GENERAL
The following discussion should be read in conjunction with our unaudited
condensed consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q and our audited consolidated Form 10-K for the
fiscal year ended January 31, 2022.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q, including statements containing the
phrases “believes,” “intends,” “expects,” “anticipates,” “predicts,” “projects,”
“will be,” “should be,” “looking ahead,” “may” or similar words, constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We intend that such forward-looking statements be subject to the
safe harbors created by such Acts. These forward-looking statements include
statements regarding our intent, belief or current expectations in respect of
(i) the declaration or payment of dividends; (ii) the leasing, management or
operation of the Hotels; (iii) the adequacy of reserves for renovation and
refurbishment; (iv) our financing plans; (v) our position regarding investments,
acquisitions, developments, financings, conflicts of interest and other matters;
(vi) expansion of UniGen; (vii) our plans and expectations regarding future
sales of hotel properties; and (viii) trends affecting our or any Hotel’s
financial condition or results of operations.
These forward-looking statements reflect our current views in respect of future
events and financial performance, but are subject to many uncertainties and
factors relating to the operations and business environment of the Hotels that
may cause our actual results to differ materially from any future results
expressed or implied by such forward-looking statements. Examples of such
uncertainties include, but are not limited to:
? Virus Pandemic and its effect on the Travel Industry;
? inflation and economic recession;
? terrorist attacks or other acts of war;
? local, national, or international, political economic and business conditions,
including, without limitation, conditions that may, or may continue to, affect
public securities markets generally, the hospitality industry or the markets
in which we operate or will operate;
? available cash, supply chain issues, and increased labor costs for diversified
clean energy development and production;
? fluctuations in hotel occupancy rates;
? changes in room rental rates that may be charged by InnSuites Hotels in
response to market rental rate changes or otherwise;
? seasonality of our hotel operations business;
? our ability to sell any of our Hotels at market value, listed sale price, or
at all;
? interest rate fluctuations;
? changes in, or reinterpretations of, governmental regulations, including, but
not limited to, environmental and other regulations, the Americans with
Disability Act and federal income tax laws and regulations;
? competition including supply and demand for hotel rooms and hotel properties;
? availability of credit or other financing;
? our ability to meet present and future debt service obligations;
? our ability to refinance or extend the maturity of indebtedness at, prior to,
or after the time it matures;
? any changes in our financial condition or operating results due to
acquisitions or dispositions of hotel properties;
? insufficient resources to pursue our current strategy;
? concentration of our investments in the InnSuites Hotels® brand;
? loss of membership contracts;
? the financial condition of franchises, brand membership companies and travel
related companies;
? ability to develop and maintain positive relations with “Best Western” and
potential future franchises or brands;
? real estate and hospitality market conditions;
? hospitality industry factors;
? our ability to carry out our strategy, including our strategy regarding
diversification and investments;
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? the Trust’s ability to remain listed on the NYSE American;
? effectiveness of the Trust’s software program;
? the need to periodically repair and renovate our Hotels at a cost at or in
excess of our standard 4% reserve;
? tariffs may affect trade and travel;
? our ability to cost effectively integrate any acquisitions with the Trust in a
timely manner;
? increases in the cost of labor, energy, healthcare, insurance and other
operating expenses as a result of changed or increased regulation or
otherwise;
? outbreaks of communicable diseases attributed to our hotels or impacting the
hotel industry in general;
? natural disasters, including adverse climate changes in the areas where we
have or serve hotels;
? airline strikes;
? transportation and fuel price increases;
? adequacy of insurance coverage and increases in cost for health care coverage
for employees and potential government regulation with respect to health care
coverage;
? data breaches or cybersecurity attacks, including breaches impacting the
integrity and security of employee and guest data; and
? loss of key personnel and uncertainties in the interpretation and application
of the 2017 Tax Cuts and Jobs Act.
We do not undertake any obligation to update publicly or revise any
forward-looking statements whether as a result of new information, future events
or otherwise except as may be required by law. Pursuant to Section 21E(b)(2)(E)
of the Securities Exchange Act of 1934, as amended, the qualifications set forth
hereinabove are inapplicable to any forward-looking statements in this Form 10-K
relating to the operations of the Partnership.
OVERVIEW
We are engaged in the ownership and operation of hotel properties. On April 30,
2022 the Trust had two moderate service hotels in Tucson, Arizona and
Albuquerque, New Mexico with 270 hotel suites. Both of our Hotels are branded
through membership agreements with Best Western, and both are also trademarked
as “InnSuites”. We are also involved in various operations incidental to the
operation of hotels, such as the operation of a restaurant and bar, and
meeting/banquet room rentals.
At April 30, 2022, we owned a direct 21.00% interest in the Albuquerque, New
Mexico Hotel, and, together with the Partnership, owned an indirect 51.01%
interest in the Tucson, Arizona Hotel.
Our operations consist of one reportable segment – Hotel Ownership & Hotel
Management Services. Hotel Ownership Operations derives its revenue from the
operation of the Trust’s two hotel properties with an aggregate of 270 hotel
suites in Arizona and New Mexico. Hotel management services, provides management
services for the Trust’s two Hotels. As part of our management services, we also
provide trademark and licensing services.
