InnSuites Hospitality Trust Form 10-Q Summary
Business context and reporting period
InnSuites Hospitality Trust filed its unaudited Form 10-Q for the quarter ended October 31, 2015, covering the three and nine months ended October 31, 2015. As of the reporting date, the Trust owned interests in four hotels totaling 576 suites in Arizona, southern California and New Mexico, and operated the IBC Developments hospitality-services platform serving approximately 6,500 independent hotels.
Management is transitioning from hotel ownership toward hospitality services, including management, trademark, reservation and advertising services through IBC Hotels. On August 1, 2015, the Trust committed to a plan to sell all hotel properties except Yuma; three properties were classified as discontinued operations and assets held for sale.
Key financial metrics
| Metric | Nine months ended October 31, 2015 | Nine months ended October 31, 2014 |
|---|---|---|
| Continuing-operations revenue | $2.689 million | $2.075 million |
| Operating loss | $(1.030) million | $(1.544) million |
| Net loss from continuing operations | $(1.355) million | $(1.878) million |
| Income from discontinued operations and assets held for sale | $2.121 million | $0.616 million |
| Consolidated net income (loss) | $0.767 million | $(1.262) million |
| Net income (loss) attributable to controlling interests | $0.823 million | $(1.235) million |
| Adjusted EBITDA | $1.468 million | $(0.552) million |
| FFO | $1.144 million | $(0.886) million |
| Net cash used in operating activities | $(0.400) million | $0.455 million |
| Net cash provided by investing activities | $3.397 million | $(1.039) million |
| Net cash used in financing activities | $(0.440) million | $0.634 million |
For the three months ended October 31, 2015, continuing-operations revenue was $763,544, operating loss was $423,977, and net loss from continuing operations was $506,129. Consolidated net income was $1.338 million, including a $2.352 million gain on disposal of discontinued operations.
At October 31, 2015, total assets were $22.241 million, total liabilities were $16.667 million, and total equity was $5.574 million. Cash and cash equivalents were $1.575 million in continuing operations and $1.489 million in discontinued operations and assets held for sale, or approximately $3.064 million on a consolidated cash-flow basis.
Debt included approximately $13.908 million of mortgage notes payable, $566,000 of a non-revolving bank note, approximately $97,000 of short-term secured merchant-processor notes, $74,000 of secured promissory notes related to share and partnership-unit repurchases, and approximately $16,000 of other unsecured notes. The filing reports approximately $198,000 of minimum debt payments due in fiscal 2016 and approximately $702,000 due in fiscal 2017.
Material changes versus the prior comparable period
- Continuing-operations revenue increased 29.5%, primarily from higher Yuma room revenue and rapid growth in IBC revenue.
- Yuma occupancy increased to 63.10% from 59.22%; ADR increased to $72.74 from $66.03; and REVPAR increased to $45.90 from $39.11.
- IBC Developments revenue increased to $144,951 from $15,293, but the segment remained loss-making, with an operating loss of $229,123.
- Continuing-operations operating loss improved by $513,909, although operating expenses remained higher than revenue.
- Management and trademark fee revenue declined to $171,030 from $208,967 because affiliates of the CEO sold a managed hotel.
- Operating cash flow declined from $454,818 provided to $400,342 used, despite reported consolidated net income, mainly because of the noncash gain on the hotel sale and working-capital changes.
- Investing cash flow benefited from $4.713 million received from the Tucson St. Mary’s hotel sale; the Trust also spent $1.317 million on hotel improvements.
- Financing cash flow reflected debt repayments, distributions to non-controlling holders, a $1.100 million stock sale and $1.800 million from sales of non-controlling subsidiary interests.
Guidance, outlook, risks and unusual items
- On October 14, 2015, the Trust sold the Tucson St. Mary’s hotel for approximately $9.7 million, used approximately $4.7 million to repay the related mortgage and approximately $379,000 to reduce payables, and retained the balance for operations and capital improvements.
- On November 9, 2015, a subsidiary agreed to sell the Ontario hotel for $14.8 million, with an estimated February 1, 2016 closing. The transaction remained subject to approvals, financing and buyer due diligence and might not close.
- On November 30, 2015, the Trust sold 704,225 shares to related party Rare Earth Financial for approximately $1.5 million, strengthening liquidity and supporting NYSE MKT listing compliance.
- Management expected moderate economic improvement, higher revenues and operating margins, continued improvement in occupancy, modest rate increases and steady food-and-beverage revenue. It also expected management and trademark fees to decline and IBC revenue to grow, but provided no assurance that these plans would succeed.
- Management stated that approximately $3.0 million of cash at October 31, 2015, the subsequent $1.5 million equity raise and the $1.0 million related-party credit facility should be sufficient for obligations over at least the next year. The filing cautions that refinancing, additional funding or favorable asset sales may not be available.
- The Trust remained subject to an NYSE MKT compliance plan and faced potential delisting if it failed to regain compliance by the applicable deadline.
- Key risks include weak or seasonal hotel demand, competition, interest-rate and refinancing risk, debt-service requirements, labor and operating-cost inflation, dependence on related parties and the InnSuites brand, execution of hotel sales and IBC expansion, franchise relationships, cybersecurity, weather, disasters and other hospitality-industry disruptions.
- The filing reports ordinary-course litigation and insurance-covered claims, but management did not expect a material adverse effect. Total future minimum ground-lease and office-lease payments were reported at $6.349 million.
Important facts for investors to verify
- Whether the Ontario hotel sale closed on the proposed terms and how proceeds were applied.
- The status of NYSE MKT listing compliance following the November 30, 2015 related-party equity placement.
- The sustainability of liquidity and debt service given negative operating cash flow and continuing-operations losses.
- The carrying values, mortgage balances and eventual sale prices of the remaining hotels classified as held for sale.
- Whether IBC Developments can achieve projected growth and reach profitability after increased sales, marketing and technology spending.
- The impact of related-party transactions, ownership concentration and management-fee dependence on governance and recurring revenue.
- The distinction between GAAP earnings, Adjusted EBITDA and FFO, particularly because 2015 earnings were materially affected by the Tucson St. Mary’s disposal gain.