Business context and reporting period
The filing is InterGroup Corporation’s Form 10-K for the fiscal year ended June 30, 2018, compared with the year ended June 30, 2017. This differs from the request metadata’s “2017 Q4.” InterGroup’s results consolidate its controlled subsidiaries and are driven primarily by a 544-room Hilton hotel in San Francisco, rental properties, and securities investments.
Financial performance and condition
- Revenue: $71.579 million, up 3.7% from $69.005 million. Hotel revenue rose to $57.099 million from $54.334 million; real estate revenue declined to $14.480 million from $14.671 million.
- Profit: Consolidated net income was $5.813 million versus a $1.676 million loss. Net income attributable to InterGroup was $4.081 million, or $1.73 basic and $1.53 diluted per share, compared with a $1.653 million attributable loss, or $0.70 per share, in 2017.
- Nonrecurring item: Fiscal 2018 results included $8.3 million received in a legal malpractice settlement: $5.575 million recorded as recovery of legal settlement costs and $2.725 million as a reduction in legal expense. The filing identifies this settlement as the principal reason for the year-over-year earnings improvement.
- Operations and margins: Hotel operating income before nonrecurring charges, interest, depreciation and amortization was $16.996 million, or 29.8% of hotel revenue, versus $13.617 million, or 25.1%. Hotel occupancy increased to 94% from 91%; average daily rate remained $250, and RevPAR rose to $235 from $227.
- Cash flow: Operating activities generated $11.448 million, compared with $6.294 million. Investing activities used $0.792 million and financing activities used $5.474 million. Cash and cash equivalents increased to $8.053 million from $2.871 million.
- Liquidity and assets: Marketable securities were $13.841 million, restricted cash $9.458 million, and total assets $131.680 million. Restricted cash includes lender reserves and funds restricted for hotel capital improvements. Management said available cash, securities, real estate and operating cash flows were expected to meet obligations.
- Debt and capital structure: Balance-sheet mortgage debt was $177.245 million before debt issuance costs; related-party and other notes were $5.735 million, and capital leases were $1.355 million. Total liabilities were $201.647 million against total shareholders’ deficit of $69.967 million. The hotel mortgage bears 5.275% and the subordinated mezzanine loan 9.75%; both mature in January 2024. Contractual obligations, including stated interest, totaled $235.142 million.
- Investments: Marketable securities declined to $13.841 million from $17.177 million. The company reported a $1.777 million net securities loss, including a $6.007 million realized loss and a $2.337 million unrealized loss on Comstock Mining shares. Other investment impairment was $0.200 million.
Material changes versus the prior year
- Consolidated earnings swung to profit, principally due to the $8.3 million settlement; income tax expense increased to $3.056 million from $0.521 million.
- Hotel revenue increased, led by room and food-and-beverage revenue; operating expenses before nonrecurring items declined to $40.103 million from $40.717 million.
- Real estate operating expenses increased to $7.579 million from $7.166 million, primarily because of higher property taxes; management cited increased vacancy loss as the main reason for lower real estate revenue.
- Cash increased and securities holdings decreased. Margin balances and obligations for securities sold also declined year over year.
Outlook, risks and unusual items
- Outlook: No specific financial guidance is provided. Management planned hotel technology upgrades and room renovations during fiscal 2019, including returning rooms to service. The filing cited the Moscone Center expansion, then scheduled for completion in December 2018, as a potential source of local hotel demand.
- Hotel and property risks: Substantially all revenue depends on one San Francisco hotel, exposing results to local economic conditions, competition, seasonality, labor costs and negotiations, and required renovation spending. Several union agreements were due to expire in 2018.
- Leverage and financing: The company has substantial debt, debt-service requirements and limited flexibility; future renovation funding may depend on obtaining financing. A July 2018 $5 million revolving credit line carried a variable rate of 30-day LIBOR plus 3% and was due in June 2019; $2.969 million was drawn to refinance a property mortgage.
- Other risks: Securities-market volatility, short-sale and margin exposure, real estate and hotel operating costs, catastrophic or uninsured losses, litigation, and the concentrated investment portfolio may affect results. The CEO beneficially owned 64.4% of the common stock, limiting other shareholders’ influence.
- Controls and audit: The independent auditor gave an unqualified opinion on the financial statements. Management reported an unremediated material weakness in internal control over financial reporting related to tax-provision preparation; a computational error in estimating the Tax Act transition impact was identified in fiscal 2018. The auditor did not attest to internal-control effectiveness.
- Capital returns: The company paid no cash dividend and said it did not expect to do so in the near future. It repurchased 25,527 shares during fiscal 2018 for approximately $0.642 million.
Most important facts to verify
- How much of fiscal 2018 earnings and operating cash generation reflects the one-time $8.3 million settlement rather than recurring operations.
- Debt maturities, required payments and covenant or guaranty compliance, including the short-term revolving line and the property loan maturing after year-end.
- Progress, cost and funding of hotel technology upgrades and renovations, and whether planned room capacity returns to service on schedule.
- Remediation of the tax-provision material weakness and the final tax effects of the Tax Act.
- Performance of the San Francisco hotel and rental portfolio, including occupancy, RevPAR, vacancy and labor-cost trends.