InnSuites Hospitality Trust 2014 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended January 31, 2015. InnSuites Hospitality Trust owns interests in and operates five hotels totaling 843 suites in Arizona, California and New Mexico; manages eight hotels; licenses its trademarks to nine hotels; and operates IBC Hotels, a reservation and service network serving approximately 6,300 unrelated hotel properties. The Trust is an Ohio real estate investment trust but is not a REIT for federal income-tax purposes.
The Trust reports two segments: Hotel Operations and Corporate Overhead, and IBC Developments. The filing was audited by Semple, Marchal & Cooper, LLP, which issued an unqualified opinion. Management reported effective disclosure controls and internal control over financial reporting.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Total revenue | $14.673 million | $14.885 million | Down 1.4% |
| Operating income/(loss) | $(1.171) million | $0.013 million | Declined $1.184 million |
| Consolidated net loss | $(2.241) million | $(0.841) million | Loss increased $1.400 million |
| Net loss attributable to controlling interests | $(2.104) million | $(1.022) million | Loss increased $1.082 million |
| Basic and diluted loss per share | $(0.25) | $(0.12) | Worsened |
| Net cash from operating activities | $0.600 million | $0.720 million | Down $0.120 million |
| Net cash used in investing activities | $(1.302) million | $(0.862) million | Higher investment outflow |
| Net cash from financing activities | $0.814 million | $0.044 million | Improved $0.770 million |
| Adjusted EBITDA | $0.611 million | $1.796 million | Down $1.185 million |
| FFO | $(0.459) million | $0.957 million | Declined $1.416 million |
Hotel occupancy declined to 63.16% from 65.65%; ADR increased to $67.85 from $66.55; and REVPAR declined to $42.86 from $43.69. Room revenue decreased to $13.186 million from $13.442 million, while management and trademark fee revenue increased 43% to $278,000. IBC revenue increased to approximately $20,000 from approximately $1,000, but the segment generated a $326,000 operating loss.
At January 31, 2015, cash and cash equivalents were $508,000, current assets were $1.133 million, total assets were $27.028 million and total liabilities were $24.063 million. Total equity was $2.965 million, including $1.619 million attributable to Trust shareholders and $1.346 million of non-controlling interest.
Debt, liquidity and capital allocation
- Mortgage debt totaled approximately $19.122 million at January 31, 2015. Other borrowings included $1.227 million of notes payable to banks, $542,000 owed under a related-party revolving line, and $526,000 of other notes payable.
- Total scheduled debt payments were approximately $7.635 million in fiscal 2016, including $5.334 million of mortgage payments and $1.290 million of bank notes.
- The Trust had $125,000 drawn on a $600,000 bank line of credit at January 31, 2015. The line matured June 23, 2015; the balance was reported as zero on April 24, 2015.
- Management expected to refinance or extend a mortgage payment of approximately $4.812 million due April 28, 2015 and to renew the bank line. Management stated that available financing and expected refinancing would provide sufficient liquidity for at least the following year, but noted that success was not assured.
- Hotel capital expenditures increased to approximately $1.415 million from $761,000. The Trust planned fiscal 2016 capital expenditures at approximately the fiscal 2015 level.
- The Trust paid a $0.01-per-share dividend in the fourth quarter and repurchased 99,897 shares during the fiscal year for approximately $220,000. The filing states that the Trust intends to maintain a conservative dividend policy while reducing debt and funding internal growth.
Material changes versus the prior comparable period
- Revenue decreased modestly, but operating expenses increased 6.5%, producing an operating loss versus near break-even operating income in fiscal 2014.
- Room expenses increased approximately 7.9%, general and administrative expenses increased approximately $311,000, utilities increased approximately $112,000, and IBC sales and marketing investment increased substantially.
- Income-tax provision increased to approximately $199,000 from $37,000, primarily due to tax treatment of sales of ownership interests in hotel subsidiaries.
- Cash investment in hotel improvements increased by approximately $653,000.
- The Trust raised approximately $3.339 million through sales of non-controlling interests in hotel subsidiaries, compared with approximately $1.117 million in fiscal 2014. Ownership interests declined in certain properties, including Ontario and Yuma, while the Trust retained control.
- The Albuquerque mortgage was paid in full. Ontario debt was refinanced with a $5.7 million loan, and the Tucson Oracle property obtained approximately $3.5 million of new financing in connection with a land purchase and debt refinancing.
- Gross hotel property increased by approximately $3.843 million, including a $2.5 million land purchase associated with the Tucson Oracle property.
- The Trust remained subject to NYSE MKT continued-listing deficiencies relating to equity and losses. The exchange granted an extension through December 29, 2015 to regain compliance; failure could result in delisting.
Guidance, outlook, risks and unusual items
Management anticipated moderate economic improvement in fiscal 2016, improved occupancy, modestly higher room rates and relatively stable food and beverage revenue. Management expected management and trademark fee revenue to remain broadly flat and anticipated strong growth in IBC Hotels over the next several fiscal years.
- Major operating risks include competition for corporate, leisure, group and government business; increased hotel supply in Yuma and Ontario; seasonal demand; economic weakness; labor, energy, healthcare and insurance costs; regulatory and environmental compliance; ADA requirements; privacy and cybersecurity matters; and adverse weather or other travel disruptions.
- Liquidity is dependent on hotel cash flow, refinancing or extending debt, continued access to credit and further sales of non-controlling interests. The filing states that failure to obtain financing could require asset sales on unfavorable terms.
- Hotel properties were listed for sale at aggregate asking prices of $56.4 million against aggregate book value of $25.8 million and mortgage balances of $19.1 million. The asking prices were not based on appraisals, and there was no assurance that the properties could be sold at those prices or at all.
- The Trust accrued a $265,000 unpaid portion of a $350,000 Yuma restructuring fee at January 31, 2015; the filing states that the amount was paid after year-end.
- Related-party financing and transactions are significant. James F. Wirth and affiliates held approximately 73.2% of the Trust’s outstanding shares and approximately 25.8% of Partnership units at year-end. A related-party revolving line had a $542,000 payable balance at January 31, 2015; the filing reports a later balance of approximately $807,000 as of April 24, 2015.
- After year-end, the Board adopted a proposed 2015 equity incentive plan, including a performance-based option for 1,000,000 shares to Pamela Barnhill and additional options for senior executives, subject to shareholder approval. The Trust also terminated its planned purchase of a 51% interest in Hotel Trinity.
Most important facts for investors to verify
- Whether the Tucson St. Mary’s mortgage was successfully refinanced or extended after its April 28, 2015 maturity and whether all fiscal 2016 debt obligations were met.
- Whether the $600,000 bank line was renewed and how the related-party credit facility was used after January 31, 2015.
- Progress toward satisfying NYSE MKT equity and loss requirements by December 29, 2015 and the continuing risk of delisting.
- Whether occupancy, ADR and REVPAR improved as management expected, particularly in the Yuma and Ontario markets.
- Whether IBC Hotels generated material revenue and reduced consolidated losses, given its substantial planned expansion and fiscal 2015 operating loss.
- The economic impact of additional non-controlling-interest sales, priority distribution obligations and related-party restructuring fees on the Trust’s future cash flows and ownership interests.
- The filing contains an internal inconsistency regarding fiscal 2015 treasury-stock repurchases: Item 5 reports 16,868 shares, while the financial-statement notes report 99,897 shares. Investors should reconcile this difference in the filed financial statements and subsequent filings.