Description

InterGroup Corporation (ticker: INTG)

$26.30
Market cap: $62.7 million
Enterprise value: $211.5 million

Intergroup Corporation (ticker: INTG) is at the center of a series of cross-holdings of related securities whose value is primarily driven by ownership in the San Francisco Hilton Financial District Hotel along with other primarily California real estate.  The SF Hilton dwarfs the value of its other assets, which does include some mining interests, and it is perhaps because those mining interests once dominated the upside potential of this stock that as a result it has been left for dead with the rest of the mining sector.  Four years ago, INTG was the subject of an excellent write-up and thread that focused on this hidden value, which has since proven itself to be ephemeral, namely its ownership of preferred shares in the publicly traded Nevada gold miner Comstock Mining (ticker: LODE).  

Meanwhile, the stock is trading close to the same price.

In the meantime, INTG completed a transaction that more than doubled its ownership in this hotel that in turn has benefited from the skyrocketing valuation of San Francisco hotel properties:

The Hotel is centrally located near the Financial District in San Francisco, one block from the Transamerica Pyramid. The Embarcadero Center is within walking distance and North Beach is two blocks away. Chinatown is directly across the bridge that runs from the Hotel to Portsmouth Square Park. The Hotel is a 31-story (including parking garage), steel and concrete, A-frame building, built in 1970. The Hotel has 543 well-appointed guest rooms and luxury suites situated on 22 floors. The third floor houses the Chinese Culture Center and grand ballroom. The Hotel has approximately 22,000 square feet of meeting room space, including the grand ballroom. Other features of the Hotel include a 5-level underground parking garage and pedestrian bridge across Kearny Street connecting the Hotel and the Chinese Culture Center with Portsmouth Square Park in Chinatown. The bridge, built and owned by the Partnership, is included in the lease to the Chinese Culture Center.

The Hotel is currently undergoing major guestroom renovations that will span over the next three years. The Partnership expects to expend at least 4% of gross annual Hotel revenues each year for capital improvements and requirements. (InterGroup Corporation 10-K)

CROSS HOLDINGS & SHARE COUNTS:

INTG’s cross holdings are not only complex, they are probably also to blame for putting INTG outside of standard valuation screens.  Despite a modest $62.7 million market cap, Bloomberg shows INTG to have a $211.5 million enterprise value and a negative book value.  This disguises the fact that INTG’s look through valuation nets out to being worth at least double its current share price.  In fact, its direct and indirect stakes in the hotel net out to being close to $50/share—which alone is nearly double the current share price, while its apartment complexes conservatively net to an additional $17/share.  Add in other assets minus other liabilities and InterGroup’s pre-tax net assets are worth approximately $74/share.  There is a lot of ground to cover before a discussion of tax mitigation strategies, but taxes could be greatly minimized in a stock exchange, REIT conversion and/or refinancing.

Let’s begin with the cross ownership in related securities SFEF (Santa Fe Financial Corp) and PRSI (Portsmouth Square Inc).  

SFEF: 1,241,181 outstanding shares (no options)

PRSI: 734,183 outstanding shares (no options)

INTG: 2,749,905 outstanding shares (includes options: 2,382,905 shares + 367,000 options at average strike price of $16.85.  This analysis assumes that INTG’s price will be significantly higher than all the stock prices.  The proceeds from options exercised are added to cash in this analysis.)

SFEF owns 68.8% of PRSI

INTG owns 81.7% of SFEF (.817 * .688 * 734,183 PRSI shares = 412,681 PRSI shares)

INTG owns 13.1% of PRSI (.131 * 734,183 PRSI shares = 96,718 PRSI shares)

PRSI owns 93% of the 543-room SF Hilton Financial District Hotel

Therefore, INTG directly and indirectly owns 508,859 shares of PRSI, which accounts for 69.31% of PRSI.  Since PRSI owns 93% of the hotel, INTG deserves credit for a total look-through ownership of 64.5% of the hotel.

GENERAL OUTLINE OF THE SUM-OF-THE-PARTS VALUATION:

Based on a $600,000 per key appraisal of hotel and garage:

543 (rooms) * $600k = $325.8M - $117M (mortgage) = $208.8M

INTG’s interest of 64.5% = $134.7M / 2,749,905 shares = $48.98/share (INTG’s hotel ownership)

We believe that $600,000 per key is a conservative appraisal, but we’ll return to that after completing a review of the other assets.

