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| INTG > SEC Filings for INTG > Form 10-Q on 13-Feb-2009 | All Recent SEC Filings |
13-Feb-2009
Quarterly Report
FORWARD-LOOKING STATEMENTS AND PROJECTIONS
The Company may from time to time make forward-looking statements and projections concerning future expectations. When used in this discussion, the words "anticipate," "estimate," "expect," "project," "intend," "plan," "believe," "may," "could," "might" and similar expressions, are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties, such as national and worldwide economic conditions, including the impact of recessionary conditions on tourism, travel and the lodging industry, the impact of terrorism and war on the national and international economies, including tourism and securities markets, energy and fuel costs, natural disasters, general economic conditions and competition in the hotel industry in the San Francisco area, seasonality, labor relations and labor disruptions, partnership distributions, the ability to obtain financing at favorable interest rates and terms, securities markets, regulatory factors, litigation and other factors discussed below in this Report and in the Company's Annual Report on Form 10-KSB for the fiscal year ended June 30, 2008, that could cause actual results to differ materially from those projected. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as to the date hereof. The Company undertakes no obligation to publicly release the results of any revisions to those forward- looking statements, which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
RESULTS OF OPERATIONS
The Company's principal business is conducted through its general and limited partnership interest in the Justice Investors limited partnership ("Justice" or the "Partnership"). The Company has a 50.0% limited partnership interest in Justice and serves as one of the general partners. Justice owns the land, improvements and leaseholds at 750 Kearny Street, San Francisco, California, known as the Hilton San Francisco Financial District (the "Hotel"). The financial statements of Justice have been consolidated with those of the Company.
The Hotel is operated by the Partnership as a full service Hilton brand hotel pursuant to a Franchise License Agreement with Hilton Hotels Corporation. The term of the Agreement is for a period of 15 years commencing on January 12, 2006, with an option to extend the license term for another five years, subject to certain conditions. Justice also has a Management Agreement with Prism Hospitality L.P. ("Prism") to perform the day-to-day management functions of the Hotel.
Until September 30, 2008, the Partnership also derived income from the lease of the parking garage to Evon Corporation ("Evon") the other general partner of Justice. As discussed below, effective October 1, 2008, Justice entered into an installment sale agreement with Evon to purchase the remaining term of the garage lease and related garage assets. Justice also leases a portion of the lobby level of the Hotel to a day spa operator. Portsmouth also receives management fees as a general partner of Justice for its services in overseeing and managing the Partnership's assets. Those fees are eliminated in consolidation.
In addition to the operations of the Hotel, the Company also generates income from the ownership and management of real estate. Properties include eighteen apartment complexes, two commercial real estate properties, and two single- family houses as strategic investments. The properties are located throughout the United States, but are concentrated in Texas and Southern California. The Company also has investments in unimproved real property. All of the Company's residential rental properties with exception of the San Antonio, Texas, Las Colinas, Texas and Morris County, New Jersey properties, are managed by professional third party property management companies.
The Company acquires its investments in real estate and other investments utilizing cash, securities or debt, subject to approval or guidelines of the Board of Directors. The Company also invests in income-producing instruments, equity and debt securities and will consider other investments if such investments offer growth or profit potential.
RECENT DEVELOPMENTS
Effective October 1, 2008, Justice and Evon entered into an Installment Sale Agreement whereby the Partnership purchased all of Evon's right title and interest in the remaining term of its lease of the parking garage, which was to expire on November 30, 2010, and other related assets. The partnership also agreed to assume Evon's contract with Ace Parking for the management of the garage and any other liabilities related to the operation of the garage commencing October 1, 2008. The purchase price for the garage lease and related assets was approximately $755,000, payable in one down payment of approximately $28,000 and 26 equal monthly installments of approximately $29,000, which includes interest at the rate of 2.4% per annum.
