Business context and reporting period
The InterGroup Corporation’s unaudited Form 10-Q covers the quarter and six months ended December 31, 2016, its fiscal second quarter and first half of fiscal 2017. Its principal activities are operating the Hilton San Francisco Financial District hotel and garage through subsidiaries, owning rental real estate, and investing in marketable and other securities. The filing states that period results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2016 |
|---|---|---|
| Revenue | $16.442 million, down 4.7% year over year | $34.696 million, down 3.6% |
| Operating income | $3.105 million, versus $1.705 million | $7.300 million, versus $5.451 million |
| Consolidated net loss | $2.009 million, versus $5.130 million | $414,000, versus $4.417 million |
| Net loss attributable to InterGroup | $1.716 million; $0.72 per share | $525,000; $0.22 per share |
| Operating cash flow | Not presented for the quarter | $2.512 million, versus $3.175 million |
Hotel revenue declined to $12.837 million for the quarter and $27.442 million for the half year. Hotel income before mortgage interest, depreciation and amortization was $3.226 million and $7.575 million, respectively (about 25.1% and 27.6% of hotel revenue). For the half year, average occupancy rose to 93% from 92%, while average daily rate fell to $245 from $254 and RevPAR to $228 from $234. Real estate revenue was broadly stable: $3.605 million for the quarter and $7.254 million for the half year.
Investment results remained a major earnings swing factor: marketable securities losses were $3.290 million for the quarter and $2.136 million for the half year, with much of the loss associated with Comstock Mining. The half-year loss was lower than the prior-year $5.976 million; the portfolio’s Comstock concentration was approximately 41% at December 31.
At December 31, total assets were $132.792 million, including $3.771 million cash, $4.183 million restricted cash and $17.044 million marketable securities. Total liabilities were $206.695 million and shareholders’ deficit was $73.903 million. Hotel and real-estate mortgage notes totaled $181.878 million on the balance sheet; other notes payable were $4.670 million. The filing does not present current assets and current liabilities in a way that supports a clear current ratio.
For the six months, cash decreased $1.633 million. Operating activities provided $2.512 million; investing activities used $962,000 and financing activities used $3.183 million, including $1.869 million of net mortgage and other note repayments and $352,000 of treasury-stock purchases.
Material changes, outlook and risks
- Operating performance improved despite lower hotel revenue: hotel operating expenses fell $2.358 million for the quarter and $3.295 million for the half year. Management attributed the reductions to GMP Management’s June 2016 resignation, lower legal expenses following a settlement, and cost-control efforts. The hotel reported income of $666,000 for the quarter and $2.473 million for the half year.
- The Hotel’s room and food-and-beverage revenues weakened, primarily with lower group business, room rates, catering and banquet activity. Management described plans to pursue higher-rated business, group and international travel, improve guest experience, and return food-and-beverage operations to profitability.
- On February 1, 2017, Justice entered a 10-year hotel management agreement with Interstate Management Company, effective February 3, 2017. The parking garage has been managed in-house since the Ace Parking contract ended in October 2016.
- The hotel mortgage bears 5.275% interest and was interest-only through January 2017, with amortization beginning in February 2017 and maturity in January 2024. The $20 million mezzanine loan bears 9.75% interest and also matures in January 2024. A separate $1 million house mortgage has an adjustable rate reported at 4.5% and a balloon maturity in August 2018. Management acknowledges debt-service risk but believes cash flows and assets will be adequate to meet obligations.
- A $5.575 million settlement payment to Evon Corporation was due by January 10, 2017; the filing says all settlement conditions had been satisfied as of January 17, 2017. The filing reports no off-balance-sheet arrangements and no material changes to internal control over financial reporting. Management concluded disclosure controls were effective.
- No numerical earnings or revenue guidance was provided. Risks cited include economic and travel-industry conditions, competition, seasonality, labor disruptions, natural disasters, securities-market volatility, litigation, financing terms and the ability to meet debt service. Management cautions that securities gains and losses can fluctuate significantly and may not predict future results.
Important facts for investors to verify
- Whether hotel rate and group-business trends, and the planned management transition, support improved operating results.
- The performance and concentration risk of the marketable-securities portfolio, particularly its Comstock Mining exposure and unrealized losses.
- Debt amortization, maturities, interest costs and cash available after required payments; the contractual-obligations schedule includes substantial obligations thereafter.
- The effect of the settlement payment and ongoing hotel, real-estate and investment cash flows on liquidity.
- The six-month per-share figures: the filing reports consolidated net loss of $414,000 but a $525,000 loss attributable to InterGroup, reflecting noncontrolling-interest attribution.