Business context and reporting period
The InterGroup Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2018, the third quarter of its fiscal year ending June 30, 2018. The request metadata labels the period “2017 Q3,” but the filing itself reports fiscal 2018 Q3. InterGroup’s principal activities are its indirect hotel operations through Justice Investors, residential and commercial real estate, and securities investing.
Financial results and position
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 | Nine months ended March 31, 2018 | Nine months ended March 31, 2017 |
|---|---|---|---|---|
| Total revenue | $17.972 million | $17.208 million | $52.898 million | $51.904 million |
| Income (loss) from operations | $3.468 million | $3.137 million | $8.963 million | $10.437 million |
| Consolidated net income (loss) | $779,000 | $(170,000) | $(2.023) million | $(584,000) |
| Net income (loss) attributable to InterGroup | $528,000 | $(147,000) | $(1.089) million | $(672,000) |
| Net cash provided by operating activities | Not presented for the quarter | $4.832 million | $6.872 million |
- Quarterly operating margin was approximately 19.3%, compared with 18.2% a year earlier; nine-month operating margin was approximately 16.9%, down from 20.1%.
- For the nine months, cash used in investing activities was $838,000 and cash used in financing activities was $3.194 million. Cash and cash equivalents rose by $800,000 to $3.671 million; restricted cash was $8.036 million.
- At March 31, total assets were $122.484 million, total liabilities $199.896 million, and shareholders’ deficit $77.412 million. Marketable securities were $9.442 million, down from $17.177 million at June 30, 2017.
- Mortgage notes payable were $177.901 million and related-party and other notes payable were $5.827 million. The hotel senior mortgage carried a 5.275% rate and the $20 million mezzanine loan a 9.75% rate; both mature in January 2024. The company also guarantees these Justice loans and reported compliance with related net-worth and liquidity requirements.
Material changes versus comparable periods
- Quarterly revenue rose 4.4%; hotel revenue increased to $14.344 million, while real estate revenue declined modestly to $3.628 million. Quarterly consolidated results improved to net income, with management attributing the change mainly to increased hotel revenue.
- Hotel revenue growth reflected higher occupancy, food and beverage, and garage income. Occupancy increased to 95% from 85%, while average daily rate fell to $250 from $272 and RevPAR rose to $239 from $229.
- Nine-month revenue increased 1.9%, but operating income declined 14.1% and consolidated net loss widened. Management cited higher hotel and real estate operating costs, including legal expense; hotel operating income before interest, depreciation and amortization fell to $10.063 million from $10.737 million.
- Nine-month marketable-securities losses were $2.308 million, including a $3.498 million unrealized loss related to Comstock Mining. The portfolio’s fair value fell to $9.442 million; Comstock represented approximately 14% of the portfolio at quarter end.
Outlook, risks, contingencies and unusual items
- No specific earnings or revenue guidance was provided. Management said it expects hotel and garage cash flows to meet partnership obligations and believes company cash, securities, and related cash flows will cover current and future obligations; it cited potential appreciated hotel value as a possible borrowing source.
- Management identified debt service, hotel-industry competition and seasonality, economic conditions, labor disruptions, fuel costs, securities-market volatility, litigation, and financing availability as risks. Securities gains and losses may fluctuate materially and may not predict future results.
- The Tax Cuts and Jobs Act resulted in a provisional $879,000 tax charge in the quarter ended December 31, 2017 to remeasure deferred tax assets. The company said it expected to finalize related adjustments by June 30, 2018; final effects could differ.
- A settlement in an arbitration matter calls for respondents to pay $8.3 million; the filing says the payment will be recorded upon receipt and does not report receipt. The filing also notes customary legal proceedings and reports no off-balance-sheet arrangements.
- Disclosure controls and procedures were deemed ineffective at quarter end because of a material weakness related to deferred income taxes and tax expense. The company described remediation steps, including hiring a tax specialist and assigning oversight to the audit committee.
- The filing reports a $1 million real-estate mortgage with an adjustable rate of 5.50% and a balloon payment at maturity in August 2018.
Important facts for investors to verify
- Confirm the filing period: the report covers the quarter ended March 31, 2018, notwithstanding the request’s “2017 Q3” label.
- Track hotel operating costs and legal expenses against occupancy, room rates, and RevPAR to assess whether hotel revenue gains translate into sustainable earnings.
- Review the marketable-securities portfolio, particularly the Comstock position, valuation changes, and exposure to further unrealized losses.
- Assess debt-service capacity, upcoming maturities and balloon payments, and the company’s continuing guarantor obligations and covenant compliance.
- Check whether the $8.3 million arbitration settlement was received and how it was ultimately recognized, and whether the deferred-tax control weakness was fully remediated.