ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Form 10-K for the fiscal year ended January 31, 2021.
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 with respect to 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:
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Covid-19
Virus Pandemic and its effect and recovery on the Economic and Travel Industry slowdown;
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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;
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fluctuations
in hotel occupancy rates;
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changes
in room rental rates that may be charged by InnSuites Hotels in response to market rental rate changes or otherwise;
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seasonality
of our hotel operations business;
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our
ability to sell any of our Hotels at market value, or at all;
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interest
rate fluctuations;
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changes
in, or reinterpretations of, governmental regulations, including, but not limited to, environmental and other regulations, the Americans
with Disability Act, Covid-19 restrictions, and federal income tax laws and regulations;
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competition
including supply and demand for hotel rooms and hotel properties;
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availability
of credit or other financing;
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our
ability to meet present and future debt service obligations;
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our
ability to refinance or extend the maturity of indebtedness at, prior to, or after the time it matures;
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any
changes in our financial condition or operating results due to acquisitions or dispositions of hotel properties;
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concentration
of our investments in the InnSuites Hotels® brand;
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loss
of membership contracts;
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the
financial condition of franchises, brand membership companies and travel related companies;
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ability
to develop and maintain positive relations with “Best Western” and potential future franchises or brands;
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real
estate and hospitality market conditions;
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hospitality
industry factors;
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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;
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effectiveness
of the Trust’s software and cyber security;
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the
need to periodically repair and renovate our Hotels at a cost at or in excess of our standard 4% reserve;
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tariffs
and health travel restrictions may affect trade and travel;
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our
ability to cost effectively integrate any acquisitions with the Trust in a timely manner;
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increases
in the cost and availability of labor, energy, healthcare, insurance and other operating expenses as a result of inflation, or changed
or increased regulation, or otherwise;
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terrorist
attacks or other acts of war;
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outbreaks
of communicable diseases attributed to our hotels or impacting the hotel industry in general;
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natural
disasters, including adverse climate changes in the areas where we have or serve hotels;
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airline
strikes;
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transportation
and fuel price increases;
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adequacy
of insurance coverage and increases in cost for health care coverage for employees and potential government regulation with respect
to health care coverage;
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data
breaches or cybersecurity attacks, including breaches impacting the integrity and security of employee and guest data; and
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loss
of key personnel and uncertainties in the interpretation and application of ever-changing tax laws.
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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 July 31, 2021. 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 trademarked as InnSuites Hotels. We are also involved in various operations incidental to the operation of hotels, such
as the operation of restaurants and meeting/banquet room rentals.
At
July 31, 2021, we owned a direct 20.67% 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 Operations & 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 travel industry. Unfavorable changes in these factors,
such as the virus-related travel slowdown in the Fiscal Year 2021, (February 1, 2020 to January 31, 2021), can and have negatively impacted
hotel room demand and pricing, which reduces our profit margins. Additionally, our ability to manage costs could be adversely impacted
by significant increases in operating expenses, resulting in lower operating margins and higher hourly labor costs. Either a further
increase in supply or a further 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.