Our results are significantly affected by the overall economy and travel,
occupancy and room rates at the Hotels, our ability to manage costs, changes in
room rates, and changes in the number of available suites caused by the Trust’s
disposition activities. Results are also significantly impacted by overall
economic conditions and conditions in the hotel and travel industries. Although
hotel operations have now bounced back, virus-related travel slowdown in the
Fiscal Year 2021, (February 1, 2020 to January 31, 2021), and Fiscal Year 2022,
(February 1, 2021 to January 31, 2022), negatively impacted hotel room demand
and pricing, which reduced our profit margins. Increases in supply or decline in
demand could result in increased competition, which could have an adverse effect
on the rates and occupancy revenue of the Hotels in their respective markets.
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Over time, we expect our UniGen diversification efficient clean energy
generation investment to grow and provide a substantial source of income in the
foreseeable future.
We expect the current Fiscal Year 2023 to be continued recovery of the travel
industry, continued recovery of our Hotel’s occupancy levels, continued recovery
of room rates, as well as continuation of current cost control all leading to
improved profitability of our hotels. We believe that we have positioned the
Hotels to remain competitive through our now fully completed Tucson and
Albuquerque hotel refurbishments, by offering fully refurbished studios and
two-room suites at each location, and by maintaining complementary guest items,
including complimentary breakfast and free Internet access.
Our strategic plan is to continue to obtain the full benefit of our real estate
equity, by ultimately obtaining full market value for our two Hotels at market
value which is believed by management to be substantially higher than lower book
values, over the next 12-36 months. In addition, the Trust is seeking a larger
private reverse merger partner that may benefit from a merger that would afford
that partner access to our listing on the NYSE AMERICAN.
In the process of reviewing merger opportunities, the Trust identified in
December 2019, and invested $1 million in UniGen Power, Inc. (“UniGen”), an
innovative efficient clean energy power generation company. The Trust has
invested $1 million in debentures convertible into 1 million shares of UniGen
Power Inc., and in addition has acquired warrants to purchase approximately an
additional 2 million UniGen shares over the next approximately three years,
which could result up to 25% ownership in UniGen. For more information on our
strategic plan, including information on our progress in disposing of our hotel
properties and expanding energy diversification, see “Future Positioning” in
this Management Discussion and Analysis of Financial Condition and Results of
Operations
HOTEL OPERATIONS
Our expenses consist primarily of property taxes, insurance, corporate overhead,
interest on mortgage debt, professional fees, depreciation of the Hotels and
hotel operating expenses. Hotel operating expenses consist primarily of payroll,
guest and maintenance supplies, marketing, and utilities expenses. Under the
terms of its Partnership Agreement, the Partnership is required to reimburse us
for all such expenses. Accordingly, management believes that a review of the
historical performance of the operations of the Hotels, particularly with
respect to occupancy, which is calculated as rooms sold divided by total rooms
available, average daily rate (“ADR”), calculated as total room revenue divided
by number of rooms sold, and revenue per available room (“REVPAR”), calculated
as total room revenue divided by number of rooms available, is appropriate for
understanding revenue from the Hotels.
The following tables show historical financial and other information for the
periods indicated:
For the Fiscal Year Ended
Albuquerque January 31,
2022 2021 Change %-Incr/Decr
Occupancy 83.40 % 78.60 % 4.80 % 6.11 %
Average Daily Rate (ADR) $ 94.23 $ 68.08 $ 26.15 38.41 %
Revenue Per Available Room (REVPAR) $ 78.59 $ 53.50 $ 25.09 46.90 %
For the Fiscal Year Ended
Tucson January 31,
2022 2021 Change %-Incr/Decr
Occupancy 81.06 % 79.00 % 2.06 % 2.61 %
Average Daily Rate (ADR) $ 113.54 $ 76.89 $ 36.65 47.67 %
Revenue Per Available Room (REVPAR) $ 92.04 $ 60.74 $ 31.30 51.53 %
For the Fiscal Year Ended
Combined January 31,
2022 2021 Change %-Incr/Decr
Occupancy 82.02 % 78.85 % 3.17 % 4.02 %
Average Daily Rate (ADR) $ 105.45 $ 74.84 $ 30.61 40.90 %
Revenue Per Available Room (REVPAR) $ 86.50 $ 59.01 $ 27.49 46.59 %
No assurance can be given that occupancy, ADR and/or REVPAR will not increase or
decrease as a result of changes in national or local economic or hospitality
industry conditions.
We enter transactions with certain related parties from time to time. For
information relating to such related party transactions see the following:
? For a discussion of management and licensing agreements with certain related
parties, see Note 2 to our Unaudited Condensed Consolidated Financial
Statements – “Summary of Significant Policies – Revenue Recognition – Hotel
Operations”
? For a discussion of guarantees of our mortgage notes payable by certain
related parties, see Note 6 to our Unaudited Condensed Consolidated Financial
Statements – “Mortgage Notes Payable.”
? For a discussion of our equity sales and restructuring agreements involving
certain related parties, see Note 3 to our Unaudited Condensed Consolidated
Financial Statements – “Sale of Ownership Interests in Subsidiaries”.
? For a discussion of other related party transactions, see Note 11 to our
Unaudited Condensed Consolidated Financial Statements – “Related Party
Transactions.”
RESULTS OF OPERATIONS FOR THE FISCAL TWELVE MONTH TRAILING ENDED APRIL 30, 2022
COMPARED TO THE FISCAL TWELVE MONTH TRAILING ENDED APRIL 30, 2021.