On December 1, 2008, Portsmouth and Evon, as the two general partners of Justice, entered into a 2008 Amendment to the Limited Partnership Agreement (the "Amendment") that provides for a change in the respective roles of the general partners. Pursuant to the Amendment, Portsmouth will assume the role of Managing General Partner and Evon will continue on as the Co-General Partner of Justice. The Amendment was ratified by approximately 98% of the limited partnership interests. The Amendment also provides that future amendments to the Limited Partnership Agreement may be made only upon the consent of the general partners and at least seventy five percent (75%) of the interests if the limited partners. Consent of at least 75% of the interests of the limited partners will also be required to remove a general partner pursuant to the Amendment. A copy of the full text of the Amendment is filed as Exhibit 10.1 to this Report.
Concurrent with the Amendment to the Limited Partnership Agreement, a new General Partner Compensation Agreement (the "Compensation Agreement") was entered into on December 1, 2008, among Justice, Portsmouth and Evon to terminate and supersede all prior compensation agreement for the general partners. Pursuant to the Compensation Agreement, the general partners of Justice will be entitled to receive an amount equal to 1.5% of the gross annual revenues of the Partnership (as defined), less $75,000 to be used as a contribution toward the cost of Justice engaging an asset manager. In no event shall the annual compensation be less than a minimum base of approximately $285,000, with eighty percent (80%) of that amount being allocated to Portsmouth for its services as managing general partner and twenty percent (20%) allocated to Evon as the co-general partner. Compensation earned by the general partners in each calendar year in excess of the minimum base, will be payable in equal fifty percent (50%) shares to Portsmouth and Evon. A copy of the full text of the Compensation Agreement is filed as Exhibit 10.2 to this Report.
Three Months Ended December 31, 2008 Compared to the Three Months Ended December 31, 2007
The Company had a net loss of $615,000 for the three months ended December 31, 2008 compared to net income of $347,000 for the three months ended December 31, 2007. As discussed in Note 1, the Company stopped recording a minority interest benefit in Justice Investors beginning the quarter ended December 31, 2008 resulting in the recording of an additional $608,000 in net loss. During the three months ended December 31, 2008, the Company had a loss on hotel operations of $1,210,000 compared to a loss of $604,000 primarily due to one- time loss related to the termination of the hotel garage lease. During the same period, income from investment transactions decreased to $191,000 for the three months ended December 31, 2008 from $1,061,000 for the three months ended December 31, 2007. Income from real estate operations decreased to $106,000 for the three months ended December 31, 2008 from $249,000 for the three months ended December 31, 2007.
The following table sets forth a more detailed presentation of Hotel operations for the three months ended December 31, 2008 and 2007.
For the three months ended December 31, 2008 2007
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Hotel revenues:
Hotel rooms $ 6,612,000 $ 7,309,000
Food and beverage 1,268,000 1,659,000
Garage 571,000 421,000
Other operating departments 193,000 230,000
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Total hotel revenues 8,644,000 9,619,000
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Operating expenses excluding interest, depreciation
and amortization (7,277,000) (8,399,000)
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Operating income 1,367,000 1,220,000
Loss on termination of garage lease (684,000) -
Interest expense (724,000) (703,000)
Depreciation and amortization expense (1,169,000) (1,121,000)
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Loss from hotel operations $(1,210,000) $ (604,000)
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For the three months ended December 31, 2008, the Hotel generated operating income of approximately $1,367,000, before the loss on termination of garage lease, interest, depreciation and amortization, on operating revenues of approximately $8,644,000 compared to operating income of approximately $1,242,000 before interest, depreciation and amortization, on operating revenues of approximately $9,619,000 for the three months ended December 31, 2007. The increase in Hotel operating income is primarily attributable to lower operating expenses and an increase in garage revenues partially offset by a decrease in room and food and beverage revenues. Management expects that the termination of the garage lease will result in greater operating income in the future and promote greater efficiencies with the garage operations now integrated into those of the Hotel.