We
experienced extremely weak economic conditions during the first six months of Fiscal Year 2021, February 1, 2020 to July 31,
2020, compared to Fiscal Year 2020 due to the Virus. primarily a result of the Covid-19 virus pandemic. As of July 31, 2021,
we are experiencing a solid recovery of travel and hospitality industry which is expected to continue for the remainder of the current
Fiscal Year 2022, ending January 31, 2022 due to recovering from the Covid-19 travel related restrictions. We expect the major challenge
for current Fiscal Year 2022 to be the continued recovery of the travel industry, continued recovery of our Hotel’s occupancy levels,
continued by recovery of room rates, as well as continuation of current strong cost control all leading to improved profitability of
our hotels. We believe that we have positioned the Hotels to remain competitive through our now completed refurbishment(s), by offering
a relatively large number of fully refurbished two-room suites at each location, and by maintaining robust 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 seeking buyers for the remaining two Hotels at
market value which is 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”, or “UPI), 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 two to 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, labor, 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:
Albuquerque
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For the Six Months Ended July 31,
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2021
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2020
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Change
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%-Incr/Decr
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Occupancy
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85.00
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%
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58.90
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%
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26.10
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%
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44.31
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%
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Average Daily Rate (ADR)
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$
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77.92
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$
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70.84
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$
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7.08
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|
|
9.99
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%
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Revenue Per Available Room (REVPAR)
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$
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66.23
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$
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41.73
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$
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24.50
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58.71
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%
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Tucson
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|
For the Six Months Ended July 31,
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2021
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|
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2020
|
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Change
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%-Incr/Decr
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Occupancy
|
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73.80
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%
|
|
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55.90
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%
|
|
|
17.90
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%
|
|
|
32.02
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%
|
Average Daily Rate (ADR)
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|
$
|
76.59
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|
|
$
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85.14
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|
$
|
(8.55
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)
|
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|
-10.04
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%
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Revenue Per Available Room (REVPAR)
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|
$
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56.52
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|
|
$
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47.59
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|
|
$
|
8.93
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|
|
|
18.76
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%
|
Total
|
|
For the Six Months Ended July 31,
|
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|
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2021
|
|
|
2020
|
|
|
Change
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%-Incr/Decr
|
|
Occupancy
|
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|
78.43
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%
|
|
|
57.06
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%
|
|
|
21.37
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%
|
|
|
37.45
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%
|
Average Daily Rate (ADR)
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|
$
|
77.19
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|
|
$
|
79.42
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|
|
$
|
(2.23
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)
|
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|
-2.81
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%
|
Revenue Per Available Room (REVPAR)
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|
$
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60.54
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$
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45.32
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$
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15.22
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33.58
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%
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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:
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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”
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●
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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.”
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●
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For
a discussion of our equity sales and restructuring agreements involving certain related parties, see Notes 3 to our Unaudited Condensed
Consolidated Financial Statements – “Sale of Ownership Interests in Subsidiaries”.
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●
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For
a discussion of other related party transactions, see Note 11 to our Unaudited Condensed Consolidated Financial Statements –
“Related Party Transactions.”
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RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JULY 31, 2021 COMPARED TO THE SIX MONTHS ENDED JULY 31, 2020
A
summary of total operating results of the Trust for the six months ended July 31, 2021 and 2020 is as follows:
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2021
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2020
|
|
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Change
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% Change
|
|
Total Revenues
|
|
$
|
3,069,189
|
|
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$
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2,370,798
|
|
|
$
|
698,391
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|
|
|
29
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%
|
Operating Expenses
|
|
|
3,313,337
|
|
|
|
3,887,365
|
|
|
|
(574,028
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)
|
|
|
(15
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)%
|
Operating Loss
|
|
|
(244,148
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)
|
|
|
(1,516,567
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)
|
|
|
1,272,419
|
|
|
|
84
|
%
|
Interest Income and Other
|
|
|
967,463
|
|
|
|
64,352
|
|
|
|
903,111
|
|
|
|
1,403
|
%
|
Interest Expense
|
|
|
(164,590
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)
|
|
|
(168,027
|
)
|
|
|
3,437
|
|
|
|
2
|
%
|
Consolidated Net Income (Loss)
|
|
|
558,725
|
|
|
|
(1,620,242
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)
|
|
|
2,178,967
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|
|
|
134
|
%
|
The
Chief Operating Decision Maker (“CODM”), Mr. Wirth, CEO of the Trust, has determined that the Trust operations are comprised
of one reportable segment, Hotel Operations & Hotel Management Services (continuing operations) segment that has ownership interest
and manages 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 CODM does not review assets by geographical
region; therefore, no income statement or balance sheet information by geographical region is provided.
REVENUE:
For
the six months ended July 31, 2021, we had total revenue of approximately $3.1 million compared to approximately $2.4 million for the
six months ended July 31, 2020, an increase of approximately $0.7 million. In the prior fiscal years ended January 31, 2021, 2020 and
2018, we made significant refurbishment improvements to our Albuquerque, New Mexico and Tucson, Arizona. During the six months ended
July 31, 2021, we began to see increases in occupancy as demand and travel began to recover from COVID-19. Consolidated Net Income
for the six months ended July 31, 2021 was $558,725 which is an increase in excess of $2.1 million from the same prior year period of
($1,620,242). Earnings Per Share based on net loss attributable to Controlling Interest was ($0.02), up from the prior year six month
period of ($0.18), and based on the Non-GAAP calculation of Consolidated Net Income (Loss), the earnings per share was $0.06, up $0.15
from prior year similar period loss of ($0.09).