A summary of total operating results of the Trust for the twelve month trailing
periods ended April 30, 2022 and 2021 is as follows:
FY 2022/23 FY 2021/22 Change % Change
Total Revenues $ 7,146,769 $ 4,155,622 $ 2,991,147 72 %
Operating Expenses 7,098,385 6,891,526 206,859 3 %
Operating Income (Loss) 48,384 (2,735,904 ) 2,784,288 102 %
Interest Income and Other 623,645 712,114 (88,469 ) (12 )%
Interest Expense (412,900 ) (362,693 ) (50,207 ) (14 )%
Employee Retention Benefit 701,582 – 701,582 100 %
Income Tax Benefit 50 68,661 (68,611 ) (100 )%
Consolidated Net Income (Loss) 960,761 (2,317,822 ) 3,278,583 141 %
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RESULTS OF OPERATIONS FOR THE FISCAL THREE MONTHS ENDED APRIL 30, 2022 COMPARED
TO THE FISCAL THREE MONTHS ENDED APRIL 30, 2021
A summary of total operating results of the Trust for the three months ended
April 30, 2022 and 2021 is as follows:
Q1 2022 Q1 2021 Change % Change
Total Revenues $ 2,136,095 $ 1,399,126 $ 736,969 53 %
Operating Expenses 1,990,955 1,605,705 385,250 24 %
Operating Income (Loss) 145,140 (206,579 ) 351,719 170 %
Interest Income and Other 15,731 453,550 (437,819 ) (97 )%
Interest Expense (135,475 ) (89,810 ) (45,665 ) (51 )%
Employee Retention Benefit 350,791 – 350,791 0 %
Consolidated Net Income 376,187 157,161 219,026 139 %
The Trust operations are comprised of one reportable segment, Hotel Ownership &
Hotel Management Services (continuing operations) segment that performs
management services and has ownership interest in two hotel properties with an
aggregate of 270 suites in Arizona and New Mexico.
The Trust has chosen to focus its hotel investments on the southwest region of
the United States. The Trust does not review assets by geographical region;
therefore, no income statement or balance sheet information by geographical
region is provided.
REVENUE:
For the First Fiscal Quarter three months ended April 30, 2022, we had total
revenue of approximately $2.14 million compared to approximately $1.40 million
for the three months ended April 30, 2021, an increase of approximately $0.7
million. In the prior fiscal years ended January 31, 2022, 2020 and 2019, we
made significant improvements to our Albuquerque, New Mexico and Tucson, Arizona
hotels. During the three months ended April 30, 2022, we had an increase in
total revenue resulting from the recovery of demand after the virus related
travel restrictions imposed due to COVID-19, and benefitting from prior
refurbishments.
Total Consolidated Net Income for the three months ended April 30, 2022 was
approximately $376,000 which is an increase of approximately $220,000 from the
same prior Fiscal Quarter for the same period of $157,161. Earnings Per Share
based on this Consolidated Net Income amount were $0.05, up $0.03 from the prior
year of $0.02, and also far exceeding their pre-Covid counterpart of Fiscal Year
2020. Earnings Per Share based on net income (loss) attributable to Controlling
Interest was $0.02, up from the prior year similar three month period of
($0.01).
Total Trust Equity increased to $4,312,186 at the end of Fiscal First Quarter
2023, up approximately $1.6 million, from the $2,760,288 reported at the end of
the prior Fiscal First Quarter 2021. Net Income before non-cash depreciation
expense was $359,806 for the Fiscal First Quarter ended April 30, 2022, compared
to $78,537 for the Fiscal First Quarter ended April 30, 2021, which is an
increase of approximately $281,269.
We realized a 53% increase in room revenues during the three months ended April
30, 2022 as room revenues were approximately $2.09 million for the three months
ending April 30, 2022 as compared to approximately $1.36 million for the three
months ending April 30, 2021. Due to increased demand as the hospitality and
travel industry recovers, food and beverage revenue increased 2% to
approximately $16,000 for the three months ending April 30, 2022 as compared to
approximately $15,000 during the three months ending April 30, 2021, an increase
of approximately $1,000. During Fiscal Year 2023, we expect additional
improvements in occupancy, modest improvements in rates and steady food and
beverage revenues.
EXPENSES:
Total expenses net of interest expense was approximately $2.0 million for the
three months ended April 30, 2022 reflecting an increase of approximately $0.4
million, or 24%, compared to total expenses net of interest expense of
approximately $1.6 million for the three months ended April 30, 2021. The
increase was primarily due to an increase in operating expenses related to
increased occupancy and revenues at the hotel properties.
Room expenses consisting of salaries and related employment taxes for property
management, front office, housekeeping personnel, reservation fees and room
supplies were approximately $567,000 for the three months ended April 30, 2022
compared to approximately $474,000 in the prior year three month period for an
increase of approximately $93,000, or 20%. Room expenses increased as occupancy
at the hotels increased, and increased expenses were incurred with the increased
occupancy.
Food and beverage expenses included food and beverage costs, personnel and
miscellaneous costs to provide banquet events. For the three months ended April
30, 2022, food and beverage expenses increased approximately $16,000, or 40%, to
approximately $56,000 for the three months ended April 30, 2022, compared to
approximately $40,000 for the three months ended April 30, 2021. The increase in
cost relative to the increase in food and beverage revenue is due to increasing
food and beverage purchasing costs.
General and administrative expenses include overhead charges for management,
accounting, shareholder and legal services. General and administrative expenses
of approximately $601,000 for the three months ended April 30, 2022, increased
approximately $145,000 from approximately $456,000 for the three months ended
April 30, 2021 primarily due to higher charges in corporate staffing in support
of the hotels and property sales efforts.
