Business context and reporting period
The InterGroup Corporation’s Form 10-Q covers the three months ended September 30, 2016, the first quarter of fiscal 2017; comparisons are with the three months ended September 30, 2015. InterGroup’s principal activities are its interest in the Hilton San Francisco Financial District hotel and garage, residential and commercial real estate, and investment in securities. The company consolidates subsidiaries Santa Fe and Portsmouth, through which it holds its hotel interests.
Financial results and position
| Metric | Three months ended Sept. 30, 2016 | Prior comparable period |
|---|---|---|
| Total revenue | $18.254 million | $18.720 million |
| Income from operations | $4.195 million | $3.746 million |
| Net income | $1.595 million | $0.713 million |
| Net income attributable to InterGroup | $1.191 million | $0.469 million |
| Basic / diluted EPS attributable to InterGroup | $0.50 / $0.48 | $0.20 / $0.19 |
| Net cash from operating activities | $(0.164) million | $4.231 million |
| Net cash used in investing activities | $(0.755) million | $(3.654) million |
| Net cash used in financing activities | $(0.428) million | $(0.762) million |
Revenue declined about 2.5%, while consolidated net income more than doubled. Hotel revenue was $14.605 million, down from $15.138 million; real estate revenue was $3.649 million, versus $3.582 million. Hotel income before interest, depreciation, and asset disposal was $4.349 million, or about 29.8% of hotel revenue, compared with $3.945 million, or about 26.1%.
At September 30, 2016, total assets were $137.583 million and total liabilities were $209.163 million, leaving a shareholders’ deficit of $71.580 million. Cash and cash equivalents were $4.057 million; restricted mortgage-impound cash was $3.968 million. Marketable securities were $19.310 million. Mortgage notes payable were $182.232 million in total ($116.188 million hotel and $66.044 million real estate); other notes payable were $6.476 million. The filing lists total material financial obligations, including interest, of $255.609 million.
Material changes and management commentary
- Hotel operating expenses fell $0.937 million year over year, primarily following related-party manager GMP’s June 2016 resignation and lower legal expenses after a May 2016 settlement. Hotel income increased to $1.807 million from $1.339 million.
- Hotel room revenue fell $0.309 million, reflecting lower group business and average daily rate. Food and beverage revenue fell $0.201 million. Average daily rate was $255 versus $265, occupancy was 97% versus 95%, and RevPAR was $246 versus $252.
- Marketable-securities gain rose to $1.154 million from $0.380 million, including $0.419 million realized gain and $0.735 million unrealized gain. Management cautions that investment gains and losses may fluctuate and are not predictive.
- Operating cash flow declined to a small outflow from a $4.231 million inflow. The company reported $4.293 million of investment in marketable securities in operating cash flow.
- Management is interviewing national hotel management companies to replace GMP. The Ace Parking contract ended October 4, 2016, after quarter-end, and the company began managing the garage in-house. Management describes guest experience, higher-rated business and group travel, and returning food and beverage operations to profitability as priorities.
Outlook, risks, and contingencies
No quantified earnings or revenue guidance is provided. Management believes hotel, garage, and real estate cash flows and available assets will be adequate for obligations, and says hotel and garage operations are expected to meet the partnership’s requirements. These are forward-looking assessments, not assurances; management notes debt-service risk and potential additional borrowing capacity from appreciated property values.
The hotel’s $97 million mortgage bears 5.275% interest, is interest-only through January 2017, begins amortizing in February 2017, and matures in January 2024. The $20 million mezzanine loan bears 9.75% interest and matures in January 2024. A $4.25 million unsecured InterGroup loan to the partnership, bearing 12% interest, had been extended to November 30, 2016; InterGroup was working to extend it further. A separate $1 million adjustable-rate mortgage on a Los Angeles house bears 4.5% as of September 30, 2016, has initial interest-only payments, and a balloon due in August 2018.
Investment concentration is material: approximately 51% of marketable securities consisted of Comstock Mining common stock. The portfolio had $7.442 million of net unrealized losses at quarter-end, including $3.846 million of unrealized losses on securities held over one year. The filing identifies economic and lodging-market conditions, competition, seasonality, labor issues, disasters, financing, securities markets, regulation, and litigation as risks. It reports routine legal proceedings and says no off-balance-sheet arrangements exist. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- Whether the $4.25 million related-party loan extension was completed before its November 30, 2016 extended maturity.
- Progress and terms of selecting a replacement hotel manager, and operating results after the garage management transition.
- Hotel performance trends, particularly room rates, group demand, food and beverage profitability, and expense savings.
- Comstock exposure, portfolio concentration, and the potential effect of market-price changes on earnings and liquidity.
- Debt-service capacity and upcoming hotel-loan amortization beginning February 2017, in light of negative shareholders’ equity and low unrestricted cash.