A decade ago James Wirth, boss of InnSuites Hospitality (NYSE: IHT), was looking for freedom in operations. So he removed the REIT status from the real estate company he founded thirty years prior so that he could focus on its day-to-day operations and hence avoid scrutiny by Wall street analysts. And because InnSuites had plenty of net loss carryover on its balance sheet from a prior merger, the REIT status lost its appeal.
Mr Wirth exhorted his shareholders to change the business strategy from the management of hotel properties to the development a booking system and a membership club. Yet while InnSuites recently boasted that the booking system has a network of over 6,000 independent hotels owners, with over 2 million rooms across the globe, it has little earnings to show for it. In its recent annual report, InnSuites recorded a minuscule $20,000 of revenue from this operating segment.
Management explained that the change in business strategy is due to a poor outlook on the hotel industry. But the lackluster operating performance over the past five years is, perhaps, at fault. Revenue per share declined to $1.77 from $1.89 per share; net operating income declined to $0.07 from $0.22 per share; equity book value declined to $0.36 from $0.40 per share; operating margin declined to less than 5% from above 10%; and debt service coverage ratio declined to 0.69 times from 1.19 times.
To develop a booking system is riskier than to manage a portfolio of hotels. First, there is plenty of competition in this space. Marriott controls 30 brands and offers a booking and loyalty program on over 5,700 hotels with over 1.1 million rooms. Hilton offers a similar booking system on over 4,300 hotels with over 715,000 rooms. Second, the concentration on one source of revenue is typically riskier compared the revenue stream from the operations of multiple hotels (before the change, the company had revenue stream from five hotels located in four different states).