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Sales and marketing expense increased approximately $69,000, or 85%, to
approximately $150,000 for the three months ended April 30, 2022 from
approximately $81,000 for the three months ended April 30, 2021. Increased focus
on sales and marketing due to the rebound in hotel occupancy drove the increase.
Repairs and maintenance expense increased by approximately $16,000, or 18%, from
approximately $91,000 reported for the three months ended April 30, 2021
compared to approximately $108,000 for the three months ended April 30, 2022.
Having completed the property improvements at our Tucson, Arizona hotel
Management anticipates the improvements which complies with the increasing Best
Western standards, will (after the adverse effects of travel restrictions and
slowdown), lead to improvement in guest satisfaction and will drive additional
revenue growth through increased occupancy and increased rates.
Hospitality expense increased by approximately $25,000, or 48%, from $52,000 for
the three months ended April 30, 2021 to approximately $77,000 for the three
months ended April 30, 2022. The increase was primarily due to COVID-19
regulations minimizing and reducing food service availability, restricting our
complimentary breakfast and social hour offerings.
Utility expenses increased approximately $25,000, or 30%, to approximately
$110,000 reported for the three months ended April 30, 2021 compared with
approximately $85,000 for the three months ended April 30, 2022.
Hotel property depreciation expenses decreased by approximately $13,000 from
approximately $185,000 reported for the three months ended April 30, 2021
compared to approximately $172,000 for the three months ended April 30, 2022.
Decreased depreciation resulted from the capital expenditures being fully
depreciated.
Real estate and personal property taxes, Insurance and Ground Rent expenses
increased approximately $21,000, or 17%, to approximately $144,000 reported for
the three months ended April 30, 2022 compared with approximately $123,000 for
the three months ended April 30, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Overview – Hotel Operations & Corporate Overhead
Two principal sources of cash to meet our cash requirements, include monthly
management fees from our two hotels and distributions to our investors of our
share of the Partnership’s cash flow of the Tucson hotel, and quarterly
distributions from the Albuquerque, New Mexico properties. Potential future real
estate hotel sales is another future source of cash. The Partnership’s principal
source of revenue is hotel operations for the hotel property it owns in Tucson,
Arizona and Albuquerque, New Mexico. Our liquidity, including our ability to
make distributions to our shareholders, will depend upon our ability, and the
Partnership’s ability, to generate sufficient cash flow from hotel operations,
from management fees, and from the potential sale and/or refinance of the hotel,
and to service our debt and the source of repayment of intercompany loan from
Tucson and Albuquerque.
Hotel operations were significantly affected by improved occupancy and
substantially increased room rates at the Hotels in the Fiscal Year 2022, as the
travel industry continues to rebound.
With approximately $3.8 million of cash as of April 30, 2022 and the
availability of three $250,000 bank lines of credit, and $2,000,000 available
from the $2,000,000 related party Demand/Revolving Line of Credit/Promissory
Note, and the availability of Advances to Affiliate credit facilities and
available Bank line of Credit, we believe that we will have enough cash on hand
to meet all of our financial obligations as they become due for at least the
next twelve months from the issuance date of the these consolidated financial
statements. Our management is analyzing other strategic options available to us,
including raising additional funds, asset sales, and benefitting from clean
energy investment cash flow as our diversification investment matures.
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IHT and InnDependent Boutique Collections Hotels (IBC), agreed to extend the
payment schedule on IBC’s note receivable to allow IBC to fully use its revenues
to build market share as the hotel industry rebounds. Management believes that
with an additional extension repayment term, that the future collectability of
the current carrying value of the note is probable and not subject to further
impairment, or allowance for the Quarter ended April 30, 2022.
There can be no assurance that we will be successful in refinancing debt or
raising additional or replacement funds, or that these funds may be available on
terms that are favorable to us. If we are unable to raise additional or
replacement funds, we may be required to sell certain of our assets to meet our
liquidity needs, which may not be on terms that are favorable.
We anticipate no additional new-build hotel supply in our markets during the
remaining Fiscal Year 2023, and accordingly we anticipate a continued rebound of
revenues and operating margins. We expect challenges for the upcoming fiscal
year to be inflation, cost control, travel, leisure, corporate, group, and
government business continued rebound to grow occupancy and further increase
room rates while maintaining and/or building market share.
Cash provided by operating activities from continuing operations totaled
approximately $92,000 during the three months ended April 30, 2022 as compared
to net cash provided of approximately $50,000 during the three months ended
April 30, 2021. Consolidated net income was approximately $376,000 for the three
months ended April 30, 2022 as compared to consolidated net income for the three
months ended April 30, 2021 of approximately $157,000. Explanation of the
differences between these fiscal years are explained above in the results of
operations of the Trust.
Changes in the adjustments to reconcile net income for the three months ended
April 30, 2022 and 2021, respectively, consist primarily of operating lease
costs, stock-based compensation, hotel property depreciation, and changes in
assets and liabilities. Hotel property depreciation was approximately $172,000
during the three months ended April 30, 2022 compared to approximately $185,000
during the three months ended April 30, 2021, a decrease of $13,000 as the Trust
recognized less depreciation as capitalized fixed assets became fully
depreciated.
