InnSuites Hospitality Trust — Form 10-K Summary
Reporting period: Fiscal year ended January 31, 2018, compared with fiscal year ended January 31, 2017. The requested period is identified as “2017 Q4,” but the filing is an annual report covering the full fiscal year.
Business context
InnSuites owns interests in and operates three hotels totaling 424 suites in Arizona and New Mexico, provides management and trademark services, and operates IBC Hospitality Technologies and International Vacation Hotels Travel. IBC served approximately 2,000 hospitality properties. The Trust is an Ohio real estate investment trust but is not a REIT for federal income-tax purposes.
The Trust owned a 51.01% interest in the Tucson hotel, a 12.79% direct interest in the Yuma hotel, and a 22.83% direct interest in the Albuquerque hotel at January 31, 2018. It sold its Ontario, California hotel on June 2, 2017.
Financial performance and key metrics
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Total revenue | $10.768 million | $9.197 million | +17.1% |
| Operating loss from continuing operations | $(3.115) million | $(2.355) million | Loss increased 32.2% |
| Net loss from continuing operations | $(4.033) million | $(2.587) million | Loss increased 55.9% |
| Consolidated net income | $6.808 million | $(2.627) million | Improved by $9.435 million |
| Net income attributable to controlling interests | $1.398 million | $(2.192) million | Improved by $3.590 million |
| Basic earnings per share | $0.71 | $(0.27) | Improved by $0.98 |
| Adjusted EBITDA | $(1.502) million | $(0.497) million | Declined |
| FFO | $(2.427) million | $(0.295) million | Declined |
The consolidated profit was driven principally by an approximately $11.446 million gain on the Ontario hotel sale. Continuing operations remained unprofitable, and the filing does not provide a meaningful consolidated operating margin because continuing operating expenses exceeded revenue.
- Hotel operating and corporate-overhead revenue increased 9.8% to $9.319 million, while the segment operating loss narrowed to $0.732 million from $1.166 million.
- IBC revenue increased to $1.448 million from $0.709 million, but its operating loss widened to $2.383 million from $1.190 million.
- Room revenue rose 14.2% to approximately $9.281 million. Occupancy increased to 74.81% from 71.62%, ADR increased to $80.07 from $72.68, and RevPAR increased to $60.07 from $52.33.
- IBC recorded $500,000 of goodwill impairment and $433,000 of intangible amortization/impairment-related expense. All reported goodwill and intangible assets were reduced to zero at January 31, 2018.
Cash flow, liquidity, debt and capital allocation
- Net cash used in operating activities was $1.551 million, compared with $0.871 million used in FY 2017.
- Net cash provided by investing activities was $4.475 million, primarily reflecting $9.604 million of cash proceeds from the Ontario sale, offset by $2.779 million of hotel capital expenditures, $1.000 million of marketable securities purchases and $1.956 million of advances to affiliates.
- Net cash provided by financing activities was $1.284 million. Financing included $5.000 million of new mortgage borrowings, $3.454 million from sales of non-controlling interests and $400,000 from share issuance, offset by debt repayments, distributions and $300,000 of treasury-stock repurchases.
- Cash and cash equivalents were $4.776 million and short-term investments were $1.000 million at January 31, 2018, for approximately $5.775 million of cash and short-term investments.
- Total liabilities were $14.959 million and total equity was $8.119 million. Mortgage debt was approximately $9.754 million, notes payable to banks were $0.952 million, and other notes payable were $1.954 million.
- Scheduled debt payments total approximately $1.754 million in FY 2019 and $0.668 million in FY 2020. The filing states that approximately $1.356 million of FY 2019 payments relate to other notes, including obligations associated with share and partnership-unit repurchases.
- Management believes available cash, a related-party revolving facility with up to $1.000 million of capacity, and affiliate advance facilities with up to $1.000 million of capacity are sufficient for obligations due over the next twelve months. Management also notes that refinancing or additional financing may not be available on favorable terms.
- The Trust paid $0.02 per share in FY 2018 dividends, compared with $0.01 per share in FY 2017, and repurchased 150,973 shares at an average price of $1.99.
Material changes versus the prior comparable period
- The Ontario hotel was sold for approximately $17.5 million, generating an approximately $11.4 million gain and removing the property from continuing operations.
- The remaining hotels benefited from higher occupancy, ADR and RevPAR following renovations and improved economic conditions, but higher payroll, marketing, general and administrative, telecommunications and hospitality costs reduced profitability.
- IBC revenue grew substantially, but increased sales, marketing, support and reservation-acquisition costs caused a significantly larger operating loss.
- Management changed prepaid-reservation reporting to a gross basis beginning August 1, 2017, adding approximately $234,000 of reservation revenue and corresponding acquisition costs. Beginning February 1, 2018, management expected to report these amounts on a net basis under the new revenue-recognition standard.
- Shareholders’ equity increased to approximately $9.671 million, and total equity increased to $8.119 million from $3.625 million, primarily due to the Ontario sale and related transactions. The Trust reported that NYSE American listing deficiencies were resolved on January 11, 2018.
Guidance, outlook, risks and unusual items
- Management expects generally steady demand, stable occupancy and ADR, modest rate improvement, steady food-and-beverage revenue and lower capital improvements in FY 2019.
- Management also expects additional hotel supply and stronger competition for corporate, leisure, group and government business, creating pressure on room rates, revenues and operating margins.
- The long-term strategy is to monetize or sell hotel assets and transition toward a hospitality-services and technology company through IBC. The remaining hotels continue to be marketed for sale, but no assurance is given that sales will occur at listed prices, on favorable terms or within the expected timeframe.
- IBC management plans additional sales and marketing investment, product development, partnerships and potential acquisitions. The company engaged an investment banker to explore financial and strategic alternatives for IBC, but no transaction is assured.
- Principal risks include debt maturities and refinancing availability, dependence on hotel occupancy and rates, seasonality, labor and operating-cost inflation, competition and new supply, Best Western membership requirements, related-party transactions, environmental and ADA compliance, cybersecurity and privacy exposure, payment fraud and chargebacks, and potential loss of key contracts or personnel.
- The filing reports no material litigation or environmental regulatory proceedings. It includes approximately $6.294 million of future minimum ground-lease and office-lease payments, including approximately $5.473 million after FY 2023.
- Auditors issued an unqualified opinion on the consolidated financial statements. Management concluded that disclosure controls and internal control over financial reporting were effective as of January 31, 2018.
Most important facts for investors to verify
- Separate recurring operating performance from the nonrecurring Ontario sale gain; continuing operations generated a $4.033 million net loss.
- Assess whether IBC can reduce its $2.383 million segment operating loss after the goodwill and intangible write-downs.
- Review debt maturities, related-party financing, mortgage guarantees and the approximately $1.754 million of FY 2019 scheduled payments.
- Evaluate the collectability and terms of approximately $1.781 million of advances and notes receivable from affiliates.
- Confirm the effect of adopting revenue-recognition guidance and reporting prepaid reservations on a net basis beginning February 1, 2018.
- Monitor whether planned hotel dispositions occur and whether proceeds are sufficient to support liquidity, debt reduction and capital improvements.
- Review ownership, governance and related-party exposure, including substantial insider ownership and transactions involving affiliates of the chairman and CEO.