InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
InnSuites Hospitality Trust is an Ohio real estate investment trust operating two moderate-service hotels with an aggregate of 270 suites in Tucson, Arizona, and Albuquerque, New Mexico. The hotels operate under the InnSuites and Best Western brands. The filing covers the three and nine months ended October 31, 2022, with comparative periods ended October 31, 2021. The financial statements are unaudited.
The Trust owns 75.98% of RRF Limited Partnership, which owns a 51.01% interest in the Tucson hotel; the Trust directly owns a 21% interest in the Albuquerque hotel. The Trust also holds investments in UniGen Power Inc., including a $1.0 million convertible debenture and $413,750 of private-company stock.
Financial Highlights
| Metric | Three Months Ended October 31, 2022 | Nine Months Ended October 31, 2022 |
|---|---|---|
| Total revenue | $1.705 million | $5.540 million |
| Operating income (loss) | $(130,216) | $15,919 |
| Consolidated net income (loss) | $107,995 | $729,783 |
| Net income (loss) attributable to controlling interests | $95,165 | $371,213 |
| Basic and diluted earnings per share | $0.01 | $0.04 |
| Net cash provided by operating activities | Not separately provided | $115,457 |
- Year-to-date operating margin was approximately 0.3%; the third-quarter operating margin was approximately negative 7.6%.
- Year-to-date net income attributable to controlling interests increased from a $431,896 loss in 2021 to income of $371,213 in 2022.
- Adjusted EBITDA, as defined by management, was approximately $395,000 for the quarter and $1.241 million year to date, compared with $11,000 and $(594,000), respectively, in the prior-year periods.
- FFO, as defined by management, was approximately $638,000 for the quarter and $1.260 million year to date, compared with $411,000 and $969,000, respectively, in the prior-year periods. These are non-GAAP measures and are not equivalent to cash flow from operations.
Liquidity, Debt and Balance Sheet
| Balance Sheet Item | October 31, 2022 | January 31, 2022 |
|---|---|---|
| Cash | $2.847 million | $1.224 million |
| Total assets | $17.267 million | $14.702 million |
| Total liabilities | $13.311 million | $10.570 million |
| Total equity | $3.956 million | $4.132 million |
| Mortgage notes payable | $9.528 million | $5.757 million |
- Cash increased by $1.623 million during the first nine months, primarily because of $3.884 million of new mortgage borrowings associated with the Tucson refinancing.
- Net cash used in investing activities was $322,740, including $182,740 of hotel improvements and $140,000 funded under the UniGen convertible note receivable.
- Net cash provided by financing activities was $1.830 million. Financing uses included $113,069 of mortgage principal payments, $1.955 million of related-party note repayments, $574,259 of distributions to noncontrolling interests, $91,175 of dividends and $243,726 of share repurchases.
- Other notes payable totaled approximately $565,595, and operating and finance lease liabilities totaled approximately $2.313 million.
- Management reported approximately $2.0 million of availability under a related-party revolving facility and $250,000 under bank revolving lines. It believes available liquidity is sufficient for obligations due over the twelve months following the filing, but notes that refinancing, asset sales or additional financing may be required.
Material Changes Versus Prior Comparable Period
- Nine-month revenue increased 16% to $5.540 million, while operating expenses increased 8% to $5.524 million. Room revenue increased 18% to $5.424 million.
- Combined occupancy declined to 73.44% from 77.18%, but combined ADR increased to $97.08 from $81.08 and REVPAR increased to $71.30 from $62.58.
- Albuquerque occupancy declined to 81.97% from 85.00%, while ADR increased 13% and REVPAR increased 9%. Tucson occupancy declined to 67.40% from 71.33%, while ADR increased 26% and REVPAR increased 19%.
- Year-to-date interest expense increased 28% to $388,336, primarily reflecting higher mortgage debt after the Tucson refinancing. General and administrative expense increased 7%, and sales and marketing expense increased 25%.
- The Trust recognized an Employee Retention Credit benefit of $1.052 million for the nine-month period and $350,791 for the quarter. The balance sheet included an Employee Retention Credit receivable of $1.403 million. This benefit was a significant contributor to reported net income.
- The prior-year nine-month results included $967,141 of PPP loan forgiveness; no comparable PPP forgiveness was recognized in 2022.
- The Trust repurchased 15,795 shares during the quarter at an average price of $2.53 per share and 83,871 shares during the nine months at an average price of $2.91 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expects continued recovery in hotel occupancy, room rates and profitability during fiscal 2023, with modest further improvements and no material additional new-build hotel supply anticipated in its markets.
- Management intends to seek buyers for both hotels over the next 24 to 36 months and is also evaluating a possible merger or reverse merger. The properties are available for sale, but neither is currently listed for sale and no transaction is assured.
- Management presented estimated market asking prices of $8.595 million for Albuquerque and $17.950 million for Tucson, compared with aggregate book value of $7.187 million and mortgage balances of $9.528 million. The asking prices are not based on appraisals and may not be realized.
- The UniGen investment remains speculative. UniGen targets assembly of its first prototype by June 30, 2023, subject to funding and supply-chain execution. The filing describes development delays, cost overruns and potential additional funding needs, including possible further IHT investment.
- Key risks include inflation, labor and utility costs, interest-rate and refinancing risk, hotel seasonality, competition, travel disruptions, pandemics, adverse economic conditions, cybersecurity events, natural disasters and the ability to sell or refinance hotel properties.
- The filing states that the Trust was current and compliant with NYSE American continued-listing equity requirements as of August 29, 2022. The cover page indicates that the Trust had not filed all required reports during the preceding twelve months, which investors should reconcile with the filing’s later compliance statements.
- Management reported no material litigation, no defaults upon senior securities and no off-balance-sheet financing arrangements. It stated that disclosure controls and internal control over financial reporting were effective, while also describing ongoing remediation of prior accounting and control deficiencies and significant accounting-staff turnover.
Most Important Facts to Verify
- Whether the $1.403 million Employee Retention Credit receivable is collectible, when cash will be received and whether the credit remains subject to review or challenge.
- The maturity profile and refinancing requirements for approximately $9.528 million of mortgage debt and $565,595 of other notes payable.
- Actual hotel occupancy, ADR, REVPAR and cash flow trends after the reported recovery, particularly given year-to-date occupancy declines.
- Whether the Trust can sell either hotel near management’s estimated asking prices and how proceeds would compare with outstanding mortgage balances.
- The financial condition, funding requirements, prototype progress and valuation support for the UniGen investment.
- The status of NYSE American filing and listing compliance, including the apparent inconsistency between the cover-page filing response and management’s later compliance statement.
- The sustainability of dividends and share repurchases given modest operating cash flow, debt obligations and distributions to noncontrolling interests.