InnSuites Hospitality Trust — Q1 FY2016 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended April 30, 2015, with comparable results for the three months ended April 30, 2014. InnSuites owned interests in five hotels totaling 843 suites in Arizona, southern California and New Mexico, and operated the IBC Developments business serving approximately 6,300 independent hotels. The Trust owned 72.11% of RRF Limited Partnership and consolidated its subsidiaries.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $5.04 million | $4.73 million | 6.6% increase |
| Operating income | $714,051 | $497,610 | 43.5% increase |
| Operating margin | 14.2% | 10.5% | Improved |
| Consolidated net income | $407,155 | $284,037 | 43.3% increase |
| Net income attributable to controlling interests | $206,532 | $60,675 | Increase |
| Net margin | 8.1% | 6.0% | Improved |
| Basic and diluted earnings per share | $0.02 | $0.01 | Increase |
| Adjusted EBITDA | $1.17 million | $941,651 | 24.3% increase |
| FFO | $863,424 | $728,078 | 18.6% increase |
| Cash flow from operations | $692,302 | $866,645 | 20.1% decrease |
Room revenue increased to $4.38 million from $4.19 million, food and beverage revenue increased to $413,127 from $393,673, and IBC Developments revenue increased to $114,197 from $9,676. Hotel occupancy declined to 73.18% from 74.04%, while ADR increased to $79.70 from $75.43 and RevPAR increased to $58.32 from $55.85.
At April 30, 2015, cash and cash equivalents were $326,459, down from $507,686 at January 31, 2015. Total assets were $26.68 million, total liabilities were $22.95 million, and total equity was $3.73 million. Hotel properties, net, totaled $25.76 million.
Mortgage notes payable totaled approximately $18.95 million, including $5.28 million classified as current. Other current debt included approximately $400,821 of notes payable to banks, $858,494 payable under a related-party line of credit, and $475,857 of other notes payable. The filing separately discusses approximately $19.02 million of mortgage debt and other short-term and related-party obligations.
Investing activities used $477,727, primarily for $478,963 of hotel improvements and additions. Financing activities used $395,801, including $1.79 million of bank-note repayments, $175,107 of mortgage principal repayments, $237,944 of distributions to non-controlling interest holders and $38,498 of treasury-stock repurchases. Proceeds from sales of non-controlling interests were $621,254.
Material Changes Versus the Prior Comparable Period
- Revenue growth and relatively contained operating-expense growth increased operating income by $216,441.
- Interest expense increased 43.3% to $265,330, primarily because of mortgage-note restructuring, increased American Express merchant financing and greater use of related-party credit facilities.
- Operating expenses increased only 2.2% overall, although room expense increased 10.4% and food and beverage expense increased 13.5%. General and administrative expense declined, while sales and marketing expense increased.
- Operating results benefited from improved room pricing despite slightly lower occupancy. Management cited improving economic and travel conditions, particularly in the Yuma and Ontario markets.
- IBC Developments became profitable, reporting $114,197 of revenue and $14,043 of operating income versus $9,676 of revenue and a $17,405 operating loss in the prior period.
- Operating cash flow declined despite higher net income, largely because of working-capital changes, including a reduction in accounts payable and accrued expenses.
- The Trust repurchased 14,410 shares for approximately $38,498 and issued 21,000 restricted shares for trustee compensation. It also granted 1,434,500 stock options subject to shareholder approval.
Guidance, Outlook, Risks and Unusual Items
- Management expects moderate economic improvement, higher revenues and operating margins, improved occupancy and ADR, and capital expenditures broadly similar to the prior year.
- Management expects IBC Developments to expand significantly over the next several fiscal years, but provides no assurance that the strategy will succeed.
- Management expects management and trademark fee revenue to decrease because a hotel owned by the CEO was sold; these fees are concentrated among three related-party hotels.
- The $600,000 bank line of credit matured June 23, 2015. The Trust had drawn $99,902 at April 30, 2015, but the filing reports an outstanding balance of approximately $528,000 as of June 1, 2015. Management expected renewal for at least one year.
- A mortgage obligation due July 28, 2015 was extended to that date after the quarter-end, and management expected to refinance or extend it. Minimum debt payments were approximately $7.05 million in fiscal 2016, including approximately $5.29 million of mortgage debt.
- Management believed available cash, the expected bank-line renewal, the related-party facility and expected mortgage refinancing would be sufficient for at least the next year. The filing cautions that refinancing, extensions and additional equity sales may not be available on favorable terms and that asset sales could be required.
- The Trust remained subject to an NYSE MKT compliance plan through December 29, 2015 relating to equity and historical losses. Failure to regain compliance could result in delisting.
- Operations are exposed to seasonality, competition, occupancy and room-rate changes, interest rates, refinancing risk, labor and operating-cost inflation, adverse weather, cybersecurity events, disasters and broader hospitality conditions.
- Non-cancelable ground and office lease commitments totaled approximately $6.42 million, including $5.70 million payable thereafter. Ordinary-course claims and litigation were not expected to have a material adverse effect.
Important Facts for Investors to Verify
- Confirm the status and terms of the bank-line renewal and the refinancing or extension of the mortgage obligation due July 28, 2015.
- Reconcile the reported debt balances, including the difference between the April 30 bank-line balance and the higher June 1 reported draw.
- Assess near-term maturities and whether operating cash flow can cover debt service, capital expenditures and distributions to non-controlling holders.
- Evaluate the concentration of management and trademark fees in related-party hotels and the effect of the reported hotel sale.
- Review the NYSE MKT compliance plan, equity levels and delisting risk.
- Assess dilution and governance implications of the 1,434,500 options, restricted-share awards and potentially convertible partnership units.
- Review related-party credit facilities, ownership interests, priority distributions and transactions involving the CEO and affiliates.
- Consider the sustainability of reported earnings and non-GAAP measures given higher interest expense, substantial leverage and declining operating cash flow.