Business context and reporting period
The InterGroup Corporation’s unaudited Form 10-Q covers the fiscal quarter and six months ended December 31, 2023, filed February 16, 2024. Its principal businesses are the Hilton San Francisco Financial District hotel, real estate rentals, and investments in marketable securities. InterGroup owns approximately 75.7% of Portsmouth Square, which owns the hotel.
Financial performance and position
- Quarter revenue: $14.321 million, up 3.2% from $13.872 million. Hotel revenue was $10.225 million; real estate revenue was $4.096 million.
- Quarter results: Operating loss was $1.346 million versus operating income of $197,000 a year earlier. Net loss attributable to InterGroup was $1.529 million, or $0.69 per share, versus income of $1.890 million, or $0.85 per share. Prior-year results included a $2.692 million insurance recovery.
- Six-month revenue and results: Revenue was $29.831 million, down from $30.260 million. Operating income fell to $250,000 from $3.060 million. Net loss attributable to InterGroup was $2.773 million, or $1.26 per share, compared with income of $1.691 million, or $0.76 per share.
- Hotel trends: For the quarter, average daily rate was $207 versus $199, occupancy was 81% versus 82%, and RevPAR was $168 versus $164. For the six months, average daily rate was $212 versus $215, occupancy 84% versus 88%, and RevPAR $180 versus $190. Six-month hotel revenue declined 4%; hotel operating expenses increased.
- Cash flow: Six-month operating cash use was $80,000; investing cash use was $3.440 million; financing provided $2.953 million. Cash, cash equivalents and restricted cash decreased $567,000 to $12.307 million.
- Liquidity and debt: At December 31, cash and equivalents were $9.371 million, restricted cash $2.936 million, and marketable securities $19.363 million ($14.354 million net of margin due to brokers, as reported in MD&A). Hotel mortgage debt was $106.503 million and real estate mortgage debt $88.686 million; other notes payable were $2.671 million. Total liabilities were $221.591 million, against total assets of $124.186 million, leaving shareholders’ deficit of $97.405 million.
- Other material items: The company recorded a $1.175 million stock-option compensation expense after extending the CEO’s option expiration date. It also obtained a $4.573 million second mortgage on a Texas apartment property in December, bearing 7.60% interest and maturing in November 2031.
Material changes versus the prior comparable period
Quarterly revenue rose modestly, but operating performance weakened as expenses increased. For the six-month period, lower hotel room revenue, reduced occupancy and higher operating costs contributed to a substantial decline in operating income. Marketable-securities results were volatile: six-month net gains were $975,000 versus $574,000, but the current period included a $390,000 unrealized loss and a $1.365 million realized gain. The prior-year period included the $2.692 million insurance recovery.
Outlook, risks and contingencies
- Hotel debt and going concern: The hotel’s $106.503 million senior and mezzanine loans matured January 1, 2024. The filing states that refinancing uncertainty and recurring hotel losses raise substantial doubt about the hotel’s ability to continue as a going concern for one year after issuance. On January 4, 2024, the hotel received a senior-loan notice of default; lenders may have rights including acceleration and foreclosure. Management reported negotiating forbearance or extensions, with terms under review by senior-lender stakeholders, but no outcome was assured. Portsmouth had made scheduled debt-service payments through maturity.
- Hotel operations: Approximately 352 guestrooms had been renovated by December 31, 2023; management expected renovations to finish by the end of May 2024 and anticipated continued high occupancy and higher average daily rates. These are expectations, not guaranteed results.
- Bridge dispute: Portsmouth disputes San Francisco’s purported revocation of a permit for a pedestrian bridge connected to the hotel and disputes responsibility for removal costs. Planning and discussions with the City were ongoing; permits were not expected before late 2024 at the earliest.
- Controls: Management concluded disclosure controls were not effective because of a material weakness involving accounting for deferred-tax-asset valuation allowances and stock-based compensation. The company reported remediation efforts, including engaging a new tax provision provider.
- Other risks: Management cited exposure to lodging demand, competition, labor, macroeconomic conditions, interest rates, securities-market fluctuations and access to financing. No off-balance-sheet arrangements were reported. No formal earnings guidance was provided.
Most important facts for investors to verify
- Whether the hotel’s senior and mezzanine lenders approved a forbearance, extension, refinancing or other resolution after the filing date, and the implications of the default notice.
- The hotel’s near-term cash needs, debt-service obligations and ability to fund operations and renovations while the loans remain unresolved.
- Progress and cost of the hotel renovation, and whether occupancy, room rates and RevPAR improve as management expects.
- The status and potential financial responsibility for the disputed bridge removal and hotel-front reconstruction.
- Remediation of the disclosed material weakness, and the impact of future securities gains or losses and stock-based compensation on reported earnings.