InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended April 30, 2017, the first quarter of fiscal 2018, compared with the three months ended April 30, 2016. The Trust owned interests in four hotels totaling 574 suites in Arizona, southern California and New Mexico, and operated the IBC Developments hospitality-services network serving approximately 6,300 hotels.
Financial Performance and Key Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $4.152 million | $3.638 million | +14.1% |
| Operating income | $323,000 | $185,000 | +$138,000 |
| Operating margin | 7.8% | 5.1% | +2.7 percentage points |
| Consolidated net income | $58,000 | $21,000 | +$37,000 |
| Net loss attributable to controlling interests | $(240,000) | $(190,000) | Loss increased |
| Basic and diluted loss per share | $(0.02) | $(0.02) | No stated change |
| Adjusted EBITDA | $439,000 | $108,000 | +$331,000 |
| Net cash from operating activities | $459,000 | $(96,000) | +$555,000 |
Room revenue increased 14.7% to $3.755 million. Hotel occupancy improved to 83.00% from 79.97%, ADR increased to $88.25 from $79.00, and REVPAR increased to $73.25 from $63.18. IBC Developments revenue increased 12.3% to $244,000, but the segment operating loss widened to $315,000 from $119,000 as sales, marketing and technology spending increased.
Operating expenses increased 10.9% to $3.829 million. Depreciation increased substantially because hotel properties were reclassified from assets held for sale back into operations. Interest expense increased 10.3% to $205,000, and the Trust recorded a $60,000 income-tax provision.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $468,000 at April 30, 2017, compared with $568,000 at January 31, 2017.
- Total assets were $22.745 million; total liabilities were $17.617 million; and total equity was $5.128 million.
- Mortgage notes payable totaled approximately $13.180 million, net of discounts. Additional disclosed debt included approximately $354,000 of an unsecured non-revolving note, $769,000 of unsecured business loans, approximately $642,000 of an unsecured promissory note to an unrelated party, and approximately $15,000 of secured promissory notes to unrelated third parties.
- Minimum debt payments were approximately $1.717 million in fiscal 2018 and $583,000 in fiscal 2019. Approximately $243,000 of mortgage payments were due during the remainder of fiscal 2018.
- Investing cash outflows were $654,000, primarily for hotel improvements and additions. Financing activities provided $95,000, compared with a $524,000 use in the prior-year quarter.
- Management cited approximately $4.9 million of estimated net proceeds available after debt repayment and non-controlling interests from the subsequent Ontario sale, approximately $998,000 of related-party line availability and approximately $899,000 of affiliate credit-facility availability.
Material Changes Versus the Prior Comparable Period
- Revenue and hotel operating performance improved materially, driven by higher occupancy and room rates, particularly at the renovated Yuma and Ontario properties.
- Hotel Operations and Corporate Overhead operating income increased to $638,000 from $304,000.
- IBC Developments remained loss-making, with its operating loss increasing to $315,000 from $119,000 due to expanded sales, marketing and technology investment.
- Cash flow from operations turned positive, primarily due to improved earnings, higher depreciation and changes in working capital.
- The Trust sold 145 Yuma non-controlling partnership units during the quarter for approximately $1.45 million and had sold approximately $1.47 million of such interests cumulatively as of April 30, 2017, as part of its equity enhancement plan.
- The Trust issued $200,000 of shares after quarter-end, including shares sold to Rare Earth Financial, an entity affiliated with the Chairman and Chief Executive Officer.
Guidance, Outlook, Risks and Unusual Items
Management expected occupancy and ADR to improve or remain strong during fiscal 2018, with moderate economic and travel-industry improvement supporting higher revenue and operating margins. Management also planned significant expansion of IBC Hotels but provided no assurance that the strategy would succeed.
On June 2, 2017, the Ontario hotel was sold to an unrelated party for $17.5 million. The Trust stated that approximately $7.27 million of debt was repaid and estimated a gain of approximately $10.8 million after transaction costs of approximately $0.7 million. The sale will reduce future hotel revenue and distributions but is expected to provide significant liquidity.
The Trust received NYSE MKT notice that it was not in compliance with continued-listing standards because stockholders' equity was below $6.0 million and it had incurred net losses from continuing operations in the five most recent fiscal years. The NYSE MKT accepted the Trust's equity enhancement plan and granted a plan period through January 19, 2018. Failure to regain compliance could result in delisting.
Key risks include refinancing and maturity risk, dependence on hotel operating cash flow and asset sales, competition, seasonality, interest-rate changes, labor and operating-cost inflation, potential loss of brand or membership arrangements, cybersecurity incidents, economic downturns and the ability to renew credit facilities. A bank line of credit was scheduled to mature on June 23, 2017, and renewal was uncertain.
Important Facts for Investors to Verify
- Confirm the final accounting impact, debt repayment and distribution of proceeds from the June 2, 2017 Ontario sale.
- Monitor compliance with the NYSE MKT equity enhancement plan through January 19, 2018.
- Assess near-term debt maturities, refinancing progress and renewal of the bank line of credit.
- Evaluate whether IBC Developments can convert higher revenue and increased investment into profitability.
- Review related-party financing, affiliate transactions, ownership interests and post-quarter-end share issuances.
- Distinguish consolidated net income from the recurring loss attributable to controlling interests and consider the limitations of Adjusted EBITDA and FFO.