InterGroup also owns additional real estate other than the hotel, primarily apartment complexes.  Fiscal 2014 NOI was $7.35M and trended higher in fiscal 2015 (year ending 6/30/15) to $7.69M.  This was despite selling two properties, including a 249 unit apartment complex in Austin, TX for $16.3M (realizing a net gain of $9.36M and netting $7.89M after selling costs and repayment of the mortgage).

Using a 6.5% cap rate, the apartments would be valued at $118.3 million.  Subtracting the $66.2 million in mortgage notes results in a value of $52.1 million.  However, there is a bit of a mismatch to the 2015 numbers due to the sale of the Austin property and another property.  Mortgages declined from $75.3M to $66.2M, with the $7.5M retirement of the two sold properties accounting for most of that change.  The properties were sold for a combined $19.8M.  If instead one annualizes 2016q1, the NOI run-rate would be $7.4M, valuing the apartments at $114M minus the $66M mortgage = $47.4M / 2,749,905 shares = $17.24/share (INTG’s apartment properties ownership).

There are other ways to make this adjustment—use the 2015 NOI but add back the $7.5M in mortgages from the sold properties.  That would still be $44.6M net or $16.20/share.

Other checks on this valuation—if the mortgages represent 60% LTV, then the real estate portfolio is worth $110.3 million.  However, INTG’s last two sales were in November, 2014 and March, 2015.  The properties were sold for $16.3M and $3.5M with respective mortgages of $6.4M (39% LTV) and $1.1M (31% LTV).  This makes a 60% LTV assumption seem very conservative for a seasoned portfolio, despite some properties being refinanced every year.

A list of the properties with their original purchase prices and current mortgage balances is below in Appendix A.

OTHER ASSETS:

Intergroup owns 13,158,466 shares of Comstock Mining Inc (ticker: LODE).  They had previously owned preferred shares in addition to common shares, but these were converted to its current stake.  LODE is currently trading for $0.39, putting a valuation of $5.1 million on its stake.  Its latest 10-Q on 9/30/15 used a closing price of $0.61 for a value of $8.0 million.

It is more straightforward to simply take all INTG’s other assets, including investment in marketable securities, other investments, cash and restricted cash, and offset them against all liabilities (ex-mortgages).  This nets out to be $40,943,000 in assets against $27,155,000 in liabilities equaling $13,788,000 / 2,749,905 shares = $5.01/share (INTG’s net other assets).  The only problem with that is it is a shortcut that fails to take into account all the various consolidations and double counting.  Also, it uses LODE’s closing price from 9/30/2015 of $0.61 per share.  That should be adjusted to $0.39/share.

Also as mentioned above, since we are using fully diluted shares, the proceeds from the 367,000 options struck at an average price of $16.85 needs to be added back, which accounts for $6.2M or $2.25/share.

In addition, there are outstanding disputes that involve transfer and occupancy taxes that include a $2.1M tax occupancy tax appeal, a $4.7M transfer tax refund lawsuit, and a mirroring $4.7M withholding dispute regarding the same transfer tax assessment.

Since INTG consolidates both assets and liabilities from the subs, what needs to be done is to figure out other non-hotel liabilities and assets from the subs and account for them when doing INTG’s other assets and liabilities.  This is spelled out in detail in Appendix B.  Adjusted for the markdown in LODE shares, this nets out to be $4.81/share, but including the $2.25 in proceeds from options being exercised, the fully diluted adjusted net other assets is approximately $7.06 (INTG’s net other assets).  

OUTSIZED MARGIN INTEREST & TRADING EXPENSES:

For those familiar with this company, one of its mysteries is the significant margin interest expense relative to the size of its investment in marketable securities.  Even more astounding are the trading expenses—over $1M each year.  This is so glaring it bears highlighting.

