NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The
condensed consolidated financial statements included herein have been prepared by Portsmouth Square, Inc. (“Portsmouth”
or the “Company”), without audit, according to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the condensed consolidated financial statements prepared in
accordance with generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures that are made are adequate to make the information presented not misleading.
Further, the condensed consolidated financial statements reflect, in the opinion of management, all adjustments (which included
only normal recurring adjustments) necessary for a fair statement of the financial position, cash flows and results of operations
as of and for the periods indicated. It is suggested that these financial statements be read in conjunction with the audited financial
statements of Portsmouth and the notes therein included in the Company’s Annual Report on Form 10-K for the year ended June
30, 2020. The December 31, 2020 condensed consolidated balance sheet was derived from the consolidated balance sheet as included
in the Company’s Form 10-K for the year ended June 30, 2020.
The
results of operations for the six months ended December 31, 2020 are not necessarily indicative of results to be expected for
the full fiscal year ending June 30, 2021.
Portsmouth’s
primary business is conducted through its general and limited partnership interest in Justice Investors Limited Partnership, a
California limited partnership (“Justice” or the “Partnership”). As December 31, 2020, Portsmouth
has a 96.6% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated
with those of the Company.
As
of December 31, 2020, Santa Fe Financial Corporation (“Santa Fe”), a public company, owns approximately 68.8% of the
outstanding common shares of Portsmouth. Santa Fe is an 87.4%-owned subsidiary of The InterGroup Corporation (“InterGroup”),
a public company. This percentage includes the power to vote an approximately 3.7% interest in the common stock in Santa Fe owned
by InterGroup’s Chairman and President pursuant to a voting trust agreement entered into on June 30, 1998. InterGroup also
directly owns approximately 13.7% of the common stock of Portsmouth.
Justice,
through its subsidiaries Justice Operating Company, LLC (“Operating”) and Justice Mezzanine Company, LLC (“Mezzanine”)
owns and operates a 544-room hotel property located at 750 Kearny Street, San Francisco California, known as the Hilton San Francisco
Financial District (the “Hotel”) and related facilities including a five-level underground parking garage. Mezzanine
is a wholly owned subsidiary of the Partnership; Operating is a wholly owned subsidiary of Mezzanine. Mezzanine is the borrower
under certain mezzanine indebtedness of Justice, and in December 2013, the Partnership conveyed ownership of the Hotel to Operating.
The Hotel is operated by the partnership as a full-service Hilton brand hotel pursuant to a Franchise License Agreement with HLT
Franchise Holding LLC (“Hilton”) through January 31, 2030.
Justice
entered into a Hotel management agreement (“HMA”) with Interstate Management Company, LLC (“Interstate”)
to manage the Hotel, along with its five-level parking garage, with an effective takeover date of February 3, 2017. The term of
the management agreement is for an initial period of ten years commencing on the takeover date and automatically renews for successive
one (1) year periods, to not exceed five years in the aggregate, subject to certain conditions. Under the terms on the HMA, base
management fee payable to Interstate shall be one and seven-tenths percent (1.70%) of total Hotel revenue. On October 25, 2019,
Interstate merged with Aimbridge Hospitality, North America’s largest independent hotel management firm. With the completion
of the merger, the newly combined company will be positioned under the Aimbridge Hospitality name in the Americas.
Due
to Securities Broker
Various
securities brokers have advanced funds to the Company for the purchase of marketable securities under standard margin agreements.
These advanced funds are recorded as a liability.
Obligations
for Securities Sold
Obligation
for securities sold represents the fair market value of shares sold with the promise to deliver that security at some future date
and the fair market value of shares underlying the written call options with the obligation to deliver that security when and
if the option is exercised. The obligation may be satisfied with current holdings of the same security or by subsequent purchases
of that security. Unrealized gains and losses from changes in the obligation are included in the condensed consolidated statements
of operations.
Income
Tax
The
Company consolidates Justice (“Hotel”) for financial reporting purposes and is not taxed on its non-controlling interest
in the Hotel. The income tax benefit (expense) during the six months ended December 31, 2020 and 2019 represent the income tax
effect on the Company’s pretax (loss) income which includes its share in the net (loss) income of the Hotel.
Recently
Issued and Adopted Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees
to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements.
ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods in fiscal years beginning after
December 15, 2018, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements.
ASU 2018-11 provides entities another option for transition, allowing entities to not apply the new standard in the comparative
periods they present in their financial statements in the year of adoption. Effective July 1, 2019, we adopted ASU 2016-02 using
the modified retrospective approach provided by ASU 2018-11. We elected certain practical expedients permitted under the transition
guidance, including the election to carryforward historical lease classification. We also elected the short-term lease practical
expedient, which allowed us to not recognize leases with a term of less than twelve months on our consolidated balance sheets.
