Business Context and Reporting Period
Company: The InterGroup Corporation (InterGroup)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2008
Business Overview: InterGroup operates primarily through its interest in Justice Investors, a partnership owning the Hilton San Francisco Financial District hotel. The company also manages a portfolio of real estate properties (apartment complexes, commercial real estate) and invests in marketable securities. The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Three Months Ended Dec 31, 2008 | Six Months Ended Dec 31, 2008 |
|---|---|---|
| Total Revenue (Hotel + Real Estate) | $11,824,000 | $24,349,000 |
| Net Income (Loss) | $(615,000) | $34,000 |
| Net Income (Loss) Per Share (Basic) | $(0.26) | $0.01 |
| Cash and Cash Equivalents | $583,000 (as of Dec 31, 2008) | |
| Total Debt (Mortgages + Line of Credit) | $121,100,000 (as of Dec 31, 2008) | |
| Operating Cash Flow (6 Months) | $3,382,000 |
Material Changes vs. Prior Period
- Profitability Shift: The company reported a net loss of $615,000 for the quarter ended Dec 31, 2008, compared to net income of $347,000 in the same period in 2007. For the six-month period, net income dropped significantly to $34,000 from $1,610,000 in the prior year.
- Hotel Operations: Hotel revenues declined to $8.64 million (quarter) and $17.94 million (six months) from $9.62 million and $19.41 million, respectively, in 2007. This was driven by a decrease in average daily rates and occupancy (79% vs 85% for the quarter) due to economic downturns.
- One-Time Loss: A $684,000 loss was recorded on the termination of the parking garage lease to Evon Corporation, effective October 1, 2008. This transaction converted the garage from a leased asset to a company-operated asset.
- Investment Gains: Net gains on marketable securities decreased to $445,000 for the quarter (from $1.375 million) but increased significantly for the six-month period to $2.088 million (from a $2,000 loss in 2007).
- Accounting Change: The company ceased recording a minority interest benefit related to Justice Investors' losses starting in the quarter ended Dec 31, 2008, resulting in an additional $608,000 recorded loss.
Outlook, Risks, and Management Commentary
- Economic Outlook: Management expects the dramatic downturn in domestic and international economies to continue impacting hotel operations through fiscal 2009. Hotel operating revenues are projected to be lower than fiscal 2008.
- Operational Strategy: Management is focusing on cost reduction, efficiency improvements, and sales and marketing efforts to maintain occupancy. The integration of garage operations is expected to improve future operating income.
- Liquidity and Debt:
- The company holds $583,000 in cash and $1.81 million in restricted cash.
- Justice Investors holds a $2.5 million line of credit (reduced from $3 million) with United California Bank. As of Dec 31, 2008, $1.756 million was drawn.
- Covenant Non-Compliance: Justice was not in compliance with a financial covenant on the line of credit due to the one-time garage lease termination loss. Management is seeking a waiver and does not anticipate a material impact.
- Real Estate Portfolio: Two apartment complexes (Austin and San Antonio, Texas) are classified as "held for sale" and reported as discontinued operations.
- Compensation Plan: A new 2008 Restricted Stock Unit (RSU) Plan was adopted to replace expiring stock option plans, subject to shareholder approval.
Investor Verification Checklist
- Covenant Waiver Status: Verify if the waiver for the line of credit covenant non-compliance has been granted by United California Bank.
- Hotel Occupancy Trends: Monitor Q2 and Q3 2009 occupancy rates and RevPar to confirm if the projected decline in revenues materializes.
- Discontinued Operations: Track the sale progress of the Austin and San Antonio apartment complexes classified as held for sale.
- Minority Interest Asset: Review the recoverability of the $7.12 million minority interest asset related to Justice Investors given the ongoing hotel losses.
- Shareholder Approval: Confirm the ratification of the 2008 Restricted Stock Unit Plan at the Annual Meeting of Shareholders.