InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
Quarterly period ended April 30, 2016, representing the first quarter of fiscal 2017. InnSuites owned interests in four hotels totaling 576 suites in Arizona, California and New Mexico, while expanding its IBC Developments hospitality-services and reservation business, which served approximately 6,500 hotels.
The Trust had committed to sell substantially all hotel properties except Yuma. Three properties were classified as discontinued operations and assets held for sale. The financial statements are unaudited and presented on a consolidated basis.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Continuing-operations revenue | $1.208 million | $1.168 million | +3.4% |
| Operating loss | $(398,000) | $(79,000) | Worsened by $319,000 |
| Net loss from continuing operations | $(458,000) | $(203,000) | Worsened by $255,000 |
| Discontinued-operations income | $478,000 | $610,000 | $(132,000) |
| Consolidated net income | $21,000 | $407,000 | $(386,000) |
| Net income (loss) attributable to controlling interests | $(190,000) | $317,000 | $(506,000) |
| Basic total earnings per share | $0.00 | $0.05 | Declined |
| Adjusted EBITDA from continuing operations | $4,000 | $569,000 | Declined by $565,000 |
| FFO | $(56,000) | $445,000 | Declined by $501,000 |
Continuing-operations operating margin was approximately negative 32.9%, compared with negative 6.7% in the prior-year quarter. Continuing-operations revenue comprised approximately $991,000 from Hotel Operations and Corporate Overhead and $217,000 from IBC Developments.
Hotel operating indicators for Yuma were occupancy of 74.5% versus 81.1%, ADR of $83.85 versus $77.79, and RevPAR of $62.51 versus $63.12.
Cash Flow, Debt and Liquidity
- Net cash used in operating activities was $96,000, compared with $692,000 of cash provided in the prior-year quarter.
- Net cash used in investing activities was $526,000, including $595,000 of hotel improvements and additions.
- Net cash used in financing activities was $524,000. Cash and cash equivalents declined by $1.146 million to $811,921, including approximately $65,000 attributable to discontinued operations.
- April 30, 2016 balance-sheet cash excluding discontinued operations was $753,309. Total assets were $23.9 million and total liabilities were $16.8 million.
- Disclosed debt included approximately $13.7 million of mortgage notes related to the hotels, $532,000 of an unsecured non-revolving note, $389,000 of an unsecured business loan, and additional smaller notes. Minimum debt payments were approximately $1.2 million in fiscal 2017 and $658,000 in fiscal 2018.
- The Trust had a related-party demand/revolving facility with $1.0 million maximum capacity and a $180,644 receivable balance at April 30, 2016. A $350,000 RepublicBank line of credit was entered into on May 3, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue increased modestly, primarily due to IBC Developments revenue, which rose 90.4% to $217,000.
- IBC Developments became loss-making, with an operating loss of $119,000 versus operating income of $14,000, as the Trust increased sales, marketing, technology and integration spending following the International Vacation Hotels acquisition.
- Hotel Operations and Corporate Overhead revenue declined 6.0% to $991,000, while its operating loss increased to $279,000 from $93,000.
- General and administrative expense increased substantially, including officer bonuses paid in shares and approximately $30,000 of NYSE MKT fees associated with share issuances.
- Discontinued-operations income declined to $478,000 from $610,000, although discontinued-operations revenue benefited from improvements at the Ontario property.
- Accounts receivable increased to $547,000 from $54,000, contributing to the use of operating cash. Related-party advances and notes receivable also increased materially.
- Shares outstanding increased during the quarter through issuances for services, sales of subsidiary interests and other equity activity. The Trust repurchased 2,112 shares for approximately $5,000.
Guidance, Outlook, Risks and Unusual Items
Management expected moderate economic improvement, higher hotel revenues and improved operating margins later in fiscal 2017. It expected occupancy and food-and-beverage operations to improve at Yuma after remodeling, while acknowledging continued competition for corporate, leisure-group and government business.
Management planned significant expansion of IBC Hotels and expected the segment to increase revenue and reduce consolidated losses, but provided no assurance that the strategy would succeed. The Trust also expected to complete sales of its remaining hotel properties during the fiscal year, although sale prices, timing and completion were uncertain.
- Liquidity depends on hotel cash flow, partnership distributions, sales of non-controlling interests, refinancing and asset sales. Management stated that available cash and financing sources should cover obligations for at least one year, but warned that refinancing or additional funding may not be available on favorable terms or at all.
- Listed asking prices for the three properties classified as discontinued operations totaled $36.85 million, but were not based on appraisals and may not be realizable.
- Material related-party activity included management fees from affiliates, related-party advances of approximately $903,000, and a $180,644 related-party note receivable.
- The Trust recorded approximately $1.0 million of consideration for the International Vacation Hotels acquisition, including $800,000 cash and $200,000 of shares.
- Lease commitments totaled approximately $6.278 million, primarily attributable to a long-term ground lease.
- Key risks include hotel occupancy and rate volatility, seasonality, competition, interest rates, debt maturities and refinancing, asset-sale execution, labor and operating costs, cybersecurity, adverse economic conditions, natural disasters and the ability to retain hotel membership relationships.
Important Facts for Investors to Verify
- Whether the planned hotel sales close on schedule and at values sufficient to repay related mortgage debt and support operations.
- The collectability and repayment terms of related-party advances and notes receivable.
- Near-term debt maturities, covenant compliance and the availability of the related-party and RepublicBank credit facilities.
- Whether IBC Developments can convert substantial revenue growth and increased spending into sustainable profitability and cash flow.
- The impact of discontinued operations and non-controlling interests on cash available to the Trust’s common shareholders.
- Whether declining occupancy and continuing hotel-industry competition pressure Yuma revenue, RevPAR and operating margins.