Business context and reporting period
The InterGroup Corporation’s unaudited Form 10-Q covers its first fiscal quarter ended September 30, 2017, compared with the three months ended September 30, 2016. Its businesses include the Hilton San Francisco Financial District hotel and garage, rental real estate, and investment transactions. The company consolidates subsidiaries that hold the hotel and real estate operations.
Financial results and position
| Metric | Quarter ended Sep. 30, 2017 | Quarter ended Sep. 30, 2016 |
|---|---|---|
| Revenue | $18.114 million | $18.254 million |
| Income from operations | $3.525 million | $4.223 million |
| Net income (loss) | $(0.295) million | $1.595 million |
| Net income (loss) attributable to InterGroup | $(0.412) million | $1.191 million |
| Basic/diluted loss per share attributable to InterGroup | $(0.17) | $0.50 / $0.48 income |
| Operating cash flow | $1.459 million | $(0.164) million |
Reported operating margin was approximately 19.5% in 2017, calculated as income from operations divided by revenue, versus approximately 23.1% in 2016. Cash and cash equivalents were $2.813 million at September 30, 2017, with restricted cash of $7.851 million. Total assets were $131.017 million, total liabilities $206.568 million, and total shareholders’ deficit $75.551 million.
Balance-sheet debt included $115.329 million of hotel mortgage notes, $63.952 million of real estate mortgage notes, and $6.020 million of related-party and other notes. The hotel mortgage bears 5.275% interest and the $20 million mezzanine loan bears 9.75%; both mature in January 2024. The company is a guarantor on these loans and reported compliance with related net-worth and liquidity requirements. Contractual obligations, including estimated interest, totaled $243.563 million.
Material changes versus the prior comparable period
- Revenue declined $0.140 million (about 0.8%), while operating costs and expenses increased $0.558 million. Net results shifted from $1.595 million of income to a $0.295 million loss.
- Hotel revenue was $14.436 million versus $14.605 million; hotel net income fell to $1.295 million from $1.807 million. Occupancy declined to 93% from 97%, and RevPAR to $237 from $246; average daily rate was nearly unchanged at $254 versus $255.
- Real estate revenue remained broadly stable at $3.678 million, compared with $3.649 million.
- Investment results turned to a $1.022 million loss on marketable securities from a $1.154 million gain. The 2017 loss comprised $0.300 million realized and $0.722 million unrealized losses.
- Operating cash flow improved to $1.459 million from cash used of $0.164 million. Cash nevertheless decreased by $0.058 million during the quarter after investing and financing outflows.
Outlook, risks, contingencies, and unusual items
No specific earnings or revenue guidance was provided. Management said hotel and garage cash flows should meet the partnership’s obligations and that company cash, securities, investment income, and management fees should cover its obligations; it also cited potential borrowing capacity supported by hotel value. These are management expectations, not guarantees.
Management identified risks including hotel-sector and economic conditions, seasonality, competition, labor disruptions, interest rates and financing access, securities-market volatility, natural disasters, and litigation. Securities are classified as trading, so fair-value changes affect earnings; approximately 29% of the portfolio was Comstock Mining stock. The filing reports $14.249 million of unrealized losses on securities held over one year. Hotel debt service and the company’s loan guarantees add financial risk.
An active arbitration alleging legal malpractice related to the partnership redemption transaction was scheduled for hearing in April 2018; management could not predict its outcome. A previously reported $5.575 million settlement was paid in full by January 2017. The company reported no off-balance-sheet arrangements. Management stated that disclosure controls were effective; it also described steps to remediate a previously identified material weakness involving deferred taxes and income tax expense.
Important facts for investors to verify
- Reconcile the reported consolidated loss with the larger loss attributable to InterGroup and review the impact of noncontrolling interests.
- Assess hotel operating trends, particularly occupancy, RevPAR, room revenue, and rising operating expenses.
- Review the marketable-securities portfolio’s concentration, long-held unrealized losses, and sensitivity to Comstock Mining’s share price.
- Examine debt maturities, interest obligations, guarantees, and the company’s compliance with guarantor liquidity and net-worth covenants.
- Track the arbitration and confirm progress in remediating the deferred-tax internal-control weakness.