We
realized a 39% increase in room revenues during the six months ended July 31, 2021 as room revenues were approximately $2.9 million for
the six months ending July 31, 2021 as compared to approximately $2.1 million for the six months ending July 31, 2020. Due to continued
COVID-19 restrictions, food and beverage revenue decreased slightly by 13% to approximately $29,000 for the six months ending July 31,
2021 as compared to approximately $33,000 during the six months ending July 31, 2020, a decrease of approximately $4,000. During the
remainder of Fiscal year 2021, we expect improvements in occupancy. Management and trademark fee revenues decreased due to the sale of
the Tempe hotel in December 2020, and were $0 compared to approximately $75,000 during the six months ended July 31, 2020. We
realized an approximate 34% decrease in other revenues from the hotel properties during the six months ended July 31, 2021 to approximately
$89,000 as compared to approximately $135,000 during the six months ended July 31, 2020.
EXPENSES:
Total
expenses net of interest expense was approximately $3.3 million for the six months ended July 31, 2021 reflecting a decrease of approximately
$574,000, or 15%, compared to total expenses net of interest expense of approximately $3.9 million for the six months ended July 31,
2020. The decrease was primarily due to a decrease in sales and occupancy expense due to an occupancy tax discrepancy generated from
our Tucson Oracle and Albuquerque hotels from prior periods.
Room
expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation
fees and room supplies were approximately $919,000 for the six months ended July 31, 2021 compared to approximately $826,000 in the prior
year six month period for an increase of approximately $93,000, or 11%. Room expenses increased as occupancy at the hotels increased,
and 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 six months
ended July 31, 2021, food and beverage expenses increased approximately $31,000, or 50%, to approximately $95,000 for six months ended
July 31, 2021, compared to approximately $63,000 for the six months ended July 31, 2020. The increase in cost relative to the decrease
in food and beverage revenue is due to increasing food and beverage purchasing costs combined with additional staff associated with increased
demand.
General
and administrative expenses include overhead charges for management, accounting, shareholder and legal services. General and administrative
expenses of approximately $954,000 for the six months ended July 31, 2021, increased approximately $36,000 from approximately $918,000
for the six months ended July 31, 2020 primarily due to higher charges in corporate staffing in support of the hotels and property sales
efforts.
Sales
and marketing expense decreased approximately $37,000, or 17%, to approximately $185,000 for the six months ended July 31, 2021 from
approximately $222,000 for the six months ended July 31, 2020. Open positions for sales and marketing resources, due to a tight labor
market, accounted for the decrease.
Repairs
and maintenance expense increased by approximately $19,000, or 11%, to approximately $194,000 for the six months ended July 31, 2021
from approximately $175,000 for the six months ended July 31, 2020. Having completed the refurbishment property improvements at our Tucson,
Arizona hotel Management anticipates the improvements which complies with the increasing Best Western standards, will continue to lead
to improvement in guest satisfaction and will drive additional revenue growth through increased occupancy and increased rates.
Hospitality
expense increased by approximately $10,000, or 10%, to approximately $105,000 for the six months ended July 31, 2021 from approximately
$95,000 for the six months ended July 31, 2020. The increase was primarily due to the increased occupancy at the hotel properties as
demands and travel began to recover from COVID-19.
Utility
expenses increased approximately $22,000, or 10%, to approximately $200,000 reported for the six months ended July 31, 2021 from approximately
$178,000 for the six months ended July 31, 2020. The increase was due to increased occupancy at the hotel properties as demands and travel
began to recover from COVID-19.
Hotel
property depreciation expenses decreased by approximately $63,000 to approximately $363,000 for the six months ended July 31, 2021 from
approximately $426,000 for the six months ended July 31, 2020. Decreased depreciation resulted from the capital expenditures being fully
depreciated.