In addition, we elected the lease and non-lease components practical expedient, which allowed us to calculate the present value
of the fixed payments without performing an allocation of lease and non-lease components. We did not record any operating lease
right-of-use (“ROU”) assets and operating lease liabilities upon adoption of the new standard as the aggregate value
of the ROU assets and operating lease liabilities are immaterial relative to our total assets and liabilities as of June 30, 2020
and 2019. The standard did not have an impact on our other finance leases, statements of operations or cash flows. See Note 4
and Note 10 for balances of finance lease ROU assets and liabilities, respectively.
On
June 16, 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments.” This ASU modifies the impairment model to utilize an expected loss methodology in
place of the currently used incurred loss methodology, which will result in the timelier recognition of losses. ASU No. 2016-13
will be effective for us as of January 1, 2023. The Company is currently reviewing the effect of ASU No. 2016-13.
In
August 2018, the FASB issued Accounting Standard Update No. 2018-13, Changes to Disclosure Requirements for Fair Value Measurements
(Topic 820) (ASU 2018-13), which improved the effectiveness of disclosure requirements for recurring and nonrecurring fair
value measurements. The amendments in this Update are effective for all entities for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and
weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description
of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the
initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective
date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified
disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. The Company
has adopted the new standard effective July 1, 2020 and the adoption of this guidance does not have a material impact on its condensed
consolidated financial statements.
NOTE
2 - LIQUIDITY
Historically,
our cash flows have been primarily generated from our Hotel operations. However, the responses by federal, state, and local civil
authorities to the COVID-19 pandemic has had a material detrimental impact on our liquidity. For the six months ended December
31, 2020, our net cash flow used in operations was $8,560,000. For the six months ended December 31, 2019, our net cash flow provided
by operations was $823,000. We have taken several steps to preserve capital and increase liquidity at our Hotel, including implementing
strict cost management measures to eliminate non-essential expenses, postponing capital expenditures, renegotiating certain reoccurring
expenses, and temporarily closing certain hotel services and outlets.
The
Company had cash and cash equivalents of $1,210,000 and $4,710,000 as of December 31, 2020 and June 30, 2020, respectively. In
addition, the Hotel had $5,977,000 and $10,666,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A. (“Lender”)
as of December 31, 2020 and June 30, 2020, respectively. Of the $10,666,000 restricted cash held as of June 30, 2020, $2,432,000
was for a possible future property improvement plan (“PIP”) requested by our franchisor, Hilton. However, Hilton has
confirmed that it will not require a PIP for our Hotel until relicensing which shall occur at the earlier of (i) January 2030,
which is six years after the maturity date of our current senior and mezzanine loans, or (ii) upon the sale of our Hotel. On August
19, 2020, Lender released PIP deposits in the amount of $2,379,000 to the Hotel. The funds were utilized to fund operating expenses,
including franchise and management fees and other expenses.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. Justice
received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, Justice has used the
proceeds from the SBA Loan primarily for payroll costs. As of December 31, 2020, Justice had used all proceeds of the SBA Loan
in qualified expenses. The SBA Loan is scheduled to mature on April 9, 2022 with a 1.00% interest rate and is subject to the terms
and conditions applicable to loans administered by the U.S. Small Business Administration under the CARES Act. All payments of
principal and interest are deferred until July 2021, and the repayment obligations under the loan may be forgiven if the funds
are used for payroll and other qualified expenses. All unforgiven portion of the principal and accrued interest will be due at
maturity. On December 29, 2020, Justice submitted its application for full loan forgiveness.
In
order to increase its liquidity position and to take advantage of the favorable interest rate environment, InterGroup refinanced
its 151-unit apartment complex in Parsippany, New Jersey on April 30, 2020, generating net proceeds of $6,814,000. In June 2020,
InterGroup refinanced one of its California properties and generated net proceeds of $1,144,000. During the three months ended
December 31, 2020, InterGroup completed refinancing on two of its California properties and generated net proceeds of $4,327,000.
In January 2021, InterGroup refinanced an additional California property and generated net proceeds of $1,057,000. InterGroup
is currently evaluating other refinancing opportunities and it could refinance additional multifamily properties should the need
arise, or should management consider the interest rate environment favorable. InterGroup has an uncollateralized $8,000,000 revolving
line of credit from CIBC Bank USA (“CIBC”) and the entire $8,000,000 is available to be drawn down as of December
31, 2020 should additional liquidity be necessary. On August 28, 2020, Santa Fe sold its 27-unit apartment complex located in
Santa Monica, California for $15,650,000 and realized a gain on the sale of approximately $12,043,000. Santa Fe will manage its
federal and state income tax liability, and anticipates the utilization of its available net operating losses and capital loss
carryforwards. Santa Fe received net proceeds of $12,163,000 after selling costs and repayment of InterGroup’s RLOC of $2,985,000
as InterGroup had drawn on its RLOC in July 2018 to pay off the previous Fannie Mae mortgage on the property. Furthermore, pursuant
to the Contribution Agreement between Santa Fe and InterGroup, Santa Fe paid InterGroup $662,000 from the sale. Santa Fe will
not seek a replacement property.
