InterGroup Corporation (NASDAQ: INTG) — Form 10-Q Summary
Reporting period: Quarter ended March 31, 2020, the third quarter of fiscal 2020, with nine-month comparisons to March 31, 2019. The filing is unaudited. Although the request metadata says “2019 Q3,” the filing itself covers 2020 Q3.
Business context and results
InterGroup’s principal operations are a 544-room Hilton hotel in San Francisco, a portfolio of residential and commercial real estate, and investments in marketable securities. The hotel is held through the Justice partnership and consolidated in the company’s statements.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total revenue | $15.016 million, down from $19.213 million | $52.902 million, down from $56.451 million |
| Operating income | $0.779 million, versus $3.899 million | $7.762 million, versus $11.599 million |
| Consolidated net income (loss) | $(3.059) million, versus $1.335 million | $(2.035) million, versus $1.341 million |
| Net income (loss) attributable to InterGroup | $(2.580) million, versus $1.051 million | $(1.996) million, versus $0.654 million |
| Operating cash flow | Not presented separately for the quarter | $2.271 million, versus $8.030 million |
Quarterly hotel revenue declined 27% to $11.259 million. Hotel operating income before interest, depreciation and amortization was $1.199 million, or about 10.6% of hotel revenue, versus $4.091 million, or about 26.4%, a year earlier. For the nine months, hotel revenue fell 8% to $41.589 million and hotel operating income before interest and depreciation declined to $8.451 million from $11.852 million.
Financial position and liquidity
- At March 31, 2020, total assets were $119.052 million, total liabilities $190.118 million, and total shareholders’ deficit $71.066 million.
- Cash and cash equivalents were $7.994 million; restricted cash was $13.493 million, for total cash, cash equivalents and restricted cash of $21.487 million. The filing notes that $11.550 million was restricted at the hotel lender.
- Reported debt-related balances included hotel mortgages of $111.729 million, real-estate mortgages of $57.399 million, a $2.985 million line of credit, $4.798 million of related-party and other notes, and $1.206 million of finance leases. These balances are reported net where applicable.
- Nine-month cash used in investing activities was $2.112 million and cash used in financing activities was $3.804 million. Cash, cash equivalents and restricted cash decreased by $3.645 million from the start of the period.
- Marketable securities were $2.853 million at quarter-end, down from $9.696 million at June 30, 2019. The portfolio recorded a $2.393 million quarterly loss and a $2.961 million nine-month loss.
Material changes and unusual items
- Hotel room demand deteriorated sharply in March as COVID-19 disrupted travel, conventions and business activity. For the quarter, occupancy was 76% versus 95%, average daily rate was $242 versus $290, and RevPAR was $184 versus $276.
- Quarterly consolidated results were also hurt by marketable-securities losses; the company reported a $2.393 million quarterly marketable-securities loss compared with a $0.961 million gain in the prior-year quarter. For the nine-month period, marketable-securities losses were $2.961 million versus $1.181 million.
- On February 5, 2020, InterGroup contributed its remaining 44.6% interest in Woodland Village to Santa Fe Financial in exchange for 97,500 Santa Fe shares. Woodland Village became wholly owned by Santa Fe; a potential subsequent earn-out is provided for in the agreement. The transaction was approved by InterGroup’s board after an independent fairness opinion, with the CEO abstaining.
- In March, the company recorded $116,000 of stock-compensation expense after extending the term of the CEO’s 100,000 options. The shareholder-approved plan amendments extended the plan and permitted longer option terms.
- InterGroup relied on SEC relief related to COVID-19 for the filing deadline; the filing states it would otherwise have been due May 15, 2020. It was signed June 18, 2020.
Outlook, risks and contingencies
- Management expects the pandemic and reduced hotel occupancy and room rates to materially and adversely affect business, liquidity and results, with operating cash flow significantly below historical levels for the foreseeable future. The hotel was not generating enough revenue to cover its operating expenses, according to the risk disclosure.
- The company furloughed hotel managers other than executive-team members, minimized hourly staffing, temporarily closed food-and-beverage outlets, reduced nonessential spending and postponed capital expenditures. Management also cited potential effects on staffing, guest loyalty, reputation and labor relations.
- Management believed available cash, subsequent financing and other liquidity sources would cover anticipated needs for at least 12 months, even if low occupancy persisted, but cautioned that its plans might not succeed.
- After quarter-end, Justice and InterGroup received CARES Act SBA loans of $4.719 million and $0.453 million, respectively, at 1% interest, with stated maturities in April 2022. Forgiveness may be available for qualified uses; eligibility and forgiveness remained subject to SBA terms and evolving guidance.
- In April 2020, the company refinanced New Jersey apartment-property mortgages with an $18.370 million fixed-rate loan at 3.17%, due April 2030, receiving approximately $6.814 million net proceeds. Two California property refinancings were planned for June and July 2020.
- Justice requested lender approval to release PIP reserves and use some FF&E reserves for operating costs and debt service, and requested temporary interest-only payments and suspension of monthly FF&E deposits. The company estimated approximately $321,000 of monthly cash-flow savings if these requests were granted; resolution was pending as of the filing.
- Management identified possible covenant pressure at the hotel from low occupancy, though it reported no missed debt-service payments and did not anticipate missing obligations over the next 12 months. It also cited possible impairment of long-lived assets and deferred tax assets.
Important facts for investors to verify
- Subsequent hotel occupancy, room rates and operating cash flow, and whether hotel revenue has recovered enough to cover operating costs.
- Whether the lender approved the requested reserve releases and payment relief, and the status of hotel loan covenants and debt service.
- Cash available for general use versus restricted cash, and whether SBA loans qualify for forgiveness and on what terms.
- Completion and proceeds of planned California refinancings, and the terms and repayment implications of the New Jersey refinancing.
- Any impairment charges, further portfolio losses, or consequences of the Woodland Village contribution and potential earn-out.