Business Context and Reporting Period
InnSuites Hospitality Trust filed its Form 10-K for the fiscal year ended January 31, 2023. The Trust owns interests in and manages two moderate-service hotels with 270 suites: the Tucson, Arizona property and the Albuquerque, New Mexico property. It operates as a C-corporation for federal tax purposes and reports one segment: hotel ownership, operations and management services.
The Trust owns a 75.98% general partner interest in RRF Limited Partnership, which controls a 51.01% interest in the Tucson hotel. The Trust also owns approximately 21% directly in the Albuquerque hotel. Management intends to pursue the sale of one or both hotels over the next 12 to 36 months and is diversifying through its investment in UniGen Power, Inc.
Financial Performance and Position
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Total revenue | $7.146 million | $6.410 million | +$736,000, approximately 11% |
| Operating loss | $(297,000) | $(303,000) | Improved by $6,000 |
| Interest expense | $530,000 | $367,000 | +$163,000, approximately 44% |
| Employee retention credit | $1.403 million | $351,000 | +$1.052 million |
| Consolidated net income | $737,000 | $1.540 million | Down 52% |
| Net income attributable to controlling interests | $523,000 | $254,000 | Up 106% |
| Basic and diluted EPS | $0.06 | $0.03 | +$0.03 |
| Cash flow from operations | $54,000 | $263,000 | Down $209,000 |
| Cash balance | $2.111 million | $1.224 million | +$887,000 |
Room revenue increased 12% to $6.974 million. Food and beverage revenue was essentially flat at $53,000, while management and trademark fee revenue fell to zero from $21,000. The operating loss represented approximately 4.2% of revenue; consolidated net income represented approximately 10.3% of revenue, substantially reflecting the employee retention credit and other non-operating items.
Combined occupancy declined to 73.96% from 75.60%, while average daily rate increased 14.78% to $95.66 and revenue per available room increased 12.30% to $70.75. Albuquerque occupancy was 82.27% and Tucson occupancy was 68.07%.
Operating expenses increased 11% to $7.443 million. General and administrative expense increased approximately $395,000, primarily from higher labor costs and minimum-wage effects. Room expense increased $211,000, hospitality expense increased $135,000, and utilities increased $45,000. Depreciation declined modestly to $702,000.
Adjusted EBITDA, as defined by management, was approximately $1.690 million versus $285,000 in FY2022. Reported FFO was approximately $1.439 million versus $2.265 million. These are non-GAAP measures and should not be treated as substitutes for GAAP net income or operating cash flow.
Liquidity, Debt and Capital Allocation
- Cash was $2.111 million at January 31, 2023. Management believes available cash and credit resources are sufficient to meet obligations for at least 12 months from the filing date.
- Available liquidity included approximately $250,000 of bank revolving lines and up to $2.0 million under a related-party demand/revolving credit facility, both with zero balances at year-end.
- Mortgage debt was approximately $9.475 million at year-end, compared with $5.757 million in the prior year, primarily reflecting the March 2022 $8.4 million Tucson refinancing.
- Scheduled FY2024 debt payments totaled approximately $794,000, including $224,000 of mortgage principal and $570,000 of other notes payable. Total mortgage debt matures principally after FY2028, although the Albuquerque mortgage is scheduled through 2029.
- Total liabilities were $13.338 million and total equity was $3.682 million. Non-controlling interests were negative $2.893 million.
- The Trust paid $0.02 per share in annual dividends, consisting of two $0.01 semiannual payments, and stated its intention to continue the policy. It also repurchased 106,604 shares during FY2023 for approximately $287,000.
Material Changes Versus the Prior Period
- Hotel demand and pricing recovered following the pandemic-related disruption. ADR and REVPAR increased substantially despite a modest decline in occupancy.
- Consolidated net income declined because FY2022 included approximately $967,000 of PPP loan forgiveness and an $798,000 reversal of a prior sales and occupancy tax liability. FY2023 included no PPP forgiveness or occupancy-tax reversal.
- The employee retention credit increased to approximately $1.403 million from $351,000 and was a major contributor to FY2023 net income and the balance sheet receivable of $1.754 million.
- Interest expense increased materially following the Tucson refinancing, although the refinancing also replaced approximately $3.8 million of intercompany advances used for property improvements.
- Investing cash outflows increased to $648,000, including $333,000 of hotel improvements and $315,000 invested in UniGen.
- The Trust exercised UniGen warrants and held 495,000 UniGen shares at a recorded cost of $588,750 at year-end, in addition to a $1.0 million convertible debenture and additional warrant interests.
- The Trust stated that it was fully compliant with NYSE American continued listing standards as of August 29, 2022, following an earlier deficiency notice.
Guidance, Outlook, Risks and Unusual Items
Management expects continued recovery in travel, modest occupancy gains, higher room rates, continued cost control and improved hotel profitability in FY2024. Management also reported record FY2023 gross operating profit at both hotels and stated that February through April 2023 produced record combined results. These statements are forward-looking and are not guarantees.
The Trust continues to market the hotels for potential sale. Management presented estimated asking prices of $9.5 million for Albuquerque and $18.5 million for Tucson, compared with combined book value of approximately $7.2 million and mortgage balances of approximately $9.5 million. The asking prices are management estimates, not appraisals, and there is no assurance that either property will sell at those prices, within the expected timeframe or at all.
- Key operating risks include hotel competition, alternative lodging, occupancy and rate volatility, seasonality, economic recession, inflation, labor shortages and rising wages, utility costs, interest rates and additional hotel supply.
- Liquidity depends heavily on hotel cash flow, distributions, refinancing or asset sales. Management cautioned that refinancing or asset sales may not be available on favorable terms.
- The $1.925 million IBC note receivable was extended, with payments deferred through May 2023 and maturity stated as June 1, 2024. Management concluded that no further impairment was required at January 31, 2023.
- UniGen is a high-risk, privately held, Level 3 investment in the research and development stage. Its valuation and potential returns are uncertain, and engineering work was on hold while UniGen pursued additional capital.
- The Trust has approximately $5.4 million of tax net operating loss carryforwards and a $2.6 million valuation allowance against net deferred tax assets.
- The filing reports no material litigation or environmental proceedings. Ordinary-course claims remain possible and are generally covered by insurance.
- Management reported effective disclosure controls and internal control over financial reporting, while also describing prior accounting-staff turnover and continuing remediation, staffing and documentation initiatives.
Important Facts for Investors to Verify
- Reconcile the filing’s inconsistent references to revenue growth and confirm the audited revenue, net income and cash-flow figures in the financial statements.
- Verify the collectability, timing and collateral supporting the $1.925 million IBC note receivable and the $1.754 million employee retention credit receivable.
- Review Tucson refinancing terms, guarantees, interest-rate provisions and scheduled debt service relative to hotel cash flow.
- Assess whether the hotel asking prices are supported by independent appraisals, comparable transactions and sustainable operating results.
- Evaluate the valuation, funding needs, conversion terms and dilution potential of the UniGen debenture, shares and warrants.
- Confirm the status of NYSE American listing compliance and any subsequent notices.
- Review related-party financing, ownership, guarantees and transactions involving James Wirth, his affiliates and Rare Earth Financial.
- Assess the sustainability of the $0.02 per-share dividend and share repurchase activity given low operating cash flow and substantial debt.