Real
estate and Personal Property Taxes, Insurance and Ground Rent expenses increased approximately $42,000, or 20%, to approximately $252,000
for the six months ended July 31, 2021 from approximately $210,000 for the six months ended July 31, 2020. The increase was primarily
due to increased insurance costs combined with increased property taxes.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2021 COMPARED TO THE THREE MONTHS ENDED JULY 31, 2020
A
summary of total operating results of the Trust for the three months ended July 31, 2021 and 2020 is as follows:
|
|
2021
|
|
|
2020
|
|
|
Change
|
|
|
% Change
|
|
Total Revenues
|
|
$
|
1,670,063
|
|
|
$
|
924,720
|
|
|
$
|
745,343
|
|
|
|
81
|
%
|
Operating Expenses
|
|
|
1,707,632
|
|
|
|
2,158,467
|
|
|
|
(450,835
|
)
|
|
|
(21
|
)%
|
Operating Loss
|
|
|
(37,569
|
)
|
|
|
(1,233,747
|
)
|
|
|
1,196,178
|
|
|
|
97
|
%
|
Interest Income and Other
|
|
|
513,913
|
|
|
|
46,596
|
|
|
|
467,317
|
|
|
|
1,003
|
%
|
Interest Expense
|
|
|
(74,780
|
)
|
|
|
(80,234
|
)
|
|
|
73,454
|
|
|
|
(7
|
)%
|
Income Tax Provision
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
%
|
Consolidated Net Income (Loss)
|
|
|
401,564
|
|
|
|
(1,267,385
|
)
|
|
|
1,668,949
|
|
|
|
132
|
%
|
REVENUE:
For
the three months ended July 31, 2021, we had total revenue of approximately $1.7 million compared to approximately $925k for the three
months ended July 31, 2020, an increase of approximately $745,000. In the prior fiscal years ended January 31, 2021, 2020 and 2018, we
made significant improvements to our Albuquerque, New Mexico and Tucson, Arizona. During the three months ended July 31, 2021, we began
to see increases in occupancy as demand and travel began to recover from COVID-19. Consolidated Net Income for the three months ended
July 31, 2021 was $401,564 which is an increase of over $1.6 million from the same prior year period of ($1,267,385).
Earnings Per Share based on net loss attributable to Controlling Interest was ($0.01), up from the prior year three
month period of ($0.14), and based on the Non-GAAP calculation of Consolidated Net Income (Loss), the earnings per share was $0.04, up
$0.11 from prior year similar period loss of ($0.07).
We
realized a 25% increase in room revenues during the three months ended July 31, 2021 as room revenues were approximately $446,000 for
the three months ending July 31, 2021 as compared to approximately $357,000 for the three months ending July 31, 2020. Due to COVID-19
eased restrictions and associated removal of lockdowns elsewhere, which allowed more dining out options instead of eating in the Hotels,
food and beverage revenue decreased by 25% to approximately $13,000 for the three months ending July 31, 2021 as compared to approximately
$18,000 during the three months ending July 31, 2020, a decrease of approximately $5,000. During fiscal year 2021, we expect additional
improvements in occupancy, modest improvements in rates and steady food and beverage revenues. Management and trademark fee revenues
decreased due to the sale of the Tempe hotel in December 2020, and were $0 compared to approximately $32,000 during the three
months ended July 31, 2020. We realized an approximate 143% increase in other revenues from the hotel properties during the three months
ended July 31, 2021 to approximately $69,000 as compared to approximately $28,000 during the three months ended July 31, 2020.
EXPENSES:
Total
expenses net of interest expense was approximately $1.7 million for the three months ended July 31, 2021 reflecting a decrease
of approximately $451,000, or 21%, compared to total expenses net of interest expense and income tax provision of approximately $2.1
million for the three months ended July 31, 2020. The decrease was primarily due to the sales and occupancy tax expense
incurred in the prior three month period and not incurred in the current period.
Room
expenses consisting of salaries and related employment taxes for property management, front office, housekeeping personnel, reservation
fees and room supplies were approximately $446,000 for the three months ended July 31, 2021 compared to approximately $357,000 in the
prior year three month period for a increase of approximately $89,000, or 25%. Room expenses increased as occupancy at
the hotels increased, and additional 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 July 31, 2021, food and beverage expenses increased approximately $24,000, or 77%, to approximately $55,000 for three months ended
July 31, 2021, compared to approximately $31,000 for the three months ended July 31, 2020. The increase in cost relative to the decrease
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 $498,000 for the three months ended July 31, 2021, increased approximately $157,000 from approximately $340,000
for the three months ended July 31, 2020 primarily due to higher charges in corporate staffing in support of the hotels and property
sales efforts.
Sales
and marketing expense decreased approximately $8,000, or 7%, to approximately $104,000 for the three months ended July 31, 2021 from
approximately $112,000 for the three months ended July 31, 2020. Open positions for sales and marketing resources, due to a tight labor
market, accounted for the decrease.