Room revenues decreased by $697,000 for the three months ended December 31, 2008 when compared to the three months ended December 31, 2007 and food and beverage revenues decreased by $391,000 for the same periods. That decrease in revenues was attributable to both a lower average daily rate and occupancy percentage compared to the prior period. The decrease in operating expenses is primarily attributable to the decline in hotel occupancy during the current quarter and management's efforts to reduce operating costs and to achieve greater efficiencies.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room ("RevPar") of the Hotel for the three months ended December 31, 2008 and 2007.
Three Months Ended Average Average
December 31, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2008 $166 79% $132
2007 $171 85% $146
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The operations of the Hotel were severely impacted by the dramatic downturn in the domestic and international economies and markets during the three months ended December 31, 2008. Average daily rate, occupancy and RevPar all declined compared to the three months ended December 31, 2007. That impact is expected to continue through fiscal 2009. If that remains true, we expect Hotel operating revenues to be less than fiscal 2008.
Facing an uncertain economy and the prospect of a lingering recession, management has continued to focus on ways to improve efficiencies and reduce operating costs and other expenses in its efforts to stabilize and maintain operating income of the Hotel. As a result of those efforts, we have seen further reductions in operating costs of the Hotel as a percentage of Hotel revenues for the three months ended December 31, 2008. Management has also increased its sales and marketing efforts in what has become an even more competitive hotel market in San Francisco as hotels have slashed rates in an effort to maintain occupancy levels. Management will also continue to explore new and innovative ways to improve operations and enhance the guest experience. One significant step was to move lunch and dinner service from the restaurant to the lounge to create a more intimate, yet lively, atmosphere and to complement the new wine bar "Flyte" in the lobby of the Hotel.
Income from real estate operations decreased to $106,000 for the three months ended December 31, 2008 from $249,000 for the three months ended December 31, 2007. Rental income increased to $3,180,000 from $3,125,000 while operating expense increased to $1,319,000 from $1,183,000. The increase in revenue and operating expenses are due of management's efforts to improve the competitiveness of the Company's properties through interior and exterior
improvements as well as providing better service. Real estate taxes increased to $364,000 for the three months ended December 31, 2008 from $290,000 for the three months ended December 31, 2007 primarily as the result of increase taxes at the Company's properties located in Texas.
As of December 31, 2008, the Company had listed for sale its 249-unit apartment complex located in Austin, Texas and its 132-unit apartment complex located in San Antonio, Texas. These properties are classified as held for sale on the Company's condensed consolidated balance sheet with the operations of these properties classified under discontinued operations in the condensed consolidated statements of operations.
The Company had a net gain on marketable securities of $445,000 for the three months ended December 31, 2008 compared to a net gain of $1,375,000 for the three months ended December 31, 2007. For the three months ended December 31, 2008, the Company had a net realized gain of $55,000 and a net unrealized gain of $390,000. For the three months ended December 31, 2007, the Company had a net realized gain of $357,000 and net unrealized gain of $1,018,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities please see the Marketable Securities section below.
Margin interest and trading expenses decreased to $301,000 for the three months ended December 31, 2008 from $373,000 for the three months ended December 31, 2007 primarily as the result of the decrease in margin interest expense related to the decrease in the use of margin.
As discussed in Note 1, during the three months December 31, 2008, the Company did not record a minority interest benefit of $608,000 related to the loss at Justice Investors. In the comparable quarter ended December 31, 2007, the Company recorded a minority interest benefit of $257,000.
The total provision for income tax changed to tax benefit of $258,000 for the three months ended December 31, 2008 from an expense of $212,000 for the three months ended December 31, 2007 primarily as the result of the Company having a pre-tax loss in the current quarter. As noted above and in Note 1, the Company did not record a pre-tax minority interest benefit for the three months ended December 31, 2008. As the result the effective tax rate during the three months ended December 31, 2008 is lower compared to the three months ended December 31, 2007.
Minority interest related to Portsmouth and Santa Fe changed to income of $414,000 for the three months ended December 31, 2008 from an expense of $68,000 for the three months ended December 31, 2007 primarily due to the loss incurred by Portsmouth and Santa Fe during the three months ended December 31, 2008.
