Business Context and Reporting Period
InnSuites Hospitality Trust filed this unaudited Form 10-Q for the quarter and nine months ended October 31, 2018. Continuing operations consisted primarily of three limited-service hotels with 260 suites in Arizona and New Mexico, plus hotel management and trademark services. IBC Hospitality Technologies was sold effective August 1, 2018, and the Yuma hotel was sold on October 24, 2018; both are presented as discontinued operations.
Key Financial Metrics
| Metric | Three Months Ended October 31, 2018 | Nine Months Ended October 31, 2018 |
|---|---|---|
| Continuing-operations revenue | $1.501 million | $4.803 million |
| Operating loss | $(0.312) million | $(0.790) million |
| Operating margin | Approximately (20.8%) | Approximately (16.5%) |
| Net loss from continuing operations | $(0.589) million | $(1.397) million |
| Consolidated net income | $12.059 million | $11.124 million |
| Net income attributable to controlling interests | $2.900 million | $1.530 million |
| Basic earnings per share attributable to controlling interests | $0.31 | $0.16 |
| Adjusted EBITDA | $(0.546) million | $(0.226) million |
| FFO | $(0.941) million | $(1.180) million |
- Continuing-operations room revenue increased 18% in the quarter to $1.435 million and 15% for the nine months to $4.582 million.
- Nine-month occupancy was 82.88%, compared with 75.81% in the prior-year period. ADR was $78.19 versus $79.48, while REVPAR increased to $65.06 from $60.50.
- Cash and cash equivalents on the continuing-operations balance sheet were $1.764 million at October 31, 2018. Discontinued operations held an additional $9.986 million, producing total cash of approximately $11.750 million in the cash-flow statement.
- Total assets were $26.532 million and total liabilities were $8.758 million. Total equity was $17.774 million, including $7.302 million of non-controlling interest.
- Debt scheduled at October 31, 2018 totaled approximately $6.964 million, including $4.852 million of mortgage debt, $0.561 million of related-party notes and $1.551 million of other notes.
- Net cash used in operating activities was $1.701 million for the nine months, compared with $1.387 million used in the prior-year period. Investing activities provided $10.305 million, largely from asset-sale proceeds; financing activities used $1.631 million.
Material Changes Versus the Prior Comparable Period
- Continuing revenue increased from $4.237 million to $4.803 million for the nine months, while the continuing-operations loss narrowed from $1.496 million to $1.397 million.
- Operating expenses increased 7% for the nine months, principally from higher room costs, repairs and maintenance, depreciation and sales and marketing expenses. Interest expense increased to $0.294 million from $0.193 million, partly because of notes issued for share and partnership-unit repurchases.
- Consolidated net income increased for the nine months to $11.124 million from $8.730 million, but income attributable to controlling interests fell sharply to $1.530 million from $8.617 million because a larger portion was allocated to non-controlling interests.
- The company recorded a $13.323 million gain on disposal of discontinued operations, consisting principally of an approximately $11.080 million gain on the Yuma sale and an approximately $2.244 million gain on the IBC sale.
- Yuma was sold for approximately $16.050 million, with approximately $9.93 million of net proceeds after debt payoff, commissions and closing costs. Its approximately $5.560 million mortgage was paid in full.
- IBC was sold for $3.0 million, consisting of $250,000 cash and a $2.750 million secured promissory note bearing 3.75% interest and maturing in June 2024.
- The company repurchased 394,796 shares during the nine months, including 184,055 open-market shares and 210,741 shares in private transactions financed with 7% notes. Treasury stock increased to 9,191,819 shares.
Guidance, Outlook, Risks and Unusual Items
- Management expected occupancy and ADR to remain generally steady, with modest rate improvement and continued improvement in hotel demand. The Tucson renovation was completed in the first week of December 2018.
- Management anticipated pressure on revenue and operating margins from additional hotel supply and competition for corporate, leisure, group and government business. Management and trademark-fee revenue was expected to decline following the sale of one of the CEO’s affiliated hotels.
- Management stated that approximately $3.0 million of cash and short-term investments, available related-party credit of up to $1.0 million and affiliate credit facilities totaling up to $1.0 million were expected to cover obligations for at least the next twelve months. The filing also warned that refinancing, additional asset sales or other financing may be unavailable or unfavorable.
- Near-term scheduled debt payments were approximately $1.230 million for the remainder of fiscal 2019 and $0.671 million for fiscal 2020. The filing identifies refinancing and asset-sale execution as important liquidity contingencies.
- The company reported a correction of an accounting error involving IBC pass-through transactions. First-quarter IBC revenue was reduced from approximately $345,000 to $131,000 and expenses from approximately $890,000 to $728,000; management stated the effect on reported EPS was not material.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Reported material weaknesses included inadequate entity-level and system controls, insufficient segregation of duties, insufficient accounting expertise and inadequate information-technology controls. Management was implementing remediation measures and had hired additional accounting personnel.
- Other risks include hotel seasonality, labor and operating-cost inflation, interest-rate exposure, competition, dependence on Best Western agreements, property renovation requirements, cybersecurity and data-breach risks, related-party transactions and the collectability of related-party receivables.
- The Trust declared a $0.01-per-share dividend payable January 30, 2019 and subsequently repurchased additional shares. Subsequent to quarter-end, approximately $8.598 million was distributed to third-party and related-party Yuma investors.
Important Facts for Investors to Verify
- Reconcile continuing-operations cash of $1.764 million with discontinued-operations cash, subsequent Yuma distributions and management’s stated liquidity of approximately $3.0 million.
- Assess the collectability and terms of the $2.750 million IBC note and related-party receivables, including the $1.569 million Rare Earth Financial balance that exceeded the stated $1.0 million facility limit at quarter-end.
- Review debt maturities, refinancing needs, guarantees and the concentration of approximately $4.852 million of mortgage debt in the Tucson property.
- Evaluate the sustainability of hotel-level cash flow given continuing operating losses, negative Adjusted EBITDA and negative FFO.
- Review the Yuma and IBC sale accounting, gain allocations to non-controlling interests, tax provisions and subsequent distributions.
- Monitor remediation of the disclosed material weaknesses and the impact of the IBC accounting correction on future reporting.