Business Context and Reporting Period
Company: The InterGroup Corporation (Intergroup)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: Intergroup operates through three primary segments: Hotel Operations (via its subsidiary Portsmouth Square, Inc., which holds a 50% interest in Justice Investors, owner of the Hilton San Francisco Financial District), Real Estate Operations (multi-family residential and commercial properties), and Investment Transactions (marketable securities and private equity). The company is classified as a smaller reporting company.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 |
|---|---|---|
| Total Revenues | $12,616,000 | $11,575,000 |
| Net Income (Total) | $76,000 | $(1,327,000) |
| Net Income Attributable to Intergroup | $9,000 | $(931,000) |
| Operating Income | $1,495,000 | $1,106,000 |
| Net Cash Provided by Operating Activities | $2,818,000 | $1,597,000 |
| Cash and Cash Equivalents (End of Period) | $1,869,000 | $879,000 |
| Total Assets | $132,552,000 | $143,921,000 |
| Total Liabilities | $135,751,000 | $135,511,000 |
| Shareholders' Deficit | $(3,199,000) | $(3,384,000) |
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $76,000 for Q3 2010, a significant improvement from a net loss of $1,327,000 in Q3 2009. This reversal was primarily driven by a $353,000 net gain on marketable securities in the current quarter, compared to a $1,322,000 loss in the prior year.
- Hotel Performance: Hotel revenues increased to $9,526,000 from $8,530,000. Operating income from hotel operations improved to $218,000 from a loss of $241,000. This was due to a 14% increase in average daily room rates ($168 vs. $147), offsetting a slight decline in occupancy (89% vs. 92%).
- Real Estate: Real estate revenues remained relatively flat at $3,090,000 compared to $3,045,000. Operating expenses increased, but interest expense decreased due to lower reset rates on certain properties.
- Investment Portfolio: Marketable securities increased in value to $8,672,000 from $7,712,000. However, the company recorded a $230,000 impairment loss on other investments (non-marketable securities) in Q3 2010, compared to none in Q3 2009.
- Liquidity: Cash and cash equivalents increased by $729,000 during the quarter, driven by strong operating cash flows of $2.8 million.
Outlook, Risks, and Subsequent Events
- Subsequent Refinancing: In November 2010, the company refinanced two apartment building mortgages. The new loans provided approximately $3.57 million in cash back to the company and fixed interest rates at 4.85% for 10 years.
- Subsequent Investment Exchange: On October 20, 2010, the company exchanged approximately $13.2 million in debt instruments held in Comstock Mining, Inc., for 13,231 shares of Series A-1 Convertible Preferred Stock.
- Hotel Distributions: No limited partnership distributions were paid in fiscal 2010 due to economic downturns. Management does not anticipate distributions in the foreseeable future until the lodging industry shows significant improvement, expected in 2011.
- Risks: Key risks include the impact of recessionary conditions on tourism and the lodging industry, the ability to obtain financing at favorable rates, and the volatility of the securities markets which significantly impacts net income.
- Properties Held for Sale: Two apartment complexes in Texas (249-unit and 132-unit) are classified as held for sale and reported as discontinued operations.
Investor Verification Checklist
- Debt Covenants: Verify compliance with the modified East West Bank term loan covenants, specifically the requirement to return to minimum profitability by June 2011.
- Investment Volatility: Assess the sustainability of the $353,000 gain on marketable securities, as management notes these gains/losses fluctuate significantly and may have no predictive value.
- Hotel Cash Flow: Confirm that the hotel continues to generate sufficient positive cash flow to service its substantial debt load ($45.8 million in hotel mortgages) without partnership distributions.
- Impairment Risks: Monitor the $6.5 million "Other Investments" portfolio for further impairment losses, given the $230,000 loss recorded in this quarter.
- Shareholder Deficit: Review the company's strategy to address the $3.2 million shareholders' deficit, which includes a significant noncontrolling interest of $(7.1 million).