InterGroup Corporation — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014; the filing is not for calendar-year 2013 or a standalone fourth quarter. Figures are consolidated and include Justice Investors and its hotel operations.
Business context
InterGroup is a real estate and investment company. Its principal operating assets are the 543-room Hilton San Francisco Financial District and a U.S. portfolio of apartments and commercial properties. InterGroup owned about 80.9% of Santa Fe, which owned about 68.8% of Portsmouth; Portsmouth became Justice’s sole general partner after the December 2013 redemption and held about 93% of its voting interest.
Financial results and liquidity
- Revenue: $67.295 million, up 8.5% from $62.039 million. Hotel revenue was $50.963 million (+9.4%); real estate revenue was $16.332 million (+5.5%).
- Profitability: Consolidated operating income was $2.658 million, down from $8.349 million. Net loss was $6.748 million versus net income of $625,000; loss attributable to InterGroup was $4.692 million, or $1.98 per share. Consolidated loss per share was $2.85.
- Hotel performance: Room revenue rose $5.124 million as rates and tourism improved; food-and-beverage revenue fell $755,000 after unprofitable outlets closed. Before restructuring, occupancy-tax penalties, interest, and depreciation, hotel operating income was $10.158 million, or about 19.9% of hotel revenue, compared with $7.930 million, or about 17.0%, in FY2013. The filing reports ADR of $229, occupancy of 92%, and RevPAR of $209, but the related table is labeled “nine months ended March 31”; verify the period.
- Cash flow: Operating cash flow was $3.284 million, down from $4.578 million. Investing used $4.588 million; financing provided $4.556 million. Cash and cash equivalents ended at $4.705 million, with another $20.145 million in restricted cash, including $16.163 million for redemption arrangements.
- Debt and balance sheet: Hotel mortgage and mezzanine debt totaled $117 million; real estate mortgages totaled $75.360 million. The hotel loans mature in 2024: the $97 million mortgage bears 5.28%, and the subordinated $20 million mezzanine loan bears 9.75%. Total liabilities were $232.092 million against assets of $165.460 million, producing a $66.632 million shareholders’ deficit. Contractual obligations, including stated future interest, totaled $272.566 million.
- Investments: Marketable securities were $11.420 million, down from $12.624 million; FY2014 net securities gain was $998,000 versus a loss of $856,000. The portfolio included a Comstock Mining position equal to 44.2% of its value. Other investments totaled $15.837 million, including $13.231 million of Comstock preferred stock. Margin borrowing was $2.925 million.
Material changes and unusual items
- Justice redeemed cash-tendered partnership interests representing about 29.173% of pre-redemption interests and accepted an alternative redemption election for about 17.146%. Portsmouth’s control increased; the transaction was funded through refinancing and resulted in a substantial capital-account reduction.
- FY2014 included $6.681 million of restructuring costs, a $3.910 million loss on extinguishment of debt (including a $3.808 million prepayment penalty), $1.278 million in hotel occupancy-tax penalty fees, and a $1.092 million loss on disposal of assets, including the hotel spa closure. These items materially affected reported results.
- Hotel interest expense rose to $4.960 million from $2.612 million, while the refinancing replaced prior hotel debt with $117 million of new mortgage and mezzanine loans. Real estate mortgage interest expense fell to $3.026 million from $3.556 million.
- Real estate revenue benefited from improved occupancy and rents and a $249,000 storm-damage insurance recovery. Management planned to sell the 249-unit Austin property and adjacent land for $15.8 million; the purchaser could terminate, and the company was negotiating an extension after receiving $458,000 in earnest money and additional consideration.
Outlook, risks, and contingencies
Management cited improving San Francisco business and leisure travel and expected hotel cash flows to cover obligations, while emphasizing that results remain exposed to economic conditions, competition, seasonality, labor costs, and natural disasters. It planned to attract more international and Chinese travel, upgrade hotel facilities, and improve food-and-beverage profitability. No quantified earnings or revenue guidance was provided.
- San Francisco disputed a $2.1 million transient-occupancy-tax and tourism-assessment claim; the amount was paid under protest and recorded as an asset while appealed. Separately, the Partnership challenged approximately $4.7 million of documentary transfer tax paid under protest; any refund was uncertain.
- Evon litigation and arbitration and a Partnership declaratory action arose from the redemption and its tax allocations. The filing states that outcomes could not be predicted; partnership tax returns might require amendment.
- In July 2014, InterGroup lent the Partnership $4.25 million unsecured at 12% for two years, with a 3% loan fee. This subsequent related-party financing funded redemption-related payments.
- Hotel debt carries limited “bad boy” guarantees that can become full recourse in specified circumstances; the company reported compliance with required net-worth and liquidity tests. The company also used margin financing and short positions, and its investment results may fluctuate materially.
- About 72% of hotel employees were union-represented; renewed collective bargaining agreements are expected to affect wages, benefits, and operating costs. Management reported no material environmental liability known to it.
Most important facts for investors to verify
- Reconcile the filing’s hotel performance table period label with management’s full-year discussion and validate the reported ADR, occupancy, and RevPAR.
- Track the remaining alternative-redemption obligations, related litigation, and the outcome of the San Francisco tax disputes and refund claims.
- Review hotel debt service capacity, the 9.75% mezzanine borrowing, covenant and guarantee exposure, and near-term real estate mortgage maturities; the filing’s narrative and debt schedule should be reconciled.
- Confirm whether the Austin property sale closes and at what net proceeds, and assess how any proceeds affect liquidity and debt.
- Assess the concentration and valuation risk in Comstock-related investments, restricted cash availability, and the company’s negative consolidated equity.
The financial statements received an unqualified audit opinion. Management stated that disclosure controls and internal control over financial reporting were effective as of June 30, 2014; the auditor did not provide an opinion on internal control.