Repairs
and maintenance expense decreased by approximately $16,000, or 19%, to approximately $103,000 for the three months ended July 31, 2021
from approximately $87,000 for the three months ended July 31, 2020. 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 $26,000, or 102%, to approximately $52,000 for the three months ended July 31, 2021 from approximately
$26,000 for the three months ended July 31, 2020. The increase was primarily due to the increased occupancy at the hotel properties due
to the removal of COVID-19 restrictions and lockdowns.
Utility
expenses increased approximately $18,000, or 19%, to approximately $115,000 reported for the three months ended July 31, 2021
from approximately $97,000 for the three months ended July 31, 2020. The increase was due to increased occupancy at the hotel properties
as demands and travel began to recover from COVID-19.
Hotel
property depreciation expenses decreased by approximately $34,000 to approximately $178,000 for the three months ended July 31, 2021
from approximately $212,000 for the three months ended July 31, 2020. Decreased depreciation resulted from the capital expenditures being
fully depreciated.
Real
Estate and Personal Property Taxes, Insurance and Ground Rent expenses increased approximately $2,000, or 2%, to approximately $129,000
for the three months ended July 31, 2021 from approximately $127,000 for the three months ended July 31, 2020. The increase was primarily
due to increased insurance costs.
LIQUIDITY
AND CAPITAL RESOURCES
Overview
– Hotel Operations & Corporate Overhead
One
principal source of cash to meet our cash requirements, including dividends to our shareholders, is our share of the Partnership’s
cash flow, and quarterly distributions from the Tucson and Albuquerque hotel 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.
Hotel
operations were significantly affected by occupancy and room rates at the Hotels in the Fiscal year 2021. As the Covid-19 vaccine becomes
more readily available and desired, and as the economy and travel industry continue to recover, occupancy has begun to recover from the
Virus, as has the related economic and travel slowdown since April 2021 and is anticipated to continue throughout Fiscal 2022. Capital
improvements are expected to decrease from the prior year due to the completed refurbishments mentioned previously.
With
approximately $1.7 million of cash as of July 31, 2021 and the availability of three $250,000 bank lines of credit, and $788,000 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. In addition,
our management is analyzing other strategic options available to us, including additional asset sales, and increasing borrowings at our
Tucson hotel. However, such transactions may not be available on terms that are favorable to us, or at all.
IHT
and InnDependent Boutique Collections Hotels (IBC), agreed to extend the payment schedule on IBC’s note receivable by one (1) year,
extending the first payment from November 2020 to November 2021. The reason for the extension is in support of IBC’s cash requirements;
related to IBC’s realization of fully benefiting from a return in occupancy and travel. These potential benefits in turn improve
IHT’s secured position on its note receivable from IBC, with secured UCC Filings in place. Management also believes that even with
an additional extension repayment term due to COVID-19 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 July 31, 2021.
Refer
to Note 16 – “Note Receivable” for information related to the Sale of IBC Hospitality Technologies (IBC).
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 2022 and most likely Fiscal Year 2023,
and accordingly we anticipate continuation since April 2021 of the recovery of revenues, room rates, and operating margins. We expect
the major challenge for the current Fiscal Year to be the continued economic and travel recovery of leisure, corporate, group, and government
business in the markets in Fiscal 2022 in which we operate, which may affect our ability to continue to maintain and recover occupancy
and further increase room rates while maintaining and/or building market share.
Net
cash provided by operating activities from operations totaled approximately
$184,000 during the six months ended July 31, 2021 as compared to net cash used in by approximately $393,000 during the six months ended
July 31, 2020. Consolidated net income was approximately $559,000 for the six months ended July 31, 2021 as compared to consolidated
net loss for the six months ended July 31, 2020 of approximately $1.6 million. 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 (loss) for the six months ended July 31, 2021 and 2020, respectively, consist primarily of
PPP Loan Forgiveness, operating lease costs, stock-based compensation, hotel property depreciation, and changes in assets and
liabilities.
