Business Context and Reporting Period
InnSuites Hospitality Trust filed its Form 10-K for the fiscal year ended January 31, 2014, corresponding to the 2013 fourth-quarter reporting period. The Trust owns interests in five hotels totaling 843 suites in Arizona, California, and New Mexico; manages eight hotels; provides trademark services to nine hotels; and operates reservation services for approximately 3,100 unrelated properties. The Trust is an Ohio real estate investment trust but is not a federal tax REIT.
The filing was audited with an unqualified opinion. Management reported effective disclosure controls and internal control over financial reporting as of January 31, 2014.
Key Financial Metrics
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $14.885 million | $14.978 million | Down $93,000, or 0.62% |
| Operating income (loss) | $12,888 | $(123,078) | Improved $135,966 |
| Operating margin | 0.09% | (0.82%) | Improved |
| Consolidated net loss | $(841,231) | $(1.076 million) | Improved $234,619 |
| Net loss attributable to controlling interests | $(1.022 million) | $(1.006 million) | Worsened $15,678 |
| Basic and diluted loss per share | $(0.12) | $(0.12) | Unchanged |
| Adjusted EBITDA | $1.796 million | $1.631 million | Up $165,272 |
| FFO | $957,374 | $678,439 | Up $278,935 |
| Cash flow from operations | $719,744 | $868,148 | Down $148,404 |
| Capital expenditures | $761,433 | $1.265 million | Down $503,445 |
Room revenue was $13.442 million, essentially flat year over year. Food and beverage revenue declined 7.1% to $991,867. Occupancy improved to 65.65% from 64.59%, while average daily rate declined 1.31% to $66.55. REVPAR increased slightly to $43.69 from $43.55. Lower operating expenses and interest expense offset the modest revenue decline.
Cash and cash equivalents were $395,903, with restricted cash of $114,337. Total assets were $25.409 million, total liabilities were $22.506 million, and total equity was $2.902 million, including $2.051 million attributable to Trust shareholders. The Trust paid a $0.01 per-share dividend, or $83,449 in total.
Material Changes Versus the Prior Period
- Operating expenses declined 1.52% to $14.872 million, primarily reflecting lower room, food and beverage, repairs and maintenance, telecommunications, utility, and property tax and insurance costs.
- General and administrative expense increased approximately $161,000 to $3.139 million, mainly due to higher corporate professional fees.
- Interest expense decreased 14.47% to $822,581, primarily following the restructuring of the Ontario mortgage.
- Consolidated net loss improved, but the loss attributable to controlling interests increased modestly because non-controlling interests reported income in 2014 versus a loss in 2013.
- Operating cash flow declined despite the lower net loss, partly because accounts receivable increased approximately $96,000 and accounts payable decreased approximately $77,000.
- Capital spending decreased to approximately $761,000, compared with $1.265 million in the prior year.
- Non-controlling interest increased to $851,203 from $164,123, reflecting additional sales of ownership interests in subsidiaries.
Debt, Liquidity, Outlook, and Risks
Mortgage debt totaled approximately $18.747 million at January 31, 2014, with total scheduled debt of approximately $20.284 million, including notes payable to banks, a related-party line of credit, and other notes. Approximately $13.185 million of debt was scheduled for fiscal 2015, including $11.753 million of mortgage principal and $1.019 million of bank notes. Significant balloon payments on the Ontario and Tucson St. Mary’s mortgages were scheduled for January 2015.
The Trust had drawn approximately $583,000 of its $600,000 bank line of credit at January 31, 2014. The facility matured on June 23, 2014, and the filing states that management was negotiating an extension. The balance increased to $600,000 as of April 18, 2014. Management expected to refinance or extend two mortgage notes and renew the line, but disclosed that there was no assurance financing would be available on favorable terms. Potential alternatives included refinancing another property, raising additional non-controlling capital, or selling assets.
Management expected moderate improvement in economic and travel conditions during fiscal 2015, with improved occupancy, modestly higher room rates, and relatively steady food and beverage revenue. The Trust planned capital expenditures at approximately the fiscal 2014 level. Its strategic plan emphasizes shifting from hotel ownership toward management, licensing, reservations, and advertising services through InnDependent Boutique Collection, which expanded from approximately 1,000 properties to 3,100 during fiscal 2014, although related revenue and expenses remained insignificant and were not separately recorded.
Principal risks include refinancing and debt-service requirements, the June 2014 line-of-credit maturity, mortgage balloon payments, low liquidity and negative shareholder equity trends, intense hotel competition, geographic concentration in southern Arizona, seasonality, economic weakness, interest-rate changes, regulatory compliance, labor and insurance costs, data breaches, adverse weather, and the possibility of losing NYSE MKT listing status.
The Trust was not in compliance with certain NYSE MKT continued-listing standards relating to shareholders’ equity and recurring losses. NYSE MKT extended the compliance period to July 8, 2014; failure to regain compliance could result in delisting.
On March 24, 2014, the Trust agreed to acquire 51% of an affiliate-owned partnership operating a 168-suite Fort Worth/Dallas hotel. Consideration was expected to be approximately 530,791 Trust shares, based on 51% of approximately $1.7 million of book net assets. The transaction required shareholder approval and customary closing conditions and was expected to close in June 2014, but completion was not assured.
Most Important Facts to Verify
- Whether the $600,000 bank line of credit was renewed before or at its June 23, 2014 maturity.
- Whether the Ontario and Tucson St. Mary’s mortgage obligations were refinanced or extended before their January 2015 maturities.
- Actual liquidity, covenant compliance, and cash requirements given approximately $13.2 million of scheduled fiscal 2015 debt payments.
- Whether the proposed 51% Fort Worth/Dallas hotel acquisition closed and the approximately 530,791 shares were issued.
- Whether the Trust regained compliance with NYSE MKT listing standards by July 8, 2014.
- The sustainability of the $0.01 annual dividend and the impact of continued losses attributable to controlling shareholders.
- The economics, accounting treatment, and potential dilution associated with related-party transactions and additional non-controlling interest offerings.
- Whether management’s projected occupancy, rate, revenue, and profitability improvements materialized in fiscal 2015.