Business Context and Reporting Period
InnSuites Hospitality Trust filed this unaudited Form 10-Q for the quarter and nine months ended October 31, 2014, representing fiscal 2015 periods. The Trust owned interests in five hotels totaling 843 suites in Arizona, California and New Mexico, and operated the InnSuites hotel brand and related management, trademark and reservation services.
Key Financial Metrics
| Metric | Three months ended October 31 | Nine months ended October 31 |
|---|---|---|
| Total revenue | $3.18 million, up 4.6% | $11.24 million, down 0.2% |
| Operating loss | $0.51 million | $0.64 million |
| Consolidated net loss | $0.67 million | $1.26 million |
| Loss attributable to controlling interests | $0.60 million, or $0.07 per share | $1.38 million, or $0.16 per share |
| Adjusted EBITDA | $(0.07) million | $0.70 million |
| FFO | $(0.23) million | $0.07 million |
| Net cash from operating activities | Not separately provided | $0.45 million |
For the nine-month period, operating margin was approximately negative 5.7% and net margin was approximately negative 11.2%. For the quarter, operating margin was approximately negative 16.1% and net margin was approximately negative 21.1%.
- Occupancy declined to 65.10% from 66.61%; ADR increased to $67.46 from $66.44, while REVPAR declined to $43.92 from $44.26.
- Cash and cash equivalents were $445,791 at October 31, 2014, compared with $395,903 at January 31, 2014. Restricted cash was $5,589.
- Total assets were $24.67 million and total liabilities were $22.13 million. Total equity was $2.54 million, including $713,819 attributable to Trust shareholders and $1.83 million of non-controlling interest.
- Hotel properties, net, were $23.43 million. Mortgage notes payable totaled approximately $16.58 million, excluding other borrowings.
- At October 31, the Trust had approximately $345,000 drawn on its bank line, $1.40 million outstanding under a related-party revolving line, approximately $1.7 million of property business loans and approximately $145,000 of secured promissory notes to unrelated parties.
Cash Flow, Debt and Liquidity
- Operating cash flow declined to $454,818 from $1.16 million in the prior-year nine-month period.
- Investing activities used $1.04 million, including $1.08 million of hotel improvements and additions and net related-party advances.
- Financing activities provided $633,761, primarily from new mortgage and bank borrowings, related-party borrowings and $1.58 million from sales of non-controlling interests, partly offset by debt repayments and distributions.
- Capital expenditures increased to $1.08 million from $407,254. Management stated that no further significant property improvements were expected during the fourth quarter.
- The $600,000 bank line matures June 23, 2015 and had $345,000 drawn at quarter-end, increasing to $505,000 as of December 1, 2014. The related-party line was increased to a $2.0 million maximum and had a $1.55 million balance as of December 1, 2014.
- Management expected approximately $5.1 million of minimum debt and mortgage payments during the remainder of fiscal 2015 and approximately $857,000 during fiscal 2016. Management expected to refinance or extend a Tucson note before its January 2015 maturity.
Material Changes Versus Prior Comparable Period
- Nine-month revenue was essentially flat, but operating expenses increased 5.0%, producing an operating loss of $635,363 versus $42,679 in the prior year.
- Nine-month consolidated net loss increased to $1.26 million from $646,718, and loss attributable to controlling interests increased to $1.38 million from $846,455.
- Quarterly revenue increased $139,752, largely from higher room revenue in Ontario and Tucson St. Mary’s and higher management and trademark fees. Higher sales and marketing costs and property taxes, insurance and ground rent offset the revenue increase.
- Interest expense declined 8.3% for the nine months and 21.9% for the quarter following the Albuquerque mortgage payoff and Ontario refinancing.
- Management cited approximately $84,000 of additional room deep-cleaning costs, higher general and administrative expenses, additional accounts receivable write-offs, an Americans with Disabilities Act claim settlement, higher credit-card processing fees and increased Best Western administration expenses.
- The Trust sold additional non-controlling interests in Albuquerque, Tucson and Ontario and began a Yuma offering. These transactions increased non-controlling interest and generated financing proceeds, but also created priority distribution rights for certain outside investors.
Outlook, Commentary, Risks and Unusual Items
- Management anticipated moderate economic improvement, higher revenues and improved operating margins, and expected Yuma revenue to improve in the fourth quarter from international medical contracts. These expectations are forward-looking and not assured.
- The Trust is pursuing a longer-term shift from hotel ownership toward management, licensing, reservation and advertising services through IBC Hotels, which had approximately 6,500 properties in its network. IBC revenues and expenses were not significant in the reported periods.
- Liquidity depends on hotel operating cash flow, debt refinancing, continued credit availability and sales of non-controlling interests. Management also considered additional refinancing, further ownership-interest sales or property sales, but warned that financing or asset sales may be unavailable or completed on unfavorable terms.
- The Trust was not in compliance with multiple NYSE MKT equity and loss-based continued-listing standards. The NYSE MKT accepted the Trust’s compliance plan and extended the deadline to December 29, 2015; failure to regain compliance could result in delisting.
- Hotel operations are seasonal and exposed to occupancy, room-rate, labor, weather, economic, competition, cybersecurity, franchise and travel-industry risks. Yuma experienced weaker government-related business.
- On November 24, 2014, a subsidiary acquired Tucson land for $2.5 million and closed a $3.5 million commercial real estate loan bearing 4.19% fixed interest for five years before annual adjustment.
- The Trust had approximately $10.08 million of future minimum ground-lease and office-lease payments, including $8.87 million thereafter.
- The filing states that ordinary-course legal matters are insured and are not expected to have a material adverse effect, but the ultimate outcomes cannot be determined.
Investor Verification Priorities
- Verify the company’s ability to refinance or extend the Tucson debt maturity and satisfy approximately $5.1 million of near-term debt and mortgage payments.
- Monitor bank-line and related-party borrowing balances, maturity dates, interest rates and related-party transaction terms.
- Assess whether occupancy, REVPAR and Yuma demand improve sufficiently to offset the company’s elevated operating-cost base.
- Review the NYSE MKT compliance plan and the risk of delisting if equity and loss-based requirements are not met by December 29, 2015.
- Evaluate the economic effect of priority distributions and non-controlling ownership sales in the Albuquerque, Tucson, Ontario and Yuma subsidiaries.
- Reconcile reported debt, property-level borrowings, collateral and scheduled maturities against available cash and operating cash flow.
- Review the subsequent Tucson land acquisition and financing, additional unit sales, and any further property refinancing or sale activity.