InnSuites Hospitality Trust — Form 10-Q Summary
Reporting period: Three and six months ended July 31, 2023. The company owns interests in and manages two moderate-service hotels totaling 270 suites in Tucson, Arizona, and Albuquerque, New Mexico. The hotels operate under the InnSuites and Best Western brands.
Financial Metrics
| Metric | Three months ended July 31, 2023 | Three months ended July 31, 2022 | Six months ended July 31, 2023 | Six months ended July 31, 2022 |
|---|---|---|---|---|
| Total revenue | $1.721 million | $1.699 million | $3.927 million | $3.835 million |
| Operating income (loss) | $(146,037) | $15,589 | $30,441 | $153,692 |
| Consolidated net income | $76,182 | $260,195 | $531,825 | $629,345 |
| Net income attributable to controlling interests | $18,855 | $102,527 | $245,661 | $283,605 |
| Basic and diluted earnings per share | $0.00 | $0.01 | $0.03 | $0.03 |
| Cash flow from operating activities | Not provided for the quarter | Not provided for the quarter | $1.439 million | $129,000 |
Six-month operating margin was approximately 0.8%, compared with 4.0% in the prior-year period. The six-month consolidated net margin was approximately 13.5%, compared with 16.4%, but results included a $701,582 Employee Retention Credit in each period. Excluding that credit, the six-month results were a loss before the credit in both periods.
- Revenue mix: Six-month room revenue increased 3% to $3.865 million. Food and beverage revenue was $28,705 and other revenue was $33,537.
- Operating expenses: Six-month expenses increased 6% to $3.897 million, outpacing revenue growth. Room expense increased 13% to $1.261 million; general and administrative expense increased 9% to $1.224 million.
- Hotel operating statistics: Combined six-month occupancy increased to 83.28% from 77.00%; combined ADR declined to $94.95 from $99.21; combined REVPAR increased to $79.07 from $76.39.
- Cash and assets: Cash was $2.399 million at July 31, 2023, compared with $2.111 million at January 31, 2023. Total assets were $16.359 million.
- Debt and liabilities: Total liabilities were $12.785 million. Mortgage notes payable totaled approximately $9.363 million, and other notes payable totaled approximately $470,000. The company reported no related-party debt balance at July 31, 2023.
- Equity: Total equity was $3.575 million, including $(2.953) million of non-controlling interest. Trust shareholders’ equity was $6.528 million.
- Capital spending and financing: Investing cash outflows were $277,194, primarily for hotel improvements. Financing cash outflows were $874,189, including mortgage principal payments, dividends, non-controlling-interest distributions, and share repurchases.
- Non-GAAP measures: Management reported six-month Adjusted EBITDA of approximately $800,000 versus $854,000 and FFO of approximately $867,000 versus $974,000. These measures are company-defined and are not substitutes for GAAP cash flow or net income.
Material Changes Versus Prior Comparable Period
- Six-month revenue increased 2%, but operating income declined by $123,251 because expenses increased faster than revenue.
- Six-month consolidated net income decreased 15%, primarily reflecting weaker operating results despite the Employee Retention Credit.
- Second-quarter operating results deteriorated substantially: revenue increased 1%, while operating expenses increased 11%, resulting in a $146,037 operating loss compared with operating income of $15,589 in the prior-year quarter.
- Second-quarter interest expense increased 33% to $162,618, contributing to the decline in net income.
- Operating cash flow improved to $1.439 million from $129,000, largely because of the Employee Retention Credit and related balance-sheet adjustments; this improvement does not necessarily indicate comparable recurring operating profitability.
- The company repurchased 53,159 shares during the six months for approximately $226,180 and paid $90,062 in dividends. Subsequent to quarter-end, it repurchased an additional 76,165 shares for approximately $183,533.
- The company issued 46,000 restricted shares for services, with an aggregate grant-date value of approximately $55,200.
Guidance, Outlook, Risks, and Unusual Items
- Management expects continued recovery in hotel demand during fiscal 2024, modest improvement in occupancy and room rates, continued cost control, and limited new hotel supply in its markets.
- Management stated that both hotels achieved record results in the first half of fiscal 2024 and expects continued strong results, although the quarterly financial statements show lower operating income and net income versus the prior year.
- The company intends to pursue sales of both hotel properties over the next 12 to 36 months. Management’s estimated asking prices total $28.0 million, but these are not based on appraisals and there is no assurance that either property will be sold at those prices or at all.
- Management is also evaluating a possible merger or reverse merger and additional financing alternatives.
- Liquidity sources include hotel operations, management fees, approximately $2.399 million of cash, three bank lines totaling $250,000, and a related-party revolving facility with up to $2.0 million of availability. Management believes liquidity is sufficient for at least the next twelve months, but acknowledges refinancing, asset-sale, and funding risks.
- Approximately $581,000 of minimum debt payments are scheduled for fiscal 2024, including $470,000 of other notes payable. The company also has an IBC note receivable of $1.925 million maturing June 1, 2024 and is seeking an extension; collectability remains a contingency.
- The Employee Retention Credit is a significant unusual item. The company recognized $701,582 in the six-month income statement, had received approximately $1.9 million by July 31, 2023, and expected an additional approximately $0.8 million.
- The company holds a high-risk, Level 3 private-company investment in UniGen, including a $1.0 million convertible debenture, approximately $618,750 of common stock, and warrants. UniGen’s prototype work was paused while it seeks additional capital.
- Key risks include hotel seasonality, inflation, labor and insurance costs, competition, interest-rate and refinancing risk, dependence on two properties, collectability of receivables, potential property-sale uncertainty, UniGen execution and funding risk, cybersecurity, travel disruptions, and adverse economic or weather conditions.
- Management reported no material litigation, no off-balance-sheet financing arrangements, no hotel impairment for the period, and effective disclosure controls and internal control over financial reporting as of July 31, 2023.
Important Facts for Investors to Verify
- Confirm the recurring earnings profile excluding the Employee Retention Credit, because reported profitability and operating cash flow were materially affected by this credit.
- Reconcile the filing’s inconsistent descriptions of certain expense changes, EBITDA and FFO tables, and references to fiscal-quarter periods.
- Evaluate debt maturities, the $470,000 fiscal 2024 other-note obligation, mortgage guarantees, and the company’s ability to refinance or sell assets.
- Assess the collectability and extension terms of the $1.925 million IBC note receivable due in 2024.
- Review the basis for management’s $28.0 million hotel asking-price estimate, which is not supported by an appraisal in the filing.
- Assess the valuation and funding prospects of the Level 3 UniGen investment and the potential dilution or capital requirements associated with its warrants.
- Verify the filing cover-page certifications: the company marked “No” for having filed all required Exchange Act reports during the preceding 12 months and “No” for required Interactive Data Files, which may indicate a compliance or filing-status issue requiring clarification.