InnSuites Hospitality Trust — Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2019. The filing is an annual report, although the request references 2018 Q4. The company operates and manages hotel properties and provides trademark and licensing services. At year-end, it owned interests in two hotels with 267 suites in Tucson, Arizona, and Albuquerque, New Mexico, and managed one additional hotel in Tempe, Arizona. It is taxed as a C-corporation rather than as a federal REIT.
Financial performance and position
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Continuing-operations revenue | $6.169 million | $5.566 million | Up 11% |
| Operating loss | $(1.305) million | $(1.594) million | Improved $289,000 |
| Interest expense | $381,000 | $333,000 | Up 15% |
| Net loss from continuing operations | $(1.986) million | $(2.163) million | Improved $177,000 |
| Consolidated net income | $11.106 million | $6.808 million | Up $4.298 million |
| Net income attributable to controlling interests | $1.420 million | $1.398 million | Up $22,000 |
| Net cash used in operating activities | $(1.799) million | $(1.551) million | Use increased $248,000 |
| Net cash provided by investing activities | $8.372 million | $4.475 million | Up $3.897 million |
| Net cash used in financing activities | $(10.399) million | $1.284 million provided | Significant decrease |
Hotel operating indicators: Occupancy increased to 80.65% from 74.81%; ADR decreased to $76.98 from $80.07; and REVPAR increased to $62.37 from $60.07. Continuing-operations room revenue rose 12.2% to $5.862 million. Food and beverage revenue increased to $50,000, while management and trademark fees declined 14% to $172,000, primarily because of the Yuma sale.
Margins: Continuing-operations operating margin was approximately negative 21.2% in FY2019 versus negative 28.6% in FY2018. Continuing-operations net margin was approximately negative 32.2% versus negative 38.8%. Reported consolidated profitability was substantially driven by gains on discontinued operations and asset sales rather than recurring hotel operations.
Liquidity and debt: Cash and short-term investments totaled approximately $2.646 million at January 31, 2019. Total current assets were $5.146 million versus total current liabilities of $3.310 million. Debt included approximately $4.825 million of mortgage notes, $484,000 of related-party notes, $1.494 million of other notes, and $9,000 of bank notes. Scheduled FY2020 debt payments totaled approximately $1.662 million, including $1.229 million of other notes payable. Management stated that available cash, a $1.0 million related-party revolving facility, and $1.0 million of affiliate credit facilities should cover obligations for at least the following twelve months.
Non-GAAP measures: Adjusted EBITDA was negative $351,000 in FY2019 versus positive $58,000 in FY2018. FFO was negative $1.622 million versus negative $3.919 million. The filing cautions that these measures are not substitutes for GAAP net income or operating cash flow.
Material changes versus the prior period
- The Yuma hotel was sold on October 24, 2018 for approximately $16.05 million, generating an approximately $11.08 million gain after estimated taxes and producing approximately $9.93 million of net proceeds after debt payoff and transaction costs.
- The IBC Hospitality Technologies business was sold effective August 1, 2018 for $3.0 million, consisting of $250,000 in cash and a $2.75 million secured note bearing 3.75% interest. The transaction generated an approximately $2.394 million gain and removed the technology business from continuing operations.
- Discontinued operations and gains on sales contributed $13.091 million of consolidated income in FY2019, compared with $8.970 million in FY2018.
- All available suites at the Tucson and Albuquerque properties were remodeled during FY2019. Capital expenditures declined to approximately $937,000 from $2.779 million.
- The Trust repurchased 433,377 shares for approximately $855,000, compared with 150,973 shares for approximately $300,000 in FY2018. Approximately 444,508 units or shares remained authorized for repurchase at year-end.
- Cash declined to $749,000 from $4.576 million, primarily reflecting distributions to non-controlling interests, share repurchases, debt-related activity, and other financing uses.
Outlook, risks, contingencies, and unusual items
- Management expects a strong economy and anticipates growth in occupancy and ADR during FY2020, but expects additional hotel supply and intense competition to pressure room rates, revenue, and margins.
- The company plans to sell its remaining Albuquerque and Tucson hotel interests over time. Listed asking prices were $7.5 million and $15.8 million, respectively, but management stated that there is no assurance of a sale, timing, or realization of those prices.
- Management is exploring refinancing, additional borrowing, additional non-controlling interest sales, and a potential merger or reverse merger with a larger private company. Financing may not be available on favorable terms or at all.
- Hotel operations are seasonal and exposed to labor shortages, weather, economic downturns, terrorism, cybersecurity incidents, changing traveler preferences, alternative lodging providers, and regulatory costs.
- The company has related-party financing and receivables involving entities affiliated with Chairman and CEO James Wirth. These arrangements, guarantees, management contracts, and priority distributions should be evaluated carefully.
- The company reported that disclosure controls and internal control over financial reporting were not effective at January 31, 2019. Material weaknesses included inadequate entity-level and system controls, insufficient segregation of duties, insufficient accounting expertise, and inadequate information-technology access controls. Remediation efforts were expected to continue through FY2020.
- The filing states that the Trust is not currently subject to material litigation or environmental proceedings, but ordinary-course claims are possible and hotel properties remain subject to environmental, ADA, lease, regulatory, and Best Western compliance risks.
- The company declared a $0.01 semiannual dividend payable July 31, 2019 and indicated an intention to continue approximately $0.02 of annual dividends, subject to available cash and hotel operations.
Most important facts for investors to verify
- Whether continuing hotel operations can reach positive operating cash flow and reduce the recurring net loss.
- The collectability and repayment schedule of the $2.75 million IBC secured note and other related-party receivables.
- Near-term debt maturities, demand loans, related-party facilities, and the company’s ability to refinance or meet FY2020 obligations.
- The actual market value, sale timing, ownership interests, and debt obligations associated with the Tucson and Albuquerque properties.
- The sustainability of occupancy gains despite lower ADR and expected new hotel supply.
- Progress in remediating the disclosed material weaknesses and the effect of accounting personnel turnover.
- The impact of discontinued operations and asset-sale gains on comparisons with recurring earnings.
- All related-party transactions, guarantees, management agreements, ownership percentages, and non-controlling interest distributions.