InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
Filed September 11, 2013, for the quarter and six months ended July 31, 2013. InnSuites owned, directly or through partnership interests, five hotels totaling 843 suites in Arizona, southern California, and New Mexico. The Trust owned 72.04% of RRF Limited Partnership and managed its hotels and certain affiliated properties under the InnSuites brand.
| Metric | Three Months Ended July 31, 2013 | Six Months Ended July 31, 2013 |
|---|---|---|
| Total revenue | $3.427 million | $8.223 million |
| Operating income (loss) | $(502,396) | $467,830 |
| Consolidated net income (loss) | $(710,571) | $72,644 |
| Net loss attributable to controlling interests | $(667,057) | $(231,049) |
| Basic and diluted loss per share | $(0.08) | $(0.03) |
Financial Position, Cash Flow, and Liquidity
- At July 31, 2013, total assets were $25.30 million, including hotel properties of $24.04 million.
- Cash and cash equivalents were $307,627, compared with $493,953 at January 31, 2013. Restricted cash was $41,955.
- Current liabilities were $3.98 million, compared with current assets of $1.04 million.
- Mortgage notes payable totaled approximately $19.35 million, including current maturities. The Trust also had $600,000 drawn on a bank line of credit and approximately $261,000 of secured promissory notes to unrelated parties.
- Total liabilities were $22.23 million and total equity was $3.06 million at July 31, 2013.
- Six-month operating cash flow was $885,553, versus $65,394 in the prior-year period. Investing activities used $278,218, principally for hotel improvements, and financing activities used $793,661.
- Capital expenditures were approximately $250,000, compared with $658,000 in the prior-year period. Repairs and maintenance expense was $606,240.
- Management stated that it expects sufficient cash to meet obligations for at least the next 12 months, based on expected operating improvement, lower capital spending, and reduced Ontario property debt service.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased 0.4% to $8.223 million; second-quarter revenue increased 1.6% to $3.427 million.
- Six-month operating expenses declined 2.6%, producing operating income of $467,830 versus $227,371 in the prior-year period. The second-quarter operating loss improved to $502,396 from $624,969.
- Six-month consolidated results improved from a $252,324 loss to $72,644 of income. However, the controlling interest continued to report a loss, which increased slightly from $221,777 to $231,049.
- Interest expense declined 18.2% for the six-month period and 24.3% for the quarter, primarily because of the Ontario property debt restructuring.
- Occupancy increased to 74.72% from 68.51%, while average daily rate declined 4.0% to $66.84. Revenue per available room increased to $50.87 from $47.67.
- Adjusted EBITDA increased to $1.367 million for the six months from $1.095 million, while second-quarter Adjusted EBITDA improved to negative $57,546 from negative $191,439. FFO increased to $978,658 for the six months but remained negative at $(261,352) for the quarter.
Outlook, Risks, Contingencies, and Unusual Items
- Management expects moderate improvement in economic conditions, revenue, and operating margins, but anticipates continued competition and pressure to maintain room rates while preserving market share.
- Capital improvements are expected to be approximately $800,000 lower than the prior year. Management is also evaluating refinancing another property and additional sales of non-controlling interests; availability and terms are uncertain.
- The $600,000 revolving bank line bears interest at prime plus 1.0%, subject to a 6.0% floor, is secured by the Yuma property and trade receivables, and matures June 23, 2014. James F. Wirth is a guarantor.
- The Trust has approximately $1.23 million of minimum debt payments over the last six months of fiscal 2014 and the first six months of fiscal 2015.
- The Trust’s hotels are listed for sale at aggregate asking prices of $58.295 million against aggregate book value of $24.045 million and mortgage balances of $19.352 million. The filing states that asking prices are not based on appraisals and may not be realized.
- The Trust was not in compliance with NYSE MKT continued-listing standards relating to stockholders’ equity and recurring losses. It received an extension through April 30, 2014 to regain compliance; failure to do so could result in delisting.
- Seasonality is significant, with the second quarter generally weaker for the southern Arizona hotels. The filing identifies risks from economic conditions, occupancy and rate changes, competition, refinancing availability, interest rates, property sales, weather, natural disasters, data breaches, and other hospitality-industry disruptions.
- Two hotels are subject to ground leases expiring in 2033 and 2050. Total future minimum ground-lease and office-lease payments were reported at $6.013 million.
- The filing reports a $6,533 loss on disposal of hotel property, no asset impairment adjustments, and no extraordinary items during the six-month period.
Investor Verification Checklist
- Verify the maturity, refinancing prospects, and interest-rate exposure of the $19.35 million mortgage balance and the June 2014 bank line maturity.
- Assess whether operating cash flow and reduced capital spending are sufficient to cover debt service, lease obligations, restricted capital reserves, and distributions.
- Monitor progress toward NYSE MKT listing compliance before the April 30, 2014 deadline.
- Evaluate whether higher occupancy can offset declining ADR and the Trust’s continuing losses attributable to controlling interests.
- Review the assumptions supporting the $58.295 million aggregate hotel asking price and the feasibility of planned property sales or refinancing.
- Consider related-party ownership, management arrangements, notes receivable, preference payments, and other transactions involving Mr. Wirth and his affiliates.
- Reconcile Adjusted EBITDA and FFO to GAAP results; the filing states that these non-GAAP measures do not represent operating cash flow or funds available for distributions.