Business context and reporting period
The InterGroup Corporation’s Form 10-K reports the fiscal year ended June 30, 2019, compared with fiscal 2018; it does not provide separate fourth-quarter results. The company’s consolidated businesses include a 544-room Hilton hotel in San Francisco, rental real estate, and securities investments. InterGroup held approximately 82.2% of Santa Fe Financial, which held approximately 68.8% of Portsmouth Square; InterGroup also directly held approximately 13.4% of Portsmouth.
Financial performance and condition
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $74.753 million | $71.579 million |
| Net income | $2.814 million | $5.813 million |
| Net income attributable to InterGroup | $1.457 million | $4.081 million |
| Operating income | $15.196 million | $21.565 million |
| Cash from operating activities | $14.269 million | $11.448 million |
| Cash and cash equivalents | $11.837 million | $8.053 million |
| Restricted cash | $13.295 million | $9.458 million |
| Marketable securities | $9.696 million | $13.841 million |
Hotel revenue rose 4.9% to $59.881 million. Room revenue increased to $51.243 million, while food-and-beverage revenue declined to $5.353 million. Hotel occupancy increased to 96% from 94%, average daily rate to $268 from $250, and RevPAR to $257 from $235. Hotel operating income before non-recurring items, interest, depreciation and amortization was $15.415 million, down from $16.996 million. Real estate revenue increased to $14.872 million from $14.480 million; real estate segment income was $2.079 million, versus $2.024 million.
The reported net-income decline primarily reflects the prior-year $8.3 million legal settlement receipt related to the Glaser matter. FY2018 recorded $5.775 million as recovery of legal settlement costs and $2.725 million as a reduction of legal expense. FY2019 also included a $398,000 loss on asset disposal and a $1.733 million net loss on marketable securities. The tax line shifted from a $3.056 million expense in FY2018 to a $301,000 benefit in FY2019.
At June 30, 2019, total assets were $130.879 million and total liabilities were $199.308 million; shareholders’ deficit was $68.429 million. Hotel and real-estate mortgage notes payable, net of debt issuance costs, totaled $171.658 million. The company also reported a $2.985 million revolving credit balance, $5.261 million of related-party and other notes payable, and $1.629 million due to its securities broker. Contractual obligations, including stated interest, totaled $220.452 million. Cash and restricted cash are not wholly unrestricted liquidity; restricted cash includes lender reserves and funds designated for hotel capital improvements.
Material changes, outlook and risks
- Hotel room growth reflected a sales strategy emphasizing higher-rated transient and midweek business; reduced discounted group business contributed to lower food-and-beverage revenue. Hotel operating expenses increased, including labor and group commissions.
- The company invested in hotel technology, including upgraded internet infrastructure and 4K televisions, and planned room renovations to return additional rooms to service. Management anticipated certain room work during FY2020 and completion of an exterior building-maintenance system by the quarter ending December 31, 2019. These are expectations, not guaranteed outcomes.
- After year-end, the $20 million mezzanine loan was refinanced at 7.25%, down from 9.75%, with maturity unchanged at January 1, 2024. Also after year-end, CIBC increased the revolving credit facility by $3 million and extended maturity to July 23, 2020. At June 30, 2019, the facility balance was $2.985 million and the original maturity was in July 2019.
- Management stated that cash, securities, real estate and operating cash flows were expected to meet current and future obligations, and cited appreciated property value as potential borrowing support. No quantitative earnings or revenue guidance was provided.
- Principal risks include reliance on one San Francisco hotel and its local market, hotel competition and seasonality, labor and operating-cost increases, renovation funding and execution, substantial debt and refinancing needs, market losses and illiquidity in investments, and natural-disaster, insurance, regulatory and litigation exposure. About 85% of hotel employees were represented by unions; Local 2’s agreement was renewed in August 2019.
- The company reported a material weakness in tax-provision controls at June 30, 2018, which management said was remediated by June 30, 2019. Disclosure controls were assessed as effective. The auditor issued an unqualified opinion on the financial statements; it did not attest to internal control over financial reporting.
- Revenue-recognition adoption had no cumulative adjustment and did not change recognition timing, according to the filing. Restricted-cash accounting changed cash-flow presentation for the periods shown.
Most important facts for investors to verify
- How hotel operating trends and planned renovations affect room availability, costs, occupancy, rates and cash generation in FY2020.
- Debt maturities, refinancing terms, covenants and guaranty requirements, including the subsequent mezzanine refinancing and expanded credit facility.
- How much reported cash is unrestricted and available after lender reserves, capital needs and scheduled debt service.
- Whether investment-portfolio valuation and losses, including long-held unrealized losses, could materially affect earnings or liquidity.
- Whether tax-control remediation remains effective and whether the company can realize deferred tax assets and use tax-loss carryforwards.