As
the sole general partner of Justice that controls approximately 96.6% of the voting interest in the Partnership, Portsmouth has
the ability to amend the partnership agreement to allow for capital calls to the limited partners of Justice if needed. The majority
of any capital calls will be met by Portsmouth. Portsmouth will have financing availability, upon the authorization of the respective
board of directors, to borrow from InterGroup and/or Santa Fe to meet any capital calls and its other obligations during the next
twelve months and beyond. On August 28, 2020, the Board of InterGroup and Santa Fe passed resolutions, respectively, to provide
funding to Portsmouth if necessary. On December 16, 2020, Justice and InterGroup entered into a loan modification agreement which
increased Justice’s borrowing from InterGroup as needed up to $10,000,000 from its current loan balance of $3,000,000 due
to InterGroup. On December 31, 2020, InterGroup advanced $700,000 to Justice per the aforementioned agreement. The Partnership
is also allowed to seek additional loans and sell partnership interests. Upon the consent of the general partner and a super majority
in interest, the Partnership may sell additional classes or series of units of the Partnership under certain conditions in order
to raise additional capital.
Our
known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including
management and franchise fees, corporate expenses, payroll and related costs, taxes, interest and principal payments on our outstanding
indebtedness, and repairs and maintenance of the Hotel.
Our
long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities and capital improvements
of the Hotel. We will continue to finance our business activities primarily with existing cash, including from the activities
described above, and cash generated from our operations. After considering our approach to liquidity and accessing our available
sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate
to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits,
taxes and compliance costs and other commitments, for at least twelve months from the date of issuance of these financial statements,
even if current levels of low occupancy and low RevPAR were to persist. The objectives of our cash management policy are to maintain
existing leverage levels and the availability of liquidity, while minimizing operational costs. We believe that our cash on hand,
along with other potential aforementioned sources of liquidity that management may be able to obtain, will be sufficient to fund
our working capital needs, as well as our capital lease and debt obligations for at least the next twelve months and beyond. However,
there can be no guarantee that management will be successful with its plan.
The
following table provides a summary as of December 31, 2020, the Company’s material financial obligations which also including
interest payments:
|
|
|
|
|
6 Months
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
Total
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
Mortgage notes payable
|
|
$
|
111,536,000
|
|
|
$
|
790,000
|
|
|
$
|
1,632,000
|
|
|
$
|
1,721,000
|
|
|
$
|
107,393,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Related party and other notes payable
|
|
|
13,690,000
|
|
|
|
520,000
|
|
|
|
9,467,000
|
|
|
|
750,000
|
|
|
|
567,000
|
|
|
|
567,000
|
|
|
|
1,819,000
|
|
Interest
|
|
|
18,913,000
|
|
|
|
2,989,000
|
|
|
|
6,291,000
|
|
|
|
6,180,000
|
|
|
|
3,453,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
144,139,000
|
|
|
$
|
4,299,000
|
|
|
$
|
17,390,000
|
|
|
$
|
8,651,000
|
|
|
$
|
111,413,000
|
|
|
$
|
567,000
|
|
|
$
|
1,819,000
|
|
NOTE
3 – REVENUE
The
following table present our revenues disaggregated by revenue streams.
For the three months ended December 31,
|
|
2020
|
|
|
2019
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
2,584,000
|
|
|
$
|
12,497,000
|
|
Food and beverage
|
|
|
76,000
|
|
|
|
1,425,000
|
|
Garage
|
|
|
424,000
|
|
|
|
776,000
|
|
Other operating departments
|
|
|
25,000
|
|
|
|
203,000
|
|
Total hotel revenue
|
|
$
|
3,109,000
|
|
|
$
|
14,901,000
|
|
For the six months ended December 31,
|
|
2020
|
|
|
2019
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
5,474,000
|
|
|
$
|
25,811,000
|
|
Food and beverage
|
|
|
113,000
|
|
|
|
2,647,000
|
|
Garage
|
|
|
894,000
|
|
|
|
1,512,000
|
|
Other operating departments
|
|
|
53,000
|
|
|
|
360,000
|
|
Total hotel revenue
|
|
$
|
6,534,000
|
|
|
$
|
30,330,000
|
|
Performance
obligations
We
identified the following performance obligations for which revenue is recognized as the respective performance obligations are
satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:
●
|
Cancelable
room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest,
which is generally when the room stay occurs.
|
|
|
●
|
Noncancelable
room reservations and banquet or conference reservations represent a series of distinct goods or services provided over
time and satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
|
|
|
●
|
Other
ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are
considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel
guest.
|
|
|
●
|
Components
of package reservations for which each component could be sold separately to other hotel guests are considered separate
performance obligations and are satisfied as set forth above.
|
Hotel
revenue primarily consists of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package
reservations), food and beverage sales and other ancillary goods and services (e.g., parking). Revenue is recognized when rooms
are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the
goods and services are provided. For package reservations, the transaction price is allocated to the performance obligations within
the package based on the estimated standalone selling prices of each component.
