InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
InnSuites Hospitality Trust owns interests in five hotels totaling 843 suites in Arizona, southern California and New Mexico and provides hotel management, trademark, reservation and related services. The filing covers the three and six months ended July 31, 2014, representing the second quarter and first six months of fiscal 2015. The financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2014 | Six Months Ended July 31, 2014 |
|---|---|---|
| Revenue | $3.330 million | $8.056 million |
| Operating income (loss) | ($621,897) | ($124,288) |
| Consolidated net income (loss) | ($875,233) | ($591,196) |
| Net income (loss) attributable to controlling interests | ($846,450) | ($784,581) |
| Net loss per share | ($0.10) | ($0.09) |
| Adjusted EBITDA | ($173,986) | $767,664 |
| FFO | ($427,322) | $300,756 |
| Net cash provided by operating activities | Not separately provided | $442,841 |
Six-month operating margin was approximately negative 1.5%, compared with positive 5.7% in the prior-year period. Six-month net margin was approximately negative 7.3%, compared with positive 0.9%. Second-quarter operating and net margins were approximately negative 18.7% and negative 26.3%, respectively.
- Six-month occupancy was 68.80%, down from 71.00%; ADR increased to $68.87 from $68.57, while REVPAR declined to $47.38 from $48.68.
- At July 31, 2014, cash and cash equivalents were $393,926 and restricted cash was $26,149.
- Total assets were $24.871 million, total liabilities were $21.431 million and total equity was $3.440 million.
- Hotel properties, net, totaled $23.579 million.
- Mortgage notes payable totaled approximately $16.935 million. The balance sheet also included $1.174 million of current notes payable to banks, $1.316 million drawn under a related-party line of credit and $163,959 of advances to affiliates.
Material Changes Versus the Prior Comparable Period
- Six-month revenue declined $166,809, or 2.0%, primarily because of lower occupancy and weakness in the Yuma, Arizona market.
- Six-month operating expenses increased $425,309, or 5.5%, producing a $592,118 deterioration in operating results from income to loss.
- General and administrative expense increased because of additional receivable write-offs, settlement of an Americans with Disabilities Act claim, higher credit-card processing costs and increased Best Western administration expenditures.
- Capital expenditures increased to $791,969 from $250,046, largely reflecting property improvements and refurbishment.
- Operating cash flow declined to $442,841 from $885,553.
- Financing activities provided $258,963, compared with $793,661 of cash used in the prior-year period, supported by related-party borrowings and $1.531 million of proceeds from sales of non-controlling ownership interests.
- The Albuquerque mortgage, with an outstanding balance of approximately $1.099 million, was paid off in June 2014.
- The Trust repurchased 44,488 shares during the six months at an average price of $2.06 per share and issued 23,100 restricted shares for trustee compensation.
Liquidity, Debt and Cash Flow
Management stated that available cash, the renewed $600,000 bank line, the $1.4 million related-party revolving facility, anticipated refinancing or extension of mortgage debt and property-level business loans should provide sufficient liquidity for at least the next year. This assessment depends on continued hotel cash flow, refinancing availability and access to additional funding.
- The bank line was renewed through June 23, 2015; $315,000 was drawn at July 31, 2014 and $575,000 was outstanding as of September 2, 2014.
- The related-party facility bears interest at 7.0%, had a $1.316 million balance at July 31, 2014 and a $917,943 balance as of September 2, 2014.
- Management expected to refinance or extend a Tucson mortgage maturing in January 2015.
- Remaining fiscal 2015 mortgage and debt payments were estimated at approximately $6.271 million, with approximately $1.750 million due in fiscal 2016.
- Future minimum ground-lease and office-lease payments totaled $10.140 million, including $8.872 million thereafter.
Outlook, Commentary and Risks
Management anticipated moderate improvement in economic conditions, higher Yuma revenue from international medical contracts and improved occupancy and ADR over the coming year. It expected limited significant property improvements during the third and fourth quarters and continued to pursue expansion of IBC Hotels, a reservation and services network of approximately 6,300 properties.
There was no formal quantified earnings or revenue guidance. Management was evaluating cost reductions, additional non-controlling interest sales, refinancing, property sales and other strategic funding alternatives. These transactions may not be available or may occur on unfavorable terms.
- The Trust remained below NYSE MKT continued-listing equity standards and had received a June 2014 deficiency notice. It submitted a compliance plan in July 2014; failure to regain compliance by June 27, 2015 could result in delisting.
- Liquidity is exposed to hotel occupancy, room rates, seasonal demand, competition, economic conditions and the ability to refinance or extend debt.
- Management disclosed material related-party relationships, including facilities with Rare Earth Financial LLC, ownership interests held by the CEO and proposed transactions involving affiliates.
- The planned acquisition of 51% of Fort Worth/Dallas Suite Hospitality Partnership was approved by shareholders but was not completed; the related Hotel Trinity acquisition was deferred pending further Board review.
- Subsequent to quarter-end, Ontario obtained a $477,000 credit-card advance and refinanced its mortgage with a $5.7 million, 10-year term loan at 4.75% fixed for the first five years, subject to stated terms.
- Seasonality, potential labor shortages, adverse weather, cybersecurity events, legal claims, franchise relationships and required property renovations could affect results and liquidity.
Important Facts for Investors to Verify
- Whether the NYSE MKT accepts the compliance plan and whether the Trust regains the required equity and profitability standards.
- The timing and terms of the Tucson mortgage refinancing or extension and the company’s ability to meet near-term debt maturities.
- Actual cash generation relative to scheduled debt service, capital expenditures and distributions.
- Whether Yuma government-related demand is replaced by international medical contracts and whether occupancy and REVPAR recover.
- The terms, balances and governance implications of related-party financing and hotel ownership transactions.
- Whether additional property-interest sales or asset sales are required to fund operations and whether those transactions generate value consistent with management’s expectations.