INTERGROUP CORP annual report, FY2015

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InterGroup Corporation — FY2015 Form 10-K Summary

Reporting period: Fiscal year ended June 30, 2015, compared with fiscal 2014. The filing is an annual report, notwithstanding the request metadata referring to “2014 Q4.” InterGroup is a diversified real estate and investment company; consolidated results include its hotel partnership and subsidiaries.

Business context and financial results

  • Key operations are the 543-room Hilton San Francisco Financial District and parking garage, residential and commercial real estate, and an investment portfolio. InterGroup held about 81.3% of Santa Fe; Santa Fe held about 68.8% of Portsmouth, which held about 93% of Justice Investors.
  • Revenue was $72.737 million, up 8.1% from $67.295 million. Hotel revenue rose to $56.811 million from $50.963 million; real estate revenue declined to $15.926 million from $16.332 million.
  • Net income was $2.057 million versus a $6.748 million net loss. Net income attributable to InterGroup was $2.942 million, or $1.23 per basic share, versus an attributable loss of $4.692 million, or $1.98 per share. The turnaround principally reflects $11.1 million of gains from real estate sales and the absence of prior-year restructuring and refinancing charges.
  • Hotel operating income before non-recurring charges, interest, and depreciation was $9.795 million, down from $10.158 million; the corresponding margin was approximately 17.2%, versus 19.9%. Hotel net loss narrowed to $388,000 from $10.664 million, substantially because fiscal 2014 included restructuring costs and other one-time charges.
  • Hotel room revenue increased with higher rates and occupancy: average daily rate was $246 versus $229, occupancy was 93% versus 92%, and RevPAR was $229 versus $209. Hotel operating expenses increased by $6.211 million, including higher labor, operating, property-tax, and legal costs.
  • Real estate sales generated $11.1 million in gains: a 249-unit Austin apartment complex and adjoining land sold for $16.3 million, producing a $9.358 million gain; a Los Angeles commercial property sold for $3.45 million, producing a $1.742 million gain. Net proceeds were $7.890 million and $2.163 million, respectively.
  • Investment activity produced a $6.236 million net loss, versus $343,000 of net income in fiscal 2014. This included a $4.652 million marketable-securities loss and $701,000 of impairment losses on other investments. Comstock Mining represented approximately 46% of the marketable-securities portfolio.
  • Operating cash flow was negative $162,000, versus positive $3.284 million. Investing activities provided $11.622 million, largely reflecting $17.592 million in net real estate-sale proceeds. Cash increased to $8.529 million from $4.705 million; restricted cash was $2.868 million.
  • Total assets were $143.419 million and total liabilities $207.391 million at year-end; shareholders’ deficit was $63.972 million. Mortgage debt was $183.233 million, with $4.905 million of other notes payable. The hotel accounted for $117 million of mortgage debt: a $97 million loan at 5.28% and a $20 million mezzanine loan at 9.75%, both maturing in January 2024. The consolidated contractual-obligations schedule totals $256.186 million including interest.
  • The company paid no common-stock dividend and said it did not expect to pay one in the near future.

Material changes and significant developments

  • Justice completed the redemption of the remaining limited-partner interests by June 30, 2015. The 2013 restructuring had raised $117 million of hotel mortgage and mezzanine debt; related fiscal 2014 charges included $6.681 million of restructuring costs and a $3.910 million debt-extinguishment loss.
  • InterGroup sold the Austin apartment property and the Los Angeles commercial property during fiscal 2015. Real estate revenue fell partly because the Austin property was no longer held, while real estate operating costs declined.
  • On June 26, 2015, the hotel franchise agreement with Hilton was amended and extended through 2030, with revised royalty terms, geographic protection, and key-money incentives. The filing says the incentives were received July 1, 2015 and recorded as a receivable at year-end, but does not provide a clear amount.
  • The company brought management of its out-of-state properties in-house in August 2014 and, after year-end, terminated its California third-party property manager. It expected all properties to be managed in-house from September 2015.
  • On August 27, 2015, InterGroup converted its $13.231 million Comstock preferred-stock investment into Comstock common shares.

Outlook, risks, and contingencies

  • Management said hotel revenue and travel demand had improved and expected continued improvement in room revenue and profitability if San Francisco market trends continued. Priorities included attracting higher-rated and international business, renovating rooms and facilities, and returning food and beverage operations to profitability. No quantified earnings or revenue guidance was provided.
  • Management believed hotel and garage cash flows would meet Justice’s obligations and that appreciated hotel and real estate value could support additional borrowing. These are management assessments, not assurances; hotel debt service and litigation were identified as risks to future cash flow.
  • Principal risks include hotel competition and seasonality; labor and benefit costs (about 79% of hotel employees were union-represented); economic or travel disruptions, disasters, and rising operating costs; real estate taxes, regulation, and rent control; financing availability; and volatile investment results. The portfolio had material Comstock concentration, and leverage through margin can amplify investment volatility.
  • Several disputes tied to the restructuring remained unresolved, including a challenge to approximately $4.7 million of San Francisco transfer tax, Evon-related litigation and partnership disputes, and a stayed legal-malpractice arbitration. A separate $2.1 million occupancy-tax assessment was paid under protest and remained recorded in other assets. Outcomes and potential recoveries were uncertain; Justice had not yet filed its 2014 partnership tax returns pending resolution of a related declaratory action.
  • The company reported no material off-balance-sheet arrangements. The auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal control.

Important facts for investors to verify

  • How much of fiscal 2015 earnings and cash generation was attributable to property-sale gains, and how the hotel performs without those one-time gains.
  • Hotel cash flow and debt-service capacity, particularly the 9.75% mezzanine loan and the hotel’s planned renovation spending.
  • The value, terms, and accounting treatment of Hilton’s key-money incentives, including the related interest-free note and its amortization.
  • Current status and possible financial effects of the San Francisco tax disputes, Evon and partnership litigation, and the delayed partnership tax filings.
  • Comstock exposure after the preferred-stock conversion, including the resulting common-stock concentration and subsequent valuation.
  • Liquidity and capital structure given negative shareholders’ equity, negative operating cash flow, and substantial total contractual obligations.
  • Related-party arrangements, including GMP management fees and reimbursements, the parent-company loan, and the $1.2 million remaining in restructuring-related fees payable to officers and directors.