InnSuites Hospitality Trust — Form 10-Q Summary
Business context and reporting period
InnSuites Hospitality Trust owns interests in five hotels totaling 843 suites in Arizona, southern California and New Mexico and operates the InnSuites brand. Its IBC Developments subsidiary provides reservation, marketing and cost-saving services to approximately 6,500 independent hotels. This report covers the three and six months ended July 31, 2015, with comparisons to July 31, 2014.
Financial performance and key metrics
| Metric | Three months ended July 31, 2015 | Six months ended July 31, 2015 |
|---|---|---|
| Total revenue | $3.506 million | $8.542 million |
| Operating income (loss) | $(0.691) million | $0.023 million |
| Consolidated net loss | $(0.978) million | $(0.571) million |
| Net loss attributable to controlling interests | $(0.761) million | $(0.554) million |
| Basic and diluted loss per share | $(0.09) | $(0.07) |
| Adjusted EBITDA | $(0.233) million | $0.937 million |
| FFO | $(0.521) million | $0.343 million |
- Six-month revenue increased 6.0% year over year, while operating expenses increased 4.1%. The resulting operating margin was approximately 0.3%, compared with a negative operating margin in the prior year.
- Six-month net loss improved from $0.591 million to $0.571 million, although the second-quarter net loss increased 11.7% from $0.875 million to $0.978 million.
- Hotel operating indicators improved for the six months: occupancy increased to 73.18% from 68.80%, ADR increased to $79.70 from $68.87, and REVPAR increased to $58.32 from $47.38.
- Six-month room revenue increased 4.6% to $7.561 million, and food and beverage revenue increased to $0.627 million. Management and trademark fees declined 11.3% to $0.128 million.
- IBC revenue increased to $0.133 million from $0.009 million, but the segment remained loss-making, with a six-month operating loss of $0.090 million.
- Net cash provided by operating activities was $0.281 million, down from $0.443 million. Capital expenditures were $0.842 million, producing negative operating cash flow after investment spending.
- Cash and cash equivalents declined to $0.301 million at July 31, 2015 from $0.508 million at January 31, 2015.
- Total assets were $26.596 million and total liabilities were $22.147 million. Total equity was $4.449 million, including $2.576 million attributable to trust shareholders and $1.874 million of non-controlling interest.
- Mortgage notes payable totaled approximately $18.769 million. Other reported debt included approximately $0.097 million of short-term merchant-processor notes, $0.600 million of a non-revolving bank note, $0.125 million of an unsecured promissory note and $0.089 million of secured notes related to share and partnership-unit repurchases.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by higher occupancy and room rates, particularly in Yuma, Arizona, and by expansion of IBC Developments.
- Operating performance improved for the six-month period, but second-quarter profitability deteriorated because operating expenses and interest expense grew faster than revenue.
- Interest expense increased 33.3% for the six months to $0.523 million and 23.3% for the quarter to $0.257 million, reflecting the Ontario mortgage restructuring and increased use of merchant-related notes.
- The Trust sold additional non-controlling interests, generating $2.571 million of financing cash flow during the six months. Yuma ownership declined to 61.88% from 73.61% at January 31, 2015, and Tucson St. Mary’s ownership was 68.09% after new unit issuances.
- The Trust repurchased 7,346 shares during the quarter for approximately $58,786 and had authorization remaining for 106,163 additional partnership units or shares.
- On July 7, 2015, a $600,000 revolving bank line was converted into a four-year non-revolving note maturing July 3, 2019, with a variable rate of Prime plus 1%, subject to a 5.5% floor.
Guidance, outlook, risks and unusual items
- Management expects continued improvement in occupancy, modest rate increases and steady food and beverage revenue during the remainder of fiscal 2016. It expects management and trademark fees to decline because an affiliate sold a managed hotel.
- Management plans significant IBC expansion through sales, marketing alliances, booking-engine development, website enhancements and a guest rewards program, but provides no assurance that the strategy will succeed.
- Management expects approximately $842,000 of fiscal 2016 capital expenditures, broadly similar to the prior fiscal year.
- Approximately $5.350 million of debt payments are due in fiscal 2016, including approximately $4.982 million of mortgage payments. Management is pursuing refinancing, extensions and potential property sales.
- The Tucson St. Mary’s property was under a July 1, 2015 agreement to be sold for $9.65 million, subject to financing and other conditions. As of September 1, 2015, buyer financing was not guaranteed and escrow funds were not non-refundable.
- The Tucson St. Mary’s first mortgage was extended on August 11, 2015 to October 28, 2015. Management expected to refinance the loan or sell the property before that date, but stated that success was not assured.
- Management believes liquidity will be adequate for at least the next year assuming continued availability of a related-party credit facility and refinancing or extension of mortgage debt. The filing warns that failure to obtain financing could require asset sales on unfavorable terms.
- The Trust remained subject to an NYSE MKT compliance plan because of prior equity and loss conditions. The exchange extended the compliance period to December 29, 2015; failure to regain compliance could result in delisting.
- Operations are seasonal, competition is significant, and results are exposed to economic conditions, interest rates, labor and operating costs, weather, disasters, cybersecurity events, franchise relationships, litigation and the ability to maintain hotel financing.
- The unaudited financial statements state that management concluded disclosure controls were effective as of July 31, 2015, with no material changes to internal control over financial reporting.
Important facts investors should verify
- Whether the Tucson St. Mary’s sale closed and whether the related mortgage was refinanced or otherwise resolved by the October 28, 2015 maturity date.
- Actual cash availability, borrowing capacity and debt maturities, particularly the approximately $5.350 million due in fiscal 2016.
- Whether hotel operating improvements are sustained and sufficient to offset higher labor, maintenance, capital and interest costs.
- Whether IBC Developments can achieve profitable scale after substantial sales, marketing and technology investment.
- The status of the NYSE MKT compliance plan and the risk of delisting.
- The sustainability of distributions, given low cash balances, negative quarterly FFO, required capital expenditures and reliance on refinancing, hotel cash flow and non-controlling-interest sales.
- The financial and governance effects of related-party credit facilities, ownership interests held by management affiliates and potential conversion of partnership units or subsidiary interests into trust shares.