InnSuites Hospitality Trust — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
InnSuites Hospitality Trust is an Ohio REIT operating two limited-service hotels with 270 suites in Tucson, Arizona, and Albuquerque, New Mexico. The hotels operate under the InnSuites and Best Western brands. The report covers the three months ended April 30, 2021, compared with April 30, 2020. The filing was signed June 28, 2021, and states that the Trust was current with SEC and NYSE American filing requirements at that time.
- The Trust owned 75.89% of RRF Limited Partnership, which indirectly owned 51.01% of the Tucson hotel; the Trust directly owned 20.67% of the Albuquerque hotel.
- The company is a smaller reporting company and its shares trade on NYSE American under IHT.
- Management and the CFO concluded that disclosure controls and internal control over financial reporting were not fully effective as of April 30, 2021. Remediation efforts are expected throughout fiscal 2022.
Financial Results and Key Metrics
| Metric | Three Months Ended April 30, 2021 | Three Months Ended April 30, 2020 | Change |
|---|---|---|---|
| Total revenue | $1.399 million | $1.446 million | Down $46,952, or 3% |
| Room revenue | $1.364 million | $1.282 million | Up 6% |
| Operating expenses | $1.606 million | $1.729 million | Down $123,193, or 7% |
| Operating loss | $(206,579) | $(282,820) | Improved $76,241 |
| Consolidated net income (loss) | $157,161 | $(352,857) | Improved $510,018 |
| Net loss attributable to controlling interests | $(106,483) | $(141,872) | Improved $35,389 |
| Net loss per share | $(0.01) | $(0.04) | Improved |
| Adjusted EBITDA | Approximately $169,000 | Approximately $142,000 | Up approximately $27,000 |
| FFO | Approximately $343,000 | Approximately $(139,000) | Improved approximately $482,000 |
- Operating margin was approximately negative 14.8% in 2021 versus negative 19.6% in 2020.
- Consolidated net income included $416,288 of PPP loan forgiveness and $37,174 of other income. Excluding the PPP forgiveness, consolidated net income would have been approximately $(259,127), before considering related tax effects.
- Interest expense was $89,810, compared with $87,793 in the prior-year quarter.
- Operating cash flow was $50,020, compared with $(372,867) in the prior-year quarter.
- Investing cash outflow was $59,434, primarily for hotel improvements. Financing cash outflow was $134,351.
- Cash declined by $143,765 during the quarter, from $1.703 million to $1.559 million.
Operating Performance
| Hotel metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total occupancy | 78.85% | 60.27% | Up 18.58 percentage points |
| Total ADR | $74.84 | $91.58 | Down 18.28% |
| Total RevPAR | $59.01 | $55.20 | Up 6.90% |
| Albuquerque occupancy | 78.60% | 59.60% | Up 19.00 percentage points |
| Tucson occupancy | 79.00% | 60.70% | Up 18.30 percentage points |
Room revenue and occupancy benefited from recovery in travel demand and completed refurbishments. Tucson ADR declined substantially, while Albuquerque ADR was broadly stable. Management and trademark fee revenue fell to zero from $102,585, primarily following the sale of the Tempe hotel.
Balance Sheet, Debt and Liquidity
- Total assets were $15.098 million at April 30, 2021, versus $15.393 million at January 31, 2021.
- Total liabilities were $12.338 million, including approximately $5.879 million of mortgage debt, $1.161 million of other notes payable, and $990,000 payable under a related-party credit facility.
- Operating and finance lease liabilities totaled approximately $2.428 million.
- Total equity was $2.760 million, including $(3.317) million of non-controlling interest. Trust shareholders’ equity was $6.078 million.
- The related-party demand/revolving facility bears interest at 7%, had an approximately $990,000 balance, and has stated borrowing capacity of up to $2.0 million through December 31, 2021, subject to the facility terms. Management reported approximately $1.0 million of remaining availability.
- Three Republic Bank revolving credit lines totaling $250,000 had zero balances at April 30, 2021.
- Management believes cash and available credit will meet obligations for at least 12 months from the filing date, but notes that refinancing, asset sales, or additional financing may be required and may not be available on favorable terms.
- Scheduled debt payments total approximately $8.030 million, including $4.756 million of mortgage payments, $1.161 million of other notes, and $990,000 of related-party debt.
Material Changes, Outlook and Unusual Items
- COVID-19 materially depressed fiscal 2021 results, but management reported a recovery in lodging demand during the first quarter of fiscal 2022. New Mexico travel restrictions continued to affect the Albuquerque hotel.
- The Tucson and Albuquerque hotels received additional PPP loans of approximately $297,601 and $253,253, respectively. Management expects, but cannot guarantee, full forgiveness by January 31, 2022.
- Prior PPP loans totaling approximately $416,288 were forgiven during the quarter and recognized as income.
- Management expects gradual recovery in occupancy, modest improvement in room rates, and lower capital expenditures after completion of major refurbishments. No specific quantitative revenue or earnings guidance was provided.
- The Trust is marketing both hotels for sale and expects to seek sales over the next 12 to 36 months. Listed asking prices were $7.995 million for Albuquerque and $16.600 million for Tucson; management cautions that these are not appraisal values and that sales may not occur at those prices or within the expected timeframe.
- The Trust holds a $1.0 million convertible debenture, stock, and warrants in privately held UniGen Power. UniGen remains in the research and development phase; management anticipates potential prototypes by year-end 2021 and profitability 18 to 24 months in the future, but these expectations are uncertain.
- The IBC note receivable had a $1.925 million carrying value after an $825,000 impairment. Payments were deferred until November 2021, and management recorded no additional impairment during the quarter.
- The Trust plans to pay a scheduled $0.01-per-share dividend on July 31, 2021 and states that its annual dividend policy is approximately $0.02 per share.
Principal Risks and Contingencies
- Continued or renewed COVID-19 restrictions, changes in travel demand, labor shortages, competition, seasonality, and pressure on occupancy or room rates.
- Ability to service, refinance, or extend debt and related-party obligations; ability to sell hotels or raise replacement capital.
- Potential volatility in the value and collectability of the UniGen investment and IBC note receivable.
- Hotel sale prices are based on management estimates rather than appraisals, and no assurance exists that either property will be sold.
- Exposure to interest-rate changes, rising labor and operating costs, insurance and property taxes, cyber risks, franchise requirements, and potential loss of Best Western membership.
- Internal control deficiencies and significant accounting personnel turnover may increase financial reporting risk.
Investor Verification Checklist
- Verify the sustainability of positive operating cash flow and the extent to which reported net income depended on PPP forgiveness.
- Reconcile consolidated results with the controlling-interest loss and non-controlling interest allocation.
- Review debt maturities, related-party financing terms, guarantees, and availability under revolving facilities.
- Assess whether hotel occupancy recovery can be maintained without further ADR deterioration.
- Validate the carrying value and repayment schedule of the IBC note receivable.
- Evaluate the assumptions supporting the UniGen investment, warrants, expected prototypes, and projected profitability.
- Monitor remediation of internal control deficiencies and future SEC and NYSE American filing compliance.
- Confirm the actual timing, pricing, and proceeds of any hotel sale or refinancing transaction.