InterGroup Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016 (filed September 28, 2016). The request metadata says “2015 Q4,” but the supplied filing reports FY2016 results and compares them with FY2015. InterGroup is a holding company whose consolidated operations include the Hilton San Francisco Financial District, rental real estate and securities investments.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Total revenue | $72.898 million | $72.737 million |
| Net income (loss) | $(9.267) million | $2.057 million |
| Net income (loss) attributable to InterGroup | $(7.136) million; $(2.99) per share | $2.942 million; $1.23 per share |
| Cash from operating activities | $8.972 million | $(0.162) million |
| Cash and cash equivalents at year-end | $5.404 million | $8.529 million |
- Hotel revenue rose 3.1% to $58.566 million. Room revenue increased $1.857 million; average daily rate rose to $257 from $246, while occupancy was 92% versus 93% and RevPAR was $237 versus $229. Hotel operating income before legal settlement costs, interest and depreciation was $11.320 million, or about 19.3% of hotel revenue, versus $9.795 million, or about 17.2%, in FY2015.
- Hotel operations reported a $4.430 million net loss, compared with a $0.388 million loss. FY2016 included $5.396 million of legal settlement costs; increased room revenue partly offset this expense.
- Real estate revenue declined to $14.332 million from $15.926 million, mainly following the March 2015 sale of the Austin apartment property. Real estate operating expenses fell to $6.790 million from $8.237 million.
- The consolidated net loss also reflected a $7.189 million loss on marketable securities, versus $4.652 million in FY2015, and the absence of FY2015’s $11.100 million real estate sale gain. FY2016 included a $3.940 million income tax benefit.
- Operating cash flow improved, but investing activities used $6.978 million and financing activities used $5.119 million; cash declined by $3.125 million during the year. Restricted cash was $3.221 million.
- Total assets were $136.110 million and total liabilities $209.357 million at June 30, 2016. Shareholders’ deficit was $73.247 million. Mortgage debt was $182.205 million, and related-party and other notes payable were $6.996 million. Contractual obligations, including stated interest, totaled $250.415 million.
- The $14.282 million marketable securities portfolio was concentrated: Comstock Mining represented approximately 65% of portfolio value. The Company recorded $6.199 million in unrealized and $0.990 million in realized securities losses.
Material changes and developments
- The Hotel’s improved room rates and RevPAR supported higher hotel revenue, while operating expenses remained broadly stable.
- In May 2016, Justice Investors and Portsmouth settled litigation with Evon for $5.575 million, due no later than January 10, 2017. Approximately $2.750 million had been paid by year-end; $2.825 million was recorded as payable. The filing reports $5.396 million of legal settlement costs in the income statement.
- In August 2015, $13.231 million of Comstock preferred stock converted into common stock. This materially increased the securities portfolio’s Comstock concentration.
- The Company refinanced a Los Angeles apartment mortgage in June 2016 and fixed the rate on a commercial-property loan through an interest-rate swap. In August 2016, it borrowed $1.000 million against a residential property.
- GMP, a related-party hotel management provider, resigned in June 2016; the Company was seeking a replacement. The Ace Parking agreement ended October 4, 2016, with parking operations planned to move in-house.
- The 2015 sale of the Austin apartment property and a commercial property generated $11.100 million in aggregate gains reflected in FY2015, affecting year-over-year comparability.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management expected hotel and garage cash flows to meet Partnership obligations, while acknowledging debt-service and legal-settlement risks. Management also stated that Company cash, securities, real estate and related cash flows would be adequate for obligations.
- Management described recent San Francisco hotel demand and business and leisure travel as improving, and planned continued room and facility renovations, cultivation of international business and efforts to restore food-and-beverage profitability. The Hotel expects to spend at least 4% of annual gross revenue on capital improvements; renovations are expected to span three years.
- Key risks include dependence on one San Francisco hotel and local market conditions, intense competition, seasonal demand, high fixed operating costs, renovation funding and execution, substantial debt, labor costs and union agreements, and potentially uninsured catastrophic losses. About 78% of Hotel employees were represented by unions; agreements expire in July 2018.
- Other litigation remained unresolved, including a malpractice arbitration stayed pending related litigation and a lawsuit against RSUI over insurance coverage. The filing gives no prediction of their outcomes. The Company had also disputed San Francisco tax assessments; the filing says the City refunded $1.45 million in settlements of two tax matters.
- The filing reports no material off-balance-sheet arrangements and no cash dividends declared or expected in the near term. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not express an opinion on internal controls.
Important facts for investors to verify
- Confirm the timing and funding of the remaining Evon settlement payment, and the status and potential recovery of legal costs from RSUI or the malpractice arbitration.
- Assess liquidity against the near-term contractual obligations, including the settlement payable, and review the terms and covenants of the hotel mortgage and mezzanine debt.
- Review the investment portfolio’s Comstock concentration, valuation exposure and subsequent performance; FY2016 marketable-securities losses were significant.
- Track the Hotel’s post-year-end management arrangements, operating results, renovation spending and labor negotiations.
- Resolve an internal inconsistency in the filing: the August 2016 property-loan disclosure generally says the $1 million loan matures in August 2018, while the subsequent-events note says August 2016. The correct maturity is unclear from the filing text.
- Consider governance and control: the filing reports concentrated ownership and states that John V. Winfield beneficially owned 62.1% of the Company’s shares, including vested options.