The InterGroup Corporation — Form 10-Q
Reporting period: Three months ended September 30, 2015, the first quarter of fiscal 2016. Comparative period: three months ended September 30, 2014. Unaudited consolidated results include the company’s hotel, real estate and investment activities.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Total revenue | $18.720 million | $19.027 million |
| Operating income | $3.746 million | $3.042 million |
| Net income (loss), consolidated | $713,000 | ($904,000) |
| Net income (loss) attributable to InterGroup | $469,000 | ($763,000) |
| EPS attributable to InterGroup, basic / diluted | $0.20 / $0.19 | ($0.32) / ($0.32) |
| Operating cash flow | $4.231 million | ($838,000) |
| Cash and cash equivalents, period end | $8.344 million | $2.620 million |
Revenue declined 1.6% year over year, while operating income rose 23.1%. Operating margin was approximately 20.0%, compared with 16.0% a year earlier. The improvement in net results reflected stronger hotel operations and a favorable swing in marketable-securities results. The filing reports consolidated EPS of $0.30 basic and $0.29 diluted, distinct from EPS attributable to InterGroup shown above.
- Hotel: Revenue was $15.138 million, up 2.1%. Hotel operating income before disposal loss, mortgage interest and depreciation was $3.945 million, versus $2.992 million. Net income from hotel operations was $1.339 million, versus $405,000. Average daily rate rose to $265 from $258; occupancy was 95%, versus 96%; RevPAR increased to $252 from $247.
- Real estate: Revenue fell to $3.582 million from $4.197 million, primarily following the March 2015 sale of a 249-unit Austin apartment property. Segment net income was $722,000, versus $1.218 million.
- Investments: Marketable securities produced a $380,000 net gain, compared with a $1.490 million loss in the prior-year quarter. The current-period result included a $440,000 unrealized gain and a $60,000 realized loss.
- Cash flow: Operating cash flow was $4.231 million; investing activities used $3.654 million and financing activities used $762,000. The company reported $2.563 million of interest paid.
Financial position and material changes
- At September 30, 2015, total assets were $139.880 million, down from $143.419 million at June 30, 2015. Total liabilities were $203.170 million and shareholders’ deficit was $63.290 million.
- Mortgage debt was $182.892 million: $117.000 million associated with the hotel and $65.892 million with real estate. Other notes payable were $4.781 million. The hotel mortgage and mezzanine financing have stated maturities in January 2024; the company has provided limited guarantees. Contractual obligations, including scheduled interest, totaled $253.104 million.
- Marketable securities increased to $17.733 million from $5.827 million, principally because $13.231 million of Comstock Mining preferred stock was converted into common stock. Comstock represented approximately 91.4% of the marketable-securities portfolio at quarter end.
- Other investments declined to $1.778 million from $15.082 million, largely reflecting that conversion. The company also purchased a Los Angeles house for $1.975 million in cash and invested $2.243 million in real estate during the quarter.
- The company repurchased 5,560 common shares for approximately $122,000. It reported 2,384,989 common shares outstanding on October 9, 2015.
Outlook, risks and notable items
- No quantified earnings or revenue guidance was provided. Management said it expects hotel, garage and lease cash flows to meet the partnership’s obligations and believes hotel and real-estate value could support additional borrowing if needed. Management also stated that company cash, securities, real estate and related cash flows should meet obligations.
- Management cited hotel debt-service demands and an ongoing legal dispute with former Justice Investors partners as risks to future cash flows. The filing also identifies exposure to economic and travel conditions, competition, seasonality, labor issues, financing availability, securities-market volatility, litigation and other risks.
- The Hilton franchise agreement was amended in June 2015, extending the term through 2030, changing the monthly royalty rate, extending geographic protection and providing incentives. The incentives were received July 1, 2015; the filing says they were included in accounts receivable at June 30, 2015. Management attributed lower hotel operating expenses partly to reduced royalty fees and lower legal expenses as the dispute moved closer to settlement.
- The company ended third-party management of its California properties in August 2015 and moved all properties to in-house management, expecting lower costs and improved efficiency. Hotel renovations and guest-experience improvements were also described; additional meeting-room and guest-room renovations were planned.
- Marketable-securities gains and losses may fluctuate significantly, and the filing cautions they may not predict future results. The concentrated Comstock position is a notable investment risk. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Progress and potential financial impact of the former-partner litigation, including any effects on partnership cash flows or guarantees.
- Hotel debt service, scheduled maturities and the assumptions behind management’s liquidity and borrowing-capacity assertions.
- Comstock’s share of the portfolio, valuation changes and the effect of concentration on earnings and liquidity.
- Whether hotel operating gains and the real-estate management changes persist, and the costs and timing of planned renovations.
- The distinction between consolidated net income and income attributable to InterGroup when assessing earnings and EPS.