The accompanying notes are an integral part of these (unaudited) condensed consolidated financial statements.
The accompanying notes
are an integral part of these (unaudited) condensed consolidated financial statements.
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 March 31, 2021 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 nine months ended March 31, 2021 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 of March 31, 2021, Portsmouth
has a 97.5% limited partnership interest in Justice and is the sole general partner. The financial statements of Justice are consolidated
with those of the Company.
Effective
February 19, 2021, Santa Fe Financial Corporation (“Santa Fe”), a public company, was liquidated and all of its assets including
its 68.8% interest in Portsmouth was distributed to its shareholders in exchange for their Santa Fe common stock. As a result, as of
March 31, 2021, the InterGroup Corporation (“InterGroup”), a public company, owns approximately 71.3% of the outstanding
common shares of Portsmouth. As of March 31, 2021, the Company’s President, Chairman of the Board and Chief Executive Officer,
John Winfield, owns approximately 2.5% of the outstanding common shares of the Company. Mr. Winfield also serves as the President, Chairman
of the Board and Chief Executive Officer of InterGroup.
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 (“Aimbridge”) 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 nine months ended March 31, 2021 and 2020 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 11 for balances of finance lease ROU assets and liabilities, respectively.
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 nine months ended March 31, 2021, our net cash
flow used in operations was $11,008,000. For the nine months ended March 31, 2020, our net cash flow used in operations was $220,000.
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 $3,298,000 and $4,710,000 as of March 31, 2021 and June 30, 2020, respectively. In addition,
the Hotel had $5,785,000 and $10,666,000 of restricted cash held by its senior lender Wells Fargo Bank, N.A. (“Lender”) as
of March 31, 2021 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 (the “SBA”).
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 March 31, 2021, 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. If the SBA approves the forgiveness amount,
all payments of principal and interest are deferred until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA
does not forgive any amount of the loan, payments would start within 30 days. 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 March 31, 2021, the SBA has not
forgiven the SBA Loan.
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. Justice will use proceeds from the Second SBA Loan primarily for
payroll costs. The Second SBA Loan is scheduled to mature on February 3, 2026 and has 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 either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by
the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified
in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period.
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. As of March 31, 2021, unused portion of the Second SBA Loan was $350,000.
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 nine months ended March 31, 2021, InterGroup
completed refinancing on three of its California properties and generated net proceeds of $5,384,000. 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 March 31, 2021 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.
As
the sole general partner of Justice that controls approximately 97.5% 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 to meet any capital calls and its other obligations during the next twelve months and beyond. On August 28,
2020, the Board of InterGroup passed resolution 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. Since
December 2020, InterGroup has advanced $2,950,000 to Justice per the aforementioned loan modification 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 March 31, 2021, the Company’s material financial obligations which also including interest
payments:
|
|
|
|
|
3 Months
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
Year
|
|
|
|
|
|
|
Total
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
Mortgage notes payable
|
|
$
|
111,130,000
|
|
|
$
|
385,000
|
|
|
$
|
1,632,000
|
|
|
$
|
1,721,000
|
|
|
$
|
107,392,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
SBA loans and other notes payable
|
|
|
7,502,000
|
|
|
|
119,000
|
|
|
|
5,200,000
|
|
|
|
183,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Related party notes payable
|
|
|
10,178,000
|
|
|
|
379,000
|
|
|
|
6,517,000
|
|
|
|
567,000
|
|
|
|
567,000
|
|
|
|
567,000
|
|
|
|
1,581,000
|
|
Interest
|
|
|
17,290,000
|
|
|
|
1,365,000
|
|
|
|
6,291,000
|
|
|
|
6,180,000
|
|
|
|
3,454,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
146,100,000
|
|
|
$
|
2,248,000
|
|
|
$
|
19,640,000
|
|
|
$
|
8,651,000
|
|
|
$
|
111,413,000
|
|
|
$
|
567,000
|
|
|
$
|
3,581,000
|
|
NOTE
3 – REVENUE
The
following table present our revenues disaggregated by revenue streams.