Changes in assets and liabilities for accounts receivable, prepaid expenses and
other assets and accounts payable and accrued expenses totaled approximately
$105,000 and $30,000 for the three months ended April 30, 2022 and 2021,
respectively. This significant decrease in changes in assets and liabilities for
the three months ended April 30, 2022 compared to the three months ended April
30, 2021 was due to the decrease in operating liabilities related to ongoing
operations.
Net cash used in investing activities totaled approximately $160,000 for the
three months ended April 30, 2022 compared to net cash used in investing
activities of approximately $59,000 for the three months ended April 30, 2021.
The increase in net cash used in activities during the three months ended April
30, 2022 was due primarily due to the additional investment into UniGen in 2022.
Net cash provided by (used in) financing activities totaled approximately
$2,697,000 and ($134,000), respectively, for the three months ended April 30,
2022 and 2021. The increase of approximately $2,831,000 was primarily due to the
refinance of the Tucson Oracle mortgage, offset by repayments to Rare Earth on
the Note Payable – Related Party.
Principal payments on mortgage notes payable for continuing operations was
approximately $26,000 and $58,000 during the three months ended April 30, 2022
and 2021, respectively. Net payments and borrowings on other notes payable was
approximately ($4,000) and approximately ($22,000) during the three months ended
April 30, 2022 and 2021, respectively.
Payments on notes payables-related party, netted against borrowings on note
payable-related party, was approximately ($977,000) and ($605,000) of cash used
in financing activities during the three months ended April 30, 2022 and 2021,
respectively.
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Borrowings on other notes payables netted against payments on other note payable
was approximately $0 and $551,000 of net cash used in financing activities
during the three months ended April 30, 2022 and 2021, respectively.
We had no sales of our IHT stock for cash for the three months ended April 30,
2022 and 2021.
During the three months ended April 30, 2022, our distributions to
non-controlling interest holders was approximately $156,000 compared with
approximately $0 for the three months ended April 30, 2021.
We continue to contribute to a Capital Expenditures Fund (the “Fund”) an amount
equal to 4% of our Tucson InnSuites Hotel revenues from operation of the Hotel.
The Fund is restricted by the mortgage lender for our Tucson property. As of
April 30, 2022, and 2021, there were no monies held in these accounts reported
on our unaudited condensed consolidated Balance Sheet as “Restricted Cash.” The
Fund is intended to be used for capital improvements to the Hotels and
refurbishment and replacement of furniture, fixtures and equipment. During the
three months ended April 30, 2022 and 2021, the Hotel spent approximately
$50,000 and $59,000 respectively, for capital expenditures. The capital
expenditures were primarily associated with the property improvements at the
Hotel, as required to meet continuing Best Western standards. We consider most
of these improvements to be revenue producing. Therefore, these amounts are
capitalized and depreciated over their estimated useful lives. For the remaining
Fiscal Year 2023 capital expenditures, we plan on spending less on capital
improvements as we have completed our property improvements at our Tucson,
Arizona hotel and our Albuquerque hotel, both of which required significant
amounts of capital improvements in prior periods. Repairs and maintenance were
charged to expense as incurred and approximated $107,000 and $91,000 for the
three months ended April 30, 2022 and 2021, respectively.
We have minimum debt payments, net of debt discounts, of approximately $743,000
and approximately $224,000 due during Fiscal Years 2023 and 2024, respectively.
Minimum debt payments due during Fiscal Year 2023 and 2024 include approximately
$158,000 and $224,000 of mortgage notes payable, and approximately $586,000 and
$0 of other notes payable, which are secured promissory notes outstanding to
unrelated third parties arising from the Shares of Beneficial Interest and
Partnership unit repurchases, respectively.
We may seek to negotiate additional credit facilities or issue debt instruments.
Any debt incurred or issued by us may be secured or unsecured, long-term,
medium-term, or short-term, bear interest at a fixed or variable rate and be
subject to such other terms as we consider prudent.
COMPETITION IN THE HOTEL INDUSTRY
The hotel industry is competitive. The hotel industry has been recovering and
growing since April, 2021. While none of the Hotels’ competitors dominate any of
their geographic markets, some of those competitors may have greater marketing
and financial resources than the Trust.
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Certain additional hotel property refurbishments have been completed by
competitors in both Hotels’ markets, and additional hotel property developments
may be built in the future. Such hotel developments could have an adverse effect
on the revenue of our Hotels in their respective markets.
The Trust’s hotel investments are located in Arizona and New Mexico. With the
completed renovations at our Tucson, Arizona and Albuquerque, New Mexico hotel
properties, those hotels are expected to see incremental demand during the next
18 months, as supply had been steady in those respective markets, and is
expected to increase. Either an increase in supply or a decline in demand could
result in increased competition, which could have an adverse effect on
occupancy, room rates and revenues of our Hotels in their respective markets.
The hotels experienced a decrease in demand due to the impact of virus-related
restrictions and reduction of travel after February 1, 2021 to January 31, 2022.
The recovery is benefitting our hotels in the First Fiscal Quarter of 2023,
February 1, 2022 to April 30, 2022. This improvement and continued upward trend
is expected to continue for the balance of Fiscal Year 2023, through January 31,
2023, as the Travel Industry continues its recovery.
The Trust may not invest further in hotels, but rather diversify into
investments such as the investment made by the Trust in December 2019 in the
innovative UniGen Power, Inc. (UniGen), efficient clean energy power generation
company. The Trust may continue to seek further diversification through a
reverse merger with a larger non-public entity seeking an NYSE-American public
stock market listing.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
As a partial offset to the current hotel industry virus induced drop in demand
pressure, the Trust looks to benefit from, and expand, its UniGen clean energy
operation diversification investments in the months, and years ahead. See Note 2
of the unaudited consolidated financial statements for discussion on UniGen.
