The InterGroup Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018, the first quarter of fiscal 2019, compared with the three months ended September 30, 2017. The filing is unaudited. InterGroup’s principal businesses are a 544-room Hilton hotel and parking garage in San Francisco, rental real estate, and securities investments.
Financial results
| Metric | Quarter ended Sep. 30, 2018 | Quarter ended Sep. 30, 2017 |
|---|---|---|
| Total revenue | $19.489 million | $18.114 million |
| Income from operations | $4.781 million | $3.525 million |
| Net income (loss) | $1.128 million | $(0.295) million |
| Net income (loss) attributable to InterGroup | $0.630 million | $(0.412) million |
| Operating cash flow | $3.996 million | $1.459 million |
- Revenue increased 7.6%. Hotel revenue was $15.810 million, up 9.5%; real estate revenue was $3.679 million, essentially unchanged.
- Hotel operating income before interest, depreciation and amortization was $5.000 million, or 31.6% of hotel revenue, versus $3.847 million, or 26.6%, a year earlier. Company-wide operating income was $4.781 million, or 24.5% of revenue, versus $3.525 million, or 19.5%.
- Hotel operating results improved primarily on higher room revenue; reduced marketable-securities losses also contributed to the year-over-year improvement. Net loss on marketable securities was $0.171 million versus $1.022 million.
- Basic and diluted earnings per share attributable to InterGroup were $0.27 and $0.24, respectively, compared with a loss per share of $0.17 in both measures a year earlier.
- Cash, cash equivalents and restricted cash totaled $20.377 million at quarter-end, including $10.001 million of cash and equivalents and $10.376 million of restricted cash. Cash and restricted cash increased $2.866 million during the quarter. Investing activities used $0.414 million and financing activities used $0.716 million.
Balance sheet, debt and liquidity
- Total assets were $133.436 million and total liabilities were $202.443 million at September 30, 2018; shareholders’ deficit was $69.007 million.
- Reported debt included $114.203 million of hotel mortgage notes, $59.674 million of real-estate mortgage notes, $5.643 million of related-party and other notes, $2.985 million drawn on a revolving credit line, and $1.299 million of capital leases.
- The company obtained a $5.0 million revolving line of credit in July 2018, bearing interest at 30-day LIBOR plus 3% and due in June 2019. InterGroup reported that it remained in compliance with the net-worth and liquidity requirements associated with its guarantees of Justice’s hotel mortgage and mezzanine loans.
- Management said hotel and garage cash flows should meet the Partnership’s obligations and that company cash, securities and other cash flows should meet its obligations. It also cited the hotel’s appreciated value as potential support for additional borrowing. The filing cautions that debt-service requirements create risk.
Material changes, outlook and risks
- Hotel room revenue rose to $13.522 million from $11.842 million, while food and beverage revenue fell to $1.449 million from $1.759 million. Management attributed the room-revenue increase to limiting midweek group business to pursue higher-rate transient occupancy and growing occupancy on shoulder dates. Hotel occupancy was 97% versus 93%, and RevPAR was $270 versus $237.
- The hotel’s average daily rate table reports $277 versus $254. However, the accompanying narrative says the average daily rate “decreased by $23,” inconsistent with the table.
- Real estate net income declined, which management attributed to higher property taxes and interest expense. Management said it continued to review occupancy, rental rates and expenses.
- Management provided no specific financial guidance. It identified risks including economic and travel-industry conditions, competition, seasonality, labor disruptions, interest rates, access to financing, securities-market volatility, natural disasters, litigation and other regulatory factors.
- The company adopted ASC 606 using the modified retrospective method with no cumulative adjustment; management said the change did not affect revenue-recognition timing. It planned to adopt the lease accounting standard on July 1, 2019 and was evaluating its effects.
- Management concluded disclosure controls were not effective at quarter-end because of a material weakness related to deferred income taxes and income-tax expense. The filing states remediation steps had been taken, but does not say the weakness was fully remediated.
- The company disclosed no off-balance-sheet arrangements. Legal proceedings were described as ordinary-course matters; no specific material case or contingency amount was identified.
Key facts for investors to verify
- Near-term repayment and refinancing plans for the revolving credit line due June 2019 and the Partnership loan from InterGroup extended to December 31, 2018.
- Status and remediation of the tax-related material weakness, given management’s conclusion that disclosure controls remained ineffective.
- The hotel ADR inconsistency: the table shows an increase from $254 to $277, while the narrative describes a $23 decrease.
- Exposure to hotel mortgage and mezzanine debt, including InterGroup’s guarantee obligations and related covenant requirements.
- Marketable-securities concentration and volatility: Colony Capital and American Realty Investors represented 16% and 15% of the portfolio, respectively; securities losses are recognized in earnings.