Business context and reporting period
The InterGroup Corporation’s Form 10-K covers the fiscal year ended June 30, 2013, compared with fiscal 2012; it is not a standalone fourth-quarter report. InterGroup’s principal activities are operating and investing in real estate and securities. Results consolidate the Justice Investors partnership, which owns the 543-room Hilton San Francisco Financial District hotel. InterGroup owned about 80.5% of Santa Fe Financial, which owned about 68.8% of Portsmouth Square; Portsmouth held a 50% interest in Justice and was its managing general partner.
Key financial metrics
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $62.039 million | $56.999 million |
| Income from operations | $8.349 million | $9.359 million |
| Net income (loss), consolidated | $625,000 | ($671,000) |
| Net income (loss) attributable to InterGroup | ($715,000) | ($2.327 million) |
| Net cash from operating activities | $4.578 million | $5.223 million |
| Cash and cash equivalents at year-end | $1.453 million | $2.100 million |
Hotel revenue was $46.565 million, up from $42.462 million; hotel income after interest and depreciation was $2.864 million, down from $3.913 million. Hotel operating income before interest, depreciation and amortization was $7.930 million, or approximately 17.0% of hotel revenue, versus $8.997 million, or approximately 21.2%. Hotel room metrics improved: average daily rate was $205 versus $191, occupancy was 90% versus 87%, and RevPAR was $184 versus $166.
Real estate revenue increased to $15.474 million from $14.537 million, while real estate operating expenses rose to $8.529 million from $7.885 million. The company reported an $856,000 marketable-securities loss, substantially less than the $4.444 million loss in FY2012. Consolidated total assets were $144.686 million and total liabilities were $140.934 million at June 30, 2013; total shareholders’ equity was $3.752 million. Mortgage balances were $116.925 million ($43.413 million hotel and $73.512 million real estate), with another $1.595 million of other notes payable. Contractual obligations including interest totaled $149.748 million. Margin borrowing was $2.762 million; restricted cash was $2.448 million.
Material changes versus the prior period
- Total revenue rose approximately 8.8%, but operating income declined about 10.8%, as operating costs grew faster than revenue.
- Hotel revenue increased about 9.7%, but hotel operating expenses increased $5.170 million. Higher union wages and benefits, insurance costs, group-business commissions and food-and-beverage staffing contributed. Food and beverage operations recorded an approximately $1.102 million loss, compared with $379,000.
- The improvement from consolidated net loss to net income primarily reflected the smaller investment loss. InterGroup nevertheless recorded a loss attributable to its shareholders in both years, with the FY2012 comparison also including a $1.710 million real-estate sale gain in discontinued operations.
- Operating cash flow declined $645,000. Investing activities used $6.058 million, including hotel and real-estate investment; financing activities provided $833,000, largely reflecting refinancing activity.
- Real estate revenue included a one-time $404,000 storm-damage insurance recovery. No real estate sale gain was recorded in FY2013.
Outlook, risks, contingencies and unusual items
Management reported improving San Francisco hotel demand and said it expected continued focus on international business, especially from China, room and facility upgrades, and returning food and beverage operations to profitability. It gave no numerical earnings or revenue guidance. Management expected hotel cash flows to cover partnership obligations, but noted uncertainty from economic conditions and other risks.
- Hotel debt includes two Prudential mortgages totaling $43.413 million, both maturing in August 2015. The filing’s contractual-obligations table shows $42.970 million in Year 3; investors should confirm the timing and refinancing plan. Other property mortgages also have near-term maturities, including a Florence, Kentucky loan due July 2014 and Los Angeles commercial-property loans due December 2013 and March 2014.
- About 80% of the hotel partnership’s approximately 244 employees were union-represented; the Local 856 agreement had expired and was being renegotiated. Wage and benefit costs were already a significant expense driver.
- A hotel wage-and-hour class action was settled for $525,000 and accrued. Prism agreed to reimburse 50% of the settlement and up to $300,000 of legal costs; the partnership also received $225,000 of insurance proceeds, allocated between the partnership and Prism.
- The investment portfolio is exposed to market volatility and concentration: Comstock Mining common stock represented 31.7% of marketable securities, and the company also carried $13.231 million of Comstock convertible preferred stock among other investments. Investment gains and losses may fluctuate materially.
- Justice redemption discussions with its co-general partner were continuing; a refinancing-based transaction could increase Portsmouth’s ownership, but completion was not assured. A development project on Maui remained on hold.
- InterGroup entered into a property-management agreement with IPS in June 2013 and an asset-management agreement effective July 1, 2013 with Delta Alliance, a related firm to IPS. The agreements provide fees of 2.8% and 0.5% of defined property operating income, respectively.
Important facts for investors to verify
- Reconcile consolidated net income of $625,000 with the $715,000 net loss attributable to InterGroup, including the noncontrolling-interest allocation.
- Review hotel and real-estate debt maturities, covenant compliance, refinancing availability and the large FY2016 contractual-obligation amount.
- Assess whether hotel cost increases and food-and-beverage losses are recurring, and whether management’s stated turnaround priorities are producing results.
- Evaluate the valuation, concentration and liquidity of the securities portfolio, including the Comstock preferred-stock investment and margin exposure.
- Confirm the final costs and reimbursements for the settled employment case, and monitor the status and terms of any Justice partnership redemption proposal.