We
do not disclose the value of unsatisfied performance obligations for contracts with an expected length of one year or less. Due
to the nature of our business, our revenue is not significantly impacted by refunds. Cash payments received in advance of guests
staying at our hotel are refunded to hotel guests if the guest cancels within the specified time period, before any services are
rendered. Refunds related to service are generally recognized as an adjustment to the transaction price at the time the hotel
stay occurs or services are rendered.
Contract
assets and liabilities
We
do not have any material contract assets as of December 31, 2020 and June 30, 2020, other than trade and other receivables, net
on our condensed consolidated balance sheets. Our receivables are primarily the result of contracts with customers, which are
reduced by an allowance for doubtful accounts that reflects our estimate of amounts that will not be collected.
We
record contract liabilities when cash payments are received or due in advance of guests staying at our hotel, which are presented
within accounts payable and other liabilities on our condensed consolidated balance sheets. Contract liabilities decreased to
$221,000 as of December 31, 2020, from $375,000 as of June 30, 2020. The decrease for the six months ended December 31, 2020 was
primarily driven by $154,000 of revenue recognized and refunds issued to guests as a result of the COVID-19 outbreak.
Contract
costs
We
consider sales commissions earned to be incremental costs of obtaining a contract with our customers. As a practical expedient,
we expense these costs as incurred as our contracts with customers are less than one year.
NOTE
4 – INVESTMENT IN HOTEL, NET
Investment
in hotel consisted of the following as of:
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
December 31, 2020
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Finance lease ROU assets
|
|
|
1,805,000
|
|
|
|
(448,000
|
)
|
|
|
1,357,000
|
|
Furniture and equipment
|
|
|
30,282,000
|
|
|
|
(27,753,000
|
)
|
|
|
2,529,000
|
|
Building and improvements
|
|
|
56,193,000
|
|
|
|
(29,422,000
|
)
|
|
|
26,771,000
|
|
Investment in Hotel, net
|
|
$
|
89,404,000
|
|
|
$
|
(57,623,000
|
)
|
|
$
|
31,781,000
|
|
|
|
|
|
|
Accumulated
|
|
|
Net Book
|
|
June 30, 2020
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Finance lease ROU assets
|
|
|
1,775,000
|
|
|
|
(291,000
|
)
|
|
|
1,484,000
|
|
Furniture and equipment
|
|
|
30,528,000
|
|
|
|
(27,498,000
|
)
|
|
|
3,030,000
|
|
Building and improvements
|
|
|
55,614,000
|
|
|
|
(28,771,000
|
)
|
|
|
26,843,000
|
|
Investment in Hotel, net
|
|
$
|
89,041,000
|
|
|
$
|
(56,560,000
|
)
|
|
$
|
32,481,000
|
|
NOTE
5 – INVESTMENT IN REAL ESTATE
In
August 2007, the Company agreed to acquire 50% interest in InterGroup Uluniu, Inc., a Hawaiian corporation and a 100% owned subsidiary
of InterGroup, for $973,000, which represents an amount equal to the costs paid by InterGroup for the acquisition and carrying
costs of approximately two acres of unimproved land held for development located in Maui, Hawaii. As a related-party transaction,
the fairness of the financial terms of the transaction were reviewed and approved by the independent director of the Company.
NOTE
6 - INVESTMENT IN MARKETABLE SECURITIES, NET
The
Company’s investment in marketable securities consists primarily of corporate equities. The Company has also periodically
invested in corporate bonds and income producing securities, which may include interests in real estate-based companies and REITs,
where financial benefit could transfer to its shareholders through income and/or capital gain.
On
December 31, 2020, and June 30, 2020, all of the Company’s marketable securities are classified as trading securities. The
change in the unrealized gains and losses on these investments are included in earnings. Trading securities are summarized as
follows:
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
Net
|
|
|
|
|
Investment
|
|
Cost
|
|
|
Unrealized Gain
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Equities
|
|
$
|
3,957,000
|
|
|
$
|
141,000
|
|
|
$
|
(3,404,000
|
)
|
|
$
|
(3,263,000
|
)
|
|
$
|
694,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Equities
|
|
$
|
3,955,000
|
|
|
$
|
66,000
|
|
|
$
|
(3,456,000
|
)
|
|
$
|
(3,390,000
|
)
|
|
$
|
565,000
|
|
As
of December 31, 2020, and June 30, 2020, approximately 53% and 60% of the investment
marketable securities balance above is comprised of the common stock of Comstock Mining, Inc. (“Comstock” - NYSE AMERICAN:
LODE), respectively.