As of June 30, 2014 (fiscal year-end), the company had investments in marketable securities of $11.4M and LODE comprised 44.2% of the portfolio, leaving $6.4M in other tradable marketable securities.  How does one generate $1M+ in interest and dividends, $1M+ in management and trading expenses, and $600k+ in margin cost for such a portfolio during these last several years?  Note 5 in the 10-K isn’t much help, as it shows a drop in the 2014 EOY portfolio from $11.4M to $5.8M at EOY 2015, for a decline of $5.6M, but on the same line shows just the net unrealized loss of $2.0M.  The net loss on marketable securities is delineated in the last line of the note as ($4.65M).  

An investor can only hope that the reduced fair value of the portfolio at year-end will result in a diminished impact from these activities.  Given the attractiveness of its own stock, let alone the related securities SFEF and PRSI, it is difficult to imagine any trading strategy that could ever produce returns comparable to buying back stock.  

Unfortunately, the most recent update from the 9/30/2015 10-Q shows a distressingly high trading and margin interest expense in the latest quarter:

PRSI Q1 “trading and margin interest expense” ($32K), but on only $279K marketable securities (ex LODE).

SFEF Q1 “trading and margin interest expense” ($27K), but on only $134K marketable securities (ex LODE).

INTG Q1 “trading and margin interest expense” ($181K), but on only $1.183M marketable securities (ex LODE).

Total Q1 “trading and margin interest expense” ($240K), but on only $1.596M marketable securities (ex LODE).

VALUATION COMPS FOR THE HOTEL:

San Francisco hotels have skyrocketed in value.  The Mandarin recently sold for $1M/key.  The SF Fairmont just sold for $760k/key.  (http://www.businesswire.com/news/home/20151124006180/en/Fairmont-San-Francisco-Hotel-Interests-Sold-Mirae)

Granted, these are both luxury hotels, but the Fairmont’s room rates are similar to the SF Hilton FiDi.

Two years ago, PRSI bought out most of the other half of the SF Hilton that it didn’t own.  They paid $330k/key, which would have valued the entire hotel at $179M, but two years is a long time in the SF hotel market.  For example, the SF Fairmont had previously been purchased in Q3 of 2012 for $338k/key—in three years its valuation increased by 125%.

PRSI’s purchase was financed by increasing the mortgage on the property, and the current mortgage breaks down to $97M prime plus $20M in mezz.  That works out to be 65% LTV.

However, cap rates at the time were arguably valued at least near 4.5%.  Here’s a cap rate table that includes the 32% year-over-year improvement in Q1 and its impact on a 4% cap rate valuation:

Note that 2015’s decline in hotel operating income is a bit difficult to gauge given this comment in INTG’s filing:

Operating expenses increased by $6,211,000 compared to the prior year primarily due to higher legal fees and higher operating expenses which include employee related expenses, room occupancy related expenses and food and beverage related expenses, franchise and credit card fees as the result in the increase in revenues and higher property taxes as the result of the redemption the limited partners and the refinancing of the Hotel. Legal expenses increased as the result of the current litigation.

Hopefully some of this is behind InterGroup.  Due to the seasonal nature of the business, it is difficult to draw a meaningful conclusion from Q1, but it is trending positive year-over-year.

San Francisco has the lowest cap rates in the nation, and although this is a bit dated, in late 2014, Class A office space was 3.5% in San Francisco versus 4.8% in NYC & Boston and closer to 5.5% in Chicago & L.A.: http://news.theregistrysf.com/cbre-cap-rates-san-francisco-lowest-nation/

SF also has the priciest hotels in the world: http://www.bloomberg.com/news/articles/2015-06-30/san-francisco-hotels-are-world-s-priciest-as-rates-surge while the city’s hotel-room count grew just 0.3% in the first five months of 2015:

San Francisco already is one of the priciest U.S. cities for apartment renters and companies seeking office space. Now the area has a new distinction: it’s the world’s most expensive place for visitors to spend the night.

The average price for a San Francisco hotel room has jumped 88 percent in the past year to $397 a night, according to an index compiled by Bloomberg of the world’s top 100 financial centers. The city ranks ahead of Geneva, where rooms set travelers back $292 a night, and Milan, at $271. Chicago, with rates at $240, ties Miami as the second-costliest U.S. cities.