For the three months ended March 31,
|
|
2021
|
|
|
2020
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
2,368,000
|
|
|
$
|
9,642,000
|
|
Food and beverage
|
|
|
17,000
|
|
|
|
874,000
|
|
Garage
|
|
|
479,000
|
|
|
|
650,000
|
|
Other operating departments
|
|
|
38,000
|
|
|
|
93,000
|
|
Total hotel revenue
|
|
$
|
2,902,000
|
|
|
$
|
11,259,000
|
|
For the nine months ended March 31,
|
|
2021
|
|
|
2020
|
|
Hotel revenues:
|
|
|
|
|
|
|
|
|
Hotel rooms
|
|
$
|
7,842,000
|
|
|
$
|
35,453,000
|
|
Food and beverage
|
|
|
130,000
|
|
|
|
3,521,000
|
|
Garage
|
|
|
1,373,000
|
|
|
|
2,162,000
|
|
Other operating departments
|
|
|
91,000
|
|
|
|
453,000
|
|
Total hotel revenue
|
|
$
|
9,436,000
|
|
|
$
|
41,589,000
|
|
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 March 31, 2021 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 $173,000 as of
March 31, 2021, from $375,000 as of June 30, 2020. The decrease for the nine months ended March 31, 2021 was primarily driven by $202,000
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
|
|
March 31, 2021
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,124,000
|
|
|
$
|
-
|
|
|
$
|
1,124,000
|
|
Finance lease ROU assets
|
|
|
1,805,000
|
|
|
|
(527,000
|
)
|
|
|
1,278,000
|
|
Furniture and equipment
|
|
|
30,438,000
|
|
|
|
(27,857,000
|
)
|
|
|
2,581,000
|
|
Building and improvements
|
|
|
56,194,000
|
|
|
|
(29,742,000
|
)
|
|
|
26,452,000
|
|
Investment in Hotel, net
|
|
$
|
89,561,000
|
|
|
$
|
(58,126,000
|
)
|
|
$
|
31,435,000
|
|
|
|
|
|
|
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. (“Uluniu”), 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. In March 2021, in an effort
to make both companies more efficient, InterGroup purchased back the 50% interest of Uluniu from Portsmouth for $980,000, which represents
Portsmouth’s carrying cost of the investment. No gains or losses were realized as a result of the transaction since it was a related-party
transaction. As a related-party transaction, the fairness of the financial terms of the transactions 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 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
March 31, 2021, 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 March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
3,348,000
|
|
|
$
|
206,000
|
|
|
$
|
(1,951,000
|
)
|
|
$
|
(1,745,000
|
)
|
|
$
|
1,603,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equities
|
|
$
|
3,955,000
|
|
|
$
|
66,000
|
|
|
$
|
(3,456,000
|
)
|
|
$
|
(3,390,000
|
)
|
|
$
|
565,000
|
|
As
of March 31, 2021, and June 30, 2020, approximately 77% 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 March 31, 2021, and June 30, 2020, the Company had $1,946,000 and $3,448,000, respectively,
of unrealized losses related to securities held for over one year; of which $1,845,000 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 nine months ended March 31, 2021 and 2020, respectively:
For the three months ended March 31,
|
|
2021
|
|
|
2020
|
|
Realized loss on marketable securities, net
|
|
$
|
(11,000
|
)
|
|
$
|
(192,000
|
)
|
Realized loss on marketable securities related to LODE
|
|
|
(250,000
|
)
|
|
|
-
|
|
Unrealized gain (loss) on marketable securities, net
|
|
|
80,000
|
|
|
|
(102,000
|
)
|
Unrealized gain (loss) on marketable securities related to LODE
|
|
|
1,565,000
|
|
|
|
(13,000
|
)
|
Net gain (loss) on marketable securities
|
|
$
|
1,384,000
|
|
|
$
|
(307,000
|
)
|
For the nine months ended March 31,
|
|
2021
|
|
|
2020
|
|
Realized loss on marketable securities, net
|
|
$
|
-
|
|
|
$
|
(175,000
|
)
|
Realized loss on marketable securities related to LODE
|
|
|
(250,000
|
)
|
|
|
-
|
|
Unrealized loss on marketable securities, net
|
|
|
(15,000
|
)
|
|
|
(152,000
|
)
|
Unrealized gain (loss) on marketable securities related to LODE
|
|
|
1,533,000
|
|
|
|
(194,000
|
)
|
Net gain (loss) on marketable securities
|
|
$
|
1,268,000
|
|
|
$
|
(346,000
|
)
|
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
|
|
March 31, 2021
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Private equity hedge fund, at cost
|
|
$
|
20,000
|
|
|
$
|
57,000
|
|
Other preferred stock
|
|
|
-
|
|
|
|
30,000
|
|
|
|
$
|
20,000
|
|
|
$
|
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
|
|
March 31, 2021
|
|
|
June 30, 2020
|
|
|
|
Total - Level 1
|
|
|
Total - Level 1
|
|
Assets:
|
|
|
|
|
|
|
Investment in marketable securities:
|
|
|
|
|
|
|
|
|
Basic materials
|
|
$
|
1,265,000
|
|
|
$
|
377,000
|
|
REITs and real estate companies
|
|
|
276,000
|
|
|
|
162,000
|
|
Industrials
|
|
|
62,000
|
|
|
|
-
|
|
Energy
|
|
|
-
|
|
|
|
26,000
|
|
|
|
$
|
1,603,000
|
|
|
$
|
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 nine months
|
|
Assets
|
|
Level 3
|
|
|
March 31, 2021
|
|
|
ended March 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
|
$
|
(38,000
|
)
|
|
|
|