Changes
in assets and liabilities for accounts receivable, prepaid expenses and other assets and accounts payable and accrued expenses totaled
approximately $42,000 and $786,000 for the six months ended July 31, 2021 and 2020, respectively. This significant decrease in changes
in assets and liabilities for the six months ended July 31, 2021 compared to the six months ended July 31, 2020 was due primarily
to a large reduction in accounts receivable from the prior six month period compared to the current six month period of greater than
$500,000 which was a result of accounts receivable being better accounted for timely, reducing balances, combined with payments received
in the current period.
Net
cash used in investing activities totaled approximately $117,000 for the six months ended July 31, 2021 compared to net cash used in
investing activities of approximately $400,000 for six three months ended July 31, 2020. The change in net cash provided by investing
activities during the six months ended July 31, 2021 was due primarily due to the completed investment into UniGen in 2020.
Net
cash used in financing activities totaled approximately $67,000 and $277,000, respectively, for the six months ended July 31, 2021 and
2020. The decrease of approximately $210,000 was primarily due to repayments and borrowings on the note payable - related party,
approximately $105,000 in distributions, and approximately $207,000 in repurchases in treasury shares and treasury stock in the prior
period that did not occur in the current period.
Principal
payments on mortgage notes payable for operations was approximately $101,000 and $81,000 during the six months ended July 31, 2021 and
2020, respectively. Net payments and borrowings on notes payable to banks was approximately $0 and approximately $17,000 during the six
months ended July 31, 2021 and 2020, respectively.
Borrowings
on notes payables – related party, netted against payments on note payable–related party, was approximately $382,000 and
$161,000 of cash used in financing activities during the six months ended July 31, 2021 and 2020, respectively.
Borrowings
on other notes payables netted against payments on other note payable was approximately $511,000 and $381,000 of net cash provided by
financing activities during the six months ended July 31, 2021 and 2020, respectively.
Proceeds
from sales of non-controlling ownership interests in subsidiaries decreased by approximately $10,000 as sales of non-controlling ownership
interest was $0 for the six months ended July 31, 2021 and approximately $10,000 for the six months ended July 31, 2020. We had no sales
of our IHT stock for cash for the six months ended July 31, 2021.
During
the six months ended July 31, 2021, our distributions to non-controlling interest holders was approximately $0 compared with approximately
$105,000 for the six months ended July 31, 2020.
We
continue to contribute to a Capital Expenditures Fund (the “Fund”) an amount equal to 4% of the InnSuites Hotels’ revenues
from operation of the Hotels. The Fund is restricted by the mortgage lender for one of our properties. As of July 31, 2021, and 2020,
there were no monies held in these accounts reported on our 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 six months ended July 31, 2021 and 2020, the Hotels spent approximately $0 and $191,000, respectively, for capital expenditures.
The capital expenditures were primarily associated with the property improvements at the Hotels, 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 2021 capital expenditures, we plan on spending less on capital improvements
as we have completed our property improvements at our Tucson, Arizona hotel which required significant amounts of capital improvements
during the six months ending July 31, 2020. Repairs and maintenance were charged to expense as incurred and approximated $194,000 and
$175,000 for the six months ended July 31, 2021 and 2020, respectively.
We
have minimum debt payments, net of debt discounts, of approximately $99,000 and approximately $1.9 million due during fiscal years 2022
and 2023, respectively. Minimum debt payments due during fiscal year 2022 and 2023 include approximately $84,000 and $175,000 of mortgage
notes payable, and approximately $15,000 and $577,000 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 highly competitive. There are clear signs and trends of economic recovery since April 2021, in this early part of the
current Fiscal Year 2022 from the prior year, as most of our operations for Fiscal Year 2021 from February 1, 2020 until
January 31, 2021 were down and well below previous averages in all aspects of our hotel operations, due to the impact of COVID-19.
In the current Second Fiscal Quarter of Fiscal Year 2022, ending July 31, 2021, both the Tucson and Albuquerque hotels have experienced
strong recovery of revenue and even stronger rebounds of gross operating profit to continue due to the ongoing stringent cost control
measures. Revenues are growing, and gross operating profit is growing even more again due to stringent cost control measures. The drastic
impact of COVID-19 to the world economy and hospitality industry resulted in severely reduced occupancy and significant reduction in
room rates. Continued competition for reduced demand in corporate, leisure, group, and government business in the markets in which we
operate, may affect our ability to maintain room rates and maintain market share. Each of the Hotels faces competition primarily from
other mid-market hotels located in its immediate vicinity, but also competes with hotel properties located in other geographic markets,
and increasingly from alternative lodging facilities, such as Airbnb. 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.
