Business Context and Reporting Period
Company: The Intergroup Corporation (InterGroup)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: InterGroup operates primarily through its interest in Justice Investors, which owns the Hilton San Francisco Financial District hotel. The company also manages a portfolio of real estate properties (apartments and commercial) and invests in marketable securities and private equity. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2010 | Nine Months Ended Mar 31, 2010 |
|---|---|---|
| Total Revenues | $10,466,000 | $33,300,000 |
| Net Loss (Consolidated) | $(998,000) | $(3,046,000) |
| Net Loss Attributable to InterGroup | $(226,000) | $(1,636,000) |
| Net Loss Per Share (Basic) | $(0.10) | $(0.69) |
| Operating Cash Flow (9 Months) | $5,034,000 | |
| Cash and Cash Equivalents | $1,988,000 (as of Mar 31, 2010) | |
| Total Debt (Mortgages + Line of Credit) | $119,350,000 | |
| Total Assets | $138,438,000 | |
| Shareholders' Equity (Deficit) | $(1,928,000) |
Material Changes vs. Prior Period
- Net Loss Improvement (3 Months): Net loss attributable to InterGroup improved significantly to $(226,000) from $(1,394,000) in the prior year quarter. This was driven by a net gain on marketable securities of $481,000 compared to a loss of $359,000 previously.
- Net Loss Deterioration (9 Months): Net loss attributable to InterGroup increased to $(1,636,000) from $(1,437,000) in the prior year period. This was primarily due to a net loss on marketable securities of $659,000 (vs. a gain of $1,729,000 previously) and impairment losses on other investments of $1,148,000.
- Hotel Operations: Hotel revenues increased 5.4% in the quarter ($7.46M vs $7.07M) due to a 3% increase in occupancy, though average daily rates remained flat. For the nine months, hotel revenues declined 2.6% due to lower room rates in the first half of the fiscal year.
- Real Estate: Operating expenses for real estate were reduced in both periods compared to the prior year, offsetting slight revenue declines.
- Discontinued Operations: Three apartment properties (Austin, San Antonio, Los Angeles) are classified as "held for sale" and reported as discontinued operations, generating $52,000 in income for the quarter.
Guidance, Outlook, and Risks
- Outlook: Management anticipates no significant improvement in the lodging industry until the second half of calendar 2010. Consequently, no limited partnership distributions are anticipated in the foreseeable future.
- Debt Restructuring: The company's $2.5 million line of credit was modified in April 2010. The facility was converted to a four-year term loan with a reduced interest rate (Prime + 2.5%) and rewritten financial covenants to reflect current economic conditions.
- Investment Volatility: Results are heavily influenced by the performance of marketable securities and other investments. Management notes that gains/losses on these securities may fluctuate significantly and have no predictive value.
- Hotel Challenges: The San Francisco market faces severe reductions in corporate and group travel, replaced by discounted internet bookings, making it difficult to achieve higher room rates despite high occupancy.
- Liquidity: Management believes cash flows from hotel operations, real estate, and investment income will be adequate to meet current obligations, though the company carries significant mortgage debt.
Investor Verification Checklist
- Debt Covenants: Verify the specific terms of the modified line of credit and the company's ongoing compliance with the new financial covenants.
- Investment Portfolio Valuation: Review the composition of "Other Investments" ($6.9M) and the methodology used for impairment testing, given the recurring losses in this category.
- Hotel Occupancy vs. Rate: Monitor the trend of Average Daily Rate (ADR) versus Occupancy to ensure revenue per available room (RevPAR) remains sustainable as the market recovers.
- Discontinued Operations: Track the progress of the sale for the three apartment complexes listed as "held for sale" to determine if they will be divested or reclassified.
- Noncontrolling Interest: Note the significant noncontrolling interest deficit ($6.5M) and how future losses are allocated between the parent and noncontrolling interests.