One of the most interesting data points in the article is that San Francisco is not in the top ten for average hotel cost for five-star stays, yet its average hotel cost of $382/night would make it the ninth most expensive city in the world for five-star stays—clearly these represent two different databases, but it does demonstrate that SF hotels don’t have to be among the highest luxury brands in order to command a premium price point.  Arguably, given Bloomberg’s survey, the SF Hilton appears to have some pricing power left in its rates:

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 year ended June 30, 2015 and 2014.

RevPar continues to trend nicely year-over-year for Q1:

A hotel sales survey last year showed prices in excess of $500k/key for San Francisco hotels.  It was estimated that the Westin Market Street sold in Q1 for $514k/key, the Tuscan Fisherman’s Wharf (Best Western) in Q2 for $552k/key, the Epiphany Hotel in Palo Alto sold in Q3 for $832k/key, and even the Residence Inn Palo Alto Los Altos sold for $449k/key (http://lwhospitalityadvisors.com/wp-content/uploads/2015/12/Q3-2015-Major-Sales.pdf)).  

Finally, it is worth noting how well the hotel did in Q1-2016.  Operating income went from $2.992M to $3.945M.  While it is only one quarter, this close to a million dollar quarterly increase with a 4% cap rate means something close to a $25M increase in value.  Before jumping ahead and annualizing that, it should be noted that quarters do jump around quite a bit, and while the 4 year average for Q1 (2012-2015) was $2.882M, the Q1-2014 quarter was $3.773M.  

EVEN LESS LIQUID WAYS TO INVEST:

Portsmouth Square Inc (ticker: PRSI) is relatively straightforward to value.  It owns 93% of Justice Investors, which owns the hotel.  PRSI attributes $34M in book value as the hotel cost basis.  It appears that the balance sheet consolidates the hotel’s financials, so we’ll have to separate out PRSI share.  In addition, it has approximately $4M in other net assets.  At $600k/key, the hotel minus the mortgage would be worth $209M—this is $175M over book value.  If taxed at a rate of 38%, that gain would net $109M after tax.  This puts the after-tax value of PRSI shares at $34M + 109M, multiplied by its 93% ownership of Justice, with an additional $4M in net other assets tacked on.  This calculates to $137M / 734,183 shares = $186/share (after tax) for PRSI.  The taxable asset value to PRSI would simply be 93% of $209M plus the $4M in net other assets for $198M/734k shares = $270/share.

Santa Fe Financial Corporation (ticker: SFEF) has 1,241,810 shares outstanding and owns 68.8% of PRSI (0.688 * 734,183 = 505,118 PRSI shares).  If PRSI is worth $186/share (after tax), then SFEF’s shares are worth $93.95M = $75/share (after tax) for PRSI.  The taxable asset value to SFEF would net to $110/share.  Additionally, SFEF has $3.6M more net assets than PRSI, so that should be added to the value of SFEF—this is nearly $3/share.

For those trying to keep track of it all, this table might be handy:

CONSOLIDATIONS THAT MIGHT MAKE SENSE:

Portsmouth Square Inc has just two full-time employees.  The Justice partnership has approximately 312 employees.  PRSI has investments in marketable equity securities worth $1.3M (down from $3.3M in 2014) with investments in 13 different equity positions (down from 25 positions in 2014).  In addition, PRSI owns $4.41M in Comstock preferred (at cost) that was converted into common stock (apparently now 8.9M shares for $3.5M current value).  Netting against this, PRSI obtained a $4.25M loan at 12% from INTG on 7/2/2014. This seems like a wasteful duplication of efforts.  Why not consolidate all these cross holdings and duplicated investments and intergroup loans?

In addition to the duplicated investments and intergroup loans, there is considerable board overlap and shared costs and expenses.  From the 2015 10-K:

Certain shared costs and expenses, primarily administrative expenses, rent and insurance are allocated among the Company and InterGroup based on management's estimate of the pro rata utilization of resources. For the years ended June 30, 2015 and 2014, these expenses were approximately $72,000 for each respective year.

Four of the Company’s Directors serve as directors of InterGroup and three of the Company’s Directors serve on the Board of Santa Fe.

