The InterGroup Corporation — Form 10-Q
Reporting period: Quarter and six months ended December 31, 2011; fiscal year ending June 30, 2012. Figures are unaudited. InterGroup’s businesses include a consolidated San Francisco hotel partnership, rental real estate, and investment activities.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $14.022 million | $28.661 million | $12.702 million / $25.831 million |
| Operating income | $2.666 million | $5.721 million | $1.821 million / $3.503 million |
| Operating margin | 19.0% | 20.0% | 14.3% / 13.6% |
| Consolidated net income (loss) | $727,000 | $(1.928) million | $10.546 million / $10.622 million |
| Net income (loss) attributable to InterGroup | $1,000 | $(3.074) million | $8.602 million / $8.611 million |
| Operating cash flow | Not provided for quarter | $4.160 million | $(479,000) |
Six-month hotel revenue increased 15.3% to $21.521 million, and hotel operating income rose to $3.053 million from $573,000. Management attributed the improvement to higher room rates and revenue, plus lower depreciation as renovation-related assets became fully depreciated. Real estate revenue was nearly flat at $7.140 million.
Investment results reversed sharply: the six-month net loss on marketable securities was $4.841 million, versus a $4.056 million gain in 2010; other investment and derivative results were a $417,000 loss, versus an $11.863 million gain. The prior-year comparison included an $11.422 million unrealized gain related to Comstock’s restructuring. Six-month impairment losses on other investments were $632,000.
Balance sheet, debt and liquidity
- At December 31, 2011, total assets were $145.378 million, down from $154.366 million at June 30, 2011. Shareholders’ equity was $3.625 million, down from $6.502 million.
- Cash and cash equivalents were $2.924 million; restricted cash was $2.012 million. Marketable securities were $9.777 million, down from $19.438 million at June 30.
- Mortgage notes totaled $117.637 million and other notes payable were $2.820 million. Total liabilities were $141.753 million. The filing’s contractual-obligations table totals $158.654 million, including stated future interest.
- Six-month operating cash flow was $4.160 million; investing cash outflow was $2.006 million and financing cash outflow was $594,000. Cash increased by $1.560 million. Cash interest paid was $3.444 million.
- In December, the company refinanced a $926,000 mortgage on a 12-unit apartment building with a $2.095 million loan, generating approximately $1.122 million in net proceeds. The new loan carries a 4.25% fixed rate for five years, then a variable rate, and matures in January 2022.
Material changes, outlook and risks
- Hotel performance improved: six-month average daily rate rose to $190 from $163, occupancy to 88% from 87%, and RevPAR to $168 from $142. In the December quarter, the figures were $190 versus $159, 85% versus 84%, and $162 versus $134, respectively.
- Justice Investors made a $1.0 million distribution in December 2011, its first since September 2008; Portsmouth received $500,000. Management said the hotel’s cash flows should meet partnership obligations and that hotel equity could support additional borrowing if needed.
- A Los Angeles 24-unit apartment property was sold in January 2012 for $4.370 million. The company reported approximately $2.564 million net proceeds after costs and mortgage repayment, and expects to recognize an approximately $1.7 million gain in the quarter ending March 31, 2012.
- Management plans continued hotel upgrades and efforts to attract higher-rated business, leisure, group and international travel, particularly from China. It cautioned that results depend on continued recovery in travel and the hotel market; no quantified financial guidance was provided.
- Risks cited include economic weakness, tourism and lodging demand, competition, seasonality, labor costs or disruptions, energy prices, interest rates and financing access, securities-market volatility, natural disasters, pandemics, regulation and litigation. The company stated it had no off-balance-sheet arrangements and was in compliance with the hotel partnership’s loan covenants at December 31, 2011.
Important facts for investors to verify
- Reconcile consolidated six-month net loss of $1.928 million with the larger $3.074 million loss attributable to InterGroup, including the noncontrolling-interest allocation.
- Assess the sustainability of improved hotel rates and occupancy against higher labor, staffing, franchise and management costs, and the hotel’s debt-service requirements.
- Review securities and private-investment valuations, concentration and impairment exposure; reported investment gains and losses were highly volatile year over year.
- Confirm debt maturity and refinancing exposure, particularly the contractual-obligations schedule’s large Year 2 and Year 5 amounts, and the availability of cash given restricted balances and substantial liabilities.
- Confirm the January 2012 property-sale proceeds and gain recognition in the subsequent quarter, and monitor whether hotel distributions continue.