InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
InnSuites Hospitality Trust reported results for the three and six months ended July 31, 2018, its fiscal second quarter of 2019. Continuing operations consisted primarily of three moderate- and limited-service hotels totaling 424 suites in Arizona and New Mexico, operated under the InnSuites and Best Western brands.
The company entered into an agreement on July 31, 2018 to sell its Yuma hotel for $16.25 million. Yuma assets and liabilities were classified as held for sale. The company also sold its IBC Hospitality Technologies subsidiary effective August 1, 2018; IBC results were reported as discontinued operations.
Financial Performance and Key Metrics
| Metric | Three Months Ended July 31, 2018 | Six Months Ended July 31, 2018 |
|---|---|---|
| Total revenue | $2.448 million | $5.613 million |
| Operating income (loss) | $(214) thousand | $247 thousand |
| Operating margin | (8.7%) | 4.4% |
| Net loss from continuing operations | $(551) thousand | $(260) thousand |
| Net loss attributable to controlling interests | $(690) thousand | $(1.382) million |
| Adjusted EBITDA | $(29) thousand | $(231) thousand |
| FFO | $(418) thousand | $(1.174) million |
- Six-month revenue increased 13.7% year over year, led by room revenue of $5.401 million, up 13.6%.
- Six-month occupancy increased to 81.87% from 77.38%; ADR increased to $85.52 from $79.17; and REVPAR increased to $70.38 from $61.63.
- Six-month operating expenses increased to $5.366 million from $5.053 million, primarily due to higher occupancy-related costs and depreciation from property improvements.
- Interest expense increased to $358.8 thousand from $262.5 thousand for the six-month period, partly due to notes issued for share repurchases.
- Cash used in operating activities was $615.9 thousand. Cash used in investing activities was $2.377 million, including $2.031 million invested in marketable securities. Cash used in financing activities was $908.6 thousand.
- Cash and cash equivalents were $674.6 thousand at July 31, 2018, compared with $4.576 million at January 31, 2018. Cash and short-term investments totaled approximately $3.7 million.
- Total assets were $20.840 million and total liabilities were $14.701 million at July 31, 2018. Total equity was $6.140 million.
Debt, Liquidity, and Capital Resources
Debt obligations totaled approximately $12.026 million, including approximately $9.693 million of mortgages, $906 thousand of bank notes, and $1.427 million of other notes. Approximately $1.400 million of scheduled debt payments were due during the remainder of fiscal 2019, including $1.112 million of other notes largely associated with share and partnership-unit repurchases.
Management stated that cash and short-term investments, a $1.0 million related-party demand/revolving credit facility, and up to $1.0 million of affiliate credit facilities should be sufficient to meet obligations for at least the next twelve months. Management was also evaluating refinancing, additional non-controlling-interest sales, and other funding alternatives, but warned that financing may not be available on favorable terms or at all.
Material Changes Versus the Prior Comparable Period
- Six-month continuing-operations revenue increased from $4.937 million to $5.613 million, while operating results improved from a $116 thousand loss to $247 thousand of operating income.
- Continuing-operations net loss narrowed from $708 thousand to $260 thousand.
- Consolidated results declined sharply from $9.557 million of net income to $947 thousand of net loss because the prior-year period included an approximately $11.446 million gain on the sale of the Ontario property.
- IBC revenue and expenses were reclassified to discontinued operations. IBC generated six-month revenue of $266 thousand and a net loss of $686 thousand in 2018.
- The company adopted the new revenue standard using the modified retrospective method and began presenting certain IBC revenue on a net rather than gross basis.
- Management corrected an accounting error involving IBC pass-through transactions. First-quarter 2018 revenue was reduced by approximately $214 thousand and expenses by approximately $162 thousand; management stated the effect on reported loss per share was not material.
- The company repurchased shares through open-market and private transactions, including 210,741 shares in private transactions financed with 7% notes, increasing treasury stock and debt.
Guidance, Outlook, Risks, and Unusual Items
- Management expected occupancy and ADR to remain generally steady during fiscal 2019, with modest rate improvement and steady food and beverage revenue.
- Management expected management and trademark fee revenue to decline because an affiliate of the chairman sold hotels that had generated a substantial portion of those fees.
- The Tucson renovation was expected to be completed by October 1, 2018. Remaining renovation costs were estimated at approximately $300 thousand, with approximately $280 thousand of construction in progress at July 31, 2018.
- The Yuma sale was expected to close in late September or October 2018, subject to buyer due diligence and other closing conditions. Proceeds could materially affect liquidity and debt repayment.
- Key risks include hotel seasonality, competition and additional hotel supply, occupancy and room-rate volatility, labor and operating-cost inflation, interest-rate changes, refinancing and debt-service requirements, dependence on Best Western membership arrangements, cybersecurity and data-breach risks, and the ability to sell properties at expected values.
- Disclosure controls and internal control over financial reporting were not effective as of July 31, 2018. Management identified material weaknesses involving entity-level controls, systems and manual controls, segregation of duties, accounting expertise, and information-technology access controls. Remediation efforts were expected to continue through fiscal 2019.
- The company recorded approximately $220 thousand of tax-related true-ups during the quarter and six-month period, primarily related to a prior-year tax liability associated with the Ontario sale.
Investor Verification Checklist
- Verify whether the Yuma transaction closed, the final sale proceeds, debt payoff, taxes, and any resulting gain or loss.
- Verify the terms and collectability of the $2.75 million secured promissory note received from the IBC buyer, including any working-capital purchase-price adjustment and required transition funding.
- Assess near-term debt maturities, refinancing needs, variable-rate exposure, and the availability and terms of related-party credit facilities.
- Monitor remediation of the disclosed material weaknesses and any subsequent accounting corrections or restatements.
- Evaluate the effect of lower management and trademark fees, Tucson renovation downtime, seasonal demand, and additional competitive hotel supply on future margins and cash flow.
- Reconcile share repurchases, treasury stock, related-party transactions, and the $0.01-per-share dividend accrued at July 31, 2018.