As Chairman of the Securities Investment Committee, the Company’s President and Chief Executive Officer (CEO), John V. Winfield, directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Mr. Winfield also serves as Chief Executive Officer and Chairman of Santa Fe and InterGroup and oversees the investment activity of those companies. Depending on certain market conditions and various risk factors, the Chief Executive Officer, his family, Santa Fe and InterGroup may, at times, invest in the same companies in which the Company invests. The Company encourages such investments because it places personal resources of the Chief Executive Officer and his family members, and the resources of Santa Fe and InterGroup, at risk in connection with investment decisions made on behalf of the Company.

In fiscal year ended June 30, 2004, the disinterested members of the Board of Directors established a performance based compensation program for the Company’s CEO to keep and retain his services as a direct and active manager of the Company’s securities portfolio. Pursuant to the current criteria established by the Board, Mr. Winfield is entitled to performance based compensation for his management of the Company’s securities portfolio equal to 20% of all net investment gains generated in excess of an annual return equal to the Prime Rate of Interest (as published in the Wall Street Journal) plus 2%. Compensation amounts are calculated and paid quarterly based on the results of the Company’s investment portfolio for that quarter. Should the Company have a net investment loss during any quarter, Mr. Winfield would not be entitled to any further performance-based compensation until any such investment losses are recouped by the Company. This performance based compensation program may be further modified or terminated at the discretion of the Board of Directors. The Company’s CEO did not earn any performance based compensation for the years ended June 30, 2015 and 2014.

Santa Fe Financial Corporation is in a similar situation.  Like PRSI, it only has two full-time employees.  It also has a modest investment portfolio.  It too also owns shares of Comstock Mining (4.5M shares).  PRSI loan from INTG (two-year $4.25M loan on 7/2/2014 from Intergroup at 12%, plus a 3% loan fee) is consolidated on its books.  This various bucketing and overlap seems very unnecessary and due for structural consolidation.

What is the attraction of having C Corps own controlling stakes in other C Corps that in turn own controlling stakes in a California real estate partnership?  In addition to all three corporations being publicly traded companies, subject to the filling requirements and additional expenses of being a publicly traded company, there is undoubtedly some overlap in audit fees.  Below are audit fees for the last two years—it is not spelled out what is consolidated, but it is possible that PRSI’s fees are consolidated in SFEF’s accounts while likewise SFEF is consolidated in INTG’s.  It is also possible that these represent separate fees and total more than $500k/year for the group:

Here is total executive compensation, including salary, bonus, awards and other compensation.  There are multiple footnotes indicating that some listed compensation is shared among various entities, so the totals below may not be precise.  Also of note, 2014 had numerous incentive awards related to completing the SF Hilton FiDi transaction:

CONCLUSION:

The above analysis attempts to utilize recent hotel transaction prices from an admittedly hot market to infer the valuation of InterGroup.  That does provide some idea of the upside, but investments that are dominated by a controlling shareholder can have their own slow paths to realizing value.  Another perspective is how would a fresh buyer of these assets at INTG $26/share look at what they are getting in return?  In other words, if this was a private equity investment opportunity, and someone came along looking to bail out on their minority ownership, how would today’s valuation be parsed?

First of all, the stock trading and the Comstock shares are a significant holding.  Of course, so is the drag from executive compensation and poor investment results.  These are real costs.  In the SOTP analysis, the valuations used were $7/share for other assets (appendix B), $17/share for the rental properties, and $49/share for the hotel.  Let’s start by using the other assets to defray the cost of all the other overhead and use them as offsets.  This won’t be enough for the skeptics, and that’s understandable, but it’s a start.

Then, let’s take the $17/share based on our valuation approach and instead of using a 6.5% cap rate, let’s bump it up to 8.0%.  That brings the real estate to a bargain $9.50/share.  ($7.4M / 8% = $92.3M minus $66.2M mortgages = $26.1M / 2.75M shares.)  That seems quite conservative.  

Versus a recent share price of $26.00, that leaves $15.50 for the hotel.

$15.50/share for the hotel would be the equivalent of $42.6M for INTG’s 64.5% interest, which would imply $66.1M equity plus $117M mortgages for a hotel valuation of approximately $183M.  That works out to approximately $337k per key.  Obviously, this is all just a thought experiment to find the margin-of-safety.

