InterGroup Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2014; filed May 16, 2014. The request metadata says “2013 Q3,” but the filing itself covers fiscal 2014 Q3. Financial statements are unaudited.
Business context
InterGroup’s principal operations are a 543-room Hilton hotel in San Francisco, rental real estate, and investments in marketable and private securities. The company consolidates Justice Investors, whose hotel operations are conducted through subsidiaries. Following a December 2013 redemption, Portsmouth held approximately 93% of Justice’s limited partnership interests and was its sole general partner.
Financial performance and position
| Metric | Three months ended Mar. 31, 2014 | Nine months ended Mar. 31, 2014 |
|---|---|---|
| Total revenue | $15.873 million, versus $14.379 million | $49.688 million, versus $45.238 million |
| Income from operations | $1.748 million, versus $1.022 million | $136,000, versus $5.648 million |
| Consolidated net loss | $564,000, versus $484,000 | $8.040 million, versus $84,000 |
| Net loss attributable to InterGroup | $335,000, versus $199,000 | $5.524 million, versus $790,000 |
| Operating cash flow | $694,000 for nine months, versus $2.396 million |
Quarterly revenue rose about 10%, while operating income improved. For the nine-month period, revenue rose about 10%, but operating income fell sharply and the net loss widened, principally due to restructuring and redemption costs, occupancy-tax penalties, refinancing charges, and higher interest expense. The filing reports diluted and basic loss per share attributable to InterGroup of $0.14 for the quarter and $2.33 for nine months, compared with $0.08 and $0.34, respectively.
Hotel revenue increased to $37.428 million for nine months from $33.581 million. Before restructuring charges, interest, and depreciation, hotel operating income was $7.783 million versus $5.456 million. Nine-month average daily room rate was $227 versus $201, occupancy 90% versus 88%, and RevPAR $205 versus $177. Real estate revenue was $12.260 million versus $11.657 million. Nine-month marketable-securities gains were $1.110 million, compared with a $326,000 loss.
At March 31, 2014, assets were $162.073 million and liabilities $230.223 million, resulting in a shareholders’ deficit of $68.150 million. Cash and cash equivalents were $1.545 million; restricted redemption cash was $17.104 million. Mortgage and subordinated debt totaled $189.416 million, including $117 million of hotel debt and $72.416 million of real-estate debt. Total liabilities had risen from $140.934 million at June 30, 2013, while hotel mortgage and subordinated debt increased from $43.413 million. The filing’s contractual-obligations schedule totals $388.062 million, including projected interest and redemption obligations.
Material changes and unusual items
- Justice completed a limited-partner redemption. It accepted cash tenders covering about 29.173% of previously outstanding interests and alternate redemption elections covering about 17.146%; some alternate redemptions could occur within 12 months. InterGroup’s interest increased from 50% to approximately 93%.
- Justice replaced prior hotel debt with a $97 million mortgage loan at an initial 5.28% rate and a $20 million mezzanine loan at 9.75%; both mature in January 2024. The mortgage is interest-only for its first three years. InterGroup provided limited “bad boy” guaranties and reported compliance with associated minimum net worth and liquidity requirements.
- Nine-month hotel restructuring costs were $6.995 million, including an approximately $5 million San Francisco documentary transfer tax, a $1.550 million management fee, and professional fees. A separate $3.910 million debt-extinguishment loss included a $3.808 million prepayment penalty. The spa closure and planned conversion to meeting rooms and other facilities contributed to a $1.092 million asset-disposal loss.
- The company paid $1.084 million in hotel occupancy-tax penalties and recorded $328,000 of related interest expense. San Francisco’s tax collector also claimed $2.1 million for transient occupancy tax and district assessments; the company disputed the claim, paid the amount during the quarter as part of an appeal, and recorded it in other assets under protest.
- Justice is challenging the documentary transfer-tax assessment and pursuing non-binding mediation over allocating part of that tax to former partners. Justice also commenced arbitration in April 2014 concerning a redemption-option agreement. Outcomes are uncertain.
- InterGroup contracted to sell a 249-unit Austin apartment complex and adjacent land for $15.8 million; the buyer may terminate under the agreement, subject to forfeiture of approximately $158,000 in earnest money. A Los Angeles commercial-property mortgage was extended to June 2014; another was refinanced in April 2014.
Outlook, risks, and controls
Management said hotel demand and room-rate trends had improved and expected continued strength to support room revenue and profitability if market conditions persist. Priorities include attracting international, especially Chinese, travelers; pursuing higher-rated business and group travel; upgrading facilities; and returning food and beverage operations to profitability. No quantified earnings or revenue guidance was provided. Management believes available cash, securities, operating cash flows, and hotel and real-estate operations will meet current and future obligations, while acknowledging that hotel debt service adds risk.
Disclosed risks include economic and travel conditions, San Francisco hotel competition, seasonality, labor costs and disruptions, interest rates and financing access, securities-market volatility, natural disasters, and pending tax and legal disputes. The investment portfolio was concentrated: basic-materials securities represented 59.1% of marketable securities, and Comstock Mining stock alone represented 42.4%. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track the remaining cash and alternate limited-partner redemptions, related restricted cash, and the resulting ownership and cash requirements.
- Verify hotel debt service, loan covenants, guaranty exposure, and whether operating cash flow supports the substantially higher debt balance.
- Follow the documentary transfer-tax challenge, the $2.1 million occupancy-tax appeal, mediation with former partners, and the arbitration; assess potential recoveries or additional liabilities.
- Separate recurring hotel and real-estate performance from restructuring, refinancing, tax, and asset-disposal charges when evaluating earnings.
- Check whether the Austin sale closes and whether the company addresses its near-term commercial-property mortgage maturity.
- Monitor liquidity and portfolio concentration, including the value and risks of the Comstock position and other trading securities.