Business Context and Reporting Period
InnSuites Hospitality Trust filed this unaudited Form 10-Q for the quarter and nine months ended October 31, 2013. The Trust controls five hotels totaling 843 suites in Arizona, southern California, and New Mexico and owns 72.04% of RRF Limited Partnership. Operations are conducted under the InnSuites Hotels brand, with revenue primarily from hotel rooms, food and beverage, management, trademark, and reservation services.
The Trust was a smaller reporting company. It reported 8,349,773 shares outstanding at October 31, 2013 and 9,202,282 shares outstanding as of December 5, 2013.
Financial Performance and Position
| Metric | Nine Months 2013 | Nine Months 2012 | Change |
|---|---|---|---|
| Total revenue | $11.262 million | $11.426 million | Down 1.4% |
| Operating loss | $(43) thousand | $(106) thousand | Improved $63 thousand |
| Consolidated net loss | $(647) thousand | $(823) thousand | Improved $177 thousand |
| Net loss attributable to controlling interests | $(846) thousand | $(628) thousand | Worsened $219 thousand |
| Basic and diluted loss per share | $(0.10) | $(0.07) | Worsened $0.03 |
| Adjusted EBITDA | $1.291 million | $1.201 million | Increased $90 thousand |
| FFO | $702 thousand | $484 thousand | Increased $218 thousand |
| Operating cash flow | $1.162 million | $54 thousand | Increased $1.108 million |
Third-quarter revenue was $3.039 million, down 6.1% from $3.235 million. The quarterly operating loss was $511 thousand versus $334 thousand, and consolidated net loss was $719 thousand versus $571 thousand. Loss attributable to controlling interests was $611 thousand, or $0.07 per share, compared with $398 thousand, or $0.05 per share.
For the first nine months, occupancy increased to 71.35% from 65.05%, while average daily rate declined to $64.88 from $67.98. REVPAR increased to $47.30 from $44.22. The filing indicates that higher occupancy was offset by lower room rates and reduced management and trademark fees.
At October 31, 2013, total assets were $24.753 million, including hotel properties of $23.760 million. Cash and cash equivalents were $141 thousand, restricted cash was $37 thousand, and total current assets were $789 thousand. Total liabilities were $22.506 million and total equity was $2.248 million, including trust shareholders’ equity of $2.195 million.
Mortgage notes payable totaled $19.051 million, including current and long-term portions. Other disclosed debt included $600 thousand drawn on a revolving credit line, $150 thousand outstanding under an Ontario business loan, approximately $226 thousand of secured promissory notes to unrelated parties, and $564 thousand of notes and advances payable to affiliates of Chairman and CEO James Wirth.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined modestly despite stronger occupancy, primarily because of lower room rates and the discontinuation of certain annual accounting fees.
- Operating expenses decreased 2.0%, reflecting lower food and beverage, telecommunications, sales and marketing, repairs and maintenance, utilities, and property tax, insurance, and ground-rent costs. These savings more than offset higher room, general and administrative, and depreciation expenses.
- Interest expense declined 17.8% to $606 thousand, primarily due to the Ontario debt restructuring.
- Operating cash flow improved substantially, while investing cash use declined to $431 thousand from $1.259 million because of lower capital refurbishment spending and changes in related-party notes receivable.
- Financing activities used $1.084 million, compared with $318 thousand provided in the prior-year period, reflecting mortgage and bank-note repayments, treasury-stock purchases, distributions to non-controlling interests, and other financing payments.
- Capital expenditures declined to approximately $407 thousand from $981 thousand; repairs and maintenance expense declined to approximately $923 thousand from $1.087 million.
- Controlling-interest results were weaker than consolidated results because of increased ownership interests attributable to non-controlling parties.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected moderate improvement in economic conditions and potentially higher revenue and operating margins, but anticipated continued competition, pressure to maintain room rates and market share, and ongoing hotel-industry and seasonal risks. Management expected capital improvements to be approximately $725 thousand lower than the prior year and anticipated increased cash flow from reduced Ontario principal and interest payments.
Liquidity was a significant concern. The $600 thousand revolving credit facility was fully drawn at October 31, 2013 and matured June 23, 2014. The facility bears interest at the prime rate plus 1%, subject to a 6% floor, is secured by the Yuma property and trade receivables, and is guaranteed by Mr. Wirth. Management believed it could meet obligations for at least the following year based on expected operating improvement, additional capital offerings, reduced Ontario debt service, and a planned business loan, but acknowledged that refinancing, additional non-controlling-interest sales, or property sales might not be available on favorable terms.
On September 24, 2013, Ontario entered into a $168,540 business loan, including fees, with $150,383 outstanding at October 31. On November 25, 2013, Yuma entered into a $342,000 business loan intended for working capital. Both loans are secured and repaid from a percentage of merchant receipts and include acceleration provisions upon default.
The Trust remained out of compliance with NYSE MKT continued-listing standards because of low shareholders’ equity and recurring losses. The exchange accepted a compliance plan and extended the remediation period to April 30, 2014. Management expected the Tucson offering and additional offerings to increase equity, but failure to regain compliance could result in delisting.
The Tucson restructuring contemplated a $1.6 million offering, with expected consolidated proceeds of approximately $1.14 million after Trust and Partnership purchases. Seven units totaling $70 thousand had been sold by October 31, 2013. The filing states that investors had verbally committed to purchase remaining units; however, the subsequent-event note refers to “November 26, 2014,” which appears inconsistent with the reporting timeline and should be verified.
The Trust had future minimum ground-lease and office-lease payments totaling $5.949 million, including $5.015 million after 2018. It also was required to fund hotel refurbishment reserves equal to 4% of hotel revenue; restricted cash in those accounts was $37 thousand. Management did not expect pending ordinary-course claims and litigation to have a material adverse effect.
Management reported effective disclosure controls as of October 31, 2013 and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the Trust regained NYSE MKT listing compliance by April 30, 2014 and whether the Tucson equity offering was completed as planned.
- The availability and terms of refinancing or other funding before the $600 thousand credit line maturity and other debt maturities.
- Actual cash balances, operating cash flow, and debt-service capacity given the low cash balance and fully drawn credit line.
- Whether occupancy gains can be sustained without further declines in ADR and REVPAR.
- The effect of non-controlling interests and related-party transactions on cash distributions and earnings attributable to Trust shareholders.
- The status and terms of the November 25, 2013 Yuma business loan and the apparently erroneous “November 26, 2014” date in the subsequent-event disclosure.
- The realizability of management’s listed $60.0 million aggregate hotel asking prices, which were not based on appraisals and are not assured.