InnSuites Hospitality Trust — 2019 Q1 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended April 30, 2019. InnSuites owned interests in two moderate-service hotels totaling 267 suites in Tucson, Arizona, and Albuquerque, New Mexico, and provided management and trademark services to those properties and one affiliated hotel. The Yuma hotel was sold in October 2018 and IBC Hotels LLC was sold in August 2018; prior-period results include discontinued operations from those businesses.
The company is a smaller reporting company and stated that it had not filed all required reports during the preceding 12 months. The filing was signed July 24, 2019. The company also disclosed that NYSE American issued a May 17, 2019 noncompliance notice because the fiscal 2019 Form 10-K was filed late; the Form 10-K was subsequently filed June 19, 2019.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue from continuing operations | $2.093 million | $1.864 million | +12.3% |
| Operating income (loss) | $(149,742) | $109,578 | $(259,320) |
| Net income (loss) from continuing operations | $(269,830) | $19,267 | $(289,097) |
| Net loss attributable to controlling interests | $(328,854) | $(652,015) | Improved $323,161 |
| Net loss per share, basic | $(0.03) | $(0.03) | — |
| Net cash provided by operating activities | $531,879 | $161,568 | +$370,311 |
| Adjusted EBITDA | $94,827 | $(100,596) | Improved $195,423 |
Room revenue increased to $1.995 million from $1.771 million. Occupancy rose to 94.91% from 74.81%, ADR increased to $80.98 from $80.07, and REVPAR increased to $76.86 from $60.07. On a continuing-operations basis, the approximate operating margin was negative 7.2% versus positive 5.9% in the prior period, and the net loss margin was approximately negative 12.9% versus positive 1.0%.
Operating expenses increased 27.9% to $2.243 million. General and administrative expense rose approximately $343,000 to $838,000, primarily due to corporate staffing and property-sale efforts. Depreciation increased to $242,000, while room, hospitality, and property-tax, insurance and ground-rent costs also increased with higher occupancy and hotel activity. Interest expense increased 30.8% to $122,902.
At April 30, 2019, cash and cash equivalents were $760,262 and short-term investments were $1.907 million. Total assets were $19.617 million, including $9.455 million of net property, plant and equipment and $2.521 million of long-term note receivable. Total liabilities were $11.328 million and total equity was $8.289 million. The company recorded $2.791 million of right-of-use assets and $2.856 million of operating lease liabilities following adoption of the new lease standard.
Net cash used in investing activities was $144,526, principally for $134,066 of hotel improvements. Net cash used in financing activities was $376,165, including debt repayments, distributions to non-controlling interest holders, and $58,096 of treasury-stock repurchases. Cash increased by approximately $11,000 to $760,263.
Material changes versus the prior comparable period
- Revenue increased 12.3%, driven primarily by substantially higher occupancy and room revenue.
- Despite stronger hotel operating statistics, operating income shifted from a $110,000 profit to a $150,000 loss because expenses grew faster than revenue, particularly general and administrative costs.
- Continuing-operations net income shifted from a $19,000 profit to a $270,000 loss. Total net loss improved because Q1 2018 included a $309,228 loss from discontinued operations.
- Operating cash flow increased substantially, aided by a $520,069 increase in accounts payable and accrued expenses.
- Investing cash use declined sharply from $2.014 million to $145,000, largely because Q1 2018 included a $2.0 million purchase of marketable securities.
- The company adopted ASC Topic 842 on February 1, 2019, adding approximately $2.821 million of assets and $2.914 million of liabilities, with no material effect on reported operations or cash flows.
- The company repurchased 32,732 shares at an average price of $1.77 and had authorization remaining for 411,776 shares or partnership units at April 30, 2019.
Guidance, outlook, risks and unusual items
Management expected a strong economy during fiscal 2020, continued occupancy and ADR growth, lower capital expenditures after completion of Tucson renovations, and comparable or growing management and trademark fee revenue. Management also anticipated pressure from new hotel supply and competition for corporate, leisure, group, and government business.
Liquidity depends on hotel cash flow, distributions from the Tucson partnership, Albuquerque operations, repayment of affiliate loans, financing, and potential hotel sales. Management stated that approximately $2.667 million of cash and short-term investments, available credit facilities, and affiliate borrowing capacity should cover obligations for at least the next twelve months. However, management warned that refinancing, raising capital, or selling properties may not be possible on favorable terms or at all.
Scheduled debt payments totaled approximately $6.634 million, including $1.531 million due during the remainder of fiscal 2020 and $458,000 during fiscal 2021. Mortgage debt totaled approximately $4.794 million, related-party notes approximately $405,000, and other notes approximately $1.435 million. The company also had approximately $2.856 million of operating lease liabilities.
The Tucson hotel was listed for sale at $15.8 million effective May 31, 2019. The Albuquerque listing at $7.5 million expired April 30, 2019, but management continued to consider offers. Management planned to sell both remaining hotels within two years and was exploring a merger with a larger private company.
The Board approved a one-cent semiannual dividend payable July 31, 2019, continuing the company's practice of two cents per share annually. Subsequent events also included repayment of a $425,000 Hayes Trust note, proposed verbal extensions of certain notes totaling $570,000, and repurchase of 15,503 additional shares for approximately $25,000.
Material risks include hotel seasonality, competition and new supply, labor and operating-cost inflation, interest-rate and refinancing risk, dependence on Best Western relationships, adverse economic or travel conditions, natural disasters, cybersecurity incidents, and the inability to sell properties at targeted prices. The company disclosed approximately $200,000 accrued for potential interest and penalties related to IRS and state tax notices.
Management disclosed material weaknesses in internal control over financial reporting, including inadequate entity-level and system controls, insufficient segregation of duties, insufficient accounting expertise, and inadequate information-technology access controls. The recently hired CFO departed in December 2018 and was not replaced. Remediation efforts were expected to continue throughout fiscal 2020.
Important facts for investors to verify
- Whether the NYSE American filing delinquency notice has been fully resolved and whether any further listing conditions apply.
- The status, documentation, and maturity terms of the proposed extensions for the $200,000 individual note, $270,000 Hayden loans, and $100,000 Sweitzer loans.
- Whether Tucson and Albuquerque can be sold near the stated asking prices of $15.8 million and $7.5 million, respectively.
- The sustainability of the 94.91% occupancy rate and related REVPAR improvement after seasonal effects and potential new hotel supply.
- Whether operating cash flow remains positive after the favorable working-capital benefit from increased accrued liabilities.
- Progress in remediating the disclosed material weaknesses and replacing or supplementing accounting and financial-reporting personnel.
- The collectability and repayment timing of the $986,361 affiliate advance and $632,027 related-party note receivable.
- The filing's adjusted EBITDA reconciliation, which reports $94,827 for 2019; investors should reconcile the underlying net-loss figures and definitions to the consolidated financial statements.