InnSuites Hospitality Trust — Form 10-Q Summary
Business context and reporting period
InnSuites Hospitality Trust is an Ohio business real estate investment trust that owns and manages interests in two moderate-service hotels totaling 270 suites in Tucson, Arizona, and Albuquerque, New Mexico. The hotels operate under the InnSuites and Best Western brands. The filing covers the three and nine months ended October 31, 2023, within fiscal 2024, with comparative periods ended October 31, 2022.
The Trust owns a 21.50% direct interest in the Albuquerque hotel and, through RRF Limited Partnership, an indirect 51.01% interest in the Tucson hotel. The Trust owned approximately 75.89% of RRF Limited Partnership at October 31, 2023.
Key financial metrics
| Metric | Three months ended October 31, 2023 | Three months ended October 31, 2022 | Nine months ended October 31, 2023 | Nine months ended October 31, 2022 |
|---|---|---|---|---|
| Total revenue | $1.824 million | $1.705 million | $5.752 million | $5.540 million |
| Operating income (loss) | ($150,040) | ($130,216) | ($129,819) | $15,919 |
| Consolidated net income | $90,088 | $107,995 | $611,693 | $729,783 |
| Net income attributable to controlling interests | $61,444 | $95,165 | $296,885 | $371,213 |
| Net income per share attributable to controlling interests | $0.01 | $0.01 | $0.03 | $0.04 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $1.511 million | $115,457 |
Operating margins were approximately negative 8.2% for the third quarter and negative 2.3% for the nine-month period. Reported net income was substantially supported by a $350,791 employee retention credit in the quarter and a $1.052 million credit for the nine-month period. Before the employee retention credit, the nine-month consolidated loss was $440,680.
Management reported adjusted EBITDA of approximately $353,000 for the third quarter and $1.143 million for the nine-month period, compared with $393,000 and $1.239 million, respectively, in the prior-year periods. Reported FFO was approximately $592,000 for the third quarter and $1.114 million for the nine-month period, compared with $638,000 and $1.260 million, respectively. These are non-GAAP measures and are not substitutes for GAAP cash flow.
Balance sheet, debt and liquidity
- Cash was $1.905 million at October 31, 2023, compared with $2.111 million at January 31, 2023.
- Total assets were $15.976 million and total liabilities were $12.718 million. Total equity was $3.259 million, including negative non-controlling interests of $3.147 million.
- Mortgage notes payable totaled approximately $9.306 million, net of discounts, at October 31, 2023. The principal mortgage balances were approximately $8.089 million for Tucson and $1.227 million for Albuquerque.
- Other notes payable totaled $470,000, consisting of two unsecured notes. The related-party revolving line of credit had approximately zero balance and $2.0 million of borrowing capacity.
- Three bank revolving lines of credit totaled $250,000 and had zero balances at quarter-end. Management stated that available cash and credit facilities should cover obligations for at least twelve months from the filing date.
- Minimum debt payments were approximately $525,546 for fiscal 2024 and $234,169 for fiscal 2025. The IBC note receivable of $1.925 million matures June 1, 2024, and the Trust is negotiating a further extension.
Material changes versus the prior comparable period
- Nine-month revenue increased 4% to $5.752 million, led by a 4% increase in room revenue to $5.645 million.
- Nine-month operating expenses increased 6% to $5.881 million, causing operating income to decline from $15,919 to a $129,819 loss.
- Consolidated net income declined 16% to $611,693, while controlling-interest income declined 20% to $296,885.
- Occupancy improved at both hotels. Combined occupancy increased to 81.01% from 73.44%, while combined ADR decreased to $94.50 from $97.08 and REVPAR increased to $76.56 from $71.30.
- Operating cash flow increased to $1.511 million from $115,457, largely reflecting employee retention credit-related adjustments and working-capital changes.
- Investing cash outflows increased to $390,083, including $360,083 for hotel improvements and $30,000 invested in UniGen.
- Financing cash flow changed from $1.830 million provided in the prior-year period to $1.328 million used, reflecting the absence of prior-year refinancing proceeds and increased treasury-stock repurchases.
- The Trust repurchased 223,738 shares during the nine months for approximately $399,164 and repurchased an additional 12,307 shares after quarter-end for approximately $15,056.
Guidance, outlook, risks and unusual items
Management expects fiscal 2024 to remain strong, with modest improvement in occupancy and room rates, continued cost control and improved hotel profitability. Management stated that both hotels were achieving record results during the year to date. The Trust expects lower capital expenditures after completing significant refurbishments.
The Trust continues to seek buyers for both hotels over the next 12 to 36 months and is evaluating strategic alternatives, including a possible merger or reverse merger. The stated combined estimated market asking price is $28.0 million, but management emphasized that the figures are not based on appraisals and that sales may not occur on favorable terms or at all.
- The employee retention credit is a significant unusual item. The Trust expects approximately $2.7 million in total credits and refunds, had received approximately $1.9 million by October 31, 2023, and expected an additional approximately $0.8 million.
- The Trust’s $1.925 million IBC note receivable depends on a further extension and collection from the buyer. Management recorded no additional impairment, but collectability remains a contingency.
- UniGen is a high-risk, privately held investment. Its prototype engineering was paused while it seeks additional capital. The Trust’s investment includes a $1.0 million convertible debenture, $618,750 of common stock and warrants; the investment is valued using Level 3 inputs.
- Hotel operations are seasonal and exposed to travel disruptions, labor shortages, inflation, recession, competition, weather, pandemics, cybersecurity incidents and changing occupancy or room rates.
- The Trust is exposed to refinancing and interest-rate risk, its ability to sell assets, and the need to maintain sufficient cash flow to service debt and fund distributions.
- Management reported no material litigation, no defaults upon senior securities and no off-balance-sheet financing arrangements.
- The Trust stated that disclosure controls and internal control over financial reporting were effective as of October 31, 2023, while also describing continuing enhancements to accounting staffing and control processes.
Important facts for investors to verify
- Verify the timing, eligibility, collection status and potential repayment or challenge risk associated with the employee retention credits.
- Assess whether hotel operating cash flow, available credit and asset sales are sufficient to cover debt maturities, the $1.925 million IBC receivable maturity and ongoing distributions.
- Review the terms and collectability of the IBC note receivable and the status of the requested extension beyond June 1, 2024.
- Evaluate the reliability of management’s hotel asking prices, since they are not based on appraisals and may differ materially from realized sale proceeds.
- Assess UniGen’s financing needs, prototype development and the valuation risk associated with the Trust’s Level 3 private-company investment.
- Consider the effect of non-controlling interests, related-party transactions and guarantees on the value attributable to Trust shareholders.
- Confirm the sustainability of dividends and share repurchases given negative operating income, debt obligations and reliance on unusual tax credits.
- Reconcile the filing’s cover-page reporting-status checkboxes and other presentation inconsistencies against the official SEC filing.