In our Annual Report on Form 10-K for the Fiscal Year ended January 31, 2022
filed with the SEC on May 27, 2022, we identified the critical accounting
policies that affect our more significant estimates and assumptions used in
preparing our condensed consolidated financial statements. We believe that the
policies we follow for the valuation of our Hotel properties, which constitute
most of our assets, are our most critical policies which has not changed in the
period ended April 30, 2022. Those policies include methods used to recognize
and measure any identified impairment of our Hotel property assets.
Asset Impairment
We believe that the policies we follow for the valuation of our hotel
properties, which constitute most of our assets, are our most critical policies.
The Financial Accounting Standards Board (“FASB”) has issued authoritative
guidance related to the impairment or disposal of long-lived assets, codified in
ASC Topic 360-10-35, which we apply to determine when it is necessary to test an
asset for recoverability. On an events and circumstances basis, we review the
carrying value of our hotel properties. We will record an impairment loss and
reduce the carrying value of a property when anticipated undiscounted future
cash flows and the current market value of the property do not support it
carrying value. In cases where we do not expect to recover the carrying cost of
hotel properties held for use, we will reduce the carrying value to the fair
value of the hotel, as determined by a current appraisal or other acceptable
valuation methods. We did not recognize a hotel properties impairment loss for
the three months ended April 30, 2022 or 2021. As of April 30, 2022, our
management does not believe that the carrying values of any of our hotel
properties are impaired.
Sale of Hotel Assets
Management believes that our currently owned Hotels are valued at prices that
are reasonable in relation to their current fair market value. At this time, the
Trust is unable to predict when, and if, either of its Hotel properties will be
sold. The Trust seeks to sell one hotel per year or both over the next 12-36
months. We believe that each of the assets is available at a price that is
reasonable in relation to its current fair market value. The plan is to work to
sell the remaining two hotel properties over the next 12-36 months, and if
needed beyond.
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Revenue Recognition
Revenues are primarily derived from the sources below and are recognized as
services are rendered and when collectability is reasonably assured. Amounts
received in advance of revenue recognition are considered deferred liabilities
and are generally not significant.
Revenues primarily consist of room rentals, food and beverage sales, management
and trademark fees and other miscellaneous revenues from our properties.
Revenues are recorded when rooms are occupied and when food and beverage sales
are delivered.
Each room night consumed by a guest with a cancellable reservation represents a
contract whereby the Trust has a performance obligation to provide the room
night at an agreed upon price. For cancellable reservations, the Trust
recognizes revenue as each performance obligation (i.e., each room night) is
met. Such contract is renewed if the guest continues their stay. For room nights
consumed by a guest with a non-cancellable reservation, the entire reservation
period represents the contract term whereby the Trust has a performance
obligation to provide the room night or nights at an agreed upon price. For
non-cancellable reservations, the Trust recognizes revenue over the term of the
performance period (i.e., the reservation period) as room nights are consumed.
For these reservations, the room rate is typically fixed over the reservation
period. The Trust uses an output method based on performance completed to date
(i.e., room nights consumed) to determine the amount of revenue it recognizes on
a daily basis if the length of a non-cancellable reservation exceeds one night
since consumption of room nights indicates when services are transferred to the
guest. In certain instances, variable consideration may exist with respect to
the transaction price, such as discounts, coupons and price concessions made
upon guest checkout.
In evaluating its performance obligation, the Trust bundles the obligation to
provide the guest the room itself with other obligations (such as free Wi-Fi,
grab and go breakfast, access to on-site laundry facilities and parking), as the
other obligations are not distinct and separable because the guest cannot
benefit from the additional amenities without the consumed room night. The
Trust’s obligation to provide the additional items or services is not separately
identifiable from the fundamental contractual obligation (i.e., providing the
room and its contents). The Trust has no performance obligations once a guest’s
stay is complete.
We are required to collect certain taxes and fees from customers on behalf of
government agencies and remit these back to the applicable governmental agencies
on a periodic basis. We have a legal obligation to act as a collection agent. We
do not retain these taxes and fees and, therefore, they are not included in
revenues. We record a liability when the amounts are collected and relieve the
liability when payments are made to the applicable taxing authority or other
appropriate governmental agency.
COMPLIANCE WITH CONTINUED LISTING STANDARDS OF NYSE AMERICAN
On November 15, 2021, the Trust received a letter from the NYSE American
indicating it did not meet certain financial requirements to remain listed, and
set a timeframe of 18 months to May 2023, to once again meet those standards of
earnings, capitalization, and/or profitability. The Trust provided the required
Plan by December 15, 2021, and the NYSE American has granted the additional 18
months to execute the Plan.
IHT temporarily fell out of compliance with the NYSE-American listing standards
due to the Covid related reduction in travel. IHT regained compliance
immediately following its 10-K Filing for the Fiscal year ended January 31,
2022, in May 2022.
The Trust’s Management believes it is now fully compliant with the Continued
Listing Standards Equity Requirements of the NYSE-American.
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NON-GAAP FINANCIAL MEASURES
The following non-GAAP presentations of earnings before interest, taxes,
depreciation, and amortization (“EBITDA”) and funds from operations (“FFO”) are
made to assist our investors in evaluating our operating performance.