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 now seeing incremental demand which is expected to continue during the next 18 months,
as supply had been steady in those respective markets, and demand is expected to continue to increase as COVID-19 restrictions phase
out. 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 impact
of the COVID-19 virus and the related restrictions and reduction of travel after February 1, 2020 to January 31, 2021. The recovery is
benefitting our hotels especially since April 2021 and continuing throughout the Second Fiscal Quarter May 1, 2021 to July 31, 2021.
This improvement and continued upward trend is expected to continue for the balance of Fiscal Year 2022, through January 31, 2022, as
the Covid-19 vaccines become more readily available both nationally and internationally, and the Travel Industry continues its recovery
worldwide.
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. (UPI), efficient clean energy power generation company. The Trust may continue to seek further diversification
through a reverse merger with a larger non-public entity.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
As
a partial offset to the current hotel industry Virus induced fluctuation of demand, 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, 2021 filed with the SEC on May 17, 2021, 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 a major portion of our
assets, are our most critical policies which have not changed in the period ended July 31, 2021. 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 six months ended July 31, 2021 or 2020. As of July 31, 2021,
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.
Revenue
Recognition
Revenues
are primarily derived from the following sources and are recognized as services are rendered and when collectability is reasonably assured.
Amounts received in advance of revenue recognition are considered deferred liabilities.
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
April 30, 2021, the Trust requested and was granted an extension for their annual Form 10-K. As a result, the NT 10-K filed (Form 12b-25
Filing Extension), granted a fifteen day extension for the Trust to file its’ annual Form 10-K, until May 17, 2021. Consequently,
the Trust completed and filed its’ annual 10-K and corresponding press release on May 14, 2021, and is still considered to be in
compliance currently. On June 23, 2021, the Trust received communication from the NYSE AMERICAN indicating a Late-Filer Notification
would be issued, provided it’s current quarterly 10-Q for the period ended April 30, 2021 would be considered delinquent if not
filed on or before June 29, 2021. The Trust is now current and compliant, and was able to complete their 10-Q for the period ended April
30, 2021, filing it on June 28, 2021, thus avoiding any delinquency status and adhering to this timeline. On September 15, 2021, the
Trust filed Form 12b-25, requesting an extension for their 10-Q for the period ended July 31, 2021.The trust is currently making every
effort to remain current and compliant.
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 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 loss attributable to controlling interests to Adjusted EBITDA for the three and six months ended July 31, 2021
and 2020 is approximately as follows:
|
|
Three Months Ended July 31,
|
|
|
Six Months Ended July 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net loss attributable to controlling interests
|
|
$
|
(59,000
|
)
|
|
$
|
(665,000
|
)
|
|
$
|
(166,000
|
)
|
|
$
|
(807,000
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
178,000
|
|
|
|
212,000
|
|
|
|
363,000
|
|
|
|
427,000
|
|
Interest expense
|
|
|
75,000
|
|
|
|
80,000
|
|
|
|
165,000
|
|
|
|
168,000
|
|
Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
|
-
|
|
|
|
(47,000
|
)
|
|
|
-
|
|
|
|
(64,000
|
)
|
Adjusted EBITDA
|
|
$
|
194,000
|
|
|
$
|
(420,000
|
)
|
|
$
|
362,000
|
|
|
$
|
(276,000
|
)
|
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 unaudited condensed consolidated financial statements.
An
approximate reconciliation of net loss attributable to controlling interests to FFO for the three and six months ended July 31, 2021
and 2020:
|
|
Three Months Ended July 31,
|
|
|
Six Months Ended July 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Net loss attributable to controlling interests
|
|
$
|
(59,000
|
)
|
|
$
|
(665,000
|
)
|
|
$
|
(166,000
|
)
|
|
$
|
(807,000
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
178,000
|
|
|
|
212,000
|
|
|
|
363,000
|
|
|
|
427,000
|
|
Non-controlling interest
|
|
|
461,000
|
|
|
|
(602,000
|
)
|
|
|
724,000
|
|
|
|
(813,000
|
)
|
FFO
|
|
$
|
580,000
|
|
|
$
|
(1,055,000
|
)
|
|
$
|
921,000
|
|
|
$
|
(1,193,000
|
)
|
FUTURE
POSITIONING
In
viewing the hotel industry cycles, recently reconfirmed by the COVID-19 disruption of travel and hospitality, the Board of Trustees determined
that it was appropriate 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, (which is substantially higher than the carrying book value which reflects years of non-cash
depreciation expense), on the website www.suitehotelsrealty.com.