Six Months Ended December 31, 2008 Compared to the Six Months Ended December 31, 2007
The Company had net income of $34,000 for the six months ended December 31, 2008 compared to net income of $1,610,000 for the six months ended December 31, 2007. As discussed in Note 1, the Company stopped recording a minority interest benefit in Justice Investors beginning the quarter ended December 31, 2008 resulting in the recording of an additional $608,000 in net loss. During the six months ended December 31, 2008, the Company had a loss on hotel operations of $1,019,000 compared to a loss of $1,162,000. During the same period, the Company had income from investment transactions of $961,000 for the six months ended December 31, 2008 compared to a loss from investment transactions of $820,000 for the six months ended December 31, 2007. Income from real estate operations remained consistent with the comparable period.
The following table sets forth a more detailed presentation of Hotel operations for the six months ended December 31, 2008 and 2007.
For the six months ended December 31, 2008 2007
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Hotel revenues:
Hotel rooms $14,200,000 $ 15,224,000
Food and beverage 2,527,000 2,948,000
Garage 970,000 836,000
Other operating departments 246,000 397,000
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Total hotel revenues 17,943,000 19,405,000
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Operating expenses excluding interest, depreciation
and amortization (14,519,000) (16,911,000)
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Operating income 3,424,000 2,494,000
Loss on termination of garage lease (684,000) -
Interest expense (1,443,000) (1,405,000)
Depreciation and amortization expense (2,316,000) (2,251,000)
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Loss from hotel operations $(1,019,000) $(1,162,000)
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For the six months ended December 31, 2008, the Hotel generated operating income of approximately $3,424,000, before the loss on the termination of garage lease, interest, depreciation and amortization, on operating revenues of approximately $17,943,000 compared to operating income of approximately $2,494,000 before interest, depreciation and amortization, on operating revenues of approximately $19,405,000 for the six months ended December 31, 2007.
The increase in Hotel operating income is primarily due to a significant decrease in operating expenses of approximately $2,392,000, partially offset by a decrease in operating revenues of approximately $1,462,000. The decrease in operating expenses is primarily attributable to certain nonrecurring legal and consulting fees incurred in the three months ended September 30, 2007 related to construction litigation that was settled as of June 30, 2008 and for zoning issues. Operating expenses also decreased due to a decline in hotel occupancy during the current period and management's efforts to reduce costs and achieve greater efficiencies. That decline in occupancy was also the primary reason for the decrease in operating revenues compared to the prior period. Management expects that the termination of the garage lease will result in greater operating income in the future and promote greater efficiencies with the garage operations now integrated into those of the Hotel.
The following table sets forth the average daily room rate, average occupancy percentage and room revenue per available room ("RevPar") of the Hotel for the six months ended December 31, 2008 and 2007.
Six Months Ended Average Average
December 31, Daily Rate Occupancy% RevPar
----------------- ---------- --------- --------
2008 $177 80% $142
2007 $173 87% $152
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While the Hotel was able to achieve a modest increase of approximately $4 in its average daily room rates for the six months ended December 31, 2008 compared to the six months ended December 31, 2007, that increase was primarily attributable to the three months ended September 30, 2008. The full impact of the dramatic downturn in the domestic and international economies and markets was not felt by the operations of the Hotel until September 2008 and is expected to continue at least through fiscal 2009. As a result, average occupancy percentage declined approximately 7% for the six months ended December 31, 2008 and RevPar was down approximately $10 from the comparable period.
Facing the prospect of a recession and a decline in business, group and leisure travel, both domestic and international, management has continued to focus on ways to improve efficiencies and reduce operating costs and other expenses in its efforts to stabilize and maintain operating income of the Hotel. As a result of those efforts, we have seen further reductions in operating costs of the Hotel as a percentage of Hotel revenues for the three months ended December 31, 2008. Management will also increase its sales and marketing efforts in what is expected to become an even more competitive hotel market in San Francisco. Management will also continue to explore new and innovative ways to improve operations and enhance the guest experience. One significant step was to move lunch and dinner service from the restaurant to the lounge to create a more intimate, yet lively, atmosphere and to complement the new wine bar "Flyte" in the lobby of the Hotel.
