InterGroup Corporation (NASDAQ: INTG) — FY2022 Form 10-K
Reporting period: Fiscal year ended June 30, 2022, compared with FY2021. Although the request metadata refers to “2021 Q4,” this filing covers the full fiscal year ended June 30, 2022.
Business context
InterGroup is a diversified real estate and investment company. It consolidates Portsmouth Square, in which it owned approximately 75% at year-end. Portsmouth’s principal asset is the 544-room Hilton San Francisco Financial District hotel. InterGroup also owns 20 operating real estate properties and unimproved land in Maui, and invests in marketable securities. Santa Fe Financial was liquidated in February 2021; Justice Investors was dissolved in December 2021.
Financial performance and condition
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $47.219 million | $28.658 million |
| Operating income (loss) | $3.671 million | $(4.870) million |
| Net income (loss) | $(10.616) million | $10.545 million |
| Net income (loss) attributable to InterGroup | $(8.723) million | $10.409 million |
| Net cash provided by (used in) operating activities | $0.921 million | $(19.825) million |
- Revenue and operations: Hotel revenue rose 115% to $31.534 million; real estate revenue increased to $15.685 million from $13.990 million. Hotel operating expenses increased $9.540 million as activity recovered. Hotel operations generated a $2.776 million net loss, improved from a $7.450 million loss.
- Hotel operating indicators: Average occupancy was 80% versus 55%; average daily rate was $168 versus $111; RevPAR was $134 versus $61. Management reported the hotel’s RevPAR index at 128% for the six months ended June 30, 2022, compared with its competitive set.
- Investment results and unusual items: Marketable securities produced a $7.614 million net loss, versus an $11.638 million gain in FY2021. FY2022 also included $2.000 million of gain from forgiveness of the second SBA loan. FY2021 included a $12.043 million real estate sale gain and $5.172 million of SBA loan forgiveness gains. No properties were sold in FY2022.
- Margins: Operating income was $3.671 million on $47.219 million of revenue; the filing does not present a single consolidated operating-margin measure.
- Liquidity: Cash and cash equivalents were $14.367 million; restricted cash was $8.982 million. Marketable securities, net of broker margin, were $10.110 million. The company reported $0.921 million of operating cash flow, while investing activities used $3.888 million and financing activities provided $10.924 million.
- Debt and equity: Balance-sheet mortgage debt, net of issuance costs, was $194.184 million, and related-party notes payable were $3.521 million. Total liabilities were $209.050 million against total assets of $126.046 million; shareholders’ deficit was $83.004 million. The contractual-obligations schedule lists $108.574 million of mortgage and subordinated-note payments due in FY2024, largely associated with the hotel financing.
- Tax assets: The deferred tax asset was $3.612 million after a $22.775 million valuation allowance; the allowance increased by $21.824 million year over year. The auditor identified liquidity forecasts and valuation of deferred tax assets as critical audit matters.
Material changes versus FY2021
- Revenue and hotel operating performance recovered substantially from pandemic-affected FY2021, but the company swung from net income to a net loss, principally reflecting the reversal from securities gains to losses and the absence of FY2021’s real estate sale gain.
- Cash and cash equivalents increased from $6.808 million to $14.367 million, while marketable securities declined from $35.792 million to $11.049 million. Broker margin balances fell from $7.917 million to $0.490 million.
- Real estate mortgage balances rose, including refinancing of the 358-unit Las Colinas property: the new $28.8 million mortgage generated $12.938 million of net proceeds. The company reported $16.683 million in net proceeds from FY2022 property refinancing and new mortgage borrowing.
- Portsmouth acquired the remaining 0.7% Justice partnership interest in July 2021; Justice dissolved in December 2021. InterGroup advanced a further $7.550 million to the hotel during FY2022, bringing its related-party loan balance to $14.200 million at year-end.
Outlook, risks and contingencies
- Management described hotel demand as improving, with June 2022 the strongest month since the pandemic began. It reported strong July and August 2022 performance and planned further guest-room upgrades in FY2023, including work intended to add 15 rooms. These are management statements, not formal financial guidance.
- Management stated that available cash and other sources should cover anticipated needs for at least 12 months, even if recovery is slower than expected, but cautioned that its plans may not succeed. Liquidity remains exposed to hotel recovery, securities volatility, and debt and capital requirements.
- The hotel’s mortgage and mezzanine loans mature in January 2024. The hotel had previously reported a debt-service coverage ratio below covenant levels, although its FY2022 fourth-quarter ratios were 1.69 for the mortgage and 1.34 for the mezzanine loan. The lender-controlled cash-management lockbox remains in place. The company said debt service had not been missed and it did not anticipate missing obligations.
- San Francisco revoked the permit for the hotel’s pedestrian bridge and directed its removal at the company’s expense. InterGroup disputes the revocation and responsibility for the cost. Early estimates for planning and removal exceed $2 million; the company was considering litigation, and the plan was not expected to be complete until early 2023.
- Other significant risks include dependence on a single San Francisco hotel, continuing effects of COVID-19 and economic conditions, competition, inflation and labor costs, hotel renovation needs, insurance availability, rent-control and eviction rules, and litigation. Approximately 86% of hotel employees were union-represented; one agreement had expired in August 2022 and was under review.
- The company renewed its unsecured CIBC line of credit in July 2022 at a reduced $2.0 million limit, fully available. The hotel’s related-party loan maturity was also extended to July 31, 2023.
Most important facts for investors to verify
- How the company will refinance or repay the hotel’s January 2024 debt maturity, and whether hotel cash flow and covenant compliance remain adequate.
- Current hotel trading, occupancy, rates and cash generation compared with management’s reported summer 2022 recovery.
- Who will bear the pedestrian-bridge removal and restoration costs, the litigation strategy, and the ultimate project cost.
- Whether the $14.2 million related-party advance, the reduced credit facility and other liquidity sources are sufficient for near-term obligations and planned capital spending.
- How securities-market volatility and the substantial deferred-tax valuation allowance affect reported earnings, liquidity and future tax-asset realization.
- Governance implications of CEO John Winfield’s approximately 68% beneficial ownership, his leadership roles at Portsmouth, and the related-party financing and investment relationships.