| INNSUITES HOSPITALITY TRUST Item 1A RISK FACTORS The material risks and uncertainties that management believes affect us are described below |
| You should consider carefully the risks and uncertainties described below together with all of the other information included or incorporated by reference in this annual report on Form 10-K The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations |
| This annual report on Form 10-K is qualified in its entirety by these risk factors |
| If any of the following risks actually occur to any significant extent, our financial condition and results of operations could be materially and adversely affected |
| If this were to happen, the value of our Shares of Beneficial Interest could decline, perhaps significantly, and you could lose part or all of your investment |
| We are subject to operating risks common in the hospitality industry |
| Our business is subject, directly or through our franchisors, to the following risks common in the hospitality industry, among others: · changes in occupancy and room rates achieved by our hotels and by competitive area hotels; · desirability of a hotelapstas geographic location and changes in traffic patterns; · changes in general and local economic and market conditions, which can adversely affect the level of business and leisure travel, and therefore the demand for lodging and related services; · changes in the number of hotels operating under specific franchised brands; · increases in costs due to inflation may not be able to be totally offset by increases in room rates; · over-building in one or more sectors of the hotel industry and/or in one or more geographic regions, could lead to excess supply compared to demand, and to decreases in hotel occupancy and/or room rates; · changes in travel patterns and travel costs affected by fuel prices; · changes in governmental regulations that influence or determine wages, prices or construction costs; · other unpredictable external factors, such as natural disasters, war, terrorist attacks, epidemics, airline strikes, transportation and fuel price increases and severe weather, may reduce business and leisure travel; · the need to periodically repair and renovate our hotels at a cost in excess of our standard 4prca reserve; 6 _________________________________________________________________ · increases in the cost of labor, energy, healthcare, insurance and other operating expenses resulting in lower operating margins; · the financial condition of franchisors and travel related companies; · our ability to develop and maintain positive relations with current and potential franchisors; and · our ability to develop our own regional “InnSuites” brand |
| Changes in any of these conditions could adversely impact hotel room demand and pricing and result in reduced occupancy and revenue which could adversely affect our results of operations and financial condition |
| We have a limited ability to pass through increased operating costs in the form of higher room rates, so that such increased costs could result in lower operating margins |
| The hotel industry is highly competitive |
| Each of the Hotels experiences competition primarily from other mid-market hotels in its immediate vicinity, but also competes with other hotel properties in its geographic market |
| Some of the competitors of the Hotels have substantially greater marketing and financial resources than us |
| A number of additional hotel rooms have been added, are under development or have been announced in a number of our markets, and additional hotel rooms may be developed in the future |
| Such additional hotel rooms have had, and may continue to have, an adverse effect on the revenues of the Hotels in such markets |
| We may be competing for investment opportunities with entities that have substantially greater financial resources than us |
| These entities may generally be able to accept more risk than we prudently can manage |
| Competition may generally reduce the number of suitable investment opportunities offered to us and increase the bargaining power of property owners seeking to sell hotel properties |
| We have concentrated our marketing resources on the InnSuites Hotels® brand |
| All of the Hotels are marketed as InnSuites Hotels®, a southwestern US regional brand owned by the Trust |
| Accordingly, we are subject to risks inherent in concentrating our investments in the InnSuites Hotels brand, such as a reduction in business following adverse publicity related to the brand, which could have an adverse effect on our results of operations |
| In addition, many of our Hotels are co-branded as Best Western® hotels |
| This brand is owned by its members and faces the same risks on an international scale |
| We may not have sufficient resources to pursue our current growth strategy |
| We may pursue a growth strategy, which includes acquiring, repositioning and improving hotel properties |
| We plan to pursue a strategy of converting some of our Hotels into condo-hotel units, and increased licensing of the InnSuites Hotels® brand |
| There is a risk that, due to market and other conditions beyond our control, we will not have access to sufficient equity or debt capital to pursue our growth strategies |
| Since the term and amount of our credit arrangements are limited, our ability to continue to pursue our growth strategy may depend on our ability to obtain additional private or public equity or debt financing |
| There can be no assurance that such financing is or will be available on acceptable terms when necessary |
| We have engaged in, and may continue to engage in, transactions involving Mr |
| These transactions pose conflict of interest issues for us |
| A number of our prior transactions have involved dealings with Mr |
| Wirth, our founder, largest shareholder and Chief Executive Officer |
| We may also engage in similar transactions with Mr |
| Because of the direct and indirect ownership interests of Mr |
| Wirth in, and his positions with, the Trust and its affiliates, there were, and will continue to be, inherent conflicts of interest in connection with our acquisition or disposition of hotels from or to Mr |
| Wirth or other transactions, such as loans from Rare Earth Financial LLC, an affiliate of Mr |
| Wirth has a significant interest |
| Accordingly, our management may have considered, and may in the future consider, their own interests above the interests of our other shareholders while negotiating these transactions |