As
of December 31, 2020, and June 30, 2020, the Company had $3,404,000 and $3,448,000,
respectively, of unrealized losses related to securities held for over one year; of which $3,368,000 and $3,400,000 are related
to its investment in Comstock, respectively.
Net
gains (losses) on marketable securities on the statement of operations is comprised of realized and unrealized gains (losses).
Below is the composition of net gain (loss) on marketable securities for the three and six months ended December 31, 2020 and
2019, respectively:
For the three months ended December 31,
|
|
2020
|
|
|
2019
|
|
Unrealized gain (loss) on marketable securities, net
|
|
$
|
73,000
|
|
|
$
|
(28,000
|
)
|
Unrealized loss on marketable securities related to Comstock
|
|
|
(14,000
|
)
|
|
|
(32,000
|
)
|
Realized gain on marketable securities, net
|
|
|
-
|
|
|
|
20,000
|
|
Net gain (loss) on marketable securities
|
|
$
|
59,000
|
|
|
$
|
(40,000
|
)
|
For the six months ended December 31,
|
|
2020
|
|
|
2019
|
|
Unrealized gain (loss) on marketable securities, net
|
|
$
|
95,000
|
|
|
$
|
(50,000
|
)
|
Unrealized gain (loss) on marketable securities related to Comstock
|
|
|
32,000
|
|
|
|
(181,000
|
)
|
Realized (loss) gain on marketable securities, net
|
|
|
(11,000
|
)
|
|
|
17,000
|
|
Net gain (loss) on marketable securities
|
|
$
|
116,000
|
|
|
$
|
(214,000
|
)
|
NOTE
7 – OTHER INVESTMENTS, NET
The
Company may also invest, with the approval of the Executive Strategic Real Estate and Securities Investment Committee and other
Company guidelines, 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 consolidated balance sheet
as part of other investments, net of other than temporary impairment losses.
Other
investments, net consist of the following:
Type
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Private equity hedge fund, at cost
|
|
$
|
35,000
|
|
|
$
|
57,000
|
|
Other preferred stock
|
|
|
-
|
|
|
|
30,000
|
|
|
|
$
|
35,000
|
|
|
$
|
87,000
|
|
NOTE
8 - FAIR VALUE MEASUREMENTS
The
carrying values of the Company’s financial instruments not required to be carried at fair value on a recurring basis approximate
fair value due to their short maturities (i.e., accounts receivable, other assets, accounts payable and other liabilities) or
the nature and terms of the obligation (i.e., other notes payable and mortgage notes payable).
The
assets measured at fair value on a recurring basis are as follows:
As of
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
Total - Level 1
|
|
|
Total - Level 1
|
|
Assets:
|
|
|
|
|
|
|
|
|
Investment in marketable securities:
|
|
|
|
|
|
|
|
|
Basic materials
|
|
$
|
411,000
|
|
|
$
|
377,000
|
|
REITs and real estate companies
|
|
|
283,000
|
|
|
|
162,000
|
|
Energy
|
|
|
-
|
|
|
|
26,000
|
|
|
|
$
|
694,000
|
|
|
$
|
565,000
|
|
The
fair values of investments in marketable securities are determined by the most recently traded price of each security at the balance
sheet date.
Financial
assets that are measured at fair value on a non-recurring basis and are not included in the tables above include “Other
investments, net (non-marketable securities),” that were initially measured at cost and have been written down to fair value
as a result of impairment. The following table shows the fair value hierarchy for these assets measured at fair value on a non-recurring
basis as follows:
|
|
|
|
|
|
|
|
Net loss for the six months ended
|
|
Assets
|
|
Level 3
|
|
|
December 31, 2020
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
35,000
|
|
|
$
|
35,000
|
|
|
$
|
(23,000
|
)
|
|
|
|
|
|
|
|
|
Net loss for the six
months ended
|
|
Assets
|
|
Level 3
|
|
|
June 30, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
87,000
|
|
|
$
|
87,000
|
|
|
$
|
-
|
|
For
the six months ended December 31, 2020 and 2019, we received distribution from other non-marketable investments of $29,000 and
$12,000, respectively.
Other
investments in non-marketable securities are carried at cost net of any impairment loss. The Company has no significant influence
or control over the entities that issue these investments and holds less than 20% ownership in each of the investments. These
investments are reviewed on a periodic basis for other-than-temporary impairment. The Company reviews several factors to determine
whether a loss is other-than-temporary. These factors include but are not limited to: (i) the length of time an investment is
in an unrealized loss position, (ii) the extent to which fair value is less than cost, (iii) the financial condition and near-term
prospects of the issuer and (iv) our ability to hold the investment for a period of time sufficient to allow for any anticipated
recovery in fair value.
