month Period Ended
April 30,
--------------------------------
1999 1998
------------ -----------
Occupancy 71.0% 71.1%
Average Daily Rate (ADR) $77.12 $76.05
Revenue per available room (REVPAR) $54.78 $54.04
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
ACTUAL RESULTS OF OPERATIONS FOR THE CONSOLIDATED COMPANY
Comparison of the quarter ended April 30, 1999 with 1998 (InnSuites Hospitality
Trust)
For the quarter ended April 30, 1999, the Company had revenues of $3.3
million compared to $3.8 for the quarter ended April 30, 1998, a decrease of $.5
million. Total expenses of $2.3 million for the quarter ended April 30, 1999
included an approximate increase of $300,000 over expenses of $2.0 million in
the quarter ended April 30, 1998.
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, 1999 and 1998,
general and administrative expenses increased $87,000 from $431,000 due to a
final settlement of accounting and legal charges associated with the Trust's
closing of the Cleveland office.
Interest expense increased by $151,000 in comparing the quarters ended April
30, 1999 and 1998 due to a combination of renegotiating lower interest rates and
the addition of $3.1 million in fixed mortgages and/or lines of credit. The
proceeds of those borrowings were used for capital improvements, dividends and
additional operational needs.
Property and real estate taxes, ground rent and insurance increased $146,000
in comparing the quarters ended April 30, 1999 and April 30, 1998. The majority
of the increase relates to the acquisition of the Buena Park and San Diego
hotels. Additionally, the Trust incurred charges for directors and officers
insurance in 1999.
In comparing depreciation for the three months ended April 30, 1999 and 1998,
depreciation increased $99,000 primarily due to the Trust's acquisitions of the
Buena Park and San Diego hotels.
When comparing other expenses for the three months ended April 30, 1999 and
1998, the Trust experienced a decrease of $144,000 in advisory fees due to the
sale of Mid-America ReaFund Advisors, Inc.("MARA") to the Partnership in 1999.
MARA was formerly the Trust's advisory company.
The Trust had net income before minority interest of $1 million for the
quarter ended April 30, 1999, which represented a $837,000 decrease from the
$1.8 million income earned for the quarter ended April 30, 1998. After deducting
minority interest of $614,000, the Trust had net income applicable to Shares of
Beneficial Interest of approximately $379,000 and income per share basic of $.16
for the quarter ended April 30, 1999. This amount represented a $56,000 decrease
in net income earned for the quarter ended April 30, 1999 compared to the
quarter ended April 30, 1998. The decrease is primarily a result of a change in
the percentage rent calculation.
10
As discussed previously in the notes to the financial statements, an
accounting change proposed by the Emerging Issues Task Force required that
contingent rent only be recognized when specified targets that trigger the
increases are met. After the second quarter of 1998, the Percentage Lease
agreements were modified to reflect this accounting change. The recalculation of
revenues for the period ended April 30, 1998 set forth below depicts what
revenues would have been if they had been calculated using the terms of the
modified Percentage Lease agreements. As is demonstrated below, the Trust is
actually performing better than last year for the same time period with regards
to net income and earnings per share. It is particularly important to note that
the Trust's interest in the Partnership has increased to 42% as of April 30,
1999 compared to an interest of 12.8% as of April 30, 1998. The average during
the quarter was 29.9%.