Adjusted EBITDA is defined as earnings before interest expense, amortization of
loan costs, interest income, income taxes, depreciation and amortization, and
non-controlling interests in the Trust. We present Adjusted EBITDA because we
believe these measurements (a) more accurately reflect the ongoing performance
of our hotel real estate assets and other investments, (b) provide more useful
information to investors as indicators of our ability to meet our future debt
payments and working capital requirements, and (c) provide an overall evaluation
of our financial condition. Adjusted EBITDA as calculated by us may not be
comparable to Adjusted EBITDA reported by other companies that do not define
Adjusted EBITDA exactly as we define the term. Adjusted EBITDA does not
represent cash generated from operating activities determined in accordance with
GAAP and should not be considered as an alternative to (a) GAAP net income or
loss as an indication of our financial performance or (b) GAAP cash flows from
operating activities as a measure of our liquidity.
A reconciliation of net income (loss) attributable to controlling interests to
Adjusted EBITDA for the three and three months ended April 30, 2022 and 2021 is
approximately as follows:
Three Months Ended April 30,
2022 2021
Net income (loss) attributable to controlling interests $ 188,000 $ (106,000 )
Add back:
Depreciation 172,000 185,000
Interest expense 135,000 90,000
Less:
Interest Income (16,000 ) (454,000 )
Adjusted EBITDA $ 479,000 $ (285,000 )
FFO is calculated on the basis defined by the National Association of Real
Estate Investment Trusts (“NAREIT”), which is net income (loss) attributable to
common shareholders, computed in accordance with GAAP, excluding gains or losses
on sales of properties, asset impairment adjustments, and extraordinary items as
defined by GAAP, plus depreciation and amortization of real estate assets, and
after adjustments for unconsolidated joint ventures and non-controlling
interests in the operating partnership. NAREIT developed FFO as a relative
measure of performance of an equity REIT to recognize that income-producing real
estate historically has not depreciated on the basis determined by GAAP. The
Trust is an unincorporated Ohio real estate investment trust; however, the Trust
is not a real estate investment trust for federal taxation purposes. Management
uses this measurement to compare itself to REITs with similar depreciable
assets. We consider FFO to be an appropriate measure of our ongoing normalized
operating performance. We compute FFO in accordance with our interpretation of
standards established by NAREIT, which may not be comparable to FFO reported by
other companies that either do not define the term in accordance with the
current NAREIT definition or interpret the NAREIT definition differently than
us. FFO does not represent cash generated from operating activities as
determined by GAAP and should not be considered as an alternative to (a) GAAP
net income or loss as an indication of our financial performance or (b) GAAP
cash flows from operating activities as a measure of our liquidity, nor is it
indicative of funds available to satisfy our cash needs, including our ability
to make cash distributions. However, to facilitate a clear understanding of our
historical operating results, we believe that FFO should be considered along
with our net income or loss and cash flows reported in the consolidated
financial statements.
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An approximate reconciliation of net income (loss) attributable to controlling
interests to FFO for the three and three months ended April 30, 2022 and 2021:
Three Months Ended April 30,
2022 2021
Net income (loss) attributable to controlling interests $ 188,000 $ (106,000 )
Add back:
Depreciation 172,000 185,000
Non-controlling interest 188,000 264,000
FFO $ 548,000 $ 343,000
FUTURE POSITIONING
In viewing the hotel industry cycles, recently reconfirmed by the disruption of
travel and hospitality, the Board of Trustees determined that it was appropriate
to continue to actively seek buyers for our two remaining Hotel properties. We
continue to make our Tucson Hotel and Albuquerque Hotel available for sale at
market value, on the website www.suitehotelsrealty.com.
The table below provides book values, mortgage balances and listed asking price
for the Hotels.
Mortgage
Hotel Property Book Value Balance Estimated Market Asking Price
Albuquerque $ 1,181,154 $ 1,299,000
8,595,000
Tucson Oracle 6,346,071 8,447,000 17,950,000
$ 7,527,225 $ 9,746,000 $ 26,545,000
The “Estimated Market Asking Price” is the amount at which we believe would sell
each of the Hotels and is adjusted to reflect hotel sales in the Hotels’ areas
of operation and projected upcoming 12 month earnings of each of the Hotels. The
Estimated Market Asking Price is not based on appraisals of the properties.
We have from time to time listed each of the properties with a local real estate
hotel broker who has successfully sold five of our hotel properties and we
believe that each of the assets are being marketed at a price that is reasonable
in relation to its current fair value. We plan to sell our remaining two Hotel
properties one within 12-36 months, based on current fair market value feedback
received by our local hotel real estate property professional brokers, who
specialize in the selling/buying hotel real estate properties. We can provide no
assurance that we will be able to sell either or both of the Hotel properties on
terms favorable to us or within our expected time frame, or at all.
Although believed feasible, we may be unable to realize the asking price for the
individual Hotel properties or to sell and/or refinance one or both. However, we
believe that the asking price values are reasonable based on rebounding local
market conditions, comparable sales, and anticipated upturns in occupancy,
rates, and profits per hotel. Changes in market conditions have in part
resulted, and may in the future result, in our changing one or all of the asking
prices.
Our long-term strategic plan is to obtain the full benefit of our real estate
equity, to benefit from our UniGen Power, Inc., (UniGen) clean energy operation
diversified investment, and to pursue a merger with another company, likely a
private larger entity that seeks to go public to list on the NYSE AMERICAN
Exchange.
