InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
InnSuites Hospitality Trust is an Ohio real estate investment trust operating two moderate-service hotels with 270 suites in Tucson, Arizona, and Albuquerque, New Mexico. The hotels operate under the InnSuites and Best Western brands. The Trust reports one segment: hotel ownership and management services. This report covers the three months ended April 30, 2022, the first quarter of fiscal 2023.
The Trust owns a 21.0% direct interest in the Albuquerque hotel and, through its 75.98%-owned partnership, an indirect 51.01% interest in the Tucson hotel. The financial statements are unaudited and prepared under U.S. GAAP.
Financial Performance and Position
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $2.136 million | $1.399 million | +53% |
| Operating income (loss) | $145,140 | $(206,579) | +$351,719 |
| Operating margin | 6.8% | (14.8%) | Improved |
| Consolidated net income | $376,187 | $157,161 | +139% |
| Net income (loss) attributable to controlling interests | $188,115 | $(106,483) | Improved |
| Basic and diluted EPS attributable to controlling interests | $0.02 | $(0.01) | Improved |
| Adjusted EBITDA | Approximately $479,000 | Approximately $(285,000) | Improved |
| FFO | Approximately $548,000 | Approximately $343,000 | +60% |
Room revenue increased 53% to $2.087 million, while food and beverage revenue increased 2% to $15,777 and other revenue increased to $33,148. Operating expenses rose 24% to $1.991 million, primarily due to higher occupancy-related costs, staffing, sales and marketing, utilities, and property taxes, insurance and ground rent.
Net income included a $350,791 employee retention credit benefit. The prior-year period included $416,288 of PPP loan forgiveness and $93,555 of stock-based compensation. Excluding the employee retention credit, consolidated income before that credit was $25,396 in Q1 FY2023 versus $157,161 in the prior-year period.
Cash provided by operating activities was $92,445, compared with $50,020 in the prior-year period. Investing activities used $160,332, including $110,000 funded toward a convertible note receivable from UniGen and $50,332 of hotel improvements. Financing activities provided $2.697 million, principally from $3.901 million of mortgage borrowings related to the Tucson refinancing, partly offset by related-party debt repayments, distributions to non-controlling interests, and treasury stock repurchases. Cash increased to $3.854 million from $1.224 million at January 31, 2022.
At April 30, 2022, total assets were $17.649 million, total liabilities were $13.337 million, and total equity was $4.312 million. Mortgage notes payable were approximately $9.632 million, including the newly refinanced Tucson mortgage. Other current notes payable totaled approximately $585,598. Lease liabilities totaled approximately $2.319 million.
Material Changes Versus the Prior Comparable Period
- Hotel demand and room revenue recovered materially as travel activity rebounded from COVID-19-related disruption.
- Operating results moved from a $206,579 loss to $145,140 of operating income, despite higher operating costs.
- Interest expense increased 51% to $135,475, primarily reflecting higher mortgage debt following the Tucson refinancing.
- The Trust recorded an additional $350,791 employee retention credit benefit; the balance sheet included $701,582 of employee retention credit receivable.
- The Tucson property refinanced approximately $4.5 million of existing debt and approximately $3.8 million of intercompany advances with a new approximately $8.4 million loan at 4.99%, amortized over 25 years.
- The Trust repurchased 15,795 shares for approximately $39,961, or an average of $2.53 per share.
- Distributions to non-controlling interest holders totaled $156,081.
- The Trust exercised UniGen warrants and invested approximately $110,000 during the quarter; it held 290,000 UniGen common shares at April 30, 2022.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expects continued recovery in occupancy, room rates, revenue, and profitability during fiscal 2023, supported by completed refurbishments and limited expected new hotel supply in the markets. Management stated that both hotels achieved record first-quarter results and that May began with tentative record-breaking results. The filing does not provide formal quantitative revenue or earnings guidance.
The Trust intends to pursue sales of one or both hotels over the next 12 to 36 months, potentially at estimated asking prices totaling $26.545 million. These amounts are management estimates, not appraisals, and there is no assurance that either property will sell, refinance, or achieve the stated asking prices. Management is also evaluating a possible merger and expects UniGen’s clean-energy project to progress toward a prototype targeted for operation by December 2022, subject to financing and supply-chain risks.
Management stated that approximately $3.854 million of cash, $2.0 million of related-party revolving availability, and $250,000 of bank credit availability should be sufficient to meet obligations for at least twelve months. Liquidity remains dependent on hotel cash flow, distributions, asset sales, refinancing, and access to additional financing. Approximately $743,248 of debt payments are scheduled for fiscal 2023, including $585,598 of other notes payable.
Key risks include renewed travel disruption or pandemic effects, inflation, labor and utility costs, supply-chain constraints, seasonal hotel demand, competition, interest-rate changes, refinancing risk, inability to sell properties, reliance on Best Western agreements, UniGen execution and financing risk, and potential impairment or collectability issues involving investments and notes receivable. The $1.925 million IBC note receivable was extended, with no principal or interest payments due through May 2023 and maturity in June 2024; management recorded no additional impairment.
The Trust disclosed that its disclosure controls and internal control over financial reporting were not fully effective as of April 30, 2022. Management cited staffing, segregation-of-duties, technical accounting, documentation, monitoring, and spreadsheet-control deficiencies and expects remediation efforts to continue through fiscal 2023.
The filing indicates that the Trust previously received an NYSE American deficiency notice and an 18-month compliance period through May 2023, but management believes it regained compliance following the fiscal 2022 Form 10-K filing. The cover-page certifications indicate that the Trust marked “No” regarding filing all required reports during the preceding 12 months; investors should verify the filing status directly.
The Trust expects to pay a scheduled semiannual dividend of $0.01 per share on July 31, 2022. Its stated annual dividend policy is $0.02 per share.
Important Facts for Investors to Verify
- Verify the effect, timing, eligibility, and collectability of the employee retention credit, including the $701,582 receivable and cumulative expected credits described in the filing.
- Reconcile the Tucson refinancing proceeds, related-party repayments, guarantees, interest rate, amortization, and total debt obligations.
- Assess whether operating cash flow of $92,445 is sufficient relative to scheduled debt payments, capital expenditures, distributions, and lease obligations.
- Validate the estimated hotel asking prices and the likelihood, timing, and net proceeds of any property sales.
- Review the status and remediation of ineffective disclosure and internal financial controls.
- Evaluate the collectability and revised repayment schedule of the $1.925 million IBC note receivable.
- Assess the valuation, funding requirements, dilution potential, and execution risks of the UniGen investment.
- Confirm continued NYSE American listing compliance and the significance of the cover-page indication regarding prior SEC filings.
- Distinguish recurring hotel profitability from unusual items, including the employee retention credit, prior-year PPP forgiveness, and seasonal recovery effects.