InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
Quarterly period ended April 30, 2018. InnSuites owned interests in three hotels totaling 424 suites in Arizona and New Mexico and operated the IBC Hospitality Technologies segment, which served approximately 2,000 hospitality properties. The filing was signed June 25, 2018. The company is a smaller reporting company and is no longer a shell company.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $3.475 million | $3.054 million | 14% increase |
| Operating income (loss) | $(116,280) | $68,562 | Declined $184,842 |
| Operating margin | (3.3%) | 2.2% | Down approximately 5.5 percentage points |
| Consolidated net income (loss) | $(289,961) | $58,101 | Declined $348,062 |
| Net loss attributable to controlling interests | $(652,015) | $(239,769) | Loss increased $412,246 |
| Adjusted EBITDA | $(100,596) | $438,661 | Declined $539,257 |
| FFO | $(636,331) | $(124,241) | Loss increased $512,090 |
| Operating cash flow | $161,568 | $458,984 | Down $297,416 |
Room revenue increased 12% to $3.047 million. Management and trademark fee revenue declined 16% to $66,929. IBC revenue was $344,960 versus $244,209, although adoption of ASC 606 reduced reported current-period revenue by approximately $82,000 because certain amounts are presented net. On a gross-to-gross basis, IBC revenue increased approximately 2.4%.
Hotel Operations and Corporate Overhead generated $429,592 of operating income, compared with $383,230 in the prior period. IBC generated an operating loss of $545,872, compared with a $314,668 loss in Q1 2017.
Cash and cash equivalents were $2.557 million at April 30, 2018, compared with $4.776 million at January 31, 2018. Short-term investments were $3.000 million, resulting in approximately $5.557 million of cash and short-term investments. Total assets were $22.577 million and total liabilities were $15.182 million. Total equity was $7.395 million, including $(1.469) million of non-controlling interest.
Debt payments, net of discounts, totaled approximately $12.026 million over the disclosed payment schedule. Approximately $1.400 million was due during the remainder of fiscal 2019, including approximately $1.112 million of other notes payable. Mortgage notes payable totaled approximately $9.693 million and notes payable to banks totaled approximately $906,000 under the disclosed schedule.
Cash Flow and Liquidity
- Operating activities provided $161,568 of cash.
- Investing activities used $2.014 million, principally due to the purchase of $2.0 million of marketable securities; hotel improvements used $143,704.
- Financing activities used $367,383, including $287,868 for treasury-stock repurchases and $257,245 of distributions to non-controlling interest holders.
- Cash decreased by $2.220 million during the quarter.
- Management stated that available cash and short-term investments, a $1.0 million related-party revolving facility, and up to $1.0 million of affiliate credit facilities should be sufficient to meet obligations for at least the next twelve months. The facilities and receivables are related-party arrangements and should be evaluated for availability and collectability.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by higher occupancy, room rates and improved performance at the renovated Yuma property.
- Reported operating expenses increased 20% to $3.592 million, exceeding the 14% revenue increase. Higher room, food and beverage, repairs, utilities and depreciation costs contributed to the deterioration in operating margin.
- IBC sales and marketing investment increased substantially, while IBC operating expenses rose to approximately $891,000 from $559,000, worsening the segment operating loss.
- Total interest expense increased to $177,313 from $140,686 in the consolidated statement of operations, although management separately stated that hotel-segment interest expense declined primarily because of Yuma refinancing. The filing text does not clearly reconcile these presentations.
- Discontinued operations contributed $190,221 of income in Q1 2017 and none in Q1 2018, contributing to the year-over-year decline in consolidated earnings.
- The Trust repurchased 149,603 shares for approximately $287,868, reducing outstanding shares and increasing treasury stock.
- The Trust sold 13.5 non-controlling units of the Albuquerque entity for $135,000; net proceeds from sales of non-controlling interests were $102,824.
- The company adopted ASC 606 using the modified retrospective method beginning February 1, 2018. Prepaid reservations are presented on a net basis, with no effect on retained earnings stated.
Operating Trends, Outlook and Risks
Management reported higher hotel occupancy and ADR and expects occupancy and rates to remain steady or improve during fiscal 2019. It also expects additional hotel supply, strong competition for corporate, leisure, group and government business, and pressure on revenue and operating margins. Management expects capital improvements to decline from the prior year.
The company continues to pursue a strategy of reducing reliance on hotel ownership and expanding management, trademark, reservation, advertising and technology services. IBC continued investments in software, digital marketing, loyalty rewards, central reservation and booking-engine capabilities.
The Trust has listed its hotels for sale, with disclosed asking prices totaling $39.0 million, but stated that the asking prices are not based on appraisals and that it cannot predict when, or whether, the properties will be sold. Management is also considering refinancing, additional non-controlling interest sales and other funding alternatives.
Subsequent events included a proposed sale of IBC with an initial capital infusion and seller financing, a $177,000 note payable related to the sale of 60,000 shares, marketing of the Yuma property for sale, and declaration of a $0.01-per-share dividend payable July 31, 2018. The company stated that it maintained compliance with NYSE American listing standards.
Principal risks include hotel seasonality, competition and new supply, occupancy and room-rate volatility, labor and operating-cost inflation, refinancing and debt-service requirements, dependence on related-party financing and hotel cash flows, potential unfavorable asset sales, Best Western membership requirements, cybersecurity and system risks, and the ability of IBC to achieve profitability. The company also has significant ground-lease commitments, including approximately $6.253 million of disclosed future minimum payments.
Important Facts for Investors to Verify
- Reconcile the filing’s inconsistent occupancy disclosures: the narrative cites 75.81% versus 71.78%, while the accompanying table cites 87.39% versus 83.00%.
- Assess whether the cash balance and related-party credit facilities are sufficient to cover approximately $1.400 million of near-term debt payments and ongoing operating needs.
- Evaluate the sustainability of the hotel segment’s profitability after higher operating costs, debt service and required capital improvements.
- Determine whether IBC’s increased digital marketing and technology spending can reverse its $545,872 quarterly operating loss.
- Review the terms, collectability and conflicts associated with approximately $1.65 million of advances and notes receivable from related parties.
- Confirm the status and valuation of the proposed IBC sale, the Yuma property sale process and the company’s broader hotel disposition strategy.
- Consider the effect of ASC 606 net presentation when comparing IBC revenue with prior periods.
- Review debt maturities, variable-rate exposure, guarantees and refinancing requirements, particularly the $1.112 million of other notes payable due during the remainder of fiscal 2019.