InnSuites Hospitality Trust — Form 10-Q Summary
Reporting period: Quarterly period ended October 31, 2019; comparative results are for the three and nine months ended October 31, 2018. The filing was signed December 26, 2019. InnSuites owned interests in two hotels totaling 267 suites in Arizona and New Mexico and managed those hotels plus one affiliated hotel.
Financial performance and position
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Revenue from continuing operations | $5.124 million | $4.803 million | +7% |
| Operating loss | $(606,000) | $(425,000) | Loss increased $181,000 |
| Net loss from continuing operations | $(912,000) | $(1.029) million | Loss improved $116,000 |
| Net loss attributable to controlling interests | $(1.006) million | $1.530 million income | Prior period included discontinued-operations gains |
| Adjusted EBITDA | $65,000 | $1.942 million | Down substantially |
| FFO | $(147,000) | $(1.574) million | Improved, but remained negative |
| Cash flow from operating activities | $114,000 | $(1.701) million | Improved $1.814 million |
Continuing-operations operating margin was approximately (11.8%) in the first nine months of 2019 versus approximately (8.8%) in the comparable period. Continuing-operations net margin improved to approximately (17.8%) from approximately (21.4%), primarily because the prior period included a $407,727 income-tax provision. The company remained unprofitable on a GAAP basis.
Room revenue increased 6.7% to $4.917 million, food and beverage revenue increased 52.9% to $52,000, management and trademark fees were essentially flat at $129,000, and other revenue declined 57% to $25,000. General and administrative expense increased approximately $315,000, while depreciation increased approximately $141,000. Interest expense increased 28% to $372,000.
For the third quarter, revenue was $1.497 million versus $1.486 million, operating loss was $31,000 versus $215,000, and net loss attributable to controlling interests was $201,000 versus $2.900 million of income. Third-quarter operating expenses declined 10% year over year, mainly from lower general and administrative and repair costs, partially offset by higher utilities and depreciation.
Cash, debt, and liquidity
- Cash and cash equivalents were $739,000 at October 31, 2019, compared with $749,000 at January 31, 2019.
- Short-term investments were $790,000, producing approximately $1.530 million of cash and short-term investments combined.
- Total assets were $17.671 million and total liabilities were $10.399 million. Total equity was $7.272 million, including $(1.748) million of non-controlling interest.
- Mortgage debt was approximately $4.738 million, primarily the Tucson loan at a weighted average rate of 4.69%, with scheduled maturity in June 2042.
- Scheduled debt principal payments totaled approximately $737,000 in fiscal 2020 and $497,000 in fiscal 2021; total scheduled debt payments were approximately $5.884 million, including $245,000 of related-party notes and $901,000 of other notes.
- Operating lease liabilities totaled $2.807 million, including $99,000 current and $2.708 million long term, following adoption of the new lease standard.
- Management stated that liquidity should be sufficient for at least the next twelve months based on cash and investments, a $150,000 bank line, a $1.000 million related-party revolving facility, and up to $1.000 million of affiliate advance facilities. These facilities and related-party receivables are subject to renewal and collection risk.
Material changes and unusual items
- The Yuma hotel and IBC technology business were sold in 2018. Accordingly, the 2018 comparison includes discontinued operations and a $13.323 million gain on disposal; 2019 has no discontinued-operations results. This makes total net income comparisons substantially nonrecurring.
- Investing cash flow fell to $762,000 from $10.305 million because the prior period included approximately $9.930 million of net proceeds from the Yuma sale.
- Capital expenditures declined to $242,000 from $779,000 after substantial Tucson improvements were completed.
- The Trust adopted the new lease accounting standard on February 1, 2019, recognizing approximately $2.821 million of right-of-use assets and $2.914 million of lease liabilities at adoption, with no material reported impact on earnings or cash flow.
- The Trust repurchased 73,385 shares during the nine months at an average price of $1.71 per share and retained authorization to repurchase additional shares or partnership units.
- Management reported that the Tucson and Albuquerque hotels continued to be marketed for sale. Listed asking prices totaled $24.595 million, but the filing states that no assurance exists that either property will sell at those prices, on favorable terms, or at all.
Operating trends and outlook
Management reported flat to slightly weaker economic conditions during the first nine months of fiscal 2020 and expects competition for corporate, leisure, group, and government business to remain a major challenge. It expects moderate improvement in occupancy and average daily rates, relatively steady food and beverage revenue, lower capital expenditures, and pressure on revenue and margins from additional hotel supply.
Albuquerque occupancy increased to 92.30% from 90.60%, and ADR increased to $88.35 from $83.55. Tucson occupancy declined to 67.60% from 74.71%, while ADR increased to $66.25 from $64.28. The filing reports Tucson REVPAR of $44.76 versus $47.63, but the stated percentage-change calculation appears inconsistent with those amounts.
Subsequent to quarter-end, Albuquerque Suite Hospitality entered into a $1.4 million mortgage loan, using proceeds to repay approximately $1.257 million of intercompany principal and approximately $80,000 of accrued interest. The Trust also agreed to invest up to $1.5 million in UniGen Power Inc.; the MD&A states that $600,000 was funded in December 2019 and an additional $400,000 was expected in February 2020.
Risks, contingencies, and controls
- Liquidity depends on hotel cash flows, debt service capacity, related-party loan repayments, asset sales, and refinancing. Management cautioned that financing or property sales may not be available on favorable terms or at all.
- The business is exposed to seasonality, occupancy and pricing volatility, labor and utility costs, competition and new hotel supply, economic weakness, adverse weather, terrorism, cybersecurity events, communicable diseases, and loss of Best Western membership or reservation access.
- The Trust had approximately $200,000 accrued for potential interest and penalties related to IRS and state tax notices, although management expects remediation and believes the notices lack merit.
- Ordinary-course litigation and insurance-related claims were disclosed, but management did not expect a material adverse effect.
- Management concluded that disclosure controls and internal control over financial reporting were not effective as of October 31, 2019. Reported material weaknesses included inadequate entity-level and system controls, insufficient segregation of duties, limited GAAP expertise, and inadequate information-technology access controls. Remediation was expected to continue through fiscal 2020 and 2021.
- The Trust received a May 2019 NYSE American noncompliance notice for late filing of its 2018 Form 10-K, but reported that compliance was restored on July 25, 2019.
Investor verification checklist
- Verify the sustainability of positive operating cash flow and the company’s ability to fund approximately $737,000 of fiscal 2020 scheduled debt payments.
- Review related-party receivables, affiliate facilities, guarantees, and the collection or repayment of approximately $1.0 million of advances to an affiliate.
- Assess hotel occupancy, ADR, REVPAR, competitive supply, labor costs, and the effect of seasonality on future margins.
- Evaluate the likelihood, timing, and net proceeds of proposed Tucson or Albuquerque hotel sales; asking prices are not appraisals or guaranteed proceeds.
- Review the material internal-control weaknesses and whether remediation has been independently validated.
- Separate recurring hotel performance from the prior period’s nonrecurring Yuma and IBC disposal gains.
- Confirm the terms, funding, and risk profile of the post-quarter-end UniGen investment and Albuquerque refinancing.