Income from real estate operations remained consistent with income of $284,000 for the six months ended December 31, 2008 compared to income of $278,000 for the six months ended December 31, 2007. Rental income increased to $6,406,000 from $6,124,000 while operating expense increased to $2,592,000 from $2,275,000. The increases in rental income and operating expense are due of management's efforts to improve the competitiveness of the Company's properties through interior and exterior improvements as well as providing better service. Real estate taxes increased to $730,000 for the six months ended December 31, 2008 from $676,000 for the six months ended December 31, 2007 primarily as the result of increase taxes at the Company's properties located in Texas.
As of December 31, 2008, the Company had listed for sale its 249-unit apartment complex located in Austin, Texas and its 132-unit apartment complex located in San Antonio, Texas. These properties are classified as held for sale on the Company's condensed consolidated balance sheet with the operations of these properties classified under discontinued operations in the condensed consolidated statements of operations.
During the six months ended December 31, 2007, the Company sold its 224-unit apartment complex located in Irving, Texas for $8,050,000 and recognized a gain on the sale of real estate of $4,074,000. The operations and the related gain on the sale of real estate are also included under discontinued operations.
The Company had a net gain on marketable securities of $2,088,000 for the six months ended December 31, 2008 compared to a net loss of $2,000 for the six months ended December 31, 2007. For the six months ended December 31, 2008, the Company had a net realized gain of $1,137,000 and a net unrealized gain of $951,000. For the six months ended December 31, 2007, the Company had a net realized gain of $110,000 and net unrealized loss of $112,000. Gains and losses on marketable securities may fluctuate significantly from period to period in the future and could have a significant impact on the Company's results of operations. However, the amount of gain or loss on marketable securities for any given period may have no predictive value and variations in amount from period to period may have no analytical value. For a more detailed description of the composition of the Company's marketable securities please see the Marketable Securities section below.
The Company may also invest, with the approval of the Securities Investment Committee, in private investment equity funds and other unlisted securities, such as convertible notes through private placements. Those investments in non- marketable securities are carried at cost on the Company's balance sheet as part of other investments, net of other than temporary impairment losses. As of December 31, 2008, the Company had net other investments of $7,056,000. During the six months ended December 31, 2008 and 2007, the Company performed an impairment analysis of its other investments and determined that its investments had other than temporary impairments and recorded impairment losses of $595,000 and $125,000, respectively.
Margin interest and trading expenses decreased to $639,000 for the six months ended December 31, 2008 from $805,000 for the six months ended December 31, 2007 primarily as the result of the decrease in margin interest expense related to the decrease in the use of margin.
Minority interest related to Justice Investors changed to an expense of $96,000 for the six months ended December 31, 2008 from a benefit of $535,000 for the six months ended December 31, 2007. As discussed in Note 1, during the three months December 31, 2008, the Company did not record a minority interest benefit of $608,000 related to the loss from hotel operations. The $96,000 minority interest expense was recorded during the three months ended September 30, 2008. During the six months ended December 31, 2007, the Company recorded a minority interest benefit of $535,000.
The total provision for income tax expense decreased to $52,000 for the six months ended December 31, 2008 from $833,000 for the six months end December 31, 2007. The decrease primarily was the result of having lower pre-tax income. As noted above and in Note 1, the Company did not record a pre-tax minority interest benefit for the three months ended December 31, 2008. As the result the effective tax rate during the six months ended December 31, 2008 is lower compared to the six months ended December 31, 2007.
Minority interest related to Portsmouth and Santa Fe increased to $626,000 for the six months ended December 31, 2008 from $341,000 for the six months ended December 31, 2007 primarily due to the higher loss incurred by Portsmouth and Santa Fe during the six months ended December 31, 2008.
MARKETABLE SECURITIES AND OTHER INVESTMENTS
The Company's investment portfolio is diversified with 56 different equity . . .
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