Clearly, SOTP analysis can lead to various attractive stub conclusions.  Given that the combination of the rental properties plus the other assets accounts nearly equals the current stock price ($24 vs. $26), another point-of-view is that the hotel is free or nearly so.  Of course, there are varying degrees of nonsense to any of these weightings.  The assets aren’t being separated.  (Please note that the previous VIC write up is an excellent source of further information that would support a higher rental property portfolio valuation.)  

The most important thing here is that we have a situation that calls for increased tax efficiency—the Chairman/CEO John Winfield is 68 years old, the other Class A director (and 6.6% shareholder of PRSI) is 81 years old.  Winfield owns 61.1% of INTG and 4.0% of SFEF.  A disinterested participant would wonder when not if this gets restructured.  

The path to value creation does seem straightforward—consolidate SFEF and PRSI under the INTG umbrella while also transitioning INTG into a REIT. INTG paid taxes last year ($2.75M) largely due to their $11.1M gain on sale of real estate.  That will not prove to be an efficient way forward.       

There are a range of possibilities.  Time to call out the investment bankers and tax advisors…  Why shouldn’t INTG convert to a REIT and offer to exchange shares for shares in PRSI and SFEF?  This could be a straightforward way to wrap up all the redundancies and tax efficiencies.  Many investors familiar with this situation already own shares in all three stocks, or given the liquidity constraints have at least closely examined the relative valuations.  

While investors have a right to be skeptical, they might also want to be note that some things have recently changed.  Over the last two years, INTG / PRSI / SFEF has moved its ownership of the SF Hilton FiDi to nearly complete control, has converted its complex preferred shares stake in Comstock to a much more straightforward ownership of the common stock, and has seen a diminished level of other equity investment assets.  

In addition, the CEO spent a lot of years on the Comstock assimilating and aggregating many small parcels of land.  To his way of thinking, he has built something truly great in both in its land and gold/silver potential.  LODE had been a focus, but if you examine his latest PR on LODE, he’s now distancing himself from the Comstock project.

The CEO has demonstrated a longstanding interest and activity as an investor, and now his own trio of related stocks have become dramatically undervalued securities given the complete revaluation of the SF Hotel market.  The next logical step is to consolidate and convert to a more tax efficient form.  Furthermore, such a move would probably be additionally accretive to INTG as a necessary consideration to the surviving entity.  

DISCLAIMER:

The author of this posting and related persons or entities (“Author”) currently holds a long position in this security and may hold long or offsetting short positions in related or mentioned securities.  Author may buy additional shares, or sell some or all of Author’s shares, at any time.  Author has no obligation to inform anyone of any changes to Author’s views.  Please consult your financial, legal, and/or tax advisors before making any investment decisions.  While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note.  The reader agrees not to invest based on this note, and to perform his or her own due diligence and research before taking a position in mentioned securities.  READER AGREES TO HOLD AUTHOR HARMLESS AND HEREBY WAIVES ANY CAUSES OF ACTION AGAINST AUTHOR RELATED TO THE NOTE ABOVE.  As with all investments, caveat emptor.

APPENDIX A: ADDITIONAL INFO ABOUT RENTAL PROPERTIES:

While the San Francisco Hilton Financial District is common to all three tickers, INTG also owns a substantial rental property portfolio which underpins a great deal of the current stock valuation.  Below is a cut-and-paste of some highlights from the latest 10-K:

Description of Properties

Las Colinas, Texas. The Las Colinas property is a water front apartment community along Beaver Creek that was developed in 1993 with 358 units on approximately 15.6 acres of land. The Company acquired the complex on April 30, 2004 for approximately $27,145,000… The outstanding mortgage balance was approximately $18,600,000 at June 30, 2015…

Morris County, New Jersey. The Morris County property is a two-story garden apartment complex that was completed in June 1964 with 151 units on approximately 8 acres of land. The Company acquired the complex on September 15, 1967 at an initial cost of approximately $1,600,000. …The outstanding mortgage balance was approximately $9,992,000 at June 30, 2015 and the maturity date of the mortgage is July 31, 2022. In June 2014, the Company obtained a second mortgage on this property in the amount of $2,701,000. The term of the loan is approximately 8 years with the interest rate fixed at 4.51%. …

St. Louis, Missouri. The St. Louis property is a two-story project with 264 units on approximately 17.5 acres. The Company acquired the complex on November 1, 1968 at an initial cost of $2,328,000. … The outstanding mortgage balance was approximately $5,837,000 at June 30, 2015 …

Florence, Kentucky. The Florence property is a three-story apartment complex with 157 units on approximately 6.0 acres. The Company acquired the property on December 20, 1972 at an initial cost of approximately $1,995,000. … The outstanding mortgage balance was approximately $3,482,000 at June 30, 2015.