|
|
|
|
|
Net loss for the nine months
|
|
Assets
|
|
Level 3
|
|
|
June 30, 2020
|
|
|
ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-marketable investments
|
|
$
|
87,000
|
|
|
$
|
87,000
|
|
|
$
|
(38,000
|
)
|
For
the nine months ended March 31, 2021 and 2020, we received distribution from other non-marketable investments of $29,000 and $29,000,
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
|
|
March 31, 2021
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
3,298,000
|
|
|
$
|
4,710,000
|
|
Restricted cash
|
|
|
5,785,000
|
|
|
|
11,675,000
|
|
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows
|
|
$
|
9,083,000
|
|
|
$
|
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 March 31, 2021, 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 nine months ended March 31, 2021 and 2020, 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 March 31, 2021
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
2,902,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,902,000
|
|
Segment operating expenses
|
|
|
(3,990,000
|
)
|
|
|
-
|
|
|
|
(201,000
|
)
|
|
|
(4,191,000
|
)
|
Segment loss
|
|
|
(1,088,000
|
)
|
|
|
-
|
|
|
|
(201,000
|
)
|
|
|
(1,289,000
|
)
|
Interest expense - mortgage and related party
|
|
|
(1,833,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,833,000
|
)
|
Depreciation and amortization expense
|
|
|
(503,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(503,000
|
)
|
Gain from investments
|
|
|
-
|
|
|
|
1,219,000
|
|
|
|
-
|
|
|
|
1,219,000
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
669,000
|
|
|
|
669,000
|
|
Net income (loss)
|
|
$
|
(3,424,000
|
)
|
|
$
|
1,219,000
|
|
|
$
|
468,000
|
|
|
$
|
(1,737,000
|
)
|
Total assets
|
|
$
|
40,152,000
|
|
|
$
|
1,623,000
|
|
|
$
|
10,330,000
|
|
|
$
|
52,105,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended March 31, 2020
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
11,259,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
11,259,000
|
|
Segment operating expenses
|
|
|
(10,060,000
|
)
|
|
|
-
|
|
|
|
(167,000
|
)
|
|
|
(10,227,000
|
)
|
Segment income (loss)
|
|
|
1,199,000
|
|
|
|
-
|
|
|
|
(167,000
|
)
|
|
|
1,032,000
|
|
Interest expense - mortgage and related party
|
|
|
(1,793,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,793,000
|
)
|
Depreciation and amortization expense
|
|
|
(547,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(547,000
|
)
|
Loss from investments
|
|
|
-
|
|
|
|
(337,000
|
)
|
|
|
-
|
|
|
|
(337,000
|
)
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
440,000
|
|
|
|
440,000
|
|
Net income (loss)
|
|
$
|
(1,141,000
|
)
|
|
$
|
(337,000
|
)
|
|
$
|
273,000
|
|
|
$
|
(1,205,000
|
)
|
As of and for the nine months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended March 31, 2021
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
9,436,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,436,000
|
|
Segment operating expenses
|
|
|
(14,156,000
|
)
|
|
|
-
|
|
|
|
(561,000
|
)
|
|
|
(14,717,000
|
)
|
Segment loss
|
|
|
(4,720,000
|
)
|
|
|
-
|
|
|
|
(561,000
|
)
|
|
|
(5,281,000
|
)
|
Interest expense - mortgage and related party
|
|
|
(5,415,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,415,000
|
)
|
Depreciation and amortization expense
|
|
|
(1,566,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,566,000
|
)
|
Gain from investments
|
|
|
-
|
|
|
|
1,271,000
|
|
|
|
-
|
|
|
|
1,271,000
|
|
Income tax benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
2,995,000
|
|
|
|
2,995,000
|
|
Net income (loss)
|
|
$
|
(11,701,000
|
)
|
|
$
|
1,271,000
|
|
|
$
|
2,434,000
|
|
|
$
|
(7,996,000
|
)
|
Total assets
|
|
$
|
40,152,000
|
|
|
$
|
1,623,000
|
|
|
$
|
10,330,000
|
|
|
$
|
52,105,000
|
|
For the nine months
|
|
Hotel
|
|
|
Investment
|
|
|
|
|
|
|
|
ended March 31, 2020
|
|
Operations
|
|
|
Transactions
|
|
|
Corporate
|
|
|
Total
|
|
Revenues
|
|
$
|
41,589,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
41,589,000
|
|
Segment operating expenses
|
|
|
(33,138,000
|
)
|
|
|
-
|
|
|
|
(553,000
|
)
|
|
|
(33,691,000
|
)
|
Segment income (loss)
|
|
|
8,451,000
|
|
|
|
-
|
|
|
|
(553,000
|
)
|
|
|
7,898,000
|
|
Interest expense - mortgage and related party
|
|
|
(5,541,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,541,000
|
)
|
Depreciation and amortization expense
|
|
|
(1,653,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,653,000
|
)
|
Loss from investments
|
|
|
-
|
|
|
|
(533,000
|
)
|
|
|
-
|
|
|
|
(533,000
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(25,000
|
)
|
|
|
(25,000
|
)
|
Net income (loss)
|
|
$
|
1,257,000
|
|
|
$
|
(533,000
|
)
|
|
$
|
(578,000
|
)
|
|
$
|
146,000
|
|
NOTE
11 - RELATED PARTY AND OTHER FINANCING TRANSACTIONS
The
following summarizes the balances of related party and other notes payable as of March 31, 2021 and June 30, 2020, respectively.
