InnSuites Hospitality Trust — Form 10-Q Summary
Business context and reporting period
InnSuites Hospitality Trust is an Ohio REIT-like hospitality company owning and managing two moderate-service hotels with 270 suites in Tucson, Arizona, and Albuquerque, New Mexico. The hotels operate under the InnSuites and Best Western brands. The report covers the three and six months ended July 31, 2021, compared with the corresponding 2020 periods. The financial statements are unaudited.
The Trust reported one operating segment: hotel ownership operations and hotel management services. It owned 75.98% of RRF Limited Partnership, which indirectly owned 51.01% of the Tucson hotel; the Trust directly owned 20.67% of the Albuquerque hotel.
Financial performance and key metrics
| Metric | Three months ended July 31 | Six months ended July 31 | ||
|---|---|---|---|---|
| 2021 | 2020 | 2021 | 2020 | |
| Total revenue | $1.670 million | $0.925 million | $3.069 million | $2.371 million |
| Operating loss | $(0.038) million | $(1.234) million | $(0.244) million | $(1.517) million |
| Consolidated net income (loss) | $0.402 million | $(1.267) million | $0.559 million | $(1.620) million |
| Loss attributable to controlling interests | $(0.059) million | $(0.665) million | $(0.166) million | $(0.807) million |
| Loss per share, basic and diluted | $(0.01) | $(0.14) | $(0.02) | $(0.18) |
| Adjusted EBITDA | $0.194 million | $(0.420) million | $0.362 million | $(0.276) million |
| FFO | $0.580 million | $(1.055) million | $0.921 million | $(1.193) million |
Six-month revenue increased 29%, driven primarily by a 39% increase in room revenue to $2.952 million. Six-month occupancy improved to 78.43% from 57.06%; REVPAR increased to $60.54 from $45.32, while ADR declined to $77.19 from $79.42. Albuquerque occupancy rose to 85.0% and Tucson occupancy to 73.8%.
Operating expenses declined 15% for the six months, primarily because the prior-year period included approximately $766,000 of sales and occupancy tax expense related to a prior-period discrepancy. The 2021 period also included $967,141 of PPP loan forgiveness in other income, including $550,853 recognized in the second quarter. Accordingly, reported consolidated net income benefited materially from a nonrecurring or unusual item.
Net cash provided by operating activities was $184,182 for the six months ended July 31, 2021, compared with cash used of $392,546 in the prior-year period. Investing cash use was $117,325, including $87,325 of hotel improvements and $30,000 invested in UniGen. Financing cash use was $67,617. Cash was $1.702 million at July 31, 2021, essentially unchanged from January 31, 2021.
Balance sheet, debt, and liquidity
- Total assets were $15.058 million and total liabilities were $11.898 million at July 31, 2021.
- Total equity was $3.160 million, including $6.036 million of Trust shareholders’ equity and $(2.876) million of non-controlling interest.
- Mortgage debt was approximately $5.837 million, consisting principally of the Tucson mortgage balance of approximately $4.519 million and the Albuquerque mortgage balance of approximately $1.332 million. Weighted average mortgage interest was 4.69%.
- Related-party notes payable totaled approximately $1.212 million and accrued interest at 7.0%. The related-party revolving facility had a $2.0 million capacity, with approximately $800,000 available as described in the filing.
- Other notes payable were approximately $593,000. Total scheduled debt payments were approximately $99,000 in fiscal 2022 and $1.965 million in fiscal 2023, including the related-party balance.
- Operating and finance lease liabilities totaled approximately $2.407 million.
- Management stated that cash on hand, available bank lines totaling $250,000, and related-party credit availability should cover obligations for at least twelve months from the filing date, while acknowledging that refinancing, asset sales, or additional financing may be required.
Material changes, outlook, risks, and unusual items
- Hotel demand began recovering in April 2021 as travel restrictions eased. Management expects continued recovery in occupancy, room rates, revenue, and operating margins through fiscal 2022, subject to the continuing effects of COVID-19.
- The Trust completed substantial hotel refurbishments and expects lower capital expenditures than in the prior year. It continues to emphasize cost control and completed improvements intended to support guest satisfaction and demand.
- The Trust is seeking buyers for both hotels, potentially within 12 to 36 months, and is also evaluating refinancing the Tucson hotel. Management’s estimated asking prices total $24.595 million, but these are not based on appraisals and there is no assurance of a sale or refinancing on favorable terms.
- The IBC Hospitality Technologies note receivable had a carrying value of $1.925 million after an $825,000 impairment. Payments were deferred until November 2021, and the note matures in June 2024. Management recorded no additional impairment at July 31, 2021.
- The Trust holds a $1.0 million convertible UniGen debenture, $90,000 of UniGen common stock, and warrants that could support ownership of up to approximately 25% of UniGen on a fully diluted basis. The investment is classified as a Level 3 valuation and remains subject to development, financing, and execution risk.
- On August 9, 2021, the Trust retired all 9,613,138 treasury shares held at July 31, 2021 and resumed share repurchases in late August. The filing states that repurchases during the six months ended July 31, 2021 were zero.
- Management reported that disclosure controls and internal control over financial reporting were not fully effective as of July 31, 2021. Remediation efforts include additional accounting personnel, technical expertise, documentation, segregation of duties, and supervisory review.
- COVID-19, hotel seasonality, labor shortages, competition, inflation, interest rates, refinancing availability, property sale execution, cybersecurity, and potential changes in travel demand remain key risks. The filing states that no material legal proceedings were pending.
- The filing’s cover page indicates that the Trust had not filed all required reports during the preceding 12 months, although management states it was current and compliant with NYSE American requirements after filing its prior quarterly report.
Important facts for investors to verify
- Whether the reported improvement in profitability persists after excluding approximately $967,000 of PPP loan forgiveness and the prior-year sales-tax discrepancy.
- Current hotel occupancy, ADR, REVPAR, labor costs, and operating margins as COVID-19 recovery progresses.
- Availability and maturity terms of the $2.0 million related-party credit facility, including the approximately $1.212 million outstanding balance and related-party governance considerations.
- Ability to meet the approximately $1.965 million of scheduled fiscal 2023 debt payments and obtain refinancing or asset-sale proceeds if needed.
- Collectability and repayment performance of the $1.925 million net IBC note receivable beginning in November 2021.
- Valuation, funding requirements, and milestone progress for the UniGen investment and warrants.
- Progress in remediating ineffective disclosure and internal financial reporting controls and maintaining timely SEC and exchange filings.
- Whether the stated hotel asking prices are supported by independent appraisals or completed transactions, rather than management estimates.