Austin, Texas. The Austin property is a two-story project with 249 units on approximately 7.8 acres. The Company acquired the complex with 190 units on November 18, 1999 for $4,150,000… In March 2015, the Company sold this property and the unimproved land for $16,300,000 and realized a gain on the sale of real estate of $9,358,000. The Company received net proceeds of $7,890,000 after selling costs and the repayment of the mortgage of $6,356,000 and the early prepayment of debt penalty of $1,634,000.

Los Angeles, California. The Company owns two commercial properties, twelve apartment complexes, and two single-family houses in the general area of West Los Angeles.

The first Los Angeles commercial property is a 5,500 square foot, two story building that served as the Company's corporate offices until it was leased out, effective October 1, 2009 and the Company leased a new space for its corporate office. The Company acquired the building on March 4, 1999 for $1,876,000. … The outstanding mortgage balance was approximately $950,000 at June 30, 2015 and the note matures in January 2016.

The second Los Angeles commercial property is a 5,900 square foot commercial building. The Company acquired the building on September 15, 2000 for $1,758,000. … In November 2014, the Company sold this property for $3,450,000 and realized a gain on the sale of real estate of $1,742,000. The Company received net proceeds of $2,163,000 after selling costs and the repayment of the related mortgage of $1,100,000. Prior to its sale, this property was being leased by the buyer.

The first Los Angeles apartment complex is a 10,600 square foot two-story apartment with 12 units. The Company acquired the property on July 30, 1999 at an initial cost of approximately $1,305,000. …. The outstanding mortgage balance was approximately $1,969,000 at June 30, 2015 and the maturity date of the mortgage is January 1, 2022.

The second Los Angeles apartment complex is a 29,000 square foot three-story apartment with 27 units. This complex is held by Intergroup Woodland Village, Inc. ("Woodland Village"), which is 55.4% and 44.6% owned by Santa Fe and the Company, respectively. The property was acquired on September 29, 1999 at an initial cost of approximately $4,075,000. …. The outstanding mortgage balance was approximately $3,029,000 at June 30, 2015…

The third Los Angeles apartment complex is a 12,700 square foot apartment with 14 units. The Company acquired the property on October 20, 1999 at an initial cost of approximately $2,150,000. … The outstanding mortgage balance was approximately $1,754,000 at June 30, 2015 …

The fourth Los Angeles apartment complex is a 10,500 square foot apartment with 9 units. The Company acquired the property on November 10, 1999 at an initial cost of approximately $1,675,000. … The outstanding mortgage balance was approximately $1,195,000 at June 30, 2015 ….

The fifth Los Angeles apartment complex is a 26,100 square foot two-story apartment with 31 units. The Company acquired the property on May 26, 2000 at an initial cost of approximately $7,500,000. … The outstanding mortgage balance was approximately $5,376,000 at June 30, 2015 …

The sixth Los Angeles apartment complex is a 27,600 square foot two-story apartment with 30 units. The Company acquired the property on July 7, 2000 at an initial cost of approximately $4,411,000. … The outstanding mortgage balance was approximately $6,287,000 at June 30, 2015 …

The seventh Los Angeles apartment complex is a 3,000 square foot apartment with 4 units. The Company acquired the property on July 19, 2000 at an initial cost of approximately $1,070,000. … The outstanding mortgage balance was approximately $377,000 at June 30, 2015 …

The eighth Los Angeles apartment complex is a 4,500 square foot two-story apartment with 4 units. The Company acquired the property on July 28, 2000 at an initial cost of approximately $1,005,000. … The outstanding mortgage balance was approximately $638,000 at June 30, 2015 …

The ninth Los Angeles apartment complex is a 7,500 square foot apartment with 7 units. The Company acquired the property on August 9, 2000 at an initial cost of approximately $1,308,000. … The outstanding mortgage balance was approximately $931,000 at June 30, 2015 …

The tenth Los Angeles apartment complex is a 13,000 square foot two-story apartment with 8 units. The Company acquired the property on May 1, 2001 at an initial cost of approximately $1,206,000. …The outstanding mortgage balance was approximately $482,000 at June 30, 2015.