The
table below provides book values, mortgage balances and listed asking price for the Hotels.
Hotel Property
|
|
Book Value
|
|
|
Mortgage Balance
|
|
|
Estimated Market/Asking Price
|
|
Albuquerque
|
|
$
|
1,223,600
|
|
|
$
|
1,317,223
|
|
|
|
7,995,000
|
|
Tucson Oracle
|
|
|
6,652,756
|
|
|
|
4,519,491
|
|
|
|
16,600,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,876,356
|
|
|
$
|
5,836,714
|
|
|
$
|
24,595,000
|
|
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 long time highly successful local real estate hotel broker who has successfully
sold four of our hotel properties. We believe that each of the assets are being marketed at a price that is reasonable in relation to
its current fair market value. We plan to sell our remaining two Hotel properties within 12-36 months, based on 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 upturn 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., (UPI) 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 17,
2021. The stock and unit Repurchase Program was highly successful during the Covid-19 Pandemic, throughout Fiscal Year 2021 (February
1, 2020 to January 31, 2021). We plan to continue the stock and unit buy backs in the current Fiscal Year 2022.
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. (“UPI” or “UniGen”).
The
Trust purchased secured convertible debentures (“Debentures”) in the aggregate amount of $1,000,000 (the “Loan Amount”)
(the “Loan”) yielding at an annual interest rate of 6%. 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”) to purchase up to 1,000,000 shares of Class A
Common. 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
of Class A Common Stock and a separate grant of 300,000 warrants. The Additional Warrants are exercisable at an exercise price of $2.25
per share of Class A Common Stock.
On
the Trust’s balance sheet, the investment of the $1,090,000 consists of approximately $700,000 in note receivables, approximately
$300,000 as the fair value of the warrants issued with the Trust’s investment in UniGen, and $90,000 of UniGen Common Stock. The
value of the premium related to the fair value of the warrant will accrete over the life of the debentures.
InnSuites
Hospitality Trust (IHT) made an initial $1 million diversification investment in late Fiscal Year 2020 and early Fiscal Year 2021 that
could expand into a multi-million-dollar investment totaling up to approximately 25 percent ownership in privately held UniGen Power,
Inc. (UniGen) to develop a patented high profit potential new efficient clean energy generation innovation. The initial investment was
made December 16, 2019, with significant positive progress to date despite the virus, economic, and travel disruptions of 2020. The investment
includes warrants convertible to UniGen stock upon election of the Trust. 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 is likely to obtain an opportunity to extend
and then convert a $500,000 UniGen line of credit into 500,000 shares of UniGen. IHT, but not UniGen, has an option to extend the line
of credit up to $500,000, and also has the option to receive payment convertible into stock at $1 per share. Full conversion of all IHT
held convertible debt and UniGen warrants could result in 3 million shares of UniGen stock. If all shares from all parties are fully
exercised, it would result in approximately 12 million UniGen shares outstanding, of which approximately up to 25% of the total equity
of UniGen would be held by IHT. The Trust owns less than 1% of the outstanding shares of UniGen as of July 31, 2021.
According
to UniGen Management, the UniGen clean energy innovation project has made positive progress, with the first two GenSet prototypes anticipated
to be in operation in a time period around year-end, 2021. A time delay is related to several factors, including the Covid-19 travel
restrictions on UniGen engineers to travel to UniGen China suppliers, time needed to incorporate three additional patentable innovations
discovered, and design improvements. Global Supply sources include China, Italy, Israel, and the United States. IHT has confidence in
the UniGen technical team based in Detroit and in the encouraging progress to date. Unigen profitability is anticipated to be 15 months
into the future, but future high profit potential is encouraging for IHT investors, especially considering 22 months of successful design
and development work, now complete.
James
Wirth (President) and Marc Berg (Executive Vice President) both lack significant control. They hold two of the six Board of Directors
seats or 33% and were elected in December 2019 to serve on the board of UPI to closely monitor and assist in the success of this potentially
power industry disruptive relatively clean energy generation innovation.