InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
Form 10-Q for the quarter and six months ended July 31, 2019, filed September 16, 2019. InnSuites owns interests in two limited-service hotels totaling 267 suites in Tucson, Arizona, and Albuquerque, New Mexico, and provides hotel management and trademark services. The hotels operate under InnSuites and Best Western brands. The Tucson and Albuquerque properties continue to be marketed for sale, although management cannot predict whether or when a sale will occur.
The Yuma hotel sale completed in October 2018 and the IBC technology business sale became effective in August 2018. Results from those businesses are reported as discontinued operations in the 2018 comparative periods.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2019 | Three Months Ended July 31, 2018 | Six Months Ended July 31, 2019 | Six Months Ended July 31, 2018 |
|---|---|---|---|---|
| Total revenue | $1.540 million | $1.438 million | $3.633 million | $3.302 million |
| Operating loss | $(413,341) | $(312,647) | $(575,005) | $(220,425) |
| Net loss from continuing operations | $(478,638) | $(561,732) | $(760,390) | $(560,417) |
| Net loss attributable to controlling interests | $(464,007) | $(689,618) | $(804,822) | $(1.382 million) |
| Net loss per share | $(0.05) | $(0.07) | $(0.08) | $(0.10) |
| Net cash provided by operating activities | Not separately provided | Not separately provided | $410,803 | $(615,934) |
Six-month revenue increased 10.0%, driven primarily by a 10.1% increase in room revenue to $3.466 million. However, operating expenses increased 19.5% to $4.208 million, largely because of higher general and administrative costs, increased occupancy-related expenses, and higher depreciation. The six-month operating margin was approximately negative 15.8%, compared with negative 6.7% in the prior-year period.
Adjusted EBITDA was approximately $(126,000) for the six months ended July 31, 2019, compared with $(231,000) in the prior-year period. FFO was approximately $(266,000), compared with $(353,000). These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $615,156 at July 31, 2019, compared with $749,075 at January 31, 2019.
- Cash and short-term investments totaled approximately $2.101 million at July 31, 2019.
- Total assets were $18.436 million and total liabilities were $10.838 million. Total equity was $7.599 million, including $(1.628) million of non-controlling interest.
- Mortgage notes payable totaled approximately $4.767 million, with a weighted average interest rate of 4.69%. The principal mortgage is secured by the Tucson property and matures in 2042.
- Total scheduled debt payments were approximately $6.054 million, including $921,000 due during the remaining fiscal 2020 period and $484,000 due in fiscal 2021.
- Operating lease liabilities totaled approximately $2.831 million, including $98,113 classified as current. The company adopted the new lease standard on February 1, 2019, recognizing approximately $2.821 million of additional assets and $2.914 million of liabilities at adoption.
- Available liquidity included a $150,000 bank revolving line, a related-party revolving facility with up to $1.0 million of capacity, and affiliate advances with aggregate capacity of up to $1.0 million. Management believes available resources will meet obligations for at least the next twelve months, but cautions that refinancing, asset sales, or additional financing may not be available on favorable terms.
Cash Flow and Capital Allocation
- Operating activities provided $410,803 during the six months, compared with $615,934 of cash used in the prior-year period.
- Investing activities provided $219,717, primarily from the redemption of approximately $410,000 of marketable securities, compared with $2.377 million used in the prior-year period.
- Financing activities used $764,439, including debt repayments, dividends, distributions to non-controlling interests, and treasury-stock repurchases.
- Hotel improvements and additions totaled $190,530, down from $515,937 in the prior-year period. Management expects capital expenditures to decline after completing significant Tucson improvements.
- The Trust repurchased 65,142 shares during the six months at an average price of $1.68 per share, using $109,481 of cash. An additional 411,776 shares or partnership units remained authorized for repurchase under the existing program at July 31, 2019.
Material Changes Versus the Prior Comparable Period
- Revenue increased, with Albuquerque occupancy rising to 95.90% from 95.32% and REVPAR rising 14.4% to $82.05. Tucson occupancy declined to 67.50% from 69.23%, and Tucson REVPAR declined 2.4% to $45.75.
- General and administrative expense increased approximately $538,000, or 55.7%, to $1.503 million, primarily due to corporate staffing and property-sale efforts.
- Operating loss widened to $575,005 from $220,425 despite higher revenue, reflecting expense growth that exceeded revenue growth.
- Net loss attributable to controlling interests improved because the 2018 period included discontinued-operation losses and a $209,831 income-tax provision; the 2019 period had no income-tax provision and no discontinued-operation loss.
- Interest expense declined slightly to $188,912 from $191,040, while interest income declined to $3,527 from $60,879.
- The Trust adopted the new lease accounting standard and recognized material right-of-use assets and lease liabilities, with no material effect on operations or cash flows.
- The Trust received an NYSE American noncompliance notice for late filing of its 2019 Form 10-K but reported that the deficiency was resolved and compliance restored on July 25, 2019.
Guidance, Outlook, Risks and Unusual Items
Management reported somewhat stronger economic conditions in the first half of fiscal 2020 and expects moderate growth in occupancy and room rates, steady food and beverage revenue, and higher management and trademark fees. Management also expects continued strong competition, additional hotel supply, and pressure on revenue and operating margins.
The Trust plans to continue marketing both remaining hotels and states that it intends to sell them within two years, subject to market conditions. Listed asking prices were $7.5 million for Albuquerque and $15.8 million for Tucson; these are management asking prices rather than appraisals and may not be realized.
- Liquidity depends substantially on hotel operating cash flow, distributions, related-party loan repayments, financing availability, and potential hotel sales.
- The business is seasonal and concentrated in the Southwest hotel market, creating exposure to occupancy changes, competition, weather, labor shortages, economic downturns, cybersecurity incidents, and other disruptions.
- Related-party receivables included approximately $986,000 of advances to an affiliate and $232,000 under a related-party revolving note. These arrangements involve entities associated with Chairman and CEO James Wirth.
- The company accrued approximately $200,000 for potential interest and penalties related to IRS and state tax notices, although management believes the notices lack merit.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Reported material weaknesses include inadequate entity-level and system controls, insufficient segregation of duties, insufficient accounting personnel and expertise, and deficiencies in information-technology access controls. Management expects remediation efforts to continue through fiscal 2020.
- No material litigation proceedings were reported, and management does not expect ordinary-course claims to materially affect financial position, results, or liquidity.
Most Important Facts for Investors to Verify
- Whether hotel sales occur, at what prices, and whether proceeds are sufficient to improve liquidity or reduce debt.
- Whether operating cash flow remains positive while the Trust continues to report operating and net losses.
- The timing and funding of approximately $921,000 of remaining fiscal 2020 debt payments and other near-term obligations.
- The collectability and repayment timing of related-party receivables and the terms of related-party debt and guarantees.
- Progress in remediating ineffective disclosure controls and material weaknesses in internal control over financial reporting.
- Actual occupancy, ADR, REVPAR, labor costs, competitive supply, and operating margins during the remainder of fiscal 2020.
- Potential exposure from tax notices, lease commitments, Best Western membership requirements, and the company’s ability to maintain NYSE American listing compliance.