InnSuites Hospitality Trust: Q1 2012 Form 10-Q Summary
Business Context and Reporting Period
The filing covers the three months ended April 30, 2012, the first quarter of fiscal 2013. InnSuites Hospitality Trust is an Ohio real estate investment trust that owns or holds interests in five InnSuites hotels in Arizona, California and New Mexico. It also provides hotel management, licensing and reservation services to affiliated and third-party hotels.
Effective February 1, 2012, hotel employees became employees of the individual hotels rather than InnSuites Hotels. Consequently, payroll reimbursements and related payroll expenses were eliminated from the Trust’s reported results.
Financial Highlights
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $4.820 million | $4.999 million | Down 3.6% |
| Hotel operating revenue | $4.707 million | $4.342 million | Up 11.7% |
| Operating income | $852,340 | $443,202 | Up 92.3% |
| Operating margin | 17.7% | 8.9% | Improved |
| Consolidated net income | $644,822 | $56,124 | Up $588,698 |
| Net income attributable to controlling interests | $464,214 | $50,106 | Up $414,108 |
| Net margin attributable to controlling interests | 9.6% | 1.0% | Improved |
| Basic and diluted earnings per share | $0.05 | $0.01 | Up $0.04 |
| Adjusted EBITDA | $1.286 million | $892,234 | Up 44.1% |
| Net cash provided by operating activities | $379,035 | $369,483 | Up $9,552 |
Occupancy increased to 74.4% from 67.9%. Average daily rate declined 3.3% to $75.86, while RevPAR increased 6.0% to $56.46.
Cash and cash equivalents were $836,908 at April 30, 2012, compared with $983,424 at January 31, 2012. Restricted cash was $72,579. Total assets were $27.378 million and total equity was $4.694 million.
Total liabilities were $22.684 million, including $20.224 million of mortgage notes payable, $511,192 of other notes payable and $22,519 of bank notes payable. Current liabilities were $3.204 million, including $1.039 million of current mortgage maturities.
Investing activities used $209,138, primarily for $273,367 of hotel improvements and additions. Financing activities used $316,413, reflecting $1.193 million of mortgage principal payments, $157,036 of bank-note repayments, $79,571 of treasury-share repurchases and distributions to non-controlling interests, partly offset by $1.081 million from sales of non-controlling subsidiary interests.
Material Changes Versus the Prior Comparable Period
- Total revenue declined because the Trust no longer recorded $590,608 of payroll reimbursement revenue. This was largely offset by higher hotel operating revenue.
- Operating expenses decreased 12.8% to $3.967 million, primarily because the corresponding $590,608 of related payroll expense was also eliminated.
- General and administrative expense decreased 5.3% to $796,372, which management attributed primarily to cost controls.
- Interest expense declined 46.4% to $207,626, primarily due to the Ontario mortgage restructuring and lower debt costs.
- The Ontario, California mortgage was modified in February 2012. The lender reduced principal by $500,000, waived penalties and accumulated interest in exchange for a $1.0 million principal paydown, reduced the interest rate from 8.28% to 5.0%, reduced monthly principal and interest payments from $71,100 to $31,700, and extended maturity to January 14, 2015.
- The Trust sold non-controlling interests in subsidiaries and received approximately $1.2 million during the quarter, increasing liquidity but reducing ownership interests in certain hotel properties.
- The Trust repurchased 32,933 shares at an average price of $2.42 per share and had authorization remaining to repurchase 81,018 additional units or shares.
Guidance, Outlook, Risks and Unusual Items
Management expects improving economic conditions to support hotel business levels during the remainder of the fiscal year, but provides no assurance that occupancy, room rates or RevPAR trends will continue. Hotel operations are seasonal, and the second quarter is historically the weakest period for the three southern Arizona hotels.
Management projected that operating cash flow alone might not be sufficient to meet all obligations for the remainder of fiscal 2013. It expected liquidity to be adequate based on cash balances, operating cash flow, proceeds from sales of non-controlling interests and available credit. Principal due under mortgage notes was stated as $565,000 for the remainder of fiscal 2013 and approximately $1.0 million for the period from May 1, 2012 through April 30, 2013.
The revolving bank line had a $500,000 limit, was secured by the Yuma property and trade receivables, and was guaranteed by James F. Wirth. No amounts were drawn at April 30, 2012. The line’s May 23, 2012 maturity was extended for 30 days while a longer-term extension was negotiated; the filing states that finalization was expected by June 23, 2012.
Other considerations include cumulative priority distribution obligations at certain subsidiaries, long-term ground and office lease commitments totaling $6.187 million, hotel-seasonality risk, dependence on occupancy and room rates, refinancing and debt-service risk, access to credit, competition, economic conditions and potential litigation. Management did not expect pending claims to have a material adverse effect.
Management reported that disclosure controls were effective as of April 30, 2012. However, a material weakness in information-technology controls existed as of January 31, 2012, involving program development and change management, monitoring, data transmission testing, restoration testing and incident management. A remediation plan was in progress.
Important Facts for Investors to Verify
- Whether the bank-line extension and subsequent one-year credit arrangement were finalized on the expected terms.
- Whether operating cash flow and proceeds from additional subsidiary-interest sales were sufficient to meet fiscal 2013 debt maturities and other obligations.
- The sustainability of the improved occupancy and RevPAR performance despite lower ADR and seasonal weakness.
- The effect of the Ontario debt restructuring on future interest expense, principal payments and property-level cash flow.
- The amount and timing of cumulative priority distributions owed by the Albuquerque, Tucson and Ontario subsidiaries.
- Progress in remediating the identified information-technology internal-control material weakness.
- The impact of reduced ownership interests on future distributions and earnings attributable to InnSuites shareholders.