NOTE
9 – CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The
following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated
balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statement of cash flows:
As of
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,210,000
|
|
|
$
|
4,710,000
|
|
Restricted cash
|
|
|
5,977,000
|
|
|
|
11,675,000
|
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
|
|
$
|
7,187,000
|
|
|
$
|
16,385,000
|
|
Restricted
cash is comprised of amounts held by lenders for payment of real estate taxes, insurance, replacement and capital addition reserves
for the Hotel. As of June 30, 2020, restricted cash also includes key money received from Interstate that is restricted for capital
improvements for the Hotel. As of December 31, 2020, the key money balance was zero as Hotel obtained approval from Interstate
to use the funds for hotel operations during the first quarter of fiscal year 2021.
NOTE
10 - SEGMENT INFORMATION
The
Company operates in two reportable segments, the operation of the hotel (“Hotel Operations”) and the investment of
its cash in marketable securities and other investments (“Investment Transactions”). These two operating segments,
as presented in the consolidated financial statements, reflect how management internally reviews each segment’s performance.
Management also makes operational and strategic decisions based on this same information.
Information
below represents reporting segments for the three and six months ended December 31, 2020 and 2019, respectively. Operating (loss)
income from Hotel operations consists of the operation of the hotel and operation of the garage. Income (loss) from investment
transactions consist of net investment gain (loss), impairment loss on other investments, net unrealized gain (loss) on other
investments, dividend and interest income and trading and margin interest expense. The other segment consists of corporate general
and administrative expenses and the income tax (expense) benefit for the entire Company.
As of and for the three months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended December 31, 2020
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
3,109,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,109,000
|
|
Segment operating expenses
|
|
|
(5,133,000
|
)
|
|
|
-
|
|
|
|
(184,000
|
)
|
|
|
(5,317,000
|
)
|
Segment loss
|
|
|
(2,024,000
|
)
|
|
|
-
|
|
|
|
(184,000
|
)
|
|
|
(2,208,000
|
)
|
Interest expense
|
|
|
(1,791,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,791,000
|
)
|
Depreciation and amortization expense
|
|
|
(533,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(533,000
|
)
|
Income from investments
|
|
|
-
|
|
|
|
33,000
|
|
|
|
-
|
|
|
|
33,000
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
1,255,000
|
|
|
|
1,255,000
|
|
Net income (loss)
|
|
$
|
(4,348,000
|
)
|
|
$
|
33,000
|
|
|
$
|
1,071,000
|
|
|
$
|
(3,244,000
|
)
|
Total assets
|
|
$
|
39,801,000
|
|
|
$
|
729,000
|
|
|
$
|
9,476,000
|
|
|
$
|
50,006,000
|
|
For the three months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended December 31, 2019
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
14,901,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14,901,000
|
|
Segment operating expenses
|
|
|
(11,730,000
|
)
|
|
|
-
|
|
|
|
(181,000
|
)
|
|
|
(11,911,000
|
)
|
Segment income (loss)
|
|
|
3,171,000
|
|
|
|
-
|
|
|
|
(181,000
|
)
|
|
|
2,990,000
|
|
Interest expense
|
|
|
(1,825,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,825,000
|
)
|
Depreciation and amortization expense
|
|
|
(562,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(562,000
|
)
|
Loss from investments
|
|
|
-
|
|
|
|
(30,000
|
)
|
|
|
-
|
|
|
|
(30,000
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(147,000
|
)
|
|
|
(147,000
|
)
|
Net income (loss)
|
|
$
|
784,000
|
|
|
$
|
(30,000
|
)
|
|
$
|
(328,000
|
)
|
|
$
|
426,000
|
|
As of and for the six months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended December 31, 2020
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
6,534,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,534,000
|
|
Segment operating expenses
|
|
|
(10,166,000
|
)
|
|
|
-
|
|
|
|
(360,000
|
)
|
|
|
(10,526,000
|
)
|
Segment loss
|
|
|
(3,632,000
|
)
|
|
|
-
|
|
|
|
(360,000
|
)
|
|
|
(3,992,000
|
)
|
Interest expense
|
|
|
(3,582,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,582,000
|
)
|
Depreciation and amortization expense
|
|
|
(1,063,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,063,000
|
)
|
Income from investments
|
|
|
-
|
|
|
|
52,000
|
|
|
|
-
|
|
|
|
52,000
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
2,326,000
|
|
|
|
2,326,000
|
|
Net income (loss)
|
|
$
|
(8,277,000
|
)
|
|
$
|
52,000
|
|
|
$
|
1,966,000
|
|
|
$
|
(6,259,000
|
)
|
Total assets
|
|
$
|
39,801,000
|
|
|
$
|
729,000
|
|
|
$
|
9,476,000
|
|
|
$
|
50,006,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended December 31, 2019
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
30,330,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,330,000
|
|
Segment operating expenses
|
|
|
(23,078,000
|
)
|
|
|
-
|
|
|
|
(386,000
|
)
|
|
|
(23,464,000
|
)
|
Segment income (loss)
|
|
|
7,252,000
|
|
|
|
-
|
|
|
|
(386,000
|
)
|
|
|
6,866,000
|
|
Interest expense
|
|
|
(3,748,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,748,000
|
)
|
Depreciation and amortization expense
|
|
|
(1,106,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,106,000
|
)
|
Loss from investments
|
|
|
-
|
|
|
|
(196,000
|
)
|
|
|
-
|
|
|
|
(196,000
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(465,000
|
)
|
|
|
(465,000
|
)
|
Net income (loss)
|
|
$
|
2,398,000
|
|
|
$
|
(196,000
|
)
|
|
$
|
(851,000
|
)
|
|
$
|
1,351,000
|
|
NOTE
11 - RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The
following summarizes the balances of related party and other notes payable as of December 31, 2020 and June 30, 2020, respectively.