The eleventh Los Angeles apartment complex, which is owned 100% by the Company’s subsidiary Santa Fe, is a 4,200 square foot two-story apartment with 2 units. Santa Fe acquired the property on February 1, 2002 at an initial cost of approximately $785,000. … The outstanding mortgage balance was approximately $381,000 at June 30, 2015 …

The twelfth apartment which is located in Marina del Rey, California, is a 6,316 square foot two-story apartment with 9 units. … The outstanding mortgage balance was approximately $1,404,000 at June 30, 2015 …

The first Los Angeles single-family house is a 2,771 square foot home. The Company acquired the property on November 9, 2000 at an initial cost of approximately $660,000. … The outstanding mortgage balance was approximately $410,000 at June 30, 2015 and …

The second Los Angeles single-family house is a 2,201 square foot home. The Company acquired the property on August 22, 2003 at an initial cost of approximately $700,000. … The outstanding mortgage balance was approximately $438,000 at June 30, 2015 …

In August 2004, the Company purchased an approximately two acre parcel of unimproved land in Kihei, Maui, Hawaii for $1,467,000. The Company intends to obtain the entitlements and permits necessary for the joint development of the parcel with an adjoining landowner into residential units. After the completion of this predevelopment phase, the Company will determine whether it more advantageous to sell the entitled property or to commence with construction. Due to current economic conditions, the project is on hold.

APPENDIX B: NETTING OUT THE VALUE OF “OTHER ASSETS”

LODE shares held by each company:

PRSI -   $5,697 (value marketable securities) x .951 (percentage LODE) = $5418

$5418/$0.61 = 8.882M LODE shares  ($0.61 was closing LODE share price 9-30-2015)

SFEF -  $8597 (value marketable securities) x .952 (percentage LODE) = $8184

$8184/$.0.61 = 13.416M - 8.882M = 4.534M shares

INTG  -  $17,733 (value marketable securities) x .91 (percentage LODE) = $16,137

$16,137/.$0.61 = 26.454M – 13.416M = 13.038M shares

PRSI -  8.882M LODE shares  (total $5.697M marketable securities)

SFEF -  4.534M LODE shares (total $2.900M marketable securities)

INTG -  13.038M LODE shares (total $9.136M marketable securities)

INTG “other assets”:

SFEF “other assets”:

INTG “other liabilities”:

SFEF “Other Liabilities”

INTG “other assets”:

Add INTG assets and subtract SFEF assets…same with liabilities.

$35.008M - $17.723 = $17.285M (INTG non-apartment, non-hotel “other assets”)

$3.792M - $2.582M = $1.21M (INTG non-apartment, non-hotel liabilities)

$16.075M / 2,749,905 =  $5.85/share

(PRSI and SFEF have a deferred tax liability, INTG does not.  SFEF does not break down hotel liability, but INTG does, so I subtracted that from SFEF’s “payables and liabilities”.)

(A lot of work to get little, especially since LODE is no longer $0.61/share, but is now close to half that value. The price used here was the 9-30-15 LODE price and should be adjusted for whatever the current price is on submission.)

Since we are using fully diluted shares, the proceeds from the 367,000 options struck at an average price of $16.85 needs to be added back, which accounts for $6.2M or $2.25/share.

Total INTG “other assets” adjusted for options dilution = $8.10.  (Adjusting for LODE stock mark-to-market reduces this to $7.06.)

Catalyst

This is value-without-a-catalyst.  Catalysts are hopeful...

• Market recognition of San Francisco hotel valuations
• Consolidation of publicly traded entities to simplify picture, increase liquidity, and possibly be accomplished in an accretive manner.
• Tax efficient moves such as a change to REIT status