InnSuites Hospitality Trust: Q3 FY2021 Form 10-Q Summary
Business context and reporting period
InnSuites Hospitality Trust is an Ohio-based hospitality company owning interests in two limited-service hotels totaling 270 suites in Tucson, Arizona, and Albuquerque, New Mexico, and managing three hotels during the period. The company reports one segment: hotel ownership operations and hotel management services. This unaudited Form 10-Q covers the three and nine months ended October 31, 2020, within the fiscal year ending January 31, 2021. The report was filed March 24, 2021, after filing extensions related to COVID-19 disruptions.
Financial metrics
| Metric | Three months ended Oct. 31, 2020 | Three months ended Oct. 31, 2019 | Nine months ended Oct. 31, 2020 | Nine months ended Oct. 31, 2019 |
|---|---|---|---|---|
| Total revenue | $953,000 | $1,497,000 | $3,324,000 | $5,124,000 |
| Operating loss | $(679,000) | $(31,000) | $(2,195,000) | $(606,000) |
| Consolidated net loss | $(768,000) | $(152,000) | $(2,388,000) | $(912,000) |
| Net loss attributable to controlling interests | $(481,000) | $(201,000) | $(1,288,000) | $(1,006,000) |
| Loss per share | $(0.08) | $(0.02) | $(0.26) | $(0.10) |
| Operating cash flow | Not separately provided | Not separately provided | $(721,000) | $114,000 |
| Adjusted EBITDA | $(185,000) | $191,000 | $(461,000) | $65,000 |
| FFO | $(561,000) | $118,000 | $(1,754,000) | $(147,000) |
Revenue declined 36% in the quarter and 35% for the nine-month period. Approximate operating margins were negative 71% for the quarter and negative 66% for the nine months, compared with approximately negative 2% and negative 12%, respectively, in the prior-year periods. Approximate net margins were negative 81% for the quarter and negative 72% for the nine months.
At October 31, 2020, cash and cash equivalents were $47,000 versus $1.2 million at January 31, 2020. Total assets were $14.5 million and total liabilities were $11.4 million. Total equity was $3.1 million, including negative non-controlling interest of $3.4 million. Mortgage debt and other notes payable totaled approximately $7.2 million, excluding lease liabilities. Scheduled mortgage and other-note payments totaled approximately $679,000 in fiscal 2021 and $726,000 in fiscal 2022.
Material changes versus the prior comparable period
- Room revenue declined 39% for both the three-month and nine-month comparisons, reflecting COVID-19 travel restrictions and reduced lodging demand.
- Nine-month occupancy fell from 95.32% to 53.85% at Albuquerque and from 69.23% to 57.06% at Tucson. Albuquerque REVPAR declined 50%, while Tucson REVPAR declined 3%.
- Room operating expenses decreased with lower occupancy, but total operating expenses increased 7% in the third quarter and declined only 4% for the nine months.
- Sales and occupancy tax expense increased by approximately $78,000 in the quarter and $844,000 for the nine months due to a historical occupancy-tax discrepancy. Management does not expect the additional amounts to recur and was discussing the matter with the New Mexico Taxation and Revenue Department.
- Cash used in operations shifted from $114,000 of cash provided in the prior-year nine months to $721,000 of cash used. Cash declined by $1.15 million during the nine months.
- The company invested $430,000 in UniGen during the nine months. The October 31 investment balance was approximately $1.03 million, comprising note receivables, warrants, and accrued interest.
- The company repurchased 233,569 shares during the nine months at an average price of $1.06 per share and paid approximately $247,000 for treasury stock.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects occupancy and lodging demand to partially recover as COVID-19 restrictions ease, but provides no quantified revenue or earnings guidance. Management expects management and trademark fee revenue to be flat or lower following the December 2020 sale of the affiliated Tempe hotel.
- The two remaining hotels are being marketed for sale. Listed asking prices were $8.0 million for Albuquerque and $16.6 million for Tucson, but the filing states that sales may not occur, may take longer than expected, or may not be completed at favorable prices.
- Management believes liquidity is sufficient for obligations due over the following twelve months based on approximately $47,000 of cash, available credit facilities, expected intercompany-loan repayment, and potential asset sales or refinancing. The filing cautions that refinancing, asset sales, or additional financing may not be available on favorable terms or at all.
- The affiliate-owned Tempe hotel was sold on December 18, 2020, and the approximately $657,000 intercompany loan was repaid. The filing also states that an approximately $1 million intercompany loan to Tempe was repaid; the differing amounts should be reconciled.
- PPP loans totaling approximately $503,000 were received for the company and its hotels. The company and Tucson loans were subsequently forgiven; forgiveness of the approximately $188,000 Albuquerque loan was pending as of the filing.
- The IBC note receivable had a carrying value of approximately $1.93 million after an $825,000 impairment recorded in the prior fiscal year. Payments were deferred until November 2021 because of COVID-19-related conditions. Management recorded no additional impairment, but collectability remains a risk.
- COVID-19 materially reduced demand, revenue, liquidity, and distributions from the hotels. Other key risks include debt service and refinancing, hotel occupancy and rate volatility, seasonality, competition, potential impairment, related-party transactions, and reliance on a small number of properties.
- The company reported ineffective disclosure controls and material weaknesses in internal control over financial reporting, including insufficient segregation of duties, accounting expertise, entity-level controls, documentation, and information-technology controls. Remediation efforts were expected to continue through fiscal 2022.
- The company was not timely with required SEC filings and was out of compliance with NYSE American continued-listing standards, although it reported extensions and a plan to become current.
Most important facts for investors to verify
- Current cash, borrowing availability, near-term maturities, and whether hotel operating cash flow is sufficient to service approximately $7.2 million of mortgage and other notes payable.
- Status and final amount of the Albuquerque occupancy-tax assessment and any related penalties, interest, or additional liabilities.
- Final forgiveness of the remaining Albuquerque PPP loan and accounting treatment for forgiven debt.
- Actual repayment and terms of the Tempe-related intercompany loans and consistency of the amounts disclosed.
- Collectability and revised payment schedule for the $1.93 million IBC note receivable.
- Progress, pricing, and net proceeds from any sale or refinancing of the Tucson and Albuquerque hotels.
- Remediation of material weaknesses and restoration of effective disclosure and internal controls.
- Whether COVID-19 recovery assumptions, hotel occupancy, and UniGen development milestones support management’s liquidity and strategic outlook.