As of
|
|
March 31, 2021
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Note payable - InterGroup
|
|
$
|
5,950,000
|
|
|
$
|
3,000,000
|
|
Note payable - Hilton
|
|
|
2,771,000
|
|
|
|
3,008,000
|
|
Note payable - Interstate
|
|
|
1,458,000
|
|
|
|
1,646,000
|
|
SBA Loans - Justice
|
|
|
6,719,000
|
|
|
|
4,719,000
|
|
Total related party and other notes payable
|
|
$
|
16,898,000
|
|
|
$
|
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. Since December 2020, InterGroup has
advanced $2,950,000 to Justice per the aforementioned agreement. As of March 31, 2021, the Partnership has a loan due to InterGroup in
the principal amount of $5,950,000.
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 March 31, 2021, 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 March 31, 2021, 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. If the SBA approves the forgiveness amount, all payments of principal and interest are deferred
until the date the forgiveness amount is remitted by the SBA to CIBC. If the SBA does not forgive any amount of the loan, payments would
start within 30 days. 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 March 31, 2021, the SBA has not forgiven the SBA Loan.
On
February 3, 2021, Justice entered into a second loan agreement (“Second SBA Loan”) with CIBC Bank USA administered by the
SBA. Justice received proceeds of $2,000,000 from the Second SBA Loan. Justice will use proceeds from the Second SBA Loan primarily for
payroll costs. The Second SBA Loan is scheduled to mature on February 3, 2026 and has 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 either: (a) if the SBA approves the forgiveness amount, the date the forgiveness amount is remitted by
the SBA to CIBC; or (b) if Justice does not apply for forgiveness within 10 months after the last day of the covered period specified
in the loan agreement or if the forgiveness amount is not approved, the date that is 10 months after the last day of the covered period.
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. As of March 31, 2021, unused portion of the Second SBA Loan was $350,000.
As
of March 31, 2021, the Company had finance lease obligations outstanding of $783,000. 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 March 31, 2021
are as follows:
For the year ending June 30,
|
|
|
|
2021
|
|
$
|
130,000
|
|
2022
|
|
|
508,000
|
|
2023
|
|
|
188,000
|
|
Total minimum lease payments
|
|
|
826,000
|
|
Less interest on finance lease
|
|
|
(43,000
|
)
|
Present value of future minimum lease payments
|
|
$
|
783,000
|
|
Future
minimum principal payments for all related party and other financing transactions are as follows:
For the year ending June 30,
|
|
|
|
2021
|
|
$
|
498,000
|
|
2022
|
|
|
11,717,000
|
|
2023
|
|
|
750,000
|
|
2024
|
|
|
567,000
|
|
2025
|
|
|
567,000
|
|
Thereafter
|
|
|
3,581,000
|
|
|
|
$
|
17,680,000
|
|
As
of March 31, 2021, and June 30, 2020, the Company had accounts payable to related party of $2,991,000 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.
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 $91,130,000 and $92,292,000 as of March 31, 2021 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 March 31, 2021, 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.
John
V. Winfield serves as Chief Executive Officer and Chairman of the Company 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 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 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 March 31, 2021 and June 30, 2020, respectively.
As of
|
|
March 31, 2021
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
Trade payable
|
|
$
|
2,085,000
|
|
|
$
|
3,032,000
|
|
Advance deposits
|
|
|
173,000
|
|
|
|
375,000
|
|
Property tax payable
|
|
|
14,000
|
|
|
|
523,000
|
|
Payroll and related accruals
|
|
|
2,484,000
|
|
|
|
1,969,000
|
|
Mortgage interest payable
|
|
|
414,000
|
|
|
|
527,000
|
|
Withholding and other taxes payable
|
|
|
581,000
|
|
|
|
370,000
|
|
Security deposit
|
|
|
52,000
|
|
|
|
52,000
|
|
Other payables
|
|
|
942,000
|
|
|
|
740,000
|
|
Total accounts payable and other liabilities - Justice
|
|
$
|
6,745,000
|
|
|
$
|
7,588,000
|
|
NOTE
13 – SUBSEQUENT EVENTS
None.