SHARE REPURCHASE PROGRAM
For information on the Trust’s Share Repurchase Program, see Part II, Item 5.
“Market for the Registrant’s Common Equity Related Stockholder Matters and
Issuer Purchases of Equity Securities.” of our most recent 10-K Annual Report
filed on May 27, 2022. The stock and unit Repurchase Program was highly
successful during the Covid-19 Pandemic, throughout Fiscal Year 2022 (February
1, 2021 to January 31, 2022). We plan to continue and accelerate the stock and
unit buy backs in the current Fiscal Year 2023.
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OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements or liabilities. We
do not have any majority-owned or controlled subsidiaries that are not included
in our consolidated financial statements.
SEASONALITY
The Hotels’ operations historically have been somewhat seasonal. The Tucson
Hotel typically experiences its highest occupancy in the first fiscal quarter
and, to a lesser extent, the fourth fiscal quarter (the winter high season). The
second fiscal quarter tends to be the lowest occupancy period at the Tucson
Hotel. This seasonality pattern can be expected to cause fluctuations in the
Trust’s quarterly revenues. The hotel located in New Mexico historically
experiences their most profitable periods during the second and third fiscal
quarters (the summer high season), providing balance to the general seasonality
of the Trust’s hotel business.
The seasonal nature of the Trust’s business increases its vulnerability to risks
such as labor force shortages and cash flow issues. Further, if an adverse event
such as an actual or threatened terrorist attack, viral outbreak or pandemic,
international conflict, data breach, regional economic downturn or poor weather
conditions should occur during the high season, the adverse impact to the
Trust’s revenues could likely be greater as a result of its seasonal business.
INFLATION
We rely entirely on the performance of the Hotels and InnSuites Hotels’ ability
to increase revenue to keep pace with inflation. Operators of hotels in general,
and InnSuites Hotels in particular, can change room rates quickly, but
competitive pressures may limit InnSuites Hotels’ ability to raise rates as fast
as or faster than inflation.
INVESTMENT IN UNIGEN POWER, INC.
On December 16, 2019, the Trust entered into a Convertible Debenture Purchase
Agreement with UniGen Power Inc. (“UniGen”).
The Trust purchased secured convertible debentures (“Debentures”) in the
aggregate amount of $1,000,000 (the “Loan Amount”) (the “Loan”) at an annual
interest rate of 6% (approximately $15,000 per quarter). The Debentures are
convertible into 1,000,000 Class A shares of UniGen Common Stock at an initial
conversion rate of $1.00 per share.
UniGen issued the Trust common stock purchase warrants (the “Debenture
Warrants”) including to purchase up to 1,000,000 shares of Class A Common Stock.
The Debenture Warrants are exercisable at an exercise price of $1.00 per share
of Class A Common Stock.
UniGen, also, issued the Trust additional common stock purchase warrants
(“Additional Warrants”) to purchase up to 200,000 shares and another 300,000
shares of Class A Common Stock. The Additional Warrants are exercisable at an
exercise price of $2.25 per share of Class A Common Stock.
UniGen has also agreed to allow IHT to fund a $500,000 line of credit at the
option of IHT convertible into 500,000 shares of UniGen stock at $1 per share.
The balance on this line of credit as of January 31, 2022 is $0.
The total of all stock ownership upon conversion of the note receivable is 1
million shares and if all stock warrants available but not outstanding are
exercised, these would total approximately 3 million UniGen shares, which
amounts to approximately 25% of fully diluted UniGen equity.
On the Trust’s balance sheet, the investment of the $1,000,000 consists of
approximately $700,000 in note receivables and approximately $300,000 as the
fair value of the warrant issued with the Trust’s investment in UniGen. The
value of the premium related to the fair value of the warrants will accrete over
the life of the debentures.
Privately held UniGen Power, Inc. (UniGen) is developing a patented high profit
potential new efficient clean energy generation innovation. The investment is
valued at fair value (level 3), as defined in Note 2 of the Consolidated
Financial Statements. There is no Investment Commitment to UniGen requiring any
restriction of cash. IHT has indicated its intention to exercise an additional
$190,000 investment in $1 warrants in October and November, 2022.
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UniGen is currently in pursuit of three additional valuable patents.
UniGen Power Inc. management recently reported substantial progress on several
fronts of the InnSuites Hospitality Trust (IHT) efficient clean energy
innovation diversification investment including the following:
1. Despite Covid travel and supply chain disruptions including ” reshoring” of a
portion of UniGen parts, UniGen management targets the UPI 1000 NG first
prototype to be in operation on or before December 2022 subject to continuing
supply chain delay challenges, and UniGen cash available.
2. Due to Covid, global economic events, an increasingly unreliable American
power grid, inflation, and supply chain pressures, the UniGen marketing team
estimates market position has grown and the planned power plant price has been
increased. The initial order for thirty units was recently reaffirmed.
3. UniGen Recently raised an additional $1.3 million through early existing
UniGen warrant exercises, including a $190,000 additional commitment from IHT as
part of a pre-production GenSet capital raise.
UniGen continues to seek additional development and pre-production financing.
James Wirth (President) and Marc Berg (Executive Vice President) both lack
significant control. They have two of the six Board of Directors seats or 33%
and were elected in December 2019 to serve on the board of UNIGEN to closely
monitor and assist in the success of this potentially power industry disruptive
relatively clean energy generation innovation.
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