Business context and reporting period
The InterGroup Corporation filed this unaudited Form 10-Q for the three months ended September 30, 2021, the first quarter of fiscal 2022. Its businesses include the Hilton San Francisco Financial District hotel, residential and commercial real estate, and investments in marketable securities. InterGroup owned approximately 74.9% of Portsmouth Square, which completed its purchase of Justice’s remaining limited partnership interest during the quarter.
Financial performance and condition
- Revenue: $10.921 million, up 58% from $6.909 million. Hotel revenue rose to $6.805 million from $3.425 million; real estate revenue rose to $4.116 million from $3.484 million.
- Profitability: Operating income was $556,000 versus an operating loss of $2.569 million. Net loss was $2.906 million, or $1.31 per diluted share; InterGroup-attributable net loss was $2.161 million, or $0.97 per diluted share. The prior-year quarter had net income of $4.819 million, including a $12.043 million real estate sale gain. Current-quarter total operating margin was approximately 5.1%; net margin was approximately negative 26.6%.
- Hotel performance: Hotel operating income before mortgage interest, depreciation and amortization was $472,000, compared with a $1.608 million loss. Average daily rate was $141 versus $108, occupancy was 79% versus 54%, and RevPAR was $111 versus $58. Hotel operating expenses increased by $1.3 million as activity recovered.
- Investments: The marketable securities portfolio was $23.434 million, down from $35.792 million at June 30. Investment transactions recorded a $2.335 million net loss, including a $4.421 million net unrealized loss on securities.
- Cash flow and liquidity: Operating cash flow was positive $2.497 million, compared with negative $8.009 million a year earlier; management’s cash-flow reconciliation includes significant marketable-securities and broker-balance movements. Cash and equivalents were $9.928 million and restricted cash was $9.371 million, totaling $19.299 million. Net marketable securities after broker amounts were $16.194 million. The company reported an undrawn $5 million revolving credit line.
- Debt and deficit: Total liabilities were $208.406 million against assets of $133.840 million; shareholders’ deficit was $74.566 million. Hotel and real-estate mortgage debt, net, totaled approximately $182.920 million. The contractual-obligations schedule shows $220.093 million of obligations including interest, with $113.938 million scheduled in 2024. Hotel mortgage maturity is January 2024.
Changes, outlook and risks
- Results improved in hotel operations as travel and demand recovered from pandemic-related disruption. Hotel revenue nearly doubled year over year, while real estate rental revenue also increased.
- The year-over-year decline from prior net income to a current loss is principally explained by the prior period’s $12.043 million real estate sale gain and current-period marketable-securities losses.
- Management said available cash and potential liquidity sources should meet anticipated needs for at least 12 months, including if hotel occupancy remained low, but cautioned that there is no guarantee its plans will succeed. It authorized up to $16 million of potential funding for Portsmouth hotel working capital if necessary; this is a capacity commitment, not cash already advanced.
- COVID-19, travel and lodging demand, operating costs, securities-market volatility, financing availability, and hotel debt covenants remain material risks. Management noted the hotel could fail certain debt-service coverage requirements; a lender cash lockbox was already in place.
- Justice applied for full forgiveness of its $2 million second SBA loan; the filing does not report a forgiveness decision. A separate $4.719 million Justice SBA loan had been forgiven in June 2021.
- Subsequent to quarter-end, on October 14, the company refinanced a Texas apartment property: a $28.8 million mortgage replaced a $15.9 million mortgage, generating $12.938 million net proceeds. The new loan has a fixed 2.95% rate and matures in November 2031.
- No formal earnings guidance is provided. Management describes forward-looking expectations as subject to significant uncertainty, particularly from the pandemic and financing conditions.
Most important facts for investors to verify
- Whether hotel demand, room rates and occupancy continued to recover after September 30, and whether that recovery translated into sustainable cash generation.
- The company’s ability to refinance or repay the large 2024 debt maturities, and compliance with applicable loan covenants.
- The realized and unrealized performance, concentration and liquidity of the securities portfolio, including the effects of margin and securities-sale obligations.
- The status of forgiveness for the $2 million SBA loan and the extent to which the authorized Portsmouth funding may be needed or drawn.
- Whether management’s stated 12-month liquidity assessment remains valid after considering restricted cash, debt service, hotel capital needs and the October refinancing.