The InterGroup Corporation — Q2 FY2018 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2017; comparative periods ended December 31, 2016. Balance-sheet figures are compared with June 30, 2017. The company consolidates its hotel and real-estate operations and has a marketable-securities investment portfolio.
Financial highlights
| Metric | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2017 |
|---|---|---|
| Total revenue | $16.812 million | $34.926 million |
| Income from operations | $1.970 million | $5.495 million |
| Net loss | $2.507 million | $2.802 million |
| Net loss attributable to InterGroup | $1.205 million | $1.617 million |
| InterGroup loss per share, basic and diluted | $0.51 | $0.68 |
| Net cash provided by operating activities | $1.996 million for the six months |
Quarterly revenue increased 2.3% year over year, while operating income fell 36.6%. Six-month revenue increased 0.7%, while operating income declined 24.7%. The reported consolidated net loss widened from $2.009 million to $2.507 million in the quarter and from $0.414 million to $2.802 million for the six months. The six-month operating cash flow was below the prior-period $2.512 million. Investing activities used $0.639 million and financing activities used $1.919 million; cash and cash equivalents declined $0.562 million to $2.309 million.
Quarterly consolidated operating margin was approximately 11.7% (income from operations divided by revenue), versus approximately 18.9% in the prior-year quarter. The filing does not present a consolidated gross margin measure.
Operations and material changes
- Hotel: Quarterly revenue was $13.187 million, up from $12.837 million. Operating income before interest, depreciation and amortization was $2.444 million, down from $3.226 million; the segment reported an $88,000 loss after mortgage interest and depreciation, versus $666,000 income. Occupancy was 89% in both quarters; average daily rate rose to $240 from $236 and RevPAR to $212 from $210.
- For the six months, hotel revenue rose to $27.624 million from $27.442 million, but hotel segment income fell to $1.208 million from $2.473 million. Occupancy declined to 91% from 93%; ADR increased to $247 from $245, while RevPAR decreased to $225 from $228.
- Management attributed hotel cost increases to items including franchise fees, legal fees and union wages. Quarterly room revenue benefited from the timing of a citywide conference; six-month room revenue was affected by lower group business. Food-and-beverage and garage revenue increased.
- Real estate: Quarterly revenue was $3.625 million versus $3.605 million; six-month revenue was $7.302 million versus $7.254 million. Operating expenses increased, primarily due to real-estate taxes.
- Investments: Marketable-securities losses were $1.178 million for the quarter and $2.200 million for the six months. The six-month loss included a $2.754 million loss related to Comstock Mining shares. The company recorded a $200,000 impairment loss on other investments for the six months.
Financial position, debt and liquidity
- At December 31, total assets were $126.152 million, down from $133.209 million at June 30. Total liabilities were $204.259 million; shareholders’ deficit was $78.107 million.
- Hotel and real-estate mortgage notes totaled $178.635 million; related-party and other notes payable were $5.920 million. The balance sheet also reports $2.792 million due to securities brokers and $2.071 million of obligations for securities sold. Total liabilities were not limited to these debt balances.
- Cash and cash equivalents were $2.309 million, restricted cash $7.686 million and marketable securities $13.209 million. Marketable securities declined from $17.177 million at June 30 and included $16.105 million of unrealized losses on securities held over one year.
- The Hotel’s $97 million mortgage bears 5.275% interest, began amortizing in February 2017 and matures in January 2024. The $20 million subordinated mezzanine loan bears 9.75% interest and also matures in January 2024. InterGroup is an additional guarantor on both loans and reported compliance with related minimum net-worth and liquidity requirements at December 31.
- Management said Hotel and garage cash flows, cash and investments, and partnership-related receipts should be adequate for obligations, and stated that appreciated Hotel value could support additional borrowing if needed. The filing also cautions that debt service could pressure future cash flows. Contractual obligations, including interest, totaled $240.495 million.
Outlook, risks and unusual items
- The Tax Cuts and Jobs Act prompted a provisional $879,000 charge in quarterly income-tax expense to reduce the deferred tax asset; the company expected to finalize transition adjustments by June 30, 2018. Management did not expect the forthcoming revenue-recognition standard to have a material impact, but its analysis was incomplete.
- No earnings or revenue guidance was provided. Management noted that interim results are not necessarily indicative of full-year results.
- Risks identified include hotel-industry competition, seasonality, economic and travel conditions, labor issues, financing availability and interest rates, securities-market volatility, natural disasters, litigation and other factors. Marketable-security gains and losses may fluctuate substantially and may not predict future results.
- An arbitration alleging legal malpractice and seeking declaratory relief remained active; a hearing was scheduled for April 2018, mediation had begun, and the company gave no prediction of outcome. A prior $5.575 million settlement was fully paid by January 2017.
- Management reported disclosure controls were effective. A previously identified material weakness involving deferred taxes and income-tax expense was being remediated through specialist tax review and audit-committee oversight.
- The company reported no off-balance-sheet arrangements. The filing describes related-party loans, shared directors and overlapping investment activity. InterGroup’s $4.25 million loan to the Partnership was extended to December 31, 2018.
Most important facts for investors to verify
- Whether hotel operating costs, legal fees and debt service continue to weigh on segment profitability and cash generation.
- The composition, concentration and valuation risk of the securities portfolio, particularly Comstock; Comstock represented 16% of the portfolio at December 31.
- Debt maturities, amortization, guarantees and compliance with the guarantor liquidity and net-worth covenants.
- The final tax-reform adjustment and the effectiveness of remediation for the deferred-tax internal-control weakness.
- Developments and potential exposure in the pending Glaser Weil arbitration, and the terms and governance of related-party arrangements.
- The filing’s descriptions of the rental-property portfolio differ: one section lists fifteen apartment complexes and another lists sixteen; confirm the correct count.