InterGroup Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, the first quarter of fiscal 2014 (not calendar 2013 Q1). Financial statements are unaudited.
Business context and results
InterGroup’s operations include the Hilton San Francisco Financial District hotel, rental real estate and investments. Its hotel exposure is held through subsidiaries and Justice Investors, which owns the hotel; InterGroup also owns apartment and commercial properties and a securities portfolio.
- Revenue: $17.383 million, up 9.9% from $15.811 million. Hotel revenue was $13.305 million (up 9.6%); real estate revenue was $4.078 million (up 11.0%).
- Operating income: $3.862 million, up from $2.790 million. Operating margin was approximately 22.2%, versus 17.6%.
- Net income: $1.692 million, nearly unchanged from $1.687 million. Net income attributable to InterGroup fell to $282,000 from $589,000; diluted EPS attributable to InterGroup was $0.12 versus $0.24.
- Hotel performance: Hotel operating income before interest, depreciation and amortization increased to $3.773 million from $2.972 million. Average daily rate rose to $235 from $208; occupancy remained 94%; RevPAR increased to $221 from $196. Food and beverage operations remained loss-making, with an approximately $304,000 loss.
- Investments: Net gain on marketable securities was $153,000, down from $1.525 million. The investment-transactions segment reported a $303,000 loss, compared with $970,000 income in the prior-year quarter.
- Cash flow: Operating cash flow was $1.901 million, versus $548,000. Investing activities used $528,000 and financing activities used $799,000. Cash and cash equivalents increased $574,000 to $2.027 million.
Financial position and liquidity
- At September 30, total assets were $146.069 million, total liabilities $140.489 million, and total shareholders’ equity $5.580 million.
- Cash was $2.027 million; restricted cash was $1.996 million; marketable securities were $13.724 million. Marketable securities were classified as trading, so fair-value changes flow through earnings.
- Mortgage notes totaled $116.359 million, and other hotel notes payable were $1.367 million. Contractual obligations, including stated interest, totaled $147.826 million. The hotel’s two Prudential loans mature in August 2015; management cited the hotel’s positive cash flow and believed it would meet obligations, but refinancing and future cash generation remain relevant risks.
- Management stated that cash, securities and operating cash flows should be adequate for current and future obligations. The filing reports no off-balance-sheet arrangements.
Material changes, outlook and risks
- Hotel and real estate operations improved, while investment results weakened. Management attributed hotel growth principally to higher room rates; higher union wages, commissions and franchise and management fees partly offset revenue gains. Real estate revenue also included a one-time $99,000 storm-damage insurance recovery.
- Management said it would pursue higher-rated and international hotel business, continue property and guest-room improvements, and work to return food and beverage operations to profitability. It expressed conditional optimism if San Francisco travel-market trends continue; the filing provides no quantified financial guidance.
- Marketable securities were concentrated: basic-materials holdings were 50.3% of the portfolio, and Comstock Mining represented 31.8%. The company reported $1.540 million of unrealized losses on securities held for over one year. Management cautioned that investment gains and losses can fluctuate substantially and may not predict future results.
- In a subsequent event, Justice Investors offered to redeem limited-partnership interests for $1.385 million per 1% interest and solicited approval of partnership amendments. The proposal requires at least 34% tender participation, approval by holders of at least 75% of limited-partnership interests, and a hotel refinancing. If all interests other than Portsmouth’s were redeemed, the filing estimated a new hotel loan of approximately $118 million, compared with approximately $44.3 million of existing hotel loans due in 2015. The transaction was conditional, not completed as of the filing.
- Risks discussed include economic and travel-industry conditions, competition, seasonality, labor costs and disruptions, natural disasters, securities-market volatility, and obtaining financing on acceptable terms. Hotel covenant compliance was reported as current at quarter-end. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether the Justice redemption proposal met its tender and approval conditions and obtained the contemplated refinancing.
- The hotel’s ability to refinance or repay loans maturing in 2015, and the terms and covenants of any new debt.
- Whether higher hotel rates and occupancy can be sustained while controlling operating costs and improving food and beverage results.
- The concentration, valuation and subsequent performance of the marketable-securities portfolio, especially Comstock Mining and other long-held loss positions.
- How consolidated earnings translate into earnings attributable to InterGroup shareholders, given the substantial noncontrolling interest.