InterGroup Corporation — Q2 FY2015 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2014; unaudited. InterGroup’s principal activities are operating a 543-room Hilton hotel in San Francisco through subsidiaries, owning rental real estate, and investing in securities. The filing reports consolidated results, including controlled subsidiaries.
Financial performance and position
| Metric | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2014 |
|---|---|---|
| Total revenue | $18.074 million, up 10.0% from $16.432 million | $37.101 million, up 9.7% from $33.815 million |
| Operating income | $1.657 million, versus operating loss of $5.474 million | $4.699 million, versus operating loss of $1.612 million |
| Consolidated net loss | $608,000, versus $9.168 million | $1.512 million, versus $7.476 million |
| Net loss attributable to InterGroup | $289,000, versus $5.471 million | $1.052 million, versus $5.189 million |
| Cash used in operating activities | $2.333 million for the six months, versus $270,000 provided |
Hotel revenue increased to $14.044 million for the quarter and $28.874 million for six months. However, hotel operating income before non-recurring charges, interest, and depreciation fell to $2.011 million from $2.781 million for the quarter, and to $5.003 million from $6.554 million for six months. Hotel operating expenses increased substantially. Quarterly hotel occupancy was 89% in both periods, while average daily rate rose to $245 from $218 and RevPAR to $218 from $195. For six months, occupancy was 93% versus 92%, ADR $252 versus $227, and RevPAR $232 versus $208.
Real estate revenue was broadly flat: $4.030 million for the quarter and $8.227 million for six months. Real estate operating expenses declined modestly. Investment results weakened: the company recorded marketable-security losses of $1.544 million for the quarter and $3.034 million for six months, compared with gains of $615,000 and $768,000, respectively. Most of the six-month loss was unrealized and associated with Comstock shares.
At December 31, 2014, total assets were $146.650 million, down from $165.460 million at June 30, 2014. Cash and cash equivalents were $1.153 million, versus $4.705 million; restricted cash for redemption was $1.605 million, versus $16.163 million. Total liabilities were $214.399 million and shareholders’ deficit was $67.749 million. Mortgage notes totaled $190.471 million: $117.000 million secured by the hotel and $73.471 million related to real estate. The filing’s contractual-obligations schedule totals $274.812 million, including $82.028 million of projected interest.
Cash used in investing activities was $60,000 for the six months. Financing activities used $1.159 million; cash fell by $3.552 million overall. Interest paid was $5.471 million.
Material changes and unusual items
- The much smaller year-over-year net losses primarily reflect the absence of the prior-year Justice limited-partner redemption costs, hotel restructuring and occupancy-tax penalties, and debt-extinguishment loss. The current period also included a $1.742 million gain from selling a commercial property.
- In November 2014, InterGroup sold a 5,900-square-foot commercial property for $3.450 million, realizing a $1.742 million gain and receiving $2.163 million in net proceeds after selling costs and repayment of the related mortgage.
- A new contract was signed in December to sell a 249-unit Austin apartment complex and adjacent land for $16.3 million. Closing was estimated by the end of February 2015; the buyer could terminate, subject to forfeiture of $100,000 of earnest money.
- Hotel mortgage interest expense increased, and management cited higher legal, labor, occupancy-related, food-and-beverage, franchise, credit-card, and property-tax expenses. The company also reported higher general and administrative expense, including stock compensation.
- At December 31, $1.250 million remained payable under an agreement to pay certain officers and directors fees related to the Justice partnership-interest redemption, refinancing, and reorganization.
Outlook, risks, and contingencies
Management said hotel and garage cash flows should cover the Partnership’s obligations and that hotel equity could support additional borrowing if needed. Management also believed company cash, securities, real estate, and related cash flows would meet current and future obligations. These are management expectations, not guidance with quantified forecasts; the filing provides no earnings or revenue guidance.
The hotel’s $97 million mortgage initially bears 5.28% interest and matures in January 2024; the $20 million subordinated mezzanine loan initially bears 9.75% and also matures in January 2024. Both loans were obtained in connection with the Justice redemption and refinancing. Management identified debt-service requirements and an ongoing legal dispute with former Justice partners as risks. Other disclosed risks include lodging demand and competition, seasonality, labor disruptions, economic conditions, securities-market volatility, financing availability, and litigation. InterGroup reported no off-balance-sheet arrangements. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Key investor verification points
- Check subsequent filings for whether the Austin property sale closed, its final proceeds, and any effect on liquidity or debt.
- Review the Justice former-partner dispute, related contingencies, and the timing and terms of the remaining $1.250 million officer/director fee payments.
- Assess hotel expense growth and debt-service capacity against hotel operating results; reported revenue and room metrics improved while underlying hotel operating income declined.
- Evaluate exposure to Comstock and other securities: Comstock represented about 24.5% of the marketable-securities portfolio, and securities losses materially affected results.
- Reconcile near-term liquidity, including low unrestricted cash, restricted balances, broker-related liabilities, and the $9.012 million of scheduled obligations for the next six months.
- Distinguish the consolidated net loss from the loss attributable to InterGroup when interpreting reported per-share figures.