InnSuites Hospitality Trust — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three and six months ended July 31, 2012, covering the Trust’s fiscal 2013 second quarter. The Trust owned or held interests in five InnSuites hotels in Arizona, California, and New Mexico and operated management, licensing, and reservation businesses through InnSuites Hotels, Inc.
Effective February 1, 2012, hotel employees became employees of the individual hotels rather than the management company. Consequently, related-party payroll reimbursement revenue and corresponding payroll expense were eliminated from reported results.
Financial Performance and Position
| Metric | Three Months Ended July 31, 2012 | Three Months Ended July 31, 2011 |
|---|---|---|
| Total revenue | $3.37 million | $4.04 million |
| Operating income (loss) | $(0.62) million | $(0.11) million |
| Net loss attributable to controlling interests | $(0.68) million | $(0.36) million |
| Basic and diluted loss per share | $(0.08) | $(0.04) |
| Metric | Six Months Ended July 31, 2012 | Six Months Ended July 31, 2011 |
|---|---|---|
| Total revenue | $8.19 million | $9.03 million |
| Operating income | $0.23 million | $0.34 million |
| Net loss attributable to controlling interests | $(0.22) million | $(0.31) million |
| Basic and diluted loss per share | $(0.03) | $(0.04) |
| Adjusted EBITDA | $1.09 million | $1.22 million |
Six-month revenue declined 9.3%, primarily because $1.12 million of prior-year payroll reimbursement revenue was no longer reported. Excluding that accounting and operating-structure change, hotel operating revenue increased approximately 3.4%. The six-month operating margin was approximately 2.8%, compared with 3.7% in the prior-year period. The second-quarter operating margin was approximately negative 18.5%, compared with negative 2.6% in the prior-year quarter.
Occupancy for the first six months increased to 68.51% from 64.85%. Average daily rate declined to $69.58 from $72.91, while REVPAR increased modestly to $47.67 from $47.28.
At July 31, 2012, total assets were $27.0 million, including $24.95 million of hotel properties. Cash and cash equivalents were $196,333, restricted cash was $92,567, and total equity was $4.17 million. Total liabilities were $22.83 million.
Debt included $18.95 million of long-term mortgage notes, $1.05 million of current mortgage maturities, $355,945 drawn on the bank line of credit, and $454,209 of other notes payable. Six-month interest expense was $485,097, compared with $771,454 in the prior-year period.
Cash provided by operating activities was $65,394, compared with $336,183 in the prior-year period. Investing activities used $858,227, including $657,895 for hotel improvements and $699,150 of loans to a related party, partly offset by $454,577 received on related-party notes. Financing activities provided $5,742. Cash declined by $787,091 to $196,333 during the six months.
Material Changes Versus the Prior Comparable Period
- Revenue decreased because payroll reimbursements ceased after the February 1, 2012 management-agreement changes.
- Hotel operating revenue improved for the six-month period as occupancy increased, but lower room rates and higher operating costs pressured margins.
- The second quarter deteriorated materially: revenue declined 16.5%, operating loss increased to $625,000, and controlling-interest net loss increased 90.5% to $684,000.
- Mortgage interest expense declined substantially following the restructuring of the Ontario, California mortgage debt.
- The Ontario mortgage was modified in February 2012: principal was reduced by $500,000, penalties and accumulated interest were waived, the rate was reduced from 8.28% to 5.0%, and the maturity was extended to January 14, 2015. The Trust paid $1.19 million of principal and interest during the six months.
- The Trust received $1.6 million from sales of non-controlling interests in Ontario and Tucson Foothills subsidiaries during the first six months.
- The Trust repurchased 21,040 shares during the quarter at an average price of $2.34 per share; 59,978 shares or units remained authorized for repurchase.
Guidance, Outlook, Risks, and Unusual Items
Management expected improving economic conditions to support business levels for the remainder of fiscal 2013, but provided no formal earnings or revenue guidance. Management stated that occupancy trends had improved, while room rates remained under pressure.
Management projected that operating cash flow alone might not cover all obligations for the remainder of fiscal 2013. It expects current cash, operating cash flow, proceeds from additional non-controlling-interest sales, and available credit to be sufficient, but noted that refinancing, additional credit facilities, or debt issuance may be required if conditions worsen.
The Trust had $514,000 of mortgage principal due during the remainder of fiscal 2013 and approximately $1.1 million due from August 1, 2012 through July 31, 2013. The $500,000 revolving line of credit was renewed through June 23, 2013, with $355,945 outstanding; the Trust was negotiating an increase to $600,000.
Subsequent events included the planned purchase of 31.5 Albuquerque entity units for $315,000, which would increase the Trust’s ownership from 42.25% to 50.25%, and the August 24, 2012 refinancing of the Yuma property’s $5.0 million mortgage with a $5.5 million mortgage maturing September 1, 2022. The new Yuma note is callable upon demand and bears interest at prime plus 1.0%, subject to a 5.0% floor.
Key risks include hotel occupancy and pricing volatility, seasonality, economic and travel-industry conditions, interest-rate changes, debt-service and refinancing risk, reliance on non-controlling-interest sales, competition, concentration in the InnSuites brand, and potential loss of franchise or management contracts. The filing also identifies normal-course litigation and lease commitments, including total future ground-lease and office-lease payments of approximately $6.14 million.
Management reported effective disclosure controls as of July 31, 2012. However, a material weakness in information-technology controls had existed as of January 31, 2012, and remediation efforts were ongoing.
Investor Verification Items
- Verify the sustainability of liquidity given $196,333 of cash, negative six-month free cash flow before financing, scheduled debt maturities, and reliance on asset-interest sales and credit availability.
- Separate the impact of the payroll-reimbursement change from underlying hotel operating performance.
- Monitor whether occupancy gains can offset declining ADR and second-quarter revenue weakness, particularly at the Yuma property.
- Review the terms, collateral, call provisions, and refinancing risks of the Yuma mortgage and revolving credit facility.
- Assess the economic effect and governance implications of related-party transactions involving Rare Earth Financial and affiliates of James F. Wirth.
- Confirm the timing and completion of the Albuquerque ownership purchase and its effect on consolidation and non-controlling interests.
- Track remediation of the previously reported IT control material weakness.