InterGroup Corporation — Form 10-Q
Reporting period: Quarter ended March 31, 2017, the third quarter of fiscal 2017; nine-month results are for the period ended March 31, 2017. The statements are unaudited. This differs from the request metadata’s “2016 Q3.”
Business context
InterGroup’s principal operations and assets are its interest in the Hilton San Francisco Financial District hotel and garage, a portfolio of rental properties, and investments in marketable and other securities. The company consolidates subsidiaries Santa Fe and Portsmouth, through which it controls the hotel partnership. The hotel’s management transferred to Interstate on February 3, 2017.
Financial results and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Total revenue, 2017 / 2016 | $17.208m / $18.066m | $51.904m / $54.045m |
| Operating income (loss), 2017 / 2016 | $3.137m / $(2.557)m | $10.437m / $2.894m |
| Net income (loss), 2017 / 2016 | $(0.170)m / $(4.338)m | $(0.584)m / $(8.755)m |
| Net loss attributable to InterGroup, 2017 / 2016 | $(0.147)m / $(2.914)m | $(0.672)m / $(6.744)m |
| Net loss per share attributable to InterGroup, 2017 / 2016 | $(0.06) / $(1.22) | $(0.28) / $(2.83) |
- Revenue declined approximately 4.7% for the quarter and 4.0% year to date. Operating margins were approximately 18.2% and 20.1%, respectively, compared with a quarterly operating loss and a 5.4% operating margin in the prior-year nine-month period.
- Hotel revenue was $13.495m for the quarter and $40.937m year to date, down 6.8% and 5.5%, respectively. Quarterly occupancy declined to 85% from 90%, and RevPAR to $229 from $238. For nine months, occupancy was 90% versus 91%, and RevPAR was $228 versus $235.
- Real estate revenue increased to $3.713m for the quarter and $10.967m for nine months, attributed to higher rents and lower vacancies. Operating expenses also increased.
- Cash and cash equivalents were $6.283m at March 31, 2017, up from $5.404m at June 30, 2016; restricted mortgage-impound cash was $4.317m. Marketable securities were $15.222m. Shareholders’ deficit totaled $74.147m.
- Nine-month operating cash flow was $6.872m, investing cash outflow was $1.342m, and financing cash outflow was $4.651m, resulting in a $0.879m increase in cash. Interest paid was $7.801m.
- Balance-sheet mortgage debt was $181.286m ($116.008m hotel and $65.278m real estate); other notes payable were $6.056m. Total liabilities were $208.408m. The company reported $247.576m of material contractual obligations including stated interest payments.
Changes, outlook, risks and unusual items
- The improved comparison largely reflects the absence of $5.236m in prior-year hotel restructuring costs related to the Evon/ Holdings settlement, lower hotel operating expenses, and smaller investment losses. In the current quarter, a $0.900m insurance settlement with RSUI reduced hotel operating expenses.
- The hotel’s lower group business reduced room, catering and banquet revenue. The company also reported a $2.526m nine-month net loss on marketable securities; unrealized losses were $3.040m. Comstock Mining represented approximately 39% of the securities portfolio at quarter-end, and $14.073m of unrealized losses related to securities held over one year.
- Interstate’s management agreement includes a $2.000m key-money incentive for hotel capital improvements, recorded as a receivable at March 31, 2017. The filing describes the arrangement as subject to terms and conditions.
- The hotel mortgage is at 5.275%; it began amortizing in February 2017 and matures in January 2024. The $20m mezzanine loan bears 9.75% interest, is interest-only, and also matures in January 2024. Management identifies debt service as a risk but believes hotel and garage cash flows will meet partnership obligations.
- After quarter-end, effective May 12, 2017, InterGroup agreed to become an additional guarantor and indemnitor for the hotel’s mortgage and mezzanine loans because Portsmouth could not independently meet specified guarantor net-worth and liquidity covenants as of March 31.
- Management believes company resources and cash flows will be adequate for obligations and says appreciated real estate could support additional borrowing if needed. No numerical earnings or revenue guidance is provided. Results for the nine-month period are not necessarily indicative of the full fiscal year.
- Risks identified include hotel-industry competition and seasonality, economic and travel conditions, labor disruptions, financing availability and rates, securities-market volatility, litigation, and natural disasters. The company reported no off-balance-sheet arrangements; disclosure controls were considered effective.
Key facts for investors to verify
- Reconcile the reported net loss per share with the separate per-share figures attributable to InterGroup, and distinguish consolidated results from parent-attributable results.
- Assess the hotel’s operating trend following the management transition, particularly group demand, occupancy, RevPAR and expense savings; separate recurring performance from the $0.900m RSUI settlement.
- Review the market value, concentration and recoverability of the Comstock holding and other securities, including the substantial unrealized losses.
- Verify the loan amortization, contractual debt-service schedule, guarantor covenant status and implications of InterGroup’s post-quarter-end guarantee.
- Confirm the terms, conditions and use of the $2.000m key-money incentive, and the company’s available liquidity after broker and securities-sale obligations.