INTERGROUP CORP annual report, FY2020

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InterGroup Corporation — Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2020, compared with fiscal 2019. The request metadata refers to “2019 Q4,” but the filing is an annual report for fiscal 2020.

Business context

InterGroup is a holding company with hotel, residential and commercial real estate, and securities-investment activities. Its principal operating exposure is the 544-room Hilton San Francisco Financial District, consolidated through subsidiaries. It also owns 16 apartment complexes, three single-family homes, one commercial property, and unimproved land. The filing reports control of Santa Fe Financial and, through Santa Fe and InterGroup’s direct interest, an indirect and direct interest in Portsmouth Square.

Financial results and liquidity

  • Revenue: $58.017 million, down 22.3% from $74.753 million. Hotel revenue fell 28.5% to $42.839 million; real estate revenue rose 2.1% to $15.178 million.
  • Hotel performance: Operating income before interest, depreciation and amortization was $5.506 million, versus $15.415 million. The corresponding margin was approximately 12.9%, versus 25.7%. Hotel net loss was $3.768 million, compared with $5.277 million of income.
  • Profitability: Consolidated operating income was $4.891 million, down from $15.196 million. The company recorded a net loss of $5.089 million versus net income of $2.814 million; net loss attributable to InterGroup was $3.781 million, or $1.64 per basic and diluted share, compared with attributable income of $1.457 million, or $0.63 per basic share.
  • Hotel operating indicators: Average occupancy declined to 74% from 96%; average daily rate fell to $248 from $268; RevPAR fell to $183 from $257.
  • Cash flow: Operating activities used $3.454 million, compared with providing $14.269 million in fiscal 2019. Cash, cash equivalents, and restricted cash totaled $28.286 million at year-end, including restricted funds; unrestricted cash and cash equivalents were $14.163 million.
  • Debt and capital structure: Total liabilities were $204.464 million, against assets of $130.217 million and a shareholders’ deficit of $74.247 million. Balance-sheet mortgage notes payable were $111.446 million for the Hotel and $65.612 million for real estate. Additional reported obligations included a $2.985 million line-of-credit balance and $5.172 million in SBA loans.
  • Liquidity measures: The company refinanced two apartment properties in 2020, generating reported net proceeds of $6.814 million and $1.144 million. The $8 million CIBC revolving credit facility had $5 million available at June 30; the balance was paid off after year-end, making the full facility available, according to management.
  • Investment results: Marketable securities generated a $1.913 million net loss, versus a $1.733 million loss. Other-investment impairment losses were $219,000, versus $98,000.

Material changes and unusual items

  • COVID-19-related travel restrictions and cancellations sharply reduced Hotel demand beginning in February 2020. Occupancy fell to 10% in April, and management temporarily closed several services and outlets, furloughed staff, and cut operating costs.
  • Hotel revenue decreased by $17.042 million year over year; lower operating expenses offset $7.133 million of that decline. The filing attributes the decline primarily to pandemic-related disruption.
  • The company recorded a $687,000 loss on debt extinguishment related to the Parsippany mortgage refinancing. The new mortgage had a fixed 3.17% rate and a May 2030 maturity. The Marina del Rey refinancing provided $1.144 million in net proceeds and carried a fixed 3.09% rate.
  • The Hotel’s mezzanine debt was refinanced in July 2019 at 7.25%, down from 9.75%; the filing estimates annual interest savings of $500,000.
  • InterGroup and Justice received CARES Act SBA loans totaling $5.172 million at 1% interest. The loans may be forgiven if used for eligible purposes; management said it expected to apply, but forgiveness was not reported as approved.
  • After year-end, Santa Fe sold its 27-unit Santa Monica apartment property for $15.650 million and reported an estimated $12.026 million gain. Sale proceeds paid off InterGroup’s $2.985 million credit-line balance; Santa Fe also paid InterGroup $662,000 under a contribution agreement.
  • Management reported Hotel debt-service coverage below 1.00 for the last two fiscal-year quarters, below the 1.10 covenant threshold. The Hotel had not missed debt service payments; the lender cash-management lockbox was already in place.

Outlook, risks, and contingencies

Management stated that the pandemic’s duration and effects remained uncertain and expected a material adverse impact on the business, financial condition, liquidity, and results. It said available cash and potential funding sources should cover anticipated needs for at least 12 months, even if low occupancy persisted, while cautioning that its plans might not succeed. No quantified operating or earnings guidance was provided.

  • The Hotel is a single-property operation concentrated in San Francisco, exposing results to local conditions, competition, travel demand, and pandemic-related disruptions.
  • Management identified fixed property costs, labor and union obligations, capital-improvement needs, insurance availability and cost, and potential future financing needs as material risks.
  • Contractual obligations, including interest, totaled $226.753 million. The disclosed mortgage-payment schedule includes $108.113 million due in fiscal 2024, principally reflecting Hotel debt maturities.
  • The filing says the Hotel’s low occupancy affected covenant compliance. InterGroup also guarantees certain Hotel debt obligations and must meet stated minimum net-worth and liquidity requirements; it reported compliance with those requirements at year-end.
  • Management was assessing possible impairment of long-lived assets and realization of deferred tax assets in light of COVID-19. No Hotel or real-estate impairment loss was recorded for fiscal 2020.
  • InterGroup’s CEO and chairman beneficially owned 65.9% of its common stock as of September 9, 2020. The filing also describes related-party relationships across InterGroup, Santa Fe, Portsmouth, and Justice.

Important facts for investors to verify

  • Subsequent Hotel occupancy, room rates, revenue, cash burn, and the timing and extent of a recovery in business and group travel.
  • Current Hotel debt-service coverage, lender covenant status, cash controls, and ability to service or refinance the large 2024 maturities.
  • Actual unrestricted liquidity after the post-year-end use of $2.379 million in released PIP deposits, the Santa Monica sale, and the CIBC line repayment and extension.
  • Whether the SBA loans were forgiven, and any remaining repayment obligations or related compliance issues.
  • Realization of deferred tax assets and the effect of the Santa Monica sale’s gain and tax attributes.
  • The filing’s debt and obligation schedules, including the reported mortgage balances and maturities, against the underlying notes and subsequent refinancing activity.

The independent auditor issued an unmodified opinion that the consolidated financial statements fairly present the company’s financial position and results under U.S. GAAP. The auditor did not provide an opinion on internal control over financial reporting.