Business Context and Reporting Period
Company: The InterGroup Corporation (InterGroup)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: InterGroup operates primarily through its interest in Justice Investors, which owns the Hilton San Francisco Financial District hotel. The company also holds a portfolio of real estate properties (apartments, commercial, single-family) and manages a portfolio of marketable securities and other investments. InterGroup is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 |
|---|---|---|
| Total Revenues | $11,484,000 | $12,429,000 |
| Net Loss (Continuing Ops) | $(1,369,000) | $474,000 (Income) |
| Net Loss (Total) | $(1,327,000) | $533,000 (Income) |
| Net Loss Attributable to InterGroup | $(931,000) | $608,000 (Income) |
| Operating Cash Flow | $1,597,000 | $4,340,000 |
| Cash and Equivalents (End of Period) | $879,000 | $1,127,000 |
| Total Debt (Mortgages + Line of Credit) | $121,454,000 | $121,363,000 |
| Shareholders' Equity (Deficit) | $(215,000) | $1,040,000 |
Material Changes vs. Prior Period
- Profitability Reversal: The company reported a net loss of $931,000 attributable to InterGroup for Q3 2009, compared to net income of $608,000 in Q3 2008. This shift was driven by a decline in hotel operating income and a significant swing in investment results.
- Hotel Operations: Hotel revenues decreased to $8.53 million from $9.30 million. Average Daily Rate (ADR) dropped $39 to $147, though occupancy increased to 92% from 81%. Operating income before interest, depreciation, and amortization (EBITDA) for the hotel declined to $1.65 million from $2.06 million.
- Investment Performance: The company recorded a net loss on marketable securities of $1.32 million in Q3 2009, compared to a gain of $1.64 million in the prior year. This was primarily due to a $1.47 million unrealized loss on trading securities.
- Real Estate: Real estate revenues declined slightly to $2.95 million from $3.13 million due to economic conditions, though operating expenses remained consistent.
- Discontinued Operations: Three apartment properties (Austin, San Antonio, Los Angeles) are classified as "held for sale." Income from these discontinued operations was $42,000 for Q3 2009 versus $59,000 in Q3 2008.
Outlook, Risks, and Management Commentary
- Economic Outlook: Management notes that the lodging industry continues to face significant downturns due to domestic and international economic conditions. No significant improvement is expected until the second half of calendar 2010.
- Distributions: No partnership distributions were paid for the three months ended September 30, 2009, and none are anticipated in the foreseeable future due to the economic climate and the need to maintain reserves for debt payments.
- Liquidity and Debt: The company has a $2.5 million line of credit with a balance of $1.735 million. The partnership was not in compliance with financial covenants as of June 30, 2009, but received a waiver from the bank on September 16, 2009. Management believes cash flows from hotel and garage operations are sufficient to meet current obligations.
- Cost Reductions: The hotel management company agreed to reduce its management fees by 50% for the 2009 calendar year. Additionally, the company downsized its corporate office space to reduce administrative costs.
- Risks: Key risks include recessionary impacts on tourism, competition in the San Francisco hotel market, volatility in securities markets, and the ability to obtain financing at favorable rates.
Investor Verification Checklist
- Covenant Compliance: Verify the status of the waiver received for the line of credit financial covenants and any ongoing monitoring requirements.
- Investment Valuation: Review the composition of the $15.76 million marketable securities portfolio, noting the 23.3% concentration in dairy products and the $1.47 million unrealized loss.
- Debt Service Coverage: Assess the sufficiency of hotel cash flows to cover the $117.98 million in mortgage notes and the $1.735 million line of credit, particularly given the suspension of partnership distributions.
- Properties Held for Sale: Monitor the progress of the sale for the three apartment complexes classified as discontinued operations.
- Noncontrolling Interest: Note the $5.52 million deficit in noncontrolling interest, which reflects the allocation of losses to minority partners in the Justice Investors partnership.