Business context and reporting period
InterGroup Corporation’s unaudited Form 10-Q covers the three and nine months ended March 31, 2013, compared with the corresponding 2012 periods. Although the request metadata says “2012 Q3,” the filing is for the third quarter of fiscal 2013. The company’s principal businesses are hotel operations through its consolidated subsidiaries, real estate rentals, and investment transactions.
Key financial metrics
| Metric | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Nine months ended March 31, 2013 | Nine months ended March 31, 2012 |
|---|---|---|---|---|
| Total revenue | $14.379 million | $13.803 million | $45.238 million | $42.464 million |
| Income from operations | $1.022 million | $1.601 million | $5.648 million | $7.322 million |
| Income (loss) from continuing operations | $(0.484) million | $0.762 million | $(0.084) million | $(1.194) million |
| Net income (loss) attributable to InterGroup | $(0.199) million | $1.519 million | $(0.790) million | $(1.555) million |
| Net cash provided by operating activities | Not reported for the quarter | Not reported for the quarter | $2.396 million | $2.605 million |
Balance sheet at March 31, 2013: Total assets were $144.514 million; cash and cash equivalents were $1.023 million, restricted cash was $1.731 million, and marketable securities were $12.963 million. Total liabilities were $141.512 million and total shareholders’ equity was $3.002 million. Mortgage notes payable totaled $117.142 million and other hotel notes payable were $1.646 million. The filing does not present a conventional current-assets/current-liabilities liquidity measure.
Cash flows for the nine months: Investing activities used $4.576 million and financing activities provided $1.103 million; cash decreased by $1.077 million to $1.023 million. The company reported $5.226 million of interest paid.
Material changes versus comparable periods
- Nine-month revenue increased 6.5%, but operating income declined to $5.648 million from $7.322 million as operating costs rose faster than revenue. Quarterly revenue increased, while operating income fell to $1.022 million from $1.601 million.
- Hotel revenue rose to $33.581 million for nine months, but hotel operating income after interest and depreciation fell to $1.650 million from $3.364 million. Hotel operating expenses increased $3.612 million year over year.
- Real estate revenue increased to $11.657 million for nine months from $10.789 million, aided by higher rents and a one-time $404,000 storm-damage insurance recovery; real estate operating expenses also increased.
- Investment results improved year over year: the nine-month loss on marketable securities was $326,000 versus $3.387 million, and there was no other-investment impairment charge versus $684,000 in 2012. Marketable-securities gains and losses remain volatile.
- The prior-year comparison included a $1.710 million gain on the sale of an apartment property; there was no comparable sale gain in 2013.
Outlook, risks, contingencies and unusual items
- Management said hotel demand and room performance in San Francisco had improved. For the nine-month period, average daily rate was $201 versus $189, occupancy was 88% versus 87%, and RevPAR was $177 versus $164. Management plans to pursue higher-rated and international travel, upgrade facilities, and return food and beverage operations to profitability; no numerical earnings guidance was provided.
- Hotel costs pressured results, including union wage and benefit increases, higher group and convention commissions, and food-and-beverage losses of approximately $1.032 million for the nine months. Management cited lower-than-expected enrollment at a neighboring college and Hurricane Sandy-related cancellations and mix changes as contributing factors.
- At March 31, 2013, hotel mortgage balances included $26.198 million and $17.447 million on two Prudential loans, both scheduled to mature in August 2015, and a $1.272 million term loan due April 2014. The partnership was reported in compliance with the term-loan covenants. Management expected hotel cash flows to cover obligations but noted debt-service risk.
- During fiscal 2013, the company refinanced several property mortgages, including two larger loans at fixed rates of 3.73% and 3.51% for ten years. The company received approximately $1.085 million and $1.513 million of net proceeds from those two refinancings.
- A proposal to redeem Justice Investors limited-partnership interests at prices set through a Dutch auction, funded by a hotel refinancing, was subject to a minimum 34% tender, specified 75% partner approvals, and completion of refinancing. The response deadline had been extended to May 15, 2013; the filing does not establish that the conditions were ultimately met.
- Risks identified include economic and travel-market conditions, competition, seasonality, labor relations, energy costs, natural disasters, financing availability, securities-market volatility, and litigation. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Justice Investors redemption proposal secured the required tenders, approvals, and refinancing, and what effect it had on leverage and ownership.
- Hotel operating-cost trends, especially food-and-beverage performance, labor costs, and whether improved room rates and occupancy translated into stronger hotel profitability.
- Mortgage maturities, refinancing terms, covenant compliance, and the company’s limited cash balance relative to its reported liabilities and contractual obligations.
- The valuation and concentration risk of the investment portfolio: Comstock Mining represented 33.1% of marketable securities at March 31, 2013, and the filing reported $1.889 million of unrealized losses on securities held over one year.
- The recurring nature of real estate revenue growth and the impact of one-time insurance recoveries and prior-period property-sale gains on comparisons.