The InterGroup Corporation — Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended December 31, 2018, the second quarter and first half of InterGroup’s fiscal year ending June 30, 2019. InterGroup’s principal activities are hotel operations, residential and commercial real estate, and investment transactions. Its hotel business is conducted through subsidiaries and affiliates and includes the 544-room Hilton San Francisco Financial District and its parking garage.
Financial performance and position
| Metric | Three months ended Dec. 31, 2018 | Prior-year quarter | Six months ended Dec. 31, 2018 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $17.749 million | $16.812 million | $37.238 million | $34.926 million |
| Income from operations | $2.919 million | $1.970 million | $7.700 million | $5.495 million |
| Consolidated net income (loss) | $(1.122) million | $(2.507) million | $0.006 million | $(2.802) million |
| Net income (loss) attributable to InterGroup | $(1.027) million | $(1.205) million | $(0.397) million | $(1.617) million |
| Operating cash flow | Not stated separately | Not stated separately | $4.825 million | $1.996 million |
- Revenue increased 5.6% in the quarter and 6.6% in the half-year. Operating income rose about 48% and 40%, respectively. Operating margin was approximately 16.4% for the quarter and 20.7% for the half-year.
- Hotel revenue was $13.997 million for the quarter and $29.807 million for the half-year. Quarterly hotel occupancy was 97% versus 89%; RevPAR was $232 versus $212, while average daily rate was $239 versus $240. For the half-year, occupancy was 97% versus 91%, and RevPAR was $250 versus $225.
- Marketable securities generated a $1.971 million quarterly net loss and a $2.142 million half-year net loss. The portfolio’s fair value fell to $7.586 million from $13.841 million at June 30, 2018; the company reported $11.495 million of unrealized losses on securities held over one year at December 31.
- At December 31, total assets were $125.404 million, total liabilities $195.785 million, and total shareholders’ deficit $70.381 million. Cash and cash equivalents were $8.978 million, restricted cash $10.551 million, and marketable securities $7.586 million. The balance-sheet presentation does not provide enough current-asset and current-liability detail to calculate a current ratio.
- Reported borrowings included hotel mortgage notes, net, of $113.789 million; real estate mortgage notes, net, of $59.311 million; a $2.985 million line-of-credit balance; and $5.550 million of related-party and other notes. The filing’s contractual-obligations schedule totals $228.910 million including interest; that is not the same as balance-sheet debt.
Material changes versus prior comparable periods
- Quarterly consolidated net loss narrowed by $1.385 million year over year; the company attributed the improvement primarily to higher hotel revenue. The half-year moved from a $2.802 million consolidated loss to $6,000 of consolidated income, while the loss attributable to InterGroup narrowed to $397,000.
- Hotel room revenue increased, supported by the company’s strategy to limit some midweek group business and attract higher-rate transient guests. Food and beverage revenue declined. Hotel operating expenses rose, including group commissions, management fees, and labor costs.
- Real estate income improved, which management attributed to increased occupancy and lower expenses, including real estate taxes in the quarter and salary expense in the half-year.
- Six-month operating cash flow increased to $4.825 million from $1.996 million. Investing activities used $917,000; financing activities used $1.890 million, including $4.411 million of net mortgage and other note payments, partly offset by $2.985 million drawn on the new line of credit.
- Marketable securities declined in value, contributing to investment losses. The company also repurchased treasury stock for $464,000 in the half-year.
Outlook, risks, and unusual items
- No quantified earnings or revenue guidance is provided. Management said it expects hotel and garage cash flows to meet the Partnership’s obligations and believes cash, securities, and real estate cash flows will cover the company’s obligations. It also cited potential borrowing capacity supported by appreciated hotel value.
- Management cautioned that hotel debt-service requirements create risk. The hotel mortgage bears 5.275% interest and the subordinated mezzanine loan bears 9.75%; both mature in January 2024. InterGroup has also guaranteed obligations and must meet specified net-worth and liquidity requirements; it reported compliance at December 31, 2018.
- The $5.0 million revolving credit facility bears interest at 30-day LIBOR plus 3% and is due in July 2019. A $3.0 million related-party loan is extended to June 30, 2019. These near-term maturities are relevant to liquidity.
- InterGroup adopted ASC 606 on July 1, 2018 using the modified retrospective method, with no cumulative adjustment to accumulated deficit. It planned to adopt the new lease standard on July 1, 2019 and was assessing its effect.
- Disclosure controls and procedures were reported as ineffective at quarter-end because a material weakness related to deferred income taxes and tax provision preparation had not been fully remediated. Management described remediation efforts as ongoing.
- The company reported no pending or threatened legal actions during the period and no off-balance-sheet arrangements. It warned that securities gains and losses can fluctuate substantially and that economic conditions, travel demand, competition, interest rates, labor issues, and other risks could affect results.
Important facts for investors to verify
- Confirm the timing and refinancing plan for the July 2019 revolving-credit maturity and the related-party loan due June 2019.
- Assess the hotel’s ability to sustain operating performance and debt service, including the effect of occupancy, room rates, labor, and group-business mix.
- Review the valuation and concentration risk in marketable securities, including the reported long-held unrealized losses and Comstock exposure.
- Track remediation of the tax-related material weakness and whether disclosure controls become effective.
- Reconcile the MD&A statement that hotel revenue increased 11.2% for the six months with the financial-statement figures, which show hotel revenue of $29.807 million versus $27.624 million, an increase of approximately 7.9%. The 11.2% increase corresponds to hotel room revenue in the table.