Business context and reporting period
The InterGroup Corporation’s Form 10-Q covers the three months ended September 30, 2014, its fiscal first quarter of 2015. The company’s principal activities are hotel operations through the Hilton San Francisco Financial District, residential and other real estate, and investment transactions. Its consolidated statements include Justice Investors and related subsidiaries. The financial statements are unaudited.
Financial results and position
| Metric | Quarter ended September 30, 2014 | Comparable 2013 quarter |
|---|---|---|
| Total revenue | $19.027 million | $17.383 million |
| Operating income | $3.042 million | $3.862 million |
| Net income (loss), consolidated | $(0.904) million | $1.692 million |
| Net income (loss) attributable to InterGroup | $(0.763) million | $0.282 million |
| Operating cash flow | $(0.838) million | $1.901 million |
- Revenue increased 9.5%; operating income fell 21.2%. Operating margin was approximately 16.0%, compared with 22.2% a year earlier.
- Hotel revenue rose to $14.830 million from $13.305 million. Average daily rate was $258 versus $235, occupancy was 96% versus 94%, and RevPAR was $247 versus $221. Hotel net income declined to $405,000 from $2.489 million, reflecting higher expenses and interest.
- Real estate revenue increased to $4.197 million from $4.078 million; operating expenses declined to $2.140 million from $2.278 million.
- Marketable securities produced a $1.490 million net loss, versus a $153,000 gain. The 2014 result included a $1.645 million unrealized loss. The portfolio’s fair value was $9.316 million at quarter-end; Comstock Mining represented 39.2% of that portfolio.
- Cash and cash equivalents were $2.620 million, down from $4.705 million at June 30, 2014. Investing activities used $1.524 million; financing activities provided $277,000. Restricted cash for redemption was $20.551 million, matched by a $20.551 million redemption payable.
- Total assets were $165.651 million; total liabilities were $232.862 million, leaving a shareholders’ deficit of $67.211 million. Hotel mortgage debt was $117.000 million and real estate mortgage debt was $74.974 million; other notes payable were $392,000.
- Contractual obligations, including stated interest, totaled $362.233 million. The filing lists $31.028 million due in the remaining nine months of fiscal 2015, including the $20.551 million redemption payable.
Material changes, outlook, and risks
- Management attributed the year-over-year earnings decline primarily to higher hotel mortgage interest, legal expenses related to the Justice partnership redemption, and losses on marketable securities. Hotel room and food-and-beverage revenue improved, but hotel operating expenses increased by $2.306 million.
- The hotel’s mortgage and mezzanine loans, obtained to fund partnership-interest redemptions and refinance prior debt, total $117 million and initially bear rates of 5.28% and 9.75%, respectively, with January 2024 maturities. The company provided limited guarantees. Management believes hotel and garage cash flows can meet obligations and that hotel and real estate value could support additional borrowing; these are management expectations, not guarantees.
- In July 2014, the company began managing five properties outside California in-house after terminating a third-party management arrangement. The company recognized $458,000 after a prospective buyer did not extend an agreement to purchase an Austin apartment complex and adjacent land.
- A November 2014 subsequent event: the company sold a Los Angeles commercial building for $3.450 million, expects a gain of approximately $1.740 million, and expects net proceeds of approximately $2.163 million.
- Management identified risks including economic conditions and travel demand, hotel competition and seasonality, labor disruptions, energy costs, natural disasters, securities-market volatility, financing availability, litigation, and the substantial debt burden. It provided no quantitative earnings or revenue guidance and cautioned that quarterly results may not indicate full-year performance.
- The filing reports no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- The MD&A states a quarterly net loss of $1.180 million, which does not match the financial statements’ consolidated net loss of $904,000 or InterGroup-attributable loss of $763,000. The filing does not clearly reconcile this discrepancy.
- Confirm the timing and funding of the $20.551 million redemption payable, due in the remaining nine months of fiscal 2015, given quarter-end cash of $2.620 million.
- Assess debt service, guarantees, and the company’s reliance on management’s expectation of adequate hotel cash flows or access to additional borrowing.
- Review the unresolved Justice-related legal matter and the $1.250 million in related fees still outstanding to certain company officers and directors.
- Evaluate the concentrated investment exposure: Comstock is 39.2% of marketable securities, in addition to $13.231 million of Comstock preferred stock reported in other investments.