InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
InnSuites Hospitality Trust reported unaudited results for the three months ended April 30, 2014, its first fiscal quarter of fiscal 2015. The Trust owned interests in five hotels totaling 843 suites in Arizona, California, and New Mexico, operated under the InnSuites Hotels brand. It also provided hotel management, trademark, reservation, and related services. IBC Hotels, its wholly owned subsidiary, had approximately 4,400 properties in its network, but its revenues and expenses were not significant.
The Trust controlled 72.04% of RRF Limited Partnership and consolidated its operations. As of June 1, 2014, 8,329,335 shares of beneficial interest were outstanding.
Financial Performance and Key Metrics
| Metric | Three Months Ended April 30, 2014 | Three Months Ended April 30, 2013 | Change |
|---|---|---|---|
| Total revenue | $4.726 million | $4.796 million | Down 1.5% |
| Operating expenses | $4.228 million | $3.826 million | Up 10.5% |
| Operating income | $497,610 | $970,226 | Down 48.7% |
| Consolidated net income | $284,037 | $783,215 | Down 63.7% |
| Net income attributable to controlling interests | $60,675 | $435,250 | Down approximately 86% |
| Basic and diluted earnings per share | $0.01 | $0.05 | Down $0.04 |
| Net cash provided by operating activities | $866,645 | $561,431 | Up 54.3% |
| Adjusted EBITDA | $946,363 | $1.425 million | Down 33.6% |
| FFO | $728,078 | $1.240 million | Down 41.3% |
Operating margin was approximately 10.5% in 2014 versus 20.2% in 2013. Consolidated net margin was approximately 6.0% versus 16.3%; net income attributable to controlling interests represented approximately 1.3% of revenue versus 9.1% in the prior-year period.
Room revenue declined by approximately $116,000, primarily because of reduced government-sector business at the Yuma, Arizona property. Food and beverage revenue increased by approximately $38,000, management and trademark fees increased by approximately $27,000, and other revenue declined by approximately $18,000.
Occupancy decreased to 74.04% from 76.24%. ADR increased to $75.43 from $75.30, while REVPAR declined to $55.85 from $57.41. Management stated that the prior-year operating statistics were restated using a weighted-average methodology to make the periods comparable.
Financial Position, Cash Flow, Debt, and Liquidity
- Cash and cash equivalents were $535,117 at April 30, 2014, compared with $395,903 at January 31, 2014. Restricted cash was $43,427.
- Total assets were $25.379 million and total liabilities were $21.401 million. Total equity was $3.978 million, including $1.838 million of non-controlling interest.
- Mortgage notes payable totaled approximately $18 million, including current and long-term portions. Other debt included approximately $158,000 of secured promissory notes, a fully drawn $600,000 bank line of credit, and approximately $88,000 and $167,000 outstanding under Ontario and Yuma business loans, respectively.
- The $600,000 bank line of credit matured June 23, 2014, was fully drawn at April 30, 2014, and was secured by a junior interest in the Yuma property and trade receivables. Management expected to renew it, but the filing states there was no assurance of renewal.
- A related-party revolving line of credit had a $1.0 million maximum capacity and a zero balance at April 30, 2014; the full amount was available. A related-party note receivable had a balance of $146,457.
- Operating cash flow was $866,645. Investing activities used $467,214, including $538,124 of hotel improvements. Financing activities used $260,217. Ending cash increased by $139,214 from the beginning of the period.
- Minimum debt and mortgage payments were approximately $12.360 million in fiscal 2015 and $859,000 in fiscal 2016. Management expected to refinance or extend two mortgage notes before maturity.
- Four hotels were required to deposit 4% of room revenue into lender-controlled capital expenditure escrows. Approximately $43,000 was in restricted cash at quarter-end.
Material Changes, Outlook, Risks, and Unusual Items
- Expenses increased despite relatively stable revenue. Management cited additional room deep cleaning, repairs and maintenance, higher accounts receivable bad-debt expense, an Americans with Disabilities Act settlement, higher credit-card processing fees, and increased Best Western administration expenditures.
- Hotel capital expenditures increased to $538,124 from $137,645, while repairs and maintenance expense increased to approximately $362,000 from $292,000.
- Management expected moderate improvement in economic conditions, higher Yuma revenue during the second fiscal quarter, and improved occupancy and ADR, but continued competition and pressure to maintain room rates and market share.
- The Trust was pursuing a long-term strategy to reduce reliance on hotel ownership and expand management, licensing, reservation, and advertising services through IBC Hotels. Management expected expansion of IBC Hotels to increase revenue but reduce consolidated net income over the next couple of fiscal years.
- On March 24, 2014, the Trust entered into an agreement to purchase 51% of Fort Worth/Dallas Suite Hospitality Partnership, an affiliate of Chairman and CEO James Wirth. The related-party transaction was approved by the Audit Committee and independent trustees and was expected to close in late June 2014, subject to conditions and shareholder approval; completion was not assured.
- The Trust remained subject to an NYSE MKT compliance plan concerning stockholders’ equity and historical losses. The exchange extended the compliance period to July 8, 2014. Failure to regain compliance could result in delisting.
- On June 2, 2014, the Trust paid off the Albuquerque mortgage, which had an outstanding balance of $1.099 million, eliminating approximately $16,000 of monthly principal and interest payments.
- The filing disclosed continued sales of non-controlling interests in subsidiary entities. By June 10, 2014, approximately $940,000 had been raised through Albuquerque unit sales and approximately $15,000 through Ontario unit sales to unrelated parties.
- The business is seasonal, with southern Arizona hotels generally strongest in the first fiscal quarter and weaker in the second quarter. Risks include occupancy and rate declines, economic conditions, refinancing availability, interest rates, competition, labor and operating costs, property renovation needs, adverse weather, data breaches, and other disruptions to travel.
- Subsequent-event disclosures report a Tucson business loan entered into May 21, 2014. The financial statements describe principal of $421,792, while the MD&A describes a $447,099 loan including $25,308 of fees; the filing text does not clearly reconcile these amounts.
Important Facts for Investors to Verify
- Whether the $600,000 bank line of credit was renewed after its June 23, 2014 maturity date.
- Whether the Trust successfully refinanced or extended the mortgage obligations due in fiscal 2015 and fiscal 2016.
- Whether the Fort Worth/Dallas related-party acquisition closed, the final consideration issued, and the effect on equity and NYSE MKT compliance.
- Whether the Trust regained NYSE MKT continued-listing compliance by July 8, 2014.
- The final terms and accounting treatment of the Tucson business loan, including the discrepancy between the $421,792 amount in the subsequent-events note and the $447,099 amount in MD&A.
- The sustainability of cash distributions given low controlling-interest earnings, significant near-term debt maturities, seasonal operations, and reliance on refinancing and non-controlling interest sales.
- The effect of Yuma’s reduced government-sector demand and whether occupancy and REVPAR recovered as management anticipated.
- The cumulative priority distribution obligations associated with the Albuquerque, Tucson, and Ontario subsidiary ownership offerings, including the related-party participation and lack of a Trust guarantee.