(amounts in thousands except for per share data)
April 30, April 30, April 30,
1999 1998 1998
Recalculated As Reported in 10Q
(Restated)
Revenues................................................. $ 3,285 $3,047 $3,771
Net income before minority interest...................... 993 1,107 1,831
Minority interest........................................ 614 890 1,395
------- ------ ------
Net Income applicable to common shares................... $ 379 $ 217 $ 435
Earnings per share - basic............................... .16 .13 .26
Weighted average number of shares outstanding - basic.... 2,321 1,667 1,667
Earnings per share - diluted............................. .10 .06 .11
Weighted average number of shares outstanding - diluted.. 10,090 3,873 3,873
The Scottsdale hotel is highly seasonal with best results in the first
quarter. The reduction of the Scottsdale ownership from 100% to 42% reduced the
Trust's earnings in the first quarter but will result in less seasonality in
future second, third and fourth quarters. San Diego and Buena Park are more
seasonal operations which traditionally contribute greater amounts of income in
the second quarter of the Trust's fiscal year compared to the first quarter. The
changes in percentage rent allocation and the acquisition and repositioning of
the San Diego and Buena Park hotels should provide less seasonality than the
Trust has experienced historically.
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.
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FUNDS FROM OPERATIONS (FFO)
For the Three Month Period Ended
April 30
---------------------------------------
(amounts in thousands except per share)
1999 1998 1998
Recalculated Reported
-------- ------------ --------
Net income attributable to common stockholders $ 379 $ 217 $ 435
Depreciation 618 519 519
Minority interest share of depreciation (398) (373) (373)
-------- ------------ -------
Funds from Operations (FFO) $ 599 $ 363 $ 581
======== ============ =======
FFO increased from $581,000 for the quarter ended April 30, 1998
(recalculated at $363,000) to $599,000 for the quarter ended April 30, 1999. The
increase in FFO attributable to the Trust for the three months ended April 30,
1999 over the recalculated three months ended April 30, 1998 shows the
repositioned Hotels' contribution to the Trust.
Comparison of the quarter ended March 31, 1999 with 1998 (InnSuites Hotels,
Inc.-Lessee)
For the three months ended March 31, 1999, the Lessee had revenues of $8.8
million compared to $8.1 million for the three months ended March 31, 1998. This
8.6% increase was due to improvements in ADR from $76.05 to $77.12 and a $.74
increase in REVPAR from 1998 to 1999. Total expenses decreased from $9.8 million
to $8.7 million.
Revenues increased $668,000, or 8.2%, from the three months ended March 31,
1998 to the three months ended March 31, 1999. This increased revenue was driven
by an increase in ADR coupled with an increase in REVPAR of 1.4% over the three
months ended March 31, 1998. Continued growth and repositioning of the acquired
hotels at Tucson I-10 St. Mary, Arizona, and Buena Park and San Diego,
California and the influence of tourism at the southern Arizona hotels during
the winter months helped improve the results for the three months ended March
31, 1999. Continuing efforts to enhance the properties through refurbishment
programs continues to show a positive effect on guests and referrals.
Operating and other expenses decreased by $346,000, or 6.0%, between the
years because of the repairs and repositioning costs incurred in 1998. These
costs decreased as a percentage of revenues from 71.8% in 1998 to 62.4% in 1999.
Rent expense also decreased by 18.3% due to the previously described changes in
the Percentage Leases.
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, will be its
share of the Partnership's cash flow. The Partnership's principal source of
revenue will be 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. During the first quarter, the cash payments exceeded $3
million dollars on rent receivables. Management decided that a further allowance
for bad debts was not needed.
Beyond the 4% reserve for refurbishment and replacements set aside annually,
approximately $140,000 will be spent in the next quarter for the Nova
Front Desk systems in response to potential computer systems problems associated
with the Year 2000; an ongoing expenditure totaling $450,000 for refurbishing
costs at the San Diego hotel will also be incurred in future quarters. The Trust
had no other purchase commitments beyond the 4% reserve as of April 30, 1999.
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 Internal Revenue 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.
The Trust maintains a Credit Facility with 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 two years,
subject to renewal. The terms of the Credit Facility require the Partnership to
maintain a net worth of not less than $15 million and, as of the end each fiscal
quarter, maintain a debt to net worth ratio of not greater than 1.5 to 1.0, and
a net operating income to debt service relating to encumbered properties 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 is in negotiations with lenders to adjust its covenant
requirements.
