InnSuites Hospitality Trust — Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2017. The source request references 2016 Q4, but the filing is an annual report covering fiscal 2017 and comparative fiscal 2016 results.
Business Context
InnSuites Hospitality Trust owns interests in and operates four hotels totaling 574 suites in Arizona, California and New Mexico. It also provides hotel management, trademark licensing and reservation services. Its IBC Hotels segment serves approximately 6,300 independent hotel properties, including more than 1,800 exclusive properties.
The Trust is not a real estate investment trust for federal tax purposes. It reports two segments: Hotel Operations and Corporate Overhead, and IBC Developments. Management’s long-term strategy is to monetize hotel real estate, potentially sell one or more hotels, and shift toward hospitality management, reservation, technology and licensing services.
Financial Performance and Metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $13.216 million | $11.617 million | +13.8% |
| Operating expenses | $15.304 million | $12.295 million | +24.5% |
| Operating loss | $(2.089) million | $(0.678) million | Loss increased |
| Net loss from continuing operations | $(2.591) million | $(1.491) million | Loss increased 73.8% |
| Consolidated net loss | $(2.627) million | Net income of $0.339 million | Material deterioration |
| Net loss attributable to controlling interests | $(2.192) million | Net income of $0.432 million | Material deterioration |
| Basic total EPS | $(0.27) | $0.04 | Declined |
| Adjusted EBITDA | $0.405 million | $2.190 million | Down 81.5% |
| FFO | $0.337 million | $1.470 million | Down 77.1% |
Hotel operating indicators improved: occupancy rose to 74.83% from 73.36%, ADR increased to $75.74 from $70.59, and REVPAR increased to $56.73 from $51.79. Room revenue increased 9.8% to approximately $11.952 million. Management and trademark fee revenue increased approximately 34% to $296,000, partly because management fees increased from 3% to 5% of room revenue effective May 1, 2016.
IBC revenue increased to approximately $666,730 from $202,775, but the segment’s operating loss widened to approximately $1.163 million from $286,534 because of expanded sales, marketing, technology, support and onboarding costs.
Cash Flow, Liquidity and Debt
| Metric | FY2017 | FY2016 |
|---|---|---|
| Cash used in operating activities | $(0.871) million | $(0.604) million |
| Cash used in investing activities | $(0.903) million | Cash provided of $0.654 million |
| Cash provided by financing activities | $0.385 million | $1.400 million |
| Capital expenditures | $2.255 million | $2.126 million |
| Cash and cash equivalents at period-end | $0.568 million | $1.956 million |
| Total liabilities | $18.548 million | $16.970 million |
| Total debt, as presented in debt notes | $16.384 million | Not clearly presented on the same basis |
Debt included approximately $13.309 million of mortgage notes, $1.978 million of notes payable to banks, $145,000 of related-party notes, $379,000 of affiliate borrowings and $573,000 of other notes. Mortgage debt carried weighted-average interest rates of 4.65% in fiscal 2017.
Scheduled minimum debt payments were approximately $3.204 million in fiscal 2018 and $818,000 in fiscal 2019. Management stated that cash, available related-party credit facilities and subsequent non-controlling interest sales were expected to cover obligations for at least the next twelve months, but cautioned that refinancing or additional financing might not be available on favorable terms or at all.
Shareholders’ equity declined to $3.625 million from $6.971 million, while Trust shareholders’ equity declined to $4.431 million from $6.484 million. The Trust paid a $0.01-per-share dividend in the fourth quarter and repurchased 30,227 shares at an average price of $2.55 per share.
Material Changes Versus the Prior Period
- Revenue increased, supported by higher hotel occupancy, ADR, REVPAR, room revenue and IBC reservation activity.
- Profitability deteriorated substantially because operating costs rose faster than revenue, IBC investment expanded, and hotel depreciation increased after properties were reclassified from assets held for sale to continuing operations.
- Hotel depreciation increased to approximately $2.094 million from $945,000.
- The Tucson St. Mary’s hotel sale benefited fiscal 2016 through a gain of approximately $2.352 million; no comparable gain occurred in fiscal 2017.
- Cash declined by approximately $1.389 million during fiscal 2017, and operating cash flow remained negative.
- Non-controlling interest sales generated only approximately $55,000 in fiscal 2017 versus $1.826 million in fiscal 2016, and no IHT stock sales occurred in fiscal 2017.
- The Trust reclassified its hotels back into continuing operations as of October 31, 2016 because sales had not occurred within the expected period, although the properties continued to be marketed.
Guidance, Outlook and Risks
Management expected steady economic conditions, stable occupancy and ADR, modest rate improvement, steady food and beverage revenue and lower capital spending in fiscal 2018. It also expected additional hotel supply through fiscal 2018, potentially creating pressure on room rates, occupancy and operating margins.
Management planned significant IBC expansion through additional sales and marketing personnel, technology integrations, partnerships and potential acquisitions. It engaged Viant Capital to explore financial and strategic options for IBC. There is no assurance that IBC growth or a strategic transaction will be successful.
The Trust received a January 2017 NYSE MKT notice stating that it was not in compliance with Section 1003(a)(iii) because shareholders’ equity was below $6 million and the Trust had recent continuing-operation losses. In March 2017, the exchange accepted an equity enhancement plan through January 19, 2018. Failure to regain compliance could result in delisting.
Key risks include refinancing and near-term debt maturities, negative operating cash flow, limited liquidity, competition and new hotel supply, seasonal demand, labor and operating-cost inflation, reliance on Best Western membership and reservation systems, potential hotel sale uncertainty, related-party financing and transactions, regulatory and environmental obligations, cybersecurity and data-breach exposure, and the ability to execute the IBC strategy.
Subsequent to year-end, the Trust sold approximately $1.470 million of Yuma non-controlling partnership interests and entered into an agreement to sell $200,000 of Trust shares at $1.80 per share. The filing states that no shares had been issued under that agreement as of the filing date.
Investor Verification Items
- Verify the Trust’s ability to meet approximately $3.204 million of fiscal 2018 debt payments and refinance or repay short-term and related-party obligations.
- Assess the status and terms of the NYSE MKT equity enhancement plan and the risk of delisting after January 19, 2018.
- Reconcile the stated liquidity resources, including cash, credit facilities and post-year-end Yuma interest sales, with actual available borrowing capacity and restrictions.
- Evaluate whether IBC revenue growth can offset its $1.163 million fiscal 2017 operating loss and whether a strategic transaction is achievable.
- Confirm the timing, probability and expected proceeds of any hotel dispositions, including the listed asking prices, which are not based on appraisals.
- Review related-party loans, guarantees, ownership interests and management arrangements involving James F. Wirth, affiliates and Rare Earth Financial.
- Confirm the sustainability of dividends and capital expenditures given negative operating cash flow and substantial debt service requirements.
- Review the significant increase in depreciation and the accounting implications of reclassifying hotel assets from held for sale to continuing operations.