| 7 _________________________________________________________________ Except as specifically provided in our governing documents or in certain provisions of Ohio law, nothing prohibits our officers and trustees from engaging in business activities for their own account |
| As a general principle of law, however, officers and trustees owe fiduciary duties to the shareholders of each company they represent |
| Those duties require them to deal with each company fairly |
| Additionally, all decisions involving the potential for conflict must be approved by a majority of trustees who do not have an interest in the transaction |
| We cannot guarantee, however, that the independent trustees will resolve all decisions involving conflict in favor of the Trust |
| Certain affiliates of the Trust, including Mr |
| Wirth, may have unrealized gain in their investments in certain hotels acquired by us on January 31, 1998 |
| A subsequent sale of these hotels by us may cause adverse tax consequences to such persons |
| Therefore, the interests of the Trust and certain of its affiliates, including Mr |
| Wirth, could be in opposition in connection with the disposition of any of these hotels |
| However, decisions with respect to the disposition of any of these hotels must be approved by a majority of the independent trustees |
| We have significant debt obligations |
| At January 31, 2006, our outstanding debt consisted of approximately dlra21dtta3 million in principal amount outstanding |
| There can be no assurance that the we will be able to meet our present or future debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure |
| Adverse economic conditions could cause the terms on which borrowings become available to become unfavorable to us |
| In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to liquidate one or more investments in the Hotels at times that may not permit realization of the maximum return on our investments |
| We rely on key personnel |
| Our future success is substantially dependent on the active participation of our executive officers, Mr |
| Waters and Mr |
| Green, Director of Operations, hold key positions with the Trust |
| The loss of the services of any of these individuals could have a material adverse effect on us |
| Under certain circumstances, our franchisors may terminate our franchise contracts |
| The continuation of our franchise contracts for the Hotels is subject to the maintenance of specified operating standards and other terms and conditions, and our Best Western franchise agreements are renewable annually |
| Our failure to maintain those operating standards or adhere to the other terms and conditions of the franchise contracts could result in the loss or cancellation of such franchise contracts |
| It is possible that a franchisor could condition the continuation of a franchise contract upon the completion of substantial capital improvements, which the Board of Trustees may determine to be too expensive or otherwise unwarranted in light of general economic conditions or the operating results or prospects of the affected Hotel |
| Failure to complete improvements, when required, in a manner satisfactory to the franchisor could result in the cancellation of one or more franchise contracts |
| In any case, if a franchise contract is terminated, we may seek to obtain a suitable replacement franchise, or to operate the affected Hotel independent of a franchise contract |
| In addition, we may desire to operate additional hotels under franchise contracts, and such franchisors may require that significant capital expenditures be made at such hotels as a condition of granting a franchise contract |
| The loss or lack of a franchise contract could have a material adverse effect upon the operations or the underlying value of the Hotel covered by such contract because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the franchisor |
| The loss of a number of the franchise contracts for the Hotels could have a material adverse effect on our results of operations |
| Due to the geographic concentration of the hotels in our system, our results of operations and financial condition are subject to fluctuations in regional economic conditions |
| All of our Hotels are located in the southwestern United States |
| Therefore, our results of operations and financial condition may be significantly affected by the economy of this region |
| Other adverse events affecting the southwestern United States, such as economic recessions or natural disasters, could cause a loss of revenues for our Hotels in this region, which may be greater as a result of our concentration of assets in these areas |
| 8 _________________________________________________________________ Our expenses may remain constant even if revenues decline |
| The expenses of owning property have some flexibility but are not necessarily materially reduced when circumstances such as market factors and competition cause a reduction in income from a hotel |
| Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately or as rapidly |
| In such instances, our financial condition and results of operations could be adversely affected, not only by changes in occupancy rates, but also by: · fixed labor costs; · interest rate levels; · the availability of financing; · increases in real property tax rates; · the cost of compliance with government regulations, including zoning and tax laws; and · changes in government regulations, including those governing usage, zoning and taxes |
| Our inability to sell real estate if and when desired may adversely affect our financial condition |
| Real estate assets generally cannot be sold quickly |
| In general, we may not be able to vary our portfolio of hotels or other real estate promptly in response to economic or other conditions |
| This inability to respond promptly to changes in the performance of our assets could adversely affect our financial condition |
| In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our Hotels |
| We are subject to governmental regulations affecting the hospitality industry; the costs of complying with governmental regulations, or our failure to comply with such regulations, could affect our financial condition and results of operations |
| We are subject to numerous federal, state and local government laws and regulations affecting the hospitality industry, including usage, building and zoning requirements |
| A violation of any of those laws and regulations or increased government regulation could require us to make unplanned expenditures and result in higher operating costs |
