Business context and reporting period
The InterGroup Corporation’s unaudited Form 10-Q covers the quarter and nine months ended March 31, 2021 (its fiscal third quarter), compared with the periods ended March 31, 2020. The company’s main activities are operating a 544-room Hilton hotel in San Francisco, owning and managing rental real estate, and investing in marketable securities. It consolidates Justice, which owns the hotel, and reported owning approximately 71.3% of Portsmouth Square at quarter-end.
Financial performance and position
- Revenue: Third-quarter revenue was $6.367 million, down from $15.016 million; nine-month revenue was $19.939 million, down from $52.902 million. Hotel revenue fell 74% for the quarter and 77% for the nine months, primarily due to COVID-19-related travel and business disruption.
- Profit/loss: Third-quarter consolidated net income was $1.399 million versus a $3.059 million loss a year earlier; income attributable to InterGroup was $1.110 million. Nine-month consolidated net income was $5.155 million versus a $2.035 million loss; income attributable to InterGroup was $5.595 million. Results benefited materially from investment gains and a real-estate sale, despite losses from hotel operations.
- Operating performance: Operating loss was $1.398 million for the quarter and $6.278 million for the nine months. Hotel operations recorded losses of $3.259 million and $11.420 million, respectively. For the quarter, hotel average daily rate was $103, occupancy 47%, and RevPAR $48, compared with $242, 76%, and $184 a year earlier.
- Cash flow: Nine-month operating cash outflow was $24.314 million, versus $2.271 million of inflow in 2020. Investing activities provided $12.790 million, including $15.178 million of real-estate sale proceeds; financing used $0.239 million. Cash, cash equivalents, and restricted cash totaled $16.523 million, down from $28.286 million at June 30, 2020.
- Liquidity and investments: Cash and cash equivalents were $8.880 million. Marketable securities were $36.996 million; after $9.021 million due to brokers and $5.261 million of obligations for securities sold, reported net funds available from securities were $22.714 million. The company also had $7.643 million of restricted cash and an undrawn $8 million revolving credit line.
- Debt and balance sheet: Total liabilities were $214.896 million, including hotel mortgage notes of $110.465 million and real-estate mortgage notes of $69.280 million. Total shareholders’ deficit was $71.603 million. The contractual-obligations schedule totals $223.371 million including interest, with $108.407 million of mortgage and subordinated-note payments scheduled for 2024.
Material changes versus the prior comparable period
- Hotel revenue and operating performance deteriorated sharply, reflecting pandemic-related restrictions, reduced travel, and curtailed hotel services. Management reduced staffing and expenses and deferred capital spending.
- Nine-month reported earnings improved primarily because of $12.043 million in gain on sale of real estate and $8.937 million in net gains on marketable securities, compared with securities losses and no comparable property-sale gain in 2020. The securities gains included $9.604 million of net unrealized gains.
- On August 28, 2020, Santa Fe sold a 27-unit apartment complex for $15.650 million, generating the $12.043 million gain. Santa Fe was liquidated; InterGroup received $5.013 million and Portsmouth shares in the distribution. Santa Fe’s dissolution was completed in April 2021.
- Marketable securities increased from $6.178 million at June 30, 2020 to $36.996 million at March 31, 2021. The company also refinanced three California properties, generating $5.384 million in net proceeds during the nine-month period.
Outlook, risks, and unusual items
- Management said COVID-19 had materially harmed hotel demand, liquidity, and results and expected adverse effects to continue until the pandemic ended. San Francisco’s move to less restrictive reopening tiers was described as positive, but hotel operations remained subject to capacity limits, costly sanitation requirements, and uncertain recovery.
- Management believed available cash and other potential liquidity sources would cover anticipated needs for at least 12 months, even if low occupancy and RevPAR persisted, but cautioned that execution was not assured. Liquidity had been materially affected; nine-month operating cash flow was negative.
- Justice’s $4.719 million SBA loan had not been forgiven as of March 31, 2021; InterGroup’s $453,000 SBA loan had been fully forgiven. Justice received a further $2 million SBA loan in February 2021, with $350,000 unused at quarter-end. Forgiveness of Justice’s loans was not assured.
- The hotel’s senior and mezzanine loans mature in January 2024. Low hotel occupancy could affect loan covenants, although the filing says a lender lockbox was already in place. InterGroup reported compliance with its own guarantor net-worth and liquidity requirements.
- After quarter-end, on May 14, 2021, the company bought a four-unit Los Angeles apartment complex for $2.6 million in cash and was seeking permanent financing. The filing reported no pending or threatened legal actions and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether hotel occupancy, room rates, and RevPAR recover, and whether hotel cash generation improves enough to support debt service.
- How much of reported nine-month earnings came from unrealized investment gains and the one-time property sale, versus recurring operating performance.
- The status of forgiveness and repayment obligations for Justice’s SBA loans, and the effect of any unforgiven amounts on liquidity.
- Availability and terms of the undrawn $8 million credit line and potential refinancing or related-party support, including the $5.950 million Justice balance owed to InterGroup.
- Ability to address the substantial 2024 debt maturities, including the hotel loan maturities, and any covenant or refinancing constraints.