Business context and reporting period
InterGroup Corporation’s Form 10-K covers the fiscal year ended June 30, 2012, compared with fiscal 2011. The company’s activities include operating the Hilton San Francisco Financial District through Justice Investors, owning rental real estate, and investing in securities. Its consolidated statements include Justice; reported results also reflect noncontrolling interests. The filing metadata’s “2011 Q4” label does not match the period stated in the filing.
Financial performance and condition
| Metric | FY2012 | FY2011 |
|---|---|---|
| Total revenue | $57.0 million | $49.9 million |
| Income from operations | $9.4 million | $5.0 million |
| Net income (loss) | $(0.7) million | $10.4 million |
| Net income (loss) attributable to InterGroup | $(2.3) million | $8.8 million |
| Net cash provided by operating activities | $5.2 million | $3.0 million |
- Hotel revenue grew 17% to $42.5 million; hotel operating income before interest, depreciation and amortization rose to $9.0 million from $7.0 million. Hotel net income was $3.9 million versus $0.5 million. ADR was $191 versus $163, occupancy 87% versus 86%, and RevPAR $166 versus $140.
- Real estate revenue increased to $14.5 million from $13.6 million; rental-property net income was $1.1 million versus $0.1 million.
- Investment activity generated a $6.2 million net loss in FY2012, compared with $13.2 million of net income in FY2011. Marketable securities losses were $4.4 million; other investments recorded a $0.9 million impairment loss.
- FY2011 results included an $11.4 million unrealized gain from the Comstock debt restructuring. This was a major reason for the year-over-year swing in net income; it was not recurring operating performance.
- At June 30, 2012, total assets were $139.8 million, liabilities $136.2 million, and total shareholders’ equity $3.6 million. Cash and cash equivalents were $2.1 million, restricted cash $2.0 million, marketable securities $9.0 million and other investments $15.7 million.
- Mortgage notes payable totaled $115.0 million, with another $2.1 million of other notes payable. Hotel mortgages totaled $44.3 million and real-estate mortgages $70.7 million. Cash increased by $0.7 million during the year.
- The company reported $142.7 million of contractual obligations including stated interest, with sizable scheduled obligations in the next several years. Management said available cash, securities, and operating cash flows should meet obligations; Justice was in compliance with its loan covenants at year-end.
Material changes, outlook and risks
- Hotel improvement reflected higher room rates and revenue, partly offset by higher labor, staffing, franchise and management costs. Depreciation and amortization also declined.
- InterGroup sold a 24-unit Los Angeles apartment property for $4.37 million, recognizing a $1.71 million gain and receiving $4.11 million net proceeds; it repaid the associated $1.50 million mortgage. In December 2011, it refinanced a Los Angeles apartment mortgage and received approximately $1.12 million net proceeds.
- Justice distributed $1.0 million to partners in December 2011, its first limited-partnership distribution since September 2008; Portsmouth received $0.5 million. Future distributions depend on operating results, cash flow and reserves. InterGroup declared no common-stock cash dividend and said it did not foresee one in the near future.
- Management reported improvement in San Francisco business and leisure travel and planned to pursue higher-rated and international, particularly Chinese, travel. It gave no quantified earnings or revenue guidance and cautioned that any continued improvement depends on uncertain domestic and global conditions.
- Key risks include hotel competition and seasonality, economic weakness affecting travel and rents, rising labor and operating costs, union negotiations, real-estate regulation and taxes, financing availability, property debt maturities, and securities-market volatility. Three apartment loans were due in May 2013, and both hotel mortgages matured in August 2015.
- The marketable-securities portfolio was concentrated: Comstock common stock represented 52.4% of its $9.0 million portfolio. Other investments included $13.2 million of Comstock 7.5% Series A-1 preferred stock; dividends may be paid in cash or securities at Comstock’s election. The filing describes substantial judgment in valuation and impairment assessments.
- Subsequent to year-end, the company refinanced its $9.01 million Morris County mortgage in July 2012, and six Los Angeles mortgages totaling $3.22 million in August 2012. Management reported no material off-balance-sheet arrangements; no legal proceedings requiring disclosure; and no known environmental liability expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Confirm the timing and refinancing outcomes for loans due in 2013 and the hotel debt maturing in 2015, including any resulting rates, covenants or proceeds.
- Assess whether hotel revenue and room-rate gains are sustainable and sufficient to cover operating costs, capital spending and debt service.
- Review Comstock’s financial condition, the valuation and convertibility of the preferred stock, dividend receipts, and the effect of the portfolio’s concentration.
- Reconcile consolidated earnings with the loss attributable to InterGroup and the substantial noncontrolling interest; distinguish operating gains from investment marks and property-sale gains.
- Monitor liquidity, restricted-cash availability, scheduled debt payments, and whether management’s cash-flow expectations are met.