InnSuites Hospitality Trust — Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended July 31, 2017, the second quarter of fiscal 2018. InnSuites owned interests in three limited-service hotels totaling 424 suites in Arizona and New Mexico and operated the IBC Developments hospitality-services platform serving approximately 6,300 hotels. The Trust owned 74.23% of RRF Limited Partnership at July 31, 2017.
Financial performance and key metrics
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Continuing-operations revenue | $2.405 million, up 18.6% | $5.459 million, up 16.0% |
| Operating loss | $(0.792) million | $(0.705) million |
| Net loss from continuing operations | $(1.198) million | $(1.311) million |
| Net income attributable to controlling interests | $9.628 million | $9.421 million |
| Total basic earnings per share | $0.96 | $0.97 |
| Adjusted EBITDA | $(1.095) million | $(0.813) million |
| FFO | $(1.373) million | $(1.556) million |
Total net income was driven primarily by an $11.446 million gain on the sale of the Ontario hotel. Discontinued operations produced net income of $10.697 million for the quarter and $10.869 million for the six months, compared with $0.195 million and $0.360 million, respectively, in the prior-year periods. Continuing operations remained loss-making and did not generate positive operating cash flow.
Hotel operating indicators improved for the six months: occupancy increased to 77.38% from 73.11%, ADR increased to $79.17 from $72.96, and REVPAR increased to $61.63 from $53.53. IBC Developments revenue increased 38.1% to $547,879 for the six months but generated a $660,209 operating loss.
Cash flow, balance sheet, debt and liquidity
- Cash and cash equivalents were $7.477 million at July 31, 2017, plus $0.374 million of restricted cash. Total assets were $26.122 million and total equity was $10.292 million, including $9.124 million of Trust shareholders’ equity.
- Six-month operating cash flow was negative $0.880 million, compared with negative $0.746 million in the prior-year period. Capital expenditures were $1.557 million.
- Investing cash flow was positive $6.884 million, including $9.604 million received from the Ontario sale, offset partly by $1.557 million of hotel improvements and $1.729 million of advances to affiliates.
- Financing cash flow was positive $1.396 million. The Trust borrowed $5.0 million under a new Tucson mortgage facility, made significant debt repayments, distributed $5.291 million to non-controlling holders, and repurchased $0.246 million of treasury shares.
- Debt included approximately $9.869 million of mortgage notes, $1.208 million of notes payable to banks, approximately $1.036 million of secured notes related to share and partnership-unit repurchases, and other short-term and unsecured borrowings. Minimum debt payments were approximately $1.470 million in fiscal 2018 and $0.738 million in fiscal 2019.
- Management stated that available cash, related-party facilities totaling up to $1.0 million, affiliate advance facilities totaling up to $1.0 million, and a new $150,000 RepublicBank revolving line should cover obligations for at least the next year. Management also acknowledged that refinancing, additional equity or non-controlling-interest sales may not be available on favorable terms.
Material changes versus the prior comparable period
- Revenue increased, led by higher room revenue and IBC Developments growth, but operating losses widened because expenses increased faster than revenue.
- Depreciation increased materially because hotel properties were reclassified from assets held for sale into continuing operations; depreciation was previously suspended.
- Interest expense increased 34.9% for the six months, and a $330,000 income-tax provision was recorded, primarily due to the Ontario sale and ownership-interest transactions.
- Ontario Hospitality Properties was sold on June 2, 2017 for approximately $17.5 million. Approximately $7.2 million repaid the related mortgage, $2.4 million reduced accruals and payables, and the remaining proceeds were retained for operations and capital improvements.
- Trust shareholders’ equity increased from $4.431 million at January 31, 2017 to $9.124 million at July 31, 2017, helping address the NYSE American deficiency involving equity below $6.0 million.
- The Trust repurchased 120,807 shares during the six months at an average price of $2.04 and separately purchased 88,000 shares and 433,900 convertible partnership units from individuals, including related parties, at $2.00 per unit or share.
Guidance, outlook, risks and unusual items
Management expects occupancy and ADR to remain steady or improve modestly during the remainder of fiscal 2018 and expects IBC Developments to grow through expanded sales, marketing, booking technology and loyalty-program efforts. Management also expects management and trademark-fee revenue to decline because an affiliate sold hotel properties.
The primary risks include continuing operating losses, negative operating cash flow, debt-service and refinancing requirements, reliance on hotel cash flows and related-party facilities, competition, seasonal demand, labor and operating-cost inflation, interest-rate changes, potential difficulty selling or refinancing properties, NYSE American listing compliance, and the uncertain success of the IBC expansion strategy. The Trust continues to market the remaining hotels, but cannot predict whether or when additional sales will occur.
The filing reports no material litigation, no defaults, and no material changes in internal control over financial reporting. A non-cancelable Albuquerque ground lease extends to 2058, with total future minimum payments of approximately $6.105 million. The filing also notes that the Trust is not a REIT for federal tax purposes.
Data note: The cash-flow statement reports $6.884 million of investing cash flow for the six months, while the MD&A narrative states approximately $14.799 million. The financial statements and supporting transaction detail indicate that $6.884 million is the clearly stated reported amount; this inconsistency should be verified against the filed XBRL and subsequent reports.
Important facts for investors to verify
- Whether the Ontario sale gain is fully non-recurring and whether continuing operations can reach break-even without property-sale proceeds.
- The complete maturity schedule, interest rates, collateral and guarantees for mortgage, bank, related-party and repurchase-related debt.
- The availability and actual draw status of related-party and affiliate credit facilities, including subsequent balances reported as of September 7, 2017.
- Progress toward satisfying NYSE American continued-listing requirements, including the requirement for sustained shareholders’ equity above $6.0 million.
- The economic substance, governance and cash-flow implications of related-party purchases, advances, management fees and non-controlling-interest transactions.
- The reconciliation of the conflicting investing-cash-flow amounts and the effect of discontinued operations on year-over-year comparability.