As of
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Note payable - InterGroup
|
|
$
|
3,700,000
|
|
|
$
|
3,000,000
|
|
Note payable - Hilton
|
|
|
2,850,000
|
|
|
|
3,008,000
|
|
Note payable - Interstate
|
|
|
1,521,000
|
|
|
|
1,646,000
|
|
SBA Loan - Justice
|
|
|
4,719,000
|
|
|
|
4,719,000
|
|
Total related party and other notes payable
|
|
$
|
12,790,000
|
|
|
$
|
12,373,000
|
|
On
July 2, 2014, the Partnership obtained from InterGroup an unsecured loan in the principal amount of $4,250,000 at 12% per year
fixed interest, with a term of 2 years, payable interest only each month. InterGroup received a 3% loan fee. The loan may be prepaid
at any time without penalty. The loan was extended to July 1, 2021. On December 16, 2020, Justice and InterGroup entered into
a loan modification agreement which increased Justice’s borrowing from InterGroup as needed up to $10,000,000 from its current
loan balance of $3,000,000 due to InterGroup. On December 31, 2020, InterGroup advanced $700,000 to Justice per the aforementioned
agreement.
Note
payable to Hilton (Franchisor) is a self-exhausting, interest free development incentive note which is reduced by approximately
$316,000 annually through 2030 by Hilton if the Partnership is still a Franchisee with Hilton.
On
February 1, 2017, Justice entered into an HMA with Interstate to manage the Hotel with an effective takeover date of February
3, 2017. The term of the management agreement is for an initial period of 10 years commencing on the takeover date and automatically
renews for an additional year not to exceed five years in aggregate subject to certain conditions. The HMA also provides for Interstate
to advance a key money incentive fee to the Hotel for capital improvements in the amount of $2,000,000 under certain terms and
conditions described in a separate key money agreement. The key money contribution shall be amortized in equal monthly amounts
over an eight (8) year period commencing on the second anniversary of the takeover date. As of December 31, 2020, the key money
balance was zero as Hotel obtained approval from Interstate to use the funds for hotel operations during the first quarter of
fiscal year 2021. As of June 30, 2020, balance of the key money plus accrued interest is $1,009,000 and is included in restricted
cash in the condensed consolidated balance sheet. Unamortized portion of the key money is included in the related party notes
payable in the condensed consolidated balance sheets.
On
April 9, 2020, Justice entered into a loan agreement (“SBA Loan”) with CIBC Bank USA under the recently enacted Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”) administered by the U.S. Small Business Administration. Justice
received proceeds of $4,719,000 from the SBA Loan. In accordance with the requirements of the CARES Act, the Company used proceeds
from the SBA Loan primarily for payroll costs. As of December 31, 2020, Justice had used all proceeds of the SBA Loan in qualified
expenses. The SBA Loan is scheduled to mature on April 9, 2022 with a 1.00% interest rate and is subject to the terms and conditions
applicable to loans administered by the SBA under the CARES Act. All payments of principal and interest are deferred until July
2021, and the repayment obligations under the loan may be forgiven if the funds are used for payroll and other qualified expenses.
All unforgiven portion of the principal and accrued interest will be due at maturity. On December 29, 2020, Justice submitted
its application for full loan forgiveness.
As
of December 31, 2020, the Company had finance lease obligations outstanding of $901,000. These finance leases expire in various
years through 2023 at rates ranging from 4.62% to 6.25% per annum. Minimum future lease payments for assets under finance leases
as of December 31, 2020 are as follows:
For the year ending June 30,
|
|
|
|
2021
|
|
$
|
262,000
|
|
2022
|
|
|
508,000
|
|
2023
|
|
|
188,000
|
|
Total minimum lease payments
|
|
|
958,000
|
|
Less interest on finance lease
|
|
|
(57,000
|
)
|
Present value of future minimum lease payments
|
|
$
|
901,000
|
|
Future
minimum principal payments for all related party and other financing transactions are as follows:
For the year ending June 30,
|
|
|
|
2021
|
|
$
|
520,000
|
|
2022
|
|
|
9,467,000
|
|
2023
|
|
|
750,000
|
|
2024
|
|
|
567,000
|
|
2025
|
|
|
567,000
|
|
Thereafter
|
|
|
1,819,000
|
|
|
|
$
|
13,690,000
|
|
As
of December 31, 2020, and June 30, 2020, the Company had accounts payable to related party of $2,801,000 and $2,385,000, respectively.
