Business Context and Reporting Period
Company: The InterGroup Corporation (Intergroup)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2010
Business Overview: Intergroup operates in three primary segments: Hotel Operations (via its subsidiary Portsmouth Square, Inc. and the Justice Investors partnership owning the Hilton San Francisco Financial District), Real Estate Operations (multi-family residential and commercial properties), and Investment Transactions (marketable securities and private equity). The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2010 | Six Months Ended Dec 31, 2010 |
|---|---|---|
| Total Revenues | $12,154,000 | $24,770,000 |
| Net Income (Consolidated) | $10,546,000 | $10,622,000 |
| Net Income Attributable to Intergroup | $8,602,000 | $8,611,000 |
| Income from Operations | $1,611,000 | $3,106,000 |
| Cash and Cash Equivalents | $1,213,000 | $1,213,000 |
| Total Assets | $156,482,000 | $156,482,000 |
| Total Liabilities | $149,097,000 | $149,097,000 |
| Shareholders' Equity | $7,385,000 | $7,385,000 |
Debt Profile: Total mortgage notes payable (hotel, real estate, and held for sale) totaled approximately $119.0 million as of December 31, 2010. The company refinanced two apartment building mortgages in November 2010, securing fixed rates of 4.85%.
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $10.5 million for the quarter ended Dec 31, 2010, a significant reversal from a net loss of $721,000 in the same period in 2009. For the six-month period, net income was $10.6 million compared to a loss of $2.0 million in 2009.
- Investment Gains: The primary driver of profitability was a massive increase in "Other income." Net unrealized income on other investments jumped to $11.8 million (quarter) and $11.9 million (six months) compared to $226,000 in the prior year periods. This was largely due to a debt restructuring with Comstock Mining, Inc., where debt instruments were exchanged for preferred stock, recording an unrealized gain of approximately $11.4 million.
- Hotel Performance: Hotel revenues increased to $9.1 million (quarter) and $18.7 million (six months) from $8.4 million and $16.9 million, respectively. Average Daily Rate (ADR) increased significantly ($186 vs $164 for the quarter), though occupancy dipped slightly (82% vs 86%).
- Balance Sheet: Total assets increased by $24.4 million from June 30, 2010, primarily driven by a $14.1 million increase in marketable securities and a $11.2 million increase in other investments.
Guidance, Outlook, and Risks
- Outlook: Management believes the hotel is well-positioned for industry recovery, citing increased corporate and group travel. They plan to focus on cultivating international business, particularly from China. No limited partnership distributions from the hotel are anticipated for fiscal 2011 due to modest economic improvements.
- Recent Transactions: In January 2011 (subsequent to period end), the company sold a 132-unit apartment complex in San Antonio for $5.5 million, realizing an estimated gain of $3.2 million.
- Risks:
- Investment Volatility: A significant portion of net income is derived from unrealized gains on marketable securities and other investments, which management notes may fluctuate significantly and have no predictive value.
- Liquidity: While the hotel generates positive cash flow, the company relies on investment income and real estate operations. No distributions were paid in fiscal 2010.
- Debt Covenants: The hotel partnership has financial covenants requiring a return to minimum profitability by June 2011. Management believes they are in compliance.
Investor Verification Checklist
- Sustainability of Earnings: Verify the extent to which the $10.5M net income is driven by non-recurring unrealized gains ($11.8M) versus core operating income ($1.6M).
- Comstock Investment: Review the terms and liquidity of the $13.2M Series A-1 Convertible Preferred Stock in Comstock Mining, Inc., which drove the majority of the unrealized gain.
- Hotel Cash Flow: Confirm that hotel operating cash flows are sufficient to service the $119M in mortgage debt without requiring additional equity injections, especially given the lack of partnership distributions.
- Real Estate Dispositions: Monitor the sale of the remaining "held for sale" property (249-unit Austin apartment building) to assess future cash inflows.
- Debt Maturities: Review the schedule of mortgage payments, noting significant principal due in Year 3 ($34.2M) and Year 4 ($3.4M) per the contractual obligations table.