Business Context and Reporting Period
InnSuites Hospitality Trust filed this unaudited Form 10-Q for the nine and three months ended October 31, 2012. The Trust owned or controlled interests in five hotels in Arizona, California and New Mexico and also provided hotel management, trademark licensing, reservation and related services to affiliated and third-party properties. As of December 7, 2012, 8,388,112 shares were outstanding.
Effective February 1, 2012, hotel employees became employees of the individual hotels rather than the management company. Consequently, payroll reimbursement revenue and related payroll expense were eliminated from the 2012 results.
Financial Performance and Position
| Metric | Nine months ended October 31, 2012 | Prior comparable period |
|---|---|---|
| Total revenue | $11.426 million | $12.680 million |
| Operating income (loss) | $(106,161) | $44,703 |
| Net loss attributable to controlling interests | $(627,731) | $(834,194) |
| Basic and diluted loss per share | $(0.07) | $(0.10) |
| Adjusted EBITDA | $1.201 million | $1.353 million |
| Cash flow from operations | $53,923 | $(101,539) |
For the third quarter, revenue was $3.235 million, operating loss was $333,532 and net loss attributable to controlling interests was $398,120, or $0.05 per share. Operating margin was approximately negative 10.3% and net loss attributable to controlling interests was approximately 12.3% of revenue.
At October 31, 2012, total assets were $26.406 million, cash and cash equivalents were $96,015, and restricted cash was $107,664. Total liabilities were $22.894 million and total equity was $3.512 million. Debt included $19.066 million of long-term mortgage notes, $1.177 million of current mortgage maturities, $600,000 drawn on a bank line of credit, and approximately $404,000 of other notes payable.
Investing activities used $1.259 million, including $981,126 of hotel improvements and $307,006 of net loans receivable from related parties. Financing activities provided $317,656, including $5.473 million of mortgage refinancing proceeds, $1.985 million from sales of non-controlling interests and $2.160 million of bank borrowings, partially offset by mortgage principal payments of $6.769 million.
Material Changes Versus Prior Comparable Period
- Nine-month revenue declined 9.9%, principally because $1.648 million of prior-year payroll reimbursement revenue was eliminated. Hotel operating revenue increased approximately 3.6%.
- Total operating expenses declined 8.7% because the corresponding $1.648 million payroll reimbursement expense was eliminated; general and administrative expense increased 5.3% to $2.363 million.
- The Trust moved from operating income of $44,703 to an operating loss of $106,161, despite higher occupancy, primarily because room rates declined and higher occupancy increased operating costs.
- Net loss attributable to controlling interests improved by $206,463, and interest expense declined by $420,328, primarily reflecting debt restructuring and lower mortgage interest.
- Occupancy increased to 65.05% from 61.76%, while ADR declined to $67.98 from $70.84. REVPAR increased to $44.22 from $43.75.
- Cash declined by $887,409 from January 31, 2012, to $96,015 at October 31, 2012.
Guidance, Outlook, Risks and Unusual Items
The Trust listed all five hotels for sale on October 1, 2012, as part of a strategy to transition from hotel ownership toward management, licensing, reservation and advertising services. Aggregate listed sales prices were $60.0 million against hotel property book value of $24.841 million and stated mortgage balances of approximately $19.682 million. Management cautioned that listed prices may not be realized and that properties were not classified as held for sale because a sale within one year was not yet considered probable.
Management expects economic conditions to positively affect business levels for the remainder of the fiscal year, but provided no quantified earnings or revenue guidance. Reservation fees are expected to range from 10% to 15% of revenue per reservation following the strategic shift.
Management projected that operating cash flows alone might not be sufficient to meet all obligations for the remainder of fiscal 2013. It expects liquidity to be supported by current cash, operating cash flow, sales of non-controlling interests and available credit. The $600,000 revolving credit line was fully drawn at October 31, 2012, bears interest at prime plus 1% with a 6% floor, and matures or renews in June 2013.
The Yuma mortgage was refinanced with a $5.5 million variable-rate loan, producing $143,120 of net cash proceeds and maturing September 1, 2022. The Ontario mortgage modification reduced the interest rate to 5%, lowered monthly payments from $71,100 to $31,700 and extended the maturity to January 14, 2015; the transaction was accounted for as a troubled debt restructuring.
Principal due under mortgage notes was $288,000 for the remainder of fiscal 2013 and approximately $1.2 million for November 1, 2012 through October 31, 2013. Key risks include hotel occupancy and pricing volatility, seasonality, interest rates, refinancing and debt-service capacity, the ability to sell hotels at acceptable prices, reliance on related parties and the InnSuites brand, and access to credit.
The Trust disclosed that a material weakness in information-technology controls existed as of January 31, 2012. Management was implementing remediation, including third-party testing of changes to financial reporting systems. Disclosure controls and procedures were considered effective as of October 31, 2012.
Important Facts for Investors to Verify
- Whether hotel sale transactions occur, at what prices, and the resulting effect on debt repayment, liquidity and future operating revenue.
- Whether operating cash flow and sales of non-controlling interests are sufficient to meet near-term debt, lease and other obligations.
- The terms, maturity and refinancing prospects of the fully drawn $600,000 credit line and the Ontario and other mortgage obligations.
- Whether improved occupancy can offset lower ADR, higher operating costs and the loss of payroll reimbursement revenue.
- The status and effectiveness of remediation for the previously reported IT-related material weakness.
- The collectability and settlement timing of related-party notes receivable and the remaining $135,000 affiliate hotel note due March 31, 2013.
- The ability to maintain shareholder distributions; the filing states that future distributions are not assured.