InterGroup Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2013. The filing is unaudited. InterGroup’s principal businesses are hotel operations through Justice Investors, real estate rentals, and investment activities.
Financial performance
| Metric | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2013 | Prior comparable period |
|---|---|---|---|
| Total revenue | $16.432 million | $33.815 million | $15.048 million and $30.859 million, respectively |
| Consolidated net income (loss) | $(9.168) million | $(7.476) million | $(1.287) million and $0.400 million, respectively |
| Net loss attributable to InterGroup | $(5.471) million | $(5.189) million | $(1.180) million and $(0.591) million, respectively |
| InterGroup loss per share | $(2.31) | $(2.19) | $(0.50) and $(0.25), respectively |
| Operating cash flow | Not separately presented | $0.270 million | $0.518 million for six months ended Dec. 31, 2012 |
- Six-month hotel revenue increased to $25.579 million from $23.106 million; real estate revenue increased to $8.236 million from $7.753 million.
- Hotel operating income before restructuring, occupancy-tax penalties, interest, and depreciation was $6.554 million for six months, compared with $4.544 million. The corresponding quarterly amounts were $2.781 million and $1.572 million.
- Hotel demand metrics improved: six-month average daily room rate was $227 versus $202, occupancy was 92% versus 88%, and RevPAR was $208 versus $168.
- Six-month investing cash outflow was $2.745 million and financing cash inflow was $3.947 million. Cash and cash equivalents were $2.925 million at December 31, 2013, up from $1.453 million at June 30, 2013. Cash flows and cash balances include substantial redemption and refinancing activity.
Balance sheet, debt, and liquidity
- Total assets were $166.698 million at December 31, 2013, compared with $144.686 million at June 30, 2013. Total liabilities were $234.387 million, versus $140.934 million; total shareholders’ deficit was $67.689 million, compared with equity of $3.752 million.
- Hotel mortgage and subordinated debt totaled $117.0 million; real estate mortgage debt was $72.804 million; other hotel notes payable were $0.730 million. The hotel debt comprises a $97 million mortgage loan at an initial 5.28% rate and a $20 million subordinated mezzanine loan at an initial 9.75% rate. Both mature in January 2024.
- Cash of $19.091 million was restricted for partnership redemptions and matched a $19.091 million redemption payable. The company also reported $3.459 million of restricted cash for mortgage impounds. Marketable securities were $13.099 million.
- Management said it believed available cash, securities, and operating cash flows would be adequate for obligations, and that hotel and garage cash flows would meet Justice’s requirements. It also noted that the new debt-service obligations could create additional risk. Portsmouth reported compliance with lender-required minimum net worth and liquidity at quarter-end.
Material changes and unusual items
- On December 18, 2013, Justice completed a tender and alternate redemption offer. Portsmouth’s Justice partnership interest increased from 50% to approximately 93%, and it became the sole general partner. Approximately 29.173% of prior limited-partnership interests were accepted for cash redemption; holders of approximately 17.146% elected an alternate redemption option exercisable within 12 months.
- Justice refinanced its prior debt with the $97 million mortgage and $20 million mezzanine loans, using proceeds to repay the prior mortgage, fund redemptions, and provide hotel working capital. The refinancing and restructuring materially increased reported debt and contributed to the period’s loss.
- Six-month results included $7.295 million of hotel restructuring costs, including an approximately $5 million San Francisco documentary transfer tax paid under protest, a $1.550 million management fee, and approximately $0.745 million of professional fees. Justice recorded a $3.910 million loss on debt extinguishment, largely a $3.808 million prepayment penalty, and a $1.092 million loss on asset disposal, including approximately $0.738 million related to the hotel spa closure.
- Investment results improved versus the prior year: six-month net gains on marketable securities were $0.768 million compared with a $0.583 million loss. Management cautioned that securities gains and losses can fluctuate significantly and may not predict future results.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance was provided. Management cited improving San Francisco business and leisure travel and expected that continued market improvement could support room revenue and profitability. Priorities include attracting international, especially Chinese, business; upgrading hotel facilities; differentiating the guest experience; and returning food and beverage operations to profitability.
- Justice disputes a City of San Francisco Tax Collector claim of approximately $2.1 million related to transient occupancy tax and a tourist improvement district assessment, and is seeking relief from penalties and interest. The filing gives no prediction of the outcome.
- Justice intends to challenge the documentary transfer tax assessment paid under protest; any refund is uncertain. Some former limited partners also object to the allocation of part of that tax, and the parties are pursuing non-binding mediation.
- Other identified risks include travel and lodging demand, economic conditions, competition, seasonality, labor costs and disruptions, interest rates and financing, securities-market volatility, natural disasters, litigation, and regulatory matters. The company reported no off-balance-sheet arrangements.
- In February 2014, the company contracted to sell a 249-unit Austin apartment complex and adjacent land for $15.8 million; the buyer could terminate within 45 days, with or without cause.
Most important facts for investors to verify
- Whether the San Francisco tax disputes and former-partner allocation dispute result in additional payments or refunds.
- Redemption settlement timing and final cash or property obligations under the alternate redemption elections.
- Hotel performance and cash generation after the one-time restructuring charges, alongside the cost and effect of the spa-to-meeting-space conversion.
- Debt-service capacity under the $117 million hotel financing, the real estate mortgage obligations, and the lender guaranty requirements.
- Progress and final terms of the proposed Austin property sale, and the valuation and concentration risks in the investment portfolio.