INNSUITES HOSPITALITY TRUST annual report, FY2016

InnSuites Hospitality Trust — Form 10-K Summary

Reporting period: Fiscal year ended January 31, 2016. Although the request identifies 2015 Q4, this filing is an annual report covering the full fiscal year. InnSuites operates four hotels totaling 576 suites, provides management services to six hotels, licensing services to seven hotels, and reservation services through IBC Hotels to approximately 6,300 properties.

Financial Performance and Position

Metric	FY2016	FY2015	Change
Continuing-operations revenue	$3.624 million	$2.845 million	27.4% increase
Operating loss from continuing operations	$(1.380) million	$(1.906) million	Loss narrowed by $526,000
Net loss from continuing operations	$(1.797) million	$(2.443) million	Loss narrowed by $645,000
Discontinued operations and assets held for sale	$2.137 million income	$202,000 income	Increase of $1.935 million
Consolidated net income	$339,000	$(2.241) million	Improved by $2.580 million
Net income attributable to controlling interests	$432,000	$(2.104) million	Improved by $2.536 million
Basic earnings per share	$0.04	$(0.27)	Improved
Diluted earnings per share	$0.03	$(0.27)	Improved

Continuing-operations operating margin was approximately (38.1%), based on the reported operating loss and revenue.
Hotel occupancy increased to 73.36% from 63.16%; ADR increased to $70.59 from $67.85; and REVPAR increased to $51.79 from $42.86.
Continuing hotel and corporate-overhead revenue increased 21.2% to $3.422 million. Room revenue increased approximately 28% following the Yuma renovation.
IBC revenue increased to $201,000 from $20,000, while its operating loss improved modestly to $(297,000) from $(326,000).
Net cash used in operating activities was $(604,000), compared with $600,000 provided in FY2015.
Investing activities provided $654,000, including $4.551 million of cash from the Tucson St. Mary’s sale, offset by $2.126 million of hotel capital expenditures and $800,000 paid for International Vacation Hotels assets.
Financing activities provided $1.400 million, including $3.000 million from stock sales and $1.826 million from sales of non-controlling interests.
Capital expenditures were $2.126 million, compared with $1.415 million in FY2015.
At January 31, 2016, total assets were $23.941 million, total liabilities were $16.970 million, and total equity was $6.971 million.
Cash and cash equivalents were reported as $1.796 million on the balance sheet; the cash-flow statement reports $1.958 million including $162,000 classified within discontinued operations.

Debt, Liquidity and Distributions

Mortgage debt totaled approximately $13.793 million, primarily secured by the Ontario, Tucson Oracle and Yuma properties. The Yuma mortgage is recourse to the Trust; other hotel mortgages are generally non-recourse to the Trust or Partnership.
Additional debt included approximately $932,000 of notes payable to banks and $55,000 of other notes payable. Total scheduled debt payments were approximately $1.467 million in FY2017 and $524,000 in FY2018.
The Trust had no open bank line of credit at year-end but had access to a related-party demand/revolving facility with maximum capacity of $1.0 million. Management believed available cash and this facility would cover obligations for at least the next year, but acknowledged that refinancing or additional financing may not be available on favorable terms.
The Trust paid a $0.01-per-share dividend in the fourth quarter of FY2016 and FY2015 and intends to maintain a conservative dividend policy focused on debt reduction and internal growth.
Current liabilities exceeded current assets at year-end, including liabilities associated with discontinued operations and assets held for sale, underscoring reliance on operating cash flow, asset sales and financing sources.

Material Changes and Unusual Items

On October 14, 2015, the Trust sold the Tucson St. Mary’s hotel for approximately $9.7 million, received approximately $4.6 million in cash, repaid approximately $4.7 million of mortgage debt, reduced payables by approximately $379,000, and recognized a gain of approximately $2.4 million.
All hotels other than Yuma were classified as discontinued operations or assets held for sale following the August 2015 plan to sell the hotel portfolio. The resulting gain substantially drove the improvement from a consolidated loss to consolidated income.
Discontinued-operations revenue declined to $10.848 million from $11.828 million, while income from discontinued operations and assets held for sale increased primarily because of the Tucson St. Mary’s gain.
On January 8, 2016, IBC acquired substantially all assets of International Vacation Hotels for $1.0 million, consisting of $800,000 cash and $200,000 of Trust shares. The acquisition added $500,000 of identifiable intangible assets and $500,000 of goodwill and was partially financed with a $400,000 loan at 8% interest.
The Trust issued approximately $3.0 million of shares during FY2016, including issuances to Rare Earth Financial, an affiliate of Chairman and CEO James Wirth. Related-party transactions and ownership interests are material and should be reviewed carefully.
The Trust repurchased 34,602 shares for approximately $92,000 and had authorization remaining to repurchase 93,317 units or shares.
The NYSE MKT notified the Trust in January 2016 that previously identified continued-listing deficiencies had been resolved after shareholders’ equity exceeded the applicable $6 million requirement.
The independent auditor issued an unqualified opinion. Management concluded that disclosure controls and internal control over financial reporting were effective as of January 31, 2016.

Guidance, Outlook and Risks

Management expects steady occupancy and ADR at the remaining hotels but anticipates additional hotel supply and pressure on room rates, revenue and operating margins during FY2017.
The Trust expected to sell at least one additional hotel and intended to list Yuma for sale by January 31, 2017. Management also stated that the remaining planned hotel sales were expected to be completed by July 31, 2016, subject to market conditions and financing.
Management plans to transition from hotel ownership toward a hospitality-services model centered on IBC Hotels, with expected expansion in sales, marketing, reservations, licensing and advertising. IBC charges a 10% booking fee, but management provided no assurance that the expansion will succeed or reduce losses.
The proposed Ontario sale at $14.8 million was subsequently cancelled on April 25, 2016 after the buyer defaulted. The Trust stated that it was seeking another buyer.
Key risks include hotel-market competition and new supply, concentration in southwest markets, seasonality, labor and operating-cost inflation, debt maturities and refinancing needs, dependence on asset sales, liquidity constraints, regulatory and environmental compliance, Best Western membership requirements, cybersecurity and data-breach exposure, and the ability to execute the IBC strategy.
The Trust is not a real estate investment trust for federal tax purposes. It reported approximately $9.3 million of federal and state net operating loss carryforwards, with a full valuation allowance against its net deferred tax asset.

Most Important Facts to Verify

Whether planned sales of Ontario, Tucson Oracle, Albuquerque and Yuma occurred on acceptable terms and whether sale proceeds were sufficient to repay debt and fund operations.
The status of the cancelled Ontario transaction and any subsequent replacement agreement.
Liquidity after scheduled FY2017 debt payments, hotel capital expenditures, distributions to non-controlling holders and any additional asset-sale delays.
The sustainability of positive consolidated earnings, given that FY2016 results were heavily affected by the approximately $2.4 million Tucson St. Mary’s disposal gain while continuing operations remained loss-making.
Progress, profitability and cash requirements of IBC Hotels and the acquired International Vacation Hotels business.
The terms, dilution implications and governance oversight of related-party equity issuances, advances, restructuring arrangements and priority-return obligations.
Whether the Trust maintains NYSE MKT compliance and whether its conservative dividend policy remains supportable from recurring cash flow.