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. There is not an agreement or understanding to
invest in any other properties, and there can be no assurance that the Trust
will successfully acquire or develop additional hotels.
The Partnership will contribute to a Capital Expenditures 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 Capital
Expenditures 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 the fiscal quarter ended
April 30, 1999, the Hotels spent approximately $616,000 for capital
expenditures. The Trust considers the majority of these improvements to be
revenue producing and therefore these amounts have been capitalized and are
being depreciated over their estimated useful lives. The Hotels also spent
$426,000 during the fiscal quarter ending April 30, 1999 on repairs and
maintenance and these amounts have been charged to expense as incurred.
Outstanding mortgage debt increased from $23.2 million at January 31, 1999 to
$24.2 million at April 30, 1999 due to the mortgage debt increase and the
refinancing of the Northern Phoenix property.
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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 27.1% of revenues for the fiscal quarter ended April
30, 1999. 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 rates 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. The Flagstaff, Arizona and San Diego and Buena Park, California hotels
experience their highest occupancy rates in the second and third fiscal
quarters. This seasonality pattern can be expected to cause fluctuations in the
Trust's quarterly lease revenues under the Percentage Leases. 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. The extent
of the fluctuation of earnings related to seasonality of the Hotels is
anticipated to be leveled by the fact that the Trust's ownership of the
Scottsdale hotel (which shows one of the highest seasonal fluctuations) has been
reduced to 42% from 100%. At the same time, the Trust's ownership of the other
Hotels, including the California properties (which are less seasonal and have a
different high season) was increased from an average of 14.4% to 42% as of April
30, 1999.
YEAR 2000 COMPLIANCE
The Year 2000 problem is the result of computer programs having been written
using two digits instead of four digits to define the applicable year. Any of
the Trust's computer programs that have date-sensitive software may recognize a
date using "00" as the Year 1900 rather than the Year 2000. This could
potentially result in a system failure or miscalculations, causing disruptions
of operations and normal business activity.
The Trust and the Lessee have upgraded their computer accounting programs and
the Lessee is completing the installation of new property management systems
along with necessary hardware. These new systems have been warranted to be Year
2000 compliant. The Trust has estimated the total cost which will be incurred in
connection with these installations to be approximately $400,000, which will be
capitalized and amortized over seven years. To date, the Trust has already spent
$260,000 toward the completion of these installations and anticipates completing
the project by September 1999. The Trust believes that such costs will not
result in a material adverse effect on its financial condition or results of
operations.
While these new systems represent virtually all of the Trust's computer
systems, the Trust and the Lessee cannot predict the effect of the Year 2000
problem on vendors, customers and other entities with which the Trust and the
Lessee transact business, and there can be no assurance that the effect of the
Year 2000 problem on such entities will not adversely affect the Trust's
operations.
14
Although the Trust is not aware of any threatened claims related to the Year
2000, the Trust may become subject to litigation arising from such claims, and
depending on the outcome, such litigation could have a material adverse effect
on the Trust. It is not clear whether the Trust's insurance coverage would be
adequate to offset these and other business risks related to the Year 2000.
In the event of any failure of any of the computer systems, the Trust and the
Lessee intend to perform necessary functions without the aid of the affected
computer systems until any Year 2000 problems are resolved.
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, 1999.
15
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a)
EXHIBIT
NUMBER EXHIBIT
------ -------
10.1 Promissory Note dated March 15, 1999 by InnSuites
Hospitality Trust in favor of James F. Wirth.
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.
1. Current Report on Form 8-K filed March 25, 1999, in connection with the
resignation of Arthur Andersen LLP as independent public accountants.
2. Current Report on Form 8-K filed April 22, 1999, in connection with the
appointment of KPMG LLP as independent public accountants.
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: August 8, 2000 INNSUITES HOSPITALITY TRUST (Registrant)
By: /s/ Anthony B. Waters
----------------------------------------
Anthony B. Waters
Chief Financial Officer
16