Business Context and Reporting Period
Company: The InterGroup Corporation (InterGroup)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2009
Business Overview: InterGroup operates primarily through its interest in Justice Investors, which owns the Hilton San Francisco Financial District hotel. The company also manages a portfolio of real estate properties (apartments, commercial, single-family) and invests in marketable securities and private equity funds. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2009 | Six Months Ended Dec 31, 2009 |
|---|---|---|
| Total Revenues | $11,350,000 | $22,834,000 |
| Net Loss (Consolidated) | $(721,000) | $(2,048,000) |
| Net Loss Attributable to InterGroup | $(479,000) | $(1,410,000) |
| Net Loss Per Share (Basic) | $(0.20) | $(0.60) |
| Operating Cash Flow | N/A | $3,516,000 |
| Cash and Cash Equivalents | $1,920,000 | $1,920,000 |
| Total Assets | $136,332,000 | $136,332,000 |
| Total Liabilities | $137,268,000 | $137,268,000 |
| Shareholders' Equity (Deficit) | $(936,000) | $(936,000) |
Debt Obligations: Total mortgage notes payable were approximately $117.4 million. A $2.5 million line of credit was fully utilized.
Material Changes vs. Prior Period
- Net Loss Improvement (3 Months): Net loss decreased to $721,000 from $1,029,000 in the prior year quarter. This improvement was driven by reduced hotel operating expenses and the absence of a one-time $684,000 loss on the termination of a garage lease recorded in the prior year.
- Net Loss Deterioration (6 Months): Net loss increased to $2,048,000 from $496,000 in the prior year period. This was primarily due to a significant loss from investment activities, including a $1.14 million net loss on marketable securities and a $917,000 impairment loss on other investments.
- Hotel Operations: Hotel revenues declined slightly due to lower average daily room rates ($149 vs. $167 in 2008), though occupancy rates improved to 87% from 79%. Operating expenses decreased significantly, offsetting revenue declines.
- Investment Portfolio: The value of marketable securities dropped from $13.92 million to $7.68 million. The portfolio composition shifted significantly, with REITs becoming the largest sector (38.7%) compared to Dairy products (39.0%) in the prior period.
Guidance, Outlook, and Risks
- Liquidity and Distributions: No partnership distributions were paid for the six months ended December 31, 2009, due to the economic downturn in the lodging industry. Management does not anticipate distributions in the foreseeable future until the second half of calendar 2010.
- Debt Covenant Compliance: The company was not in compliance with financial covenants on its $2.5 million line of credit as of December 31, 2009. Management is working with the bank to obtain a waiver and a longer-term extension.
- NASDAQ Listing Status: The company received notice from NASDAQ that it no longer satisfied the minimum $2.5 million stockholders' equity requirement. An extension was granted through January 28, 2010, with a potential further extension to April 13, 2010, to regain compliance. Failure to comply could result in delisting.
- Real Estate Sales: Three properties (apartment complexes in Austin and San Antonio, TX, and Los Angeles, CA) are classified as "held for sale" and reported as discontinued operations.
- Forward-Looking Risks: Risks include recessionary impacts on tourism, competition in the San Francisco hotel market, energy costs, and the volatility of the securities markets affecting investment returns.
Investor Verification Checklist
- Debt Covenant Waiver: Verify if the company successfully secured a waiver for the line of credit covenant non-compliance and the status of the extension.
- NASDAQ Compliance Plan: Confirm the status of the plan to regain compliance with the $2.5 million stockholders' equity requirement to avoid delisting.
- Investment Impairments: Review the specific details of the $917,000 impairment loss on "other investments" and the valuation methodology for the remaining private equity and warrant holdings.
- Hotel Cash Flow: Assess the sustainability of the hotel's positive cash flow given the decline in average daily room rates and the fully utilized line of credit.
- Discontinued Operations: Monitor the progress of the sale of the three properties classified as held for sale.