| In addition, our success in expanding our hotel operations or engaging in condo-hotel conversions depends upon our ability to obtain necessary building permits and zoning variances from local authorities |
| Compliance with these laws is time intensive and costly and may reduce our revenues and operating income |
| Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons |
| In addition to ADA work to date, we may be required to remove access barriers or make unplanned, substantial modifications to our Hotels to comply with the ADA or to comply with other changes in governmental rules and regulations, which could reduce the number of total available rooms, increase operating costs and have a negative impact on our results of operations |
| Any failure to comply with ADA requirements or other governmental regulations could result in the US government imposing fines or in private litigants winning damage awards against us |
| Our Hotels, like all real property, are subject to governmental regulations designed to protect the environment |
| However, if we fail to comply with such laws and regulations, we may become subject to significant liabilities, fines and/or penalties, which could adversely affect our financial condition and results of operations |
| We are also subject to laws governing our relationship with employees, including minimum or living wage requirements, overtime, working conditions and work permit requirements |
| An increase in the state or federal minimum wage rate, employee benefit costs or other costs associated with employees could increase expenses and result in lower operating margins |
| Although none of our employees are currently represented by labor unions, labor union organizing activities may take place at our existing Hotels or at any new hotel property we open |
| A lengthy strike or other work stoppage at one of our Hotels, or the threat of such activity, could have an adverse effect on our business and results of operations |
| 9 _________________________________________________________________ If we fail to comply with privacy regulations, we could be subject to fines or other restrictions on our business |
| We collect and maintain information relating to our guests for various business purposes, including maintaining guest preferences to enhance our customer service and for marketing and promotion purposes |
| The collection and use of personal data are governed by privacy laws and regulations |
| Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services to our guests |
| In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) could result in fines or restrictions on our use or transfer of data |
| Increasing use of internet reservation channels may decrease loyalty to our brands or otherwise adversely affect us |
| As is the case with many other hotel operators, a growing percentage of our hotel rooms are booked through internet travel intermediaries |
| If such bookings continue to increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from our franchisors or us |
| Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms, by increasing the importance of price and general indicators of quality at the expense of brand identification |
| These intermediaries hope that consumers will eventually develop brand loyalties to their reservations systems rather than to our lodging brands |
| If this happens our business and profitability may be significantly harmed |
| Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition |
| Our business is seasonal in nature, with the first and fourth fiscal quarters generally accounting for a greater portion of annual revenues than the second and third fiscal quarters |
| Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year |
| The seasonal nature of our business increases our vulnerability to risks such as labor force shortages and cash flow problems |
| Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, regional economic downturn or poor weather conditions should occur during the first or fourth fiscal quarters, the adverse impact to our revenues could likely be greater as a result of our southern Arizona seasonal business |
| Our properties are subject to risks relating to natural disasters, terrorist activity and war and any such event could materially adversely affect our operating results |
| Our financial and operating performance may be adversely affected by natural disasters particularly in locations where we own significant properties |
| Some types of losses, such as those from earthquake, wild fires, terrorism or environmental hazards, may be either uninsurable or too expensive to justify insuring against |
| Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property |
| In that event, we might nevertheless remain obligated for any financial obligations related to the property |
| Inflation, changes in building codes and ordinances, environmental considerations and other factors also might make it impractical to rely on insurance proceeds to replace property after that property has been damaged or destroyed |
| Under those circumstances, the insurance proceeds received by us might not be adequate to restore our economic position with respect to such property |
| Similarly, war (including the potential for war) and terrorist activity (including threats of terrorist activity), epidemics (such as SARs and bird flu), travel-related accidents, as well as geopolitical uncertainty and international conflict, which impact domestic and international travel, may cause our results to differ materially from anticipated results |
| Terrorism incidents such as the events of September 11, 2001 and wars such as the ongoing Iraq war significantly impact travel and tourism and consequently the demand for hotel rooms |
| Hospitality companies have been the target of class actions and other lawsuits alleging violations of federal and state law |
| Our operating income and profits may be reduced by legal or governmental proceedings brought by or on behalf of our employees or customers |
| In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, 10 _________________________________________________________________ discrimination and similar matters |
| A number of these lawsuits have resulted in the payment of substantial damages by the defendants |
| We cannot assure you that we will not incur substantial damages and expenses resulting from lawsuits of this type, which could have a material adverse effect on our business |