Business context and reporting period
The InterGroup Corporation’s unaudited Form 10-Q covers the three months ended September 30, 2023, its fiscal first quarter of 2024, compared with the three months ended September 30, 2022. The company consolidates Portsmouth Square, Inc. (approximately 75.7% owned), whose principal asset is the 544-room Hilton San Francisco Financial District hotel. Other activities include residential and commercial real estate and investments in marketable securities.
Financial performance and condition
| Metric | Quarter ended Sep. 30, 2023 | Quarter ended Sep. 30, 2022 |
|---|---|---|
| Total revenue | $15.510 million | $16.388 million |
| Income from operations | $1.596 million | $2.863 million |
| Net loss | $1.622 million | $0.201 million |
| Net loss attributable to InterGroup | $1.244 million | $0.199 million |
| Operating cash flow | $1.901 million | $1.715 million |
| Investing cash flow | $(1.384) million | $(2.437) million |
| Financing cash flow | $(0.632) million | $(1.746) million |
Hotel revenue was $11.093 million, down 9.9%; real estate revenue was $4.417 million, up from $4.078 million. Hotel operating income before interest, depreciation and amortization was $1.812 million, or approximately 16.3% of hotel revenue, versus $3.004 million, or 24.4%, a year earlier. Consolidated operating income was approximately 10.3% of revenue, down from 17.5%. The filing reports basic and diluted net loss per share attributable to InterGroup of $0.56, versus $0.09.
At September 30, 2023, total assets were $119.544 million, including $6.686 million of cash and cash equivalents, $6.073 million of restricted cash, and $13.590 million of marketable securities. Total liabilities were $215.831 million and total shareholders’ deficit was $96.287 million. Hotel and real estate mortgage notes payable, net, were $106.896 million and $84.475 million, respectively; other notes payable totaled $2.813 million. Cash, cash equivalents and restricted cash together were $12.759 million. The company reported a net decrease of $0.115 million in those combined balances during the quarter.
Material changes versus the prior comparable period
- Total revenue declined 5.4%, primarily reflecting lower hotel room revenue. Hotel room revenue fell by approximately $1.242 million; food and beverage revenue increased by $0.092 million.
- Hotel average daily rate fell from $230 to $218, occupancy from 94% to 88%, and RevPAR from $216 to $191.
- Real estate revenue grew by $0.339 million, primarily due to reduced vacancy at a Missouri property undergoing renovation. Real estate operating expenses rose by $0.165 million, with insurance, contract labor, painting, maintenance and repairs cited.
- Net loss widened to $1.622 million from $0.201 million. The filing attributes the hotel’s shift from income to loss mainly to lower hotel revenue. Marketable securities generated a $0.785 million net loss, versus $0.810 million; the current-quarter loss included $0.679 million of unrealized losses.
- Marketable securities declined from $18.345 million at June 30 to $13.590 million at September 30. Operating cash flow increased by $0.186 million year over year.
Outlook, risks and unusual items
- Going-concern warning for the Hotel: The Hotel’s $106.896 million senior and mezzanine debt was due January 1, 2024. The filing states that refinancing uncertainty, recurring losses and an accumulated deficit of $107.287 million raise substantial doubt about the Hotel’s ability to continue as a going concern for one year after the financial statements’ issuance. The company was pursuing refinancing or a loan modification/extension; it gave no assurance that financing would be available on acceptable terms.
- Management reported completion of approximately 307 guestroom renovations by September 30, 2023, anticipated completion by the end of March 2024, and expected occupancy and room rates to improve after renovation. These are expectations, not guaranteed outcomes.
- The company’s related-party loan to Portsmouth was extended to July 31, 2025, and its borrowing limit increased to $20 million. The balance rose from $15.7 million at June 30 to $17.2 million at September 30, including $1.5 million of additional funding during the quarter. A $2 million CIBC revolving credit line was available to draw.
- The contractual-obligations table shows $111.919 million of mortgage and subordinated notes, other notes and interest payments in the nine months categorized as fiscal 2024. The Hotel debt maturity is a substantial near-term refinancing risk.
- Portsmouth disputes the City of San Francisco’s purported revocation of a permit for a pedestrian bridge adjoining the Hotel and disputes responsibility for removal costs. Planning and discussions with the City were ongoing; the filing does not quantify any potential cost or outcome.
- Management concluded disclosure controls were not effective due to a material weakness in controls over interpretation and accounting for the deferred tax asset valuation allowance. Management said it performed additional analysis and believes the financial statements fairly present the company’s position and results.
- The filing identifies economic and travel conditions, competition, labor, natural disasters, pandemics, securities-market fluctuations and access to financing as risks. No formal financial guidance is provided.
Most important facts for investors to verify
- Whether the Hotel’s January 1, 2024 debt was refinanced, modified or extended, and on what terms, including any effects on guarantors and liquidity.
- Hotel operating trends and renovation completion: room revenue, average daily rate, occupancy and RevPAR versus management’s stated expectations.
- Available liquidity and funding needs, including restricted cash, marketable securities, the related-party loan balance and CIBC credit-line availability.
- Progress and potential financial responsibility for the San Francisco bridge removal and Hotel reconstruction; no exposure estimate is provided in this filing.
- Remediation of the material weakness in deferred-tax valuation-allowance controls and whether disclosure controls improve in subsequent filings.