These are amounts due to InterGroup and represent certain shared costs and expenses, primarily general and administrative expenses,
rent, insurance and other expenses that are allocated among the Company, Santa Fe and InterGroup.
To
fund the redemption of limited partnership interests and to repay the prior mortgage of $42,940,000, Justice obtained a $97,000,000
mortgage loan and a $20,000,000 mezzanine loan in December 2013. The mortgage loan is secured by the Partnership’s principal
asset, the Hotel. The mortgage loan bears an interest rate of 5.275% per annum with interest only payments due through January
2017. Beginning in February 2017, the loan began to amortize over a thirty-year period through its maturity date of January 2024.
Outstanding principal balance on the loan was $91,536,000 and $92,292,000 as of December 31, 2020 and June 30, 2020, respectively.
As additional security for the mortgage loan, there is a limited guaranty executed by Portsmouth in favor of the mortgage lender.
The mezzanine loan is secured by the Operating membership interest held by Mezzanine and is subordinated to the Mortgage Loan.
The mezzanine interest only loan had an interest rate of 9.75% per annum and a maturity date of January 1, 2024. As additional
security for the mezzanine loan, there is a limited guaranty executed by Portsmouth in favor of the mezzanine lender. On July
31, 2019, Mezzanine refinanced the mezzanine loan by entering into a new mezzanine loan agreement (“New Mezzanine Loan Agreement”)
with Cred Reit Holdco LLC in the amount of $20,000,000. The prior Mezzanine Loan which had a 9.75% per annum interest rate was
paid off. Interest rate on the new mezzanine loan is 7.25% and the loan matures on January 1, 2024. Interest only payments are
due monthly.
Effective
May 11, 2017, InterGroup agreed to become an additional guarantor under the limited guaranty and an additional indemnitor under
the environmental indemnity for Justice Investors limited partnership’s $97,000,000 mortgage loan and the $20,000,000 mezzanine
loan. Pursuant to the agreement, InterGroup is required to maintain certain net worth and liquidity. As of December 31, 2020,
InterGroup is in compliance with both requirements. However, due to the Hotel’s current low occupancy and its negative impact
on the Hotel’s cash flow, Justice Operating Company, LLC may not meet certain of its loan covenants such as the Debt Service
Coverage Ratio (“DSCR”) which would trigger the creation of a lock-box by the Lender for all cash collected by the
Hotel. However, such lockbox has been created and utilized from the loan inception and will be in place up to loan maturity regardless
of the DSCR.
The
Company’s Board of Directors is currently comprised of directors John V. Winfield, William J. Nance, John C. Love, Jerold
R. Babin, and Steve Grunwald. All of the Company’s directors also serve as directors of InterGroup except for Mr. Grunwald.
Messrs. Winfield and Nance also serve on the Board of Santa Fe.
John
V. Winfield serves as Chief Executive Officer and Chairman of the Company, Santa Fe, and InterGroup. Effective June 2016, Mr.
Winfield became the Managing Director of Justice. Depending on certain market conditions and various risk factors, the Chief Executive
Officer, 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 the resources of Santa Fe and InterGroup,
at risk in connection with investment decisions made on behalf of the Company.
NOTE
12 – ACCOUNTS PAYABLE AND OTHER LIABILITIES - JUSTICE
The
following summarizes the balances of accounts payable and other liabilities -Justice as of December 31, 2020 and June 30, 2020,
respectively.
As of
|
|
December 31, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Trade payable
|
|
$
|
1,446,000
|
|
|
$
|
3,032,000
|
|
Advance deposits
|
|
|
221,000
|
|
|
|
375,000
|
|
Property tax payable
|
|
|
523,000
|
|
|
|
523,000
|
|
Payroll and related accruals
|
|
|
2,221,000
|
|
|
|
1,969,000
|
|
Mortgage interest payable
|
|
|
416,000
|
|
|
|
527,000
|
|
Withholding and other taxes payable
|
|
|
519,000
|
|
|
|
370,000
|
|
Security deposit
|
|
|
52,000
|
|
|
|
52,000
|
|
Other payables
|
|
|
982,000
|
|
|
|
740,000
|
|
Total accounts payable and other liabilities - Justice
|
|
$
|
6,380,000
|
|
|
$
|
7,588,000
|
|
NOTE
13 – SUBSEQUENT EVENTS
On
January 15, 2021, we moved our corporate office from 12121 Wilshire Boulevard, Suite 610, Los Angeles, California to 1516 S. Bundy
Dr., Suite 200, Los Angeles, California where we signed a four year lease.
In January 2021, InterGroup advanced $2,000,000
to Justice per the loan modification agreement entered into on December 16, 2020.