INNSUITES HOSPITALITY TRUST quarterly report, Q3 FY2017

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InnSuites Hospitality Trust — 2016 Third-Quarter Form 10-Q Summary

Business Context and Reporting Period

InnSuites Hospitality Trust owns interests in four hotels totaling 575 suites in Arizona, California and New Mexico and operates the InnSuites Hotels brand. Its wholly owned IBC Developments segment provides reservation, marketing and related services to approximately 6,500 independent hotels. The filing covers the three and nine months ended October 31, 2016, within fiscal 2017. The financial statements are unaudited.

Financial Performance and Position

  • Nine-month revenue: Continuing-operations revenue was $9.899 million, up 12.4% from $8.810 million. Hotel Operations and Corporate Overhead revenue increased 8.2% to $9.377 million, while IBC Developments revenue increased 265.2% to $522,000.
  • Third-quarter revenue: Continuing-operations revenue was $3.157 million, up 23.2% year over year. Room revenue increased 18.3% to $2.908 million.
  • Profitability: Nine-month operating loss was $1.581 million versus $427,000 in the prior-year period; continuing-operations net loss was $2.117 million versus $1.106 million. Net loss attributable to controlling interests was $1.806 million, or $0.27 per basic share, versus net income of $823,000, or $0.10 per basic share.
  • Third-quarter profitability: Operating loss was $1.684 million versus $287,000. Continuing-operations net loss was $1.881 million, and net loss attributable to controlling interests was $1.239 million, or $0.24 per basic share, compared with prior-year net income attributable to controlling interests of $1.377 million.
  • Margins: Continuing-operations operating margin was approximately negative 16.0% for the nine months versus negative 4.8% in the prior-year period, and negative 53.4% for the third quarter versus negative 11.2%.
  • Non-GAAP measures: Nine-month Adjusted EBITDA was $403,000 versus $2.306 million; FFO attributable to controlling interests was $195,000 versus $1.683 million. Third-quarter Adjusted EBITDA was $469,000 versus $1.691 million, and FFO was $914,000 versus $1.539 million.
  • Cash flow: Net cash used in operating activities was $813,000 versus $400,000 used in the prior-year period. Investing activities used $986,000, including $1.843 million of hotel improvements, compared with $3.397 million provided in the prior year due largely to hotel-sale proceeds. Financing activities provided $338,000 versus $440,000 used.
  • Liquidity: Cash and cash equivalents were $496,000 at October 31, 2016, down from $1.956 million at January 31, 2016. Total assets were $21.957 million and total liabilities were $17.537 million.
  • Debt: Balance-sheet debt, including mortgage notes, bank notes, other notes and the related-party line of credit, totaled approximately $15.6 million. Mortgage notes totaled approximately $13.439 million. Management reported minimum debt payments of approximately $231,000 in the remainder of fiscal 2017 and $1.819 million in fiscal 2018.
  • Operating metrics: Nine-month occupancy improved to 75.35% from 74.06%; ADR increased to $75.38 from $70.68; and REVPAR increased to $56.88 from $52.54.

Material Changes Versus the Prior Comparable Period

  • Revenue growth was driven primarily by the renovated Ontario, California hotel, increased management and trademark fees, and the January 2016 acquisition of International Vacation Hotels.
  • IBC Developments grew substantially but remained loss-making: its nine-month operating loss increased to $786,000 from $231,000, reflecting significant expansion, sales and marketing and administrative investment.
  • Operating expenses increased 24.3% for the nine months, including higher depreciation, room costs, general and administrative expenses and sales and marketing expenses.
  • Depreciation increased to $1.673 million for the nine months from $804,000 and to $1.511 million for the third quarter from $123,000, following the reclassification of hotel properties out of held-for-sale accounting.
  • The prior-year periods included a $2.352 million gain on the disposal of discontinued operations. The absence of that gain materially contributed to the year-over-year decline in net income.
  • Effective May 1, 2016, management and trademark fees charged to hotels affiliated with Chairman and CEO James Wirth increased from 3% to 5% of room revenue. Related-party management and trademark fee revenue increased to approximately $208,000 from $171,000 for the nine months.
  • Shares outstanding increased, with 9,678,746 shares outstanding at October 31, 2016 versus 8,791,500 at January 31, 2016. The Trust repurchased 9,213 shares during the quarter.

Guidance, Outlook, Risks and Unusual Items

  • Management expects Ontario to outperform fiscal 2016, while Tucson and Albuquerque may continue to face market pressure. Management plans additional capital improvements at Tucson and is seeking to replace government business at Yuma.
  • Management expects continued growth in IBC Developments and increased management and trademark fee revenue, but provides no assurance that the expansion strategy will succeed or reduce consolidated losses.
  • The Trust continues to market all hotel properties for sale, but reclassified them back into operations as of October 31, 2016 because sales were no longer considered probable. Listed asking prices totaled $47.550 million; management cautioned that properties may not sell at those prices or at all.
  • Management stated that available cash, related-party credit facilities totaling $2.0 million, and $475,000 of unsecured loans obtained in December 2016 should provide sufficient funds for obligations for at least the next year. However, refinancing, extensions, additional capital raises or non-controlling-interest sales may not be available on favorable terms or at all.
  • Liquidity risks include negative operating cash flow, substantial debt service, capital expenditures, seasonal hotel demand, competition for corporate, leisure, group and government business, and dependence on hotel operating cash flows and related-party financing.
  • Other risks include interest-rate changes, labor and operating-cost inflation, economic downturns, adverse weather, terrorism, cybersecurity incidents, loss of key personnel, franchise or reservation-system issues, and the ability to maintain Best Western relationships.
  • The filing reports no material impairment of long-lived assets, no material off-balance-sheet financing arrangements, and no material adverse effect expected from ordinary-course legal claims.
  • The company terminated and rescinded proposed awards under the 2015 Equity Incentive Plan after determining that shareholder approval would not occur.

Important Facts for Investors to Verify

  • Reconcile the reported liquidity position with near-term debt maturities, merchant-receipt loan repayments and reliance on related-party facilities.
  • Assess whether IBC Developments can convert rapid revenue growth into sustainable operating profits and cash flow.
  • Review the accounting impact and ongoing comparability effects of reclassifying hotel properties from held-for-sale status and restoring depreciation.
  • Evaluate the probability, timing and net proceeds of potential hotel sales relative to the $47.550 million aggregate asking price and approximately $13.439 million of hotel mortgage debt.
  • Monitor Ontario’s improvement and continued weakness or recovery in Tucson, Albuquerque and Yuma, including occupancy, ADR and REVPAR trends.
  • Review related-party transactions, fee increases, affiliate advances, ownership concentration and the $475,000 of subsequent unsecured borrowings.
  • Confirm capital-expenditure requirements, lease commitments of approximately $6.093 million, seasonal cash